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MGC Diagnostics (NASDAQ:MGCD)

Q4 2013 Earnings Call

December 19, 2013 11:00 am ET

Executives

Joe Dorame

Gregg O. Lehman - Chief Executive Officer, President and Director

Wesley W. Winnekins - Executive Vice President of Finance and Corporate Development

Analysts

Jack Wallace - Sidoti & Company, LLC

Paul Nouri - Noble Equity Funds

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

Shai Dardashti - Dardashti Capital Management

Operator

Good morning, and welcome to the MGC Diagnostics Fourth Quarter Fiscal Year 2013 Financial Results. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joe Dorame of Lytham Partners. Please go ahead.

Joe Dorame

Thank you, Amy. Good morning, and thank you for joining us to review the financial results for MGC Diagnostics Corporation for the fourth quarter and fiscal year 2013, which ended October 31, 2013. As Amy indicated, my name is Joe Dorame of Lytham Partners. We are the investor relations consulting firm for MGC Diagnostics Corporation. With us on the call representing the company are: Dr. Gregg Lehman, President and Chief Executive Officer; and Mr. Wes Winnekins, Chief Financial Officer. At the conclusion of today's prepared remarks, we'll open the call for question-and-answer session. If anyone participating on today's call does not have a full text copy of the release, you can retrieve it from the company's website at www.mgcdiagnostics.com or numerous financial websites.

Before we begin with prepared remarks, we submit for the record the following statement. Statements made by the management team of MGC Diagnostics Corporation during the course of this conference call that are not historical facts are considered to be forward-looking statements subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for such forward-looking statements. The use of words, such as anticipate, believe, estimate, expect, project, intend, plan, will, target and other words and terms of similar meaning in connection with any discussion of future operating or financial performance or business plans or prospects identify forward-looking statements.

The forward-looking statements contained herein are subject to certain risks and uncertainties and important factors that could cause actual results to differ materially from those reflected in the forward-looking statements included herein. These risks are detailed from time to time in MGC Diagnostics Corporation's filings with the United States Securities and Exchange Commission, including the annual report on Form 10-K for the year ended October 31, 2012.

Participants on this call are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The company undertakes no obligation to publicly release the results of any revision to these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

With that said, let me turn the call over to Dr. Gregg Lehman, President and Chief Executive Officer of MGC Diagnostics Corporation. Gregg?

Gregg O. Lehman

Thank you, Joe. I would also like to thank all of you for participating on today's call. We really appreciate your continued interest and support. Fiscal 2013 was a breakout year for MGC Diagnostics. It represents the sum of our efforts to reconfigure the company through a deliberate and detailed process that was put into motion when I came onboard about 2.5 years ago. As a result of successfully implementing our strategic plan, we have all of the operational pieces and key personnel in place that contributed to driving solid double-digit revenue growth for fiscal year -- for the fiscal year and generated earnings for a fully diluted share of $0.34 compared to $0.00 per share in fiscal 2012. I am proud to report the fourth quarter represented the third consecutive quarter with record revenue growth and earnings and that the results for the full year were very strong. We've made progress in building MGC Diagnostics into a leading global medical technology company that provides innovative solutions to the global health care industry. I firmly believe we are poised to continue that progress in the coming years. We are also very pleased that our loyal shareholders have been rewarded with a substantial enhancement in the value of their investment in MGC Diagnostics.

To execute our strategic plan, a number of very difficult decisions had to be made over the past couple of years. However, the net result is a more highly focused competitive company with higher quality and innovative products, industry-leading customer service and dramatically improved financial performance from which we can continue to grow the company in coming years.

This is only possible with the commitment of the entire MGC Diagnostics team and particularly my newest team members, Todd Austin, our Executive VP of Global Marketing, Engineering and Corporate Strategy; Matt Margolies, our Executive VP of Global Sales and Service; and Wes Winnekins, our Chief Financial Officer.

Todd and Matt work closely to develop and execute a strategy to solidify our market position and leverage our products and brand to effectively address the needs of our customers, both domestically and internationally. Wes has been instrumental in managing the financial resources of the company to achieve the best possible financial outcomes on the manufacturing and sales and marketing areas of our business, implementing the lean continuous process improvement, as well as scrutinizing corporate overhead and our cost of doing business. Everyone at the company from the manufacturing floor to the back office has worked very hard to achieve the results we are talking about today. We are clearly heading in the right direction. I am very proud to be associated with this great team and company. For the fiscal year, domestic and international revenue increased 17% and 16%, respectively. The growth in annual international sales was primarily driven by a sizable sales increase in Canada, although we also experienced the sales increase in the Middle East and Latin America.

Total equipment sales for fiscal 2013 increased 22% and service revenue increased 19% compared to last year. Increased service revenue along with higher average selling prices or ASP for equipment improved our gross margin to 56% compared to 54.5% for fiscal 2012, and operating expenses as a percentage of revenue fell to 51.5% compared to 58.4% last year.

Throughout fiscal 2013, you have heard me emphasize the importance of a new metric. The point-of-sale Attachment Rate for Extended Service Contracts. We define the Attachment Rate as the percentage of instrument sales that include a point-of-sale Extended Service Contract. With the Attachment Rate as a major priority for our sales team, 26.5% of equipment sales in fiscal 2013 included an Extended Service Contract up from 6.2% in 2012, a 330% increase. These contracts, which have terms ranging from 1 to 5 years, will result in higher service revenue in future periods once the initial 12-month warranty expires. Looking ahead, our goal is to increase the Attachment Rate to ensure our customers' systems operate very efficiently.

Recurring revenue, which is comprised of supplies and service revenue, increