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Call Start: 17:00

Call End: 17:53

CardioNet, Inc. (BEAT)

Q4 2009 Earnings Call

February 17, 2010 5:00 pm ET

Executives

Randy H. Thurman - Chairman, President and CEO

Heather C. Getz- Chief Financial Officer

Anna McNamara – SVP of Clinical Operations

Philip Leone – VP of Managed Care

Analysts

Amit Bhalla - Citi

Rick Wise - Leerink Swann

Andy O'Hara - William Blair & Co.

Sara Michelmore - Cowen & Co.

Matt Dolan - Roth Capital Partners

Operator

Good afternoon, thank you for joining us for the CardioNet fourth quarter and full year 2009 earnings conference call. Certain statements during the conference call and the question and answer period to follow may relate to future events and expectations. And as such may constitute forward looking statements within the meeting of the private Securities and Litigation Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the company in the future to be materially different on the statement that the company’s executive may take today.

These risks are described in detail in our public filing with the Securities and Exchange Commission, including our latest periodical report on Form 10K or 10Q. We assume no duty to update these statements.

At this time all participants have been placed on a listen only mode. And the floor would be open for questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Mr. Randy Thurman. Sir, you may begin.

Randy H. Thurman

Thank you very much. And good afternoon everyone. Welcome to the CardioNet fourth quarter and year end 2009 investor call. I am Randy Thurman, Chairman, President and CEO of CardioNet. With me this afternoon is Heather Getz, our Chief Financial Officer, Anna McNamara, Senior Vice President of Clinical Operations and Phil Leone, Senior Vice President of Managed Care.

Before I begin, I’d like to take this opportunity to introduce all of you to Heather Getz, our new Chief Financial Officer. I have had the pleasure of working with Heather for many years and of course, Heather was CardioNet’s VP of Finance through most of last year.

Heather brings a wealth of excellent experience to CardioNet and has been working very closely with all levels of the organization, understand the dynamics of the business and the market. We are fortunate to have her as part of our executive management team. Heather replaces Marty Galvan who has left to pursue new opportunities. Marty and I began working together over 20 years ago and I thank Marty for his contributions to CardioNet, his friendship and I wish him all the best in his future endeavors.

I’ll begin today’s call with some comments about CardioNet. Heather will then provide some additional detail around our results and then we’ll take your questions.

In 2009, CardioNet achieved a number of milestones while addressing unexpected and significant adversity. And CardioNet goes into 2010 committed to our mission of improving the quality of human life by being a leader in wireless medicine. We also go into 2010 with a clear set of objectives that address the challenges faced last year. I will elaborate on those objectives shortly.

To understand CardioNet’s potential, it is important to first understand the accomplishments made by the company to commercialize technology in the emerging wireless healthcare industry. CardioNet has surpassed 300,000 patients serviced by our MCOT technology, the pioneer in mobile cardiac outpatient telemetry.

Early investors committed millions to the development of MCOT technology and to the development of the company. And its employees have meaningfully advanced the monitoring and diagnosis of cardiac patients.

Along the way, CardioNet has also developed an infrastructure, or platform as we call it, that includes patient and physician customer services. Clinical research to support our technology and what is likely the largest professional sales organization dedicated to our wireless healthcare application.

Feedback from patients and physicians tells us that we’ve performed those platform tasks superbly well and better than the perceived competition. We have received countless testimonials from physicians and patients elaborating on the significant benefits of CardioNet’s MCOT. And much of this feedback recounts patients who have long been undiagnosed until MCOT identified the underlying cause of the patient’s disease. Some of these testimonials attribute life saving outcomes to CardioNet.

Few early stage medical technology companies realize the growth that CardioNet has experienced. In 2009 patient volume grew nearly 50% over the prior year. And we are now forecasting another 30%-40% volume growth in 2010. There can be little question that this type of growth speaks to not only the clinical benefits of CardioNet’s technology, but the cost benefit advantages as well.

We believe that not only does MCOT significantly improve time to diagnosis, and yield better clinical outcome, that the cost benefit advantages to the healthcare system are measurable as well. A multi center perspective randomized study published in a peer reviewed journal demonstrated the CardioNet MCOT is nearly three times superior at detecting clinical significant arrhythmias.

Atrial fibrillation is the most prevalent form of cardiac arrhythmias and the leading cause of stroke. However, once diagnosed atrial fibrillation can be managed or treated and therefore significantly reduce the incidents of stroke.

Another advantage of MCOT is that patients lead their normal life of being monitored 24/7 by CardioNet. In certain patients, this avoids hospitalization for monitoring at a far higher cost.

These represent on a few of the examples on the significant cost benefit that MCOT brings to the healthcare system. Yet despite these facts, in July 2009 high mark unexpected reduced MCOT Medicare reimbursement by a third. This action alone as well as the corresponding reduction in reimbursement by commercial payers resulted in CardioNet becoming unprofitable in spite of the 50% growth in patient volume.

CardioNet has worked diligently with the Medicare contractor and now with CMS to provide all of the information required to obtain a national reimbursement rate above the reduced level. At the same time, CardioNet has responded significantly be reducing costs and will continue to do so.

These actions along with evaluating strategic options are being done to create the greatest potential for all stakeholders.

In addressing the unexpected challenges faced in 2009, we began to respond immediately and prepare the company for 2010 and beyond. We implemented immediate cost reduction initiative that yielded $8 million in annualized saving. I’ve identified an additional $15 million in cost reductions that will be implemented over the next 18 months.

Development began on an advanced MCOT platform that will deliver enhanced clinical capabilities in approximately 30% lower product costs to be launched, we believe, by the end of this year. We’ve engaged CMS in a very constructive process that could lead to a national reimbursement rate. We have fine tuned the selling organization following the traumatic growth in AEs, that’s account executives, in 2009. And we go into 2010 with our selling resources being fully trained and aligned against the highest growth opportunities.

With regard to the sales force, after expanding by approximately 50% in 2009 we saw the potential for optimization between our field territories and the specialty sales force. We consolidated territories from 124 to the current 106. And we are partnering with a major national contractor selling organization. CardioNet will now have 120 dedicated full time employees that are fully trained sales professionals, plus the resources of this partnered outside selling organization.

Whereas in 2009 the 79 newly hired account executives were learning the business and only partially productive, we go into 2010 with the internal sales force being fully productive and complemented by the resources of our selling partner. The market potential for CardioNet’s MCOT remains largely in front of us.

I will now turn the call over to Heather to discuss our fourth quarter and full year results. Heather?

Heather C. Getz

Thank you, Randy, and good afternoon everyone. As I transition into the role of Chief Financial Officer, I look forward to getting to know our analysts and institutional investors. I am very excited about the opportunity we have to continue driving the adoption of MCOT while also positioning CardioNet as an efficient and cost effective company.

I am assuming everyone has had the opportunity to read our earnings release and as such I will focus on more qualitative remarks. Beginning with revenue. Despite the unexpected decline in Medicare reimbursement (break in audio) 3%, revenue for the full year 2009 increased by 17% and for the fourth quarter of 2009 declined by only 3% as compared to 2008.

Driving these results with MCOT volumes which was up significantly with 50% growth for full year and 44% growth for the quarter. So it was higher than previously forecasted. For both the fourth quarter and the full year the benefit of the MCOT volume growth was offset by lower PDF volume, the aforementioned reduction in Medicare reimbursement that went into effect in September, as well as the decline in commercial reimbursement that we experienced during the year.

Turning to gross margins, despite reducing our cost per patient in 2009, gross margin percentage declined by 850 basis points in the fourth quarter and 150 basis points for the full year 2009, versus 2008. The primary driver of these declines was the reduction in Medicare and commercial reimbursement.

Operating income for the fourth quarter and full year 2009 on an adjusted basis was a loss of $5.4 million and $6 million respectively. This compares to adjusted operating income in the fourth quarter and full year 2008 of $6.5 million and $14.6 million respectively.

We were able to partially mitigate the operating losses caused by the decline in reimbursement with the cost reduction program we implemented in the third quarter of 2009, which resulted in $8 million of annualized savings and it’s reflected in our Q4 2009 run rate.

I will now move to the balance sheet. We ended 2009 with $49 million in cash and no debt. In the fourth quarter we had positive free cash flow of $6 million, primarily due to the collection of receivables. And for the full year 2009 we had negative free cash flow of $12 million, largely resulting from capital spending for infrastructure and additional devices that support our growth.

As for accounts receivable and DSO, we have made significant progress in addressing operational issues. Compared to the third quarter net accounts receivable for the fourth quarter declined by almost $9 million and our DSO declined by 16 days to 122 days.

We have seen positive trends in our cash receipt with fourth quarter collections of $36 million. This is 16% higher than Q3 and the highest in the company’s history. With our operational improvements we have reduced our time to bill to three days. Allowing us to collect our receivables faster. We have also been successful in settling older receivables with our contracted payers. And while it is still early in the process, we are seeing positive results from the collection agency that we have engaged to focus on some of our receivables.

We will continue to focus on this area in order to further streamline our operations.

Looking forward to 2010, as we stated in our release, until we experience a period of stability and gain more predictability, we will not provide specific revenue and earnings guidance. However, I would like to provide some directional comments.

In 2010 we expect MCOT volume growth of 30%-40%. We will have the full year impact of the lower commercial reimbursement we experienced in 2009 as well as the reduced Medicare rate.

On the expense side, we have begun implementation of a companywide cost reduction program that we announced in December, which will result in $15 million of additional expense saving over the next 18 months.

As a result, our overall cost per patient will decline in 2010 on an already lower base. In addition, as 2010 progresses, we expect to see modest gains in our gross margin percentage as compared to the fourth quarter of 2009.

We expect to have a onetime charge, predominantly in the first half of 2010 of approximately $3 million related to the cost savings initiative. In addition, we will also realize approximately $4 million of option expense savings in 2010, largely due to the voluntary forfeiture of options by certain executive officers in the fourth quarter of 2009.

The combination of these savings will enable us to be EBITDA positive in the second half of 2010. We also expect continued declines in our DSO as we further improve our processes. We do expect to have negative free cash flow in 2010 largely as a result of capital expenditures for devices to support the robust growth and as we introduce our new MCOT platform.

Despite the challenges we faced in 2009 we expect to see continued growth in volume and have positioned ourselves to enter 2010, and in particular 2011, with a more efficient cost structure. We will execute on an additional $15 million of cost reduction and continue to look for more opportunities.

As I mentioned before, CardioNet has nearly $50 million in cash and no debt. Factors which give us considerable flexibility as we build value for all stakeholders. We are looking forward to growing our business more efficiently and cost effectively. Thank you. I will now turn the call back to Randy.

Randy H. Thurman

Thank you, Heather. CardioNet is the unquestioned innovator in brining MCOT technology to the market. And continues to lead as demonstrated by the intellectual property rights granted to us and the unprecedented number of publications and abstracts testifying to the clinical efficacy of CardioNet’s MCOT.

We believe that wireless medicine will be one of the greatest innovations in healthcare in the next generation. And that CardioNet is a pioneer in that revolution. As is often the case with pioneers you face adversity while you continue the relentless pursuit of your vision.

Our country faces many questions about healthcare reform. The challenge is not just how to costs and expand coverage. True healthcare reform will be achieved through innovation and bringing technology to physicians, patients and Medicare beneficiaries which more accurately and rapidly diagnose as illness and disease prevents more costly forms of diagnosis and prevents patients from progressing to more serious and costly diseases while allowing patients the opportunity to lead their normal lives while being diagnosed or treated.

CardioNet does much of that and more. As we said in today’s release, we are optimistic about the future of CardioNet. We’ve responded to the 2009 reimbursement challenges by streamlining our operations with $23 million in cost reduction and productivity initiatives. Also we believe that the company will continue to experience strong volume growth. We have engaged CMS in a constructive dialog which we help will lead to a national reimbursement rate above the current level.

As Heather just said, we have almost $50 million in cash and no debt. Affording us the ability and flexibility needed to pursue our goals while investing for the future. With our diagnostic superiority, our advance reporting capabilities, and exceptional service, we expect to expand our leadership in mobile cardiac outpatient telemetry.

Lastly, I would like to complement the nearly 800 employees of CardioNet and our management team. Any young company with new technology would be challenged by 50% volume growth in a single year. This kind of growth touches every function in a company.

On the front line are our sales organization who drives the growth. Customer service which supported a dramatic increase in physician practices and customer care who ensures that Medicare beneficiaries and patients receive first class attention.

But behind the front lines are distribution, research and development and manufacturing who must proactively prepare and support such growth. In the midst of this growth CardioNet employees also launched new applications to our current technology and began development on an advanced MCOT platform, extraordinary accomplishments by any standards.

Our employees also accomplished all of this and more in the midst of a bomb shell dropping in their laps in the form of an unexpected 33% decrease in Medicare reimbursement, it is true that real leadership is only tested in the face of adversity. It is easy to look talented when everything goes well. In the face of unexpected adversity in 2009, CardioNet and its employees showed their real talent and leadership and the company’s true potential.

At this point we will take your questions.

Question-and-Answer Session

Operator

(Operator’s Instructions) You’re first question comes from the line of Rick Wise with Leerink Swann. Please proceed.

Rick Wise - Leerink Swann

Good afternoon. Let me start with gross margins if I could, Randy. Are you saying that the full impact of reimbursement was the only factor in affecting gross margins, were there any other issues in manufacturing or competitive issues, pricing issues?

Heather C. Getz

Hi, Rick, this is Heather. In 2009 from a gross margin percentage standpoint we had a number of cost reduction initiatives that favorably impacted our cost of sales and had we not executed on those efficiencies are gross margin percentage would have actually gone down further. So from a negative perspective the majority of the impact on the gross margin percentage was as a result of the price decline.

Rick Wise - Leerink Swann

I understand that the commercial reimbursement rates rolls under pressure, has that stabilized or how can we be confident that we don’t see more pressure on that side?

Heather C. Getz

Rick, in the latter half of the year we have seen commercial rates stabilize and we cannot say what will happen next year, what we can say is as of now we have seen them stabilize.

Rick Wise - Leerink Swann

You’re volume growth projection for 2010, the 30%-40%, if I’m remembering correctly, is lower than the 40% of what you all had mentioned on the last conference call. Why the reduction? Help us understand what went into that guidance reduction.

Randy H. Thurman

Rick, in terms of actual forecasted patient starts is not a change; the middle of the range we are now saying at 35% is the same patient starts $154,000 previously forecast. We ended, actually very good news, 2009 with higher actual volume than previously forecast so that merely is a change in the percentage.

A high-end of the range that we are now quoting at 40% could be achieved if we get the remaining large commercial payers under contract by mid-year. On the lower-end takes into account some patient dynamics that we are closely monitoring, specifically many insurers have increased co-pays or deductibles or change the mix of co-pay and deductable and we’re seeing patients defer service for six weeks of this year at a higher rate than we’ve seen in previous years. We suspect this co-pay dynamic and in this economy, probably is being experienced by some other companies as well.

That may sort itself out, as I’ve said, we only have six weeks of data. But again the forecast of the number of patient starts at $154,000 is the same number we’ve given again if we are successful this year at getting some of the larger commercial payers on-board, we could see even a higher number.

Rick Wise - Leerink Swann

Could I just ask one more question, maybe I’ll get a chance to ask some others later. Heather on DSOs, obviously you’ve made some solid progress, which is good to see this quarter. Can you give us any aspirational hopes of where we could be when we are talking this time next year?

And maybe take each of those elements you talked about, is there more room and time to build? Settling the older contracts, how quickly can you make progress there? The collections? Maybe just give us a little more detail on where and how you might get there in 2010. Thanks

Heather C. Getz

Sure, I’ll just start with the DFL as we look forward into 2010 as you indicated we made significant progress in the fourth quarter as it pertains to DFL in our cash collections. And what I would expect is that we will continue throughout the year to see improvements in our DSO, right now what were thinking is that we won the year in the low to mid 90s.

Given the fact that we only have one quarter behind us, we’d like to see some more quarter before we give any further information on that. As it pertains to the operational improvements again we continue to focus on this area of the company and when you’re dealing with the insurance companies, it does take time to work through these issues.

Operator

The next question comes from the line of Amit Bhalla. Please proceed.

Amit Bhalla - Citi

Hi, good afternoon. I have a couple of questions in terms of the sales force and I just want to make sure that I heard correctly. So I think, Randy, you said that you ended the quarter on 120 dedicated sales reps. Is that correct?

Randy H. Thurman

If you look at 2009 the average (inaudible) on board for the full-year was 114.

Amit Bhalla - Citi

Okay, thanks. But 114 is the full-year number, the quarter is 120, correct?

Randy H. Thurman

No, that’s not correct. We currently have 121 full-time dedicated sales professionals in CardioNet as we sit here today.

Amit Bhalla - Citi

That was not the ending fourth quarter number?

Randy H. Thurman

The ending fourth quarter number counting executives was 124.

Amit Bhalla - Citi

124, okay got it. Okay, you mentioned this partnership selling partner, but you didn’t give us much detail there. Could you tell us a little bit more about that? How many resources does that bring you? Are they dedicated to your product? And how does the economics work with this selling partner?

Randy H. Thurman

Yes, Amit, it’s a good question. The (inaudible) great opportunity for us was the realignment of the internal sales organization. We have moved these 121 dedicated internal resources to the highest return opportunities. The territories we believe we could get the greatest penetration and growth and the physician accounts, which we think can drive the highest volume as well as the untapped territories where we feel there remains great potential to add new physician accounts.

The contracted partner that we have brought on is going to compliment those efforts, targeting if you will those physician practices that are subcritical mass from a volume potential for us. They will also be targeting competitive accounts for us. So it’s a very complimentary relationship, where our dedicated internal resources, in summary, are against the highest return opportunities.

On the other hand, we know the growth potential for MCOT technology is so substantial that we didn’t want to leave unaddressed the remaining opportunity and that’s why we brought on a contracted partner.

Amit Bhalla - Citi

So how many feet does that add to your existing 121 reps?

Randy H. Thurman

Well we will start out with a relatively manageable number, remember we are going to be training them just as if they were CardioNet reps and then as we demonstrate their productivity we will add. Now let me just tell you that they are all full-time dedicated to CardioNet, they aren’t sharing their time elsewhere.

At the present time because of kind of contractual terms we're not prepared to give a specific number, for kind of contractual and competitive reasons, but the approach is going to be to start out with a manageable number and as we show success to grow that over time.

Amit Bhalla - Citi

Okay and just a quick follow up. Heather, can you give us a dollar amount of bad debt expense in the fourth quarter, and then Randy, can you give us an update on the Biotel litigation? Thanks.

Heather C. Getz

Sure. We had $6 million of bad debt expense in the fourth quarter.

Amit Bhalla - Citi

And Biotel?

Randy H. Thurman

Yeah, the Biotel litigation is you know turning. I think the next step is going to be depositions in the next couple of months. And you know I can't predict an outcome. There's really been no – nothing material to report on it recently. These – you know as you know very well these kind of legal actions take time and as I've said the next step is to take depositions and I think that will be in the next two months.

Amit Bhalla - Citi

Thank you.

Operator

Your next question comes from the line of Ryan Daniels with William Blair and Company. Please proceed.

Andy O'Hara - William Blair & Co.

Hey guys, it's Andy O'Hara in for Ryan today. Just a couple quick questions here. In terms of the update on your discussions with CMS, can you talk a little bit about the data requirements they're looking for potentially in establishing a national rate?

Randy H. Thurman

Yes, that's a good question. Since the unexpected decision by Highmark to cut our reimbursement, CardioNet has really led the industry in developing a working relationship with CMS that could lead to a national reimbursement. We believe that the decision to cut MCOT reimbursement was not correct, based on the prescribed methodologies used by Medicare reimbursement. Part of the issue stems from the fact that CardioNet's MCOT technology was really the first technology with 24/7 attendant monitoring service, that has different cost implications than your typical physician office services or the OPPS code where CardioNet was we believe inappropriately designated.

In addition, CardioNet provides both a device and a service, Andy, to your address how this is going to work, which also makes us unique. You know, we're not a peer playing device company, we don't sell devices, we supply devices we develop devices and provide a service. So this process has commenced. Part of the process, CardioNet has retained really outstanding experts who are experienced at developing reimbursement models used by Medicare. Of course, there is no guarantee of an outcome, but as we've stated previously, the unexpected cut in reimbursement by Highmark seems to be related to this OPPS hospital code. CardioNet's technology has never been developed for the hospital, never been used in a hospital environment, and in fact we've never been paid for a patient who used MCOT within a hospital environment. So it just looks to us to have been a mistake. In our subsequent discussions with CMS, you know and from their comments in the interim final rule it became apparent as I just said that our 24/7 fully staffed monitoring of patients was a new challenge and CMS didn't want to take that on, didn't have the time necessarily to take effect this year. So in essence there was no precedent in Medicare reimbursement for CardioNet MCOT technology.

Now CMS – and this is important I think has asked CardioNet with these experts that we've retained to develop and propose methodologies that account for 24/7 monitoring. We're currently working with these expert advisers and are going to be presenting this data to CMS in the very near future.

Andy O'Hara - William Blair & Co.

Okay. So this is a methodology that you guys are developing together - it wasn't a situation where CMS said 'present this data to us and we'll consider it'.

Randy H. Thurman

As I just explained in our conversations with CMS, this whole issue of no precedent for 24/7 monitoring was the issue. CMS and CardioNet agreed that we CardioNet would work with some independent experts to develop a proposed methodology or methodologies that if adopted by CMS could be used in reimbursing MCOT. That process is active literally as we sit here, and we would expect this to be a continuing process with CMS early this year.

Andy O'Hara - William Blair & Co.

Great, that's helpful. And then one more quick question here. Do you guys have any update on the remaining large commercial payers that you're hoping to bring on board this year?

Randy H. Thurman

We are in dialogue with these large commercial payers, at least in some cases the review meetings have been scheduled. As we have stated before in our targeted growth this year we have not included any volume from the large commercial payers. Obviously we are putting every effort imaginable into contracting with them and if we're successful that could provide an upside to our business.

Andy O'Hara - William Blair & Co.

Okay, great. Thanks a lot guys.

Operator

Your next question comes from the line of Sara Michelmore with Cowen and Company. Please proceed.

Sara Michelmore - Cowen & Co

Yes, thank you for taking the question. You know, Randy with some of the changes and optimization in the commercial organization I was just hoping you could just give us some color on your thoughts on sales morale and things like that. Obviously one of the risks whenever you go through a transition like this is that you may have some sales turnover so I'm just wondering if you can kind of give us your thoughts on that. Thanks.

Randy H. Thurman

Absolutely Sara. Your premise I think is an accurate one. You go through this kind of change – can create turnover, can create morale issues with your sales organization. I can tell you that that is not the case at CardioNet. First of all, we've got an outstanding leadership team on our sales organization that the area Vice Presidents have been with the company a long time, our new Senior Vice President of sales that we brought on a year ago is an outstanding leader. These changes that we undertook were very well thought through.

The other thing I will tell you is whenever you kind of rationalize a sales organization the people who are let go are your less productive ones, and that's what happened. On the flip side of that, the Reps that are with us have assumed expanded responsibility, expanded territory, expanded compensation potential obviously driven by their results.

The other thing I would say is that our account executives are out there really selling state of the art technology. Promoting and dealing with cardiac – cardiologists and electrophysiologists. Love what they're doing. They're also in the middle of a business era that's growing 50% so they know the opportunity is there for them to produce and to make a considerable amount of money. We have experienced since the end of last year virtually no turnover amongst the account executives remaining with us after the restructuring. I literally think we've experienced no unwanted turnover. About a week ago I had the three area Vice Presidents in here, had a meeting with them asked them the same exact questions that you're asking, and was convinced that as a company we're doing the right things and their leadership is. So right now I'm pretty confident that this kind of change is not going to result in any kind of noticeable disruption.

Sara Michelmore - Cowen & Co.

Okay, that's really helpful. And then, you know, just curious now that this Medicare change has gone through, it doesn't affect only yourselves it affects your competition as well. I'm just wondering if you've seen any changes in the competitive landscape good or bad since this transition has occurred.

Randy H. Thurman

Well, you know honestly Sara, we don't really face significant competition. Not all MCOT technology is created equal and CardioNet is the only company that has done substantial clinical research to support all of our claims. Independent research has been done to show CardioNet's MCOT technology to be superior. The feedback that we get from our physician customers tells us that our customer service, our patient service, our reporting technologies are superior to others who claim to be in the same business. And we know that our success rate when we go into competitive situations is significant. We also know in the past year based on the clinical research and the superiority of our service and reporting that we took away some significant customers from others that are in the business.

I commented a few minutes ago about the area Vice Presidents who came in last week and I had a meeting with them, and I actually posed the same question to them. And they said Randy, the companies that people may perceive to be our competitors are not our competitors. What they are seeing in their own words some mom and pop organizations regionally that will go in and convince a physician to make a change, but in a significant number of those cases even when a change is made we win that business back when that perceived competitor can't meet the same levels of patient physician service that we do. You've put the question in the context of the reduced reimbursement rate from Medicare – I wouldn't change my answer given that as a factor either.

Sara Michelmore - Cowen & Co.

Okay, and then maybe just one last one. We're heading into conference season, medical meeting season and I'm just wondering if there's anything that you'd highlight that either data wise that the company is presenting or doing at ACC or HRS this year. Thanks.

Randy H. Thurman

We will be present at both. At this point in time we're not prepared to kind of preannounce any news that we would introduce at those meetings. The most significant new technology that we are working on this year is the new MCOT platform which we have spoken about before, whether or not we are prepared at ACC or HRS to start talking about that – probably not.

Sara Michelmore - Cowen & Co.

Great. Thank you so much for taking my question.

Operator

Your next question comes from the line of Matt Dolan with Roth Capital Partners. Please proceed.

Matt Dolan - Roth Capital Partners

Hi everybody, good evening. Heather, maybe to start on the TNL (ph) and just looking at operating expenses, can you walk us through the timing of some of your cost cuts? You mentioned gross margins should be sustainable and improved from Q4. What should we expect for R&D and Sales and Marketing relative to what we saw in the fourth quarter?

Heather C. Getz

As it relates to the specifics around the cost cutting, other than saying that we've begun the implementation of those reductions, I can't give you specifics as to which lines they will be affecting and at which point in time.

Matt Dolan - Roth Capital Partners

Okay. And then Randy, a follow up on your reimbursement discussions with CMS. Do you get the sense that MCOT reimbursement will develop through the typical Medicare time-line for establishing rates, you know late summer into November based on the feedback you've had from them, or are do you expect to find kind of a unique conclusion to the analysis that you're presenting?

Randy H. Thurman

As much, Matt as we'd like it to be a unique solution, I think there's every reason to believe that it will follow the normal cycle.

Matt Dolan - Roth Capital Partners

Okay. And then on the – on your guidance and your outlook for volume growth in 2010, have you factored in any real traction from your contracts selling organization that you've added?

Randy H. Thurman

Only on the upside part of it. Again, the traction that we get in part is that it allows our internally dedicated account executives to focus their time on the most productive and highest return accounts. So you would expect – so we have factored that in. But in terms of real incremental revenue beyond that it would be more on the upside of our range.

Matt Dolan - Roth Capital Partners

Okay. And then finally, just on the strategic review we talked about on the last call, can you give us any insight into your expectation for timing – is there a definitive plan to complete this program or is this something that proceeds indefinitely or opportunistically, however you want to look at it?

Randy H. Thurman

The CardioNet board and the management are fully committed to pursuing everything that could maximize shareholder value. That I assure you. Regarding the strategic engagement, you know and until unless there's something material to disclose, it's really not appropriate for us to make any more comments.

Matt Dolan - Roth Capital Partners

Okay, fair enough. Thanks guys.

Operator

(Operator's Instructions) Your next question is a follow up from Amit Bhalla with Citi. Please proceed.

Amit Bhalla - Citi

Just housekeeping. Heather, can you quantify the performance of the PDS products in the quarter and then what was the actual revenue from the CardioNet systems in the quarter? Thanks.

Heather C. Getz

Sure. So from a revenue perspective the PDS revenue in the full year 2009 is about 10% of our overall revenue.

Amit Bhalla - Citi

What was it in the quarter? How much was it down year over year?

Heather C. Getz

In 2008 the PDS as a percentage was around 17% of our overall revenue.

Amit Bhalla - Citi

Okay. And just the fourth quarter CardioNet system number? To compare to the third quarter number of about $29.5 million? What was that?

Heather C. Getz

It was around $30 million.

Amit Bhalla - Citi

Okay, thanks.

Operator

Ladies and gentlemen, that concludes the Q & A portion of today's conference. I would now like to turn the call over to Mr. Randy Thurman for closing remarks.

Randy H. Thurman

Thank you very much everybody for attending the CardioNet year end 2009 and fourth quarter conference call. As I had mentioned in my comments, this organization really performed extraordinarily well in 2009 in the face of unexpected adversity. As we go into 2010 the management team has addressed that adversity in any number of ways. We are very confident about the volume projections that we've put out supported by a really fine tuned selling organization. We've also commenced a very constructive process with CMS that could – while there's no guarantee lead to a national reimbursement rate. Regardless, the company has undertaken significant cost and productivity improvement initiatives that in total will yield $23 million over time. I think you can feel certain that the CardioNet management team really stood up to the leadership challenge in 2009 – as I said before are committed to doing whatever it takes to generate value for all of our stakeholders and shareholders in 2010 and beyond. Thank you very much.

Operator

Ladies and gentlemen, (Operator's Instructions). Thank you, you may now disconnect. Have a great day.

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Source: CardioNet Q4 2009 Earnings Call Transcript
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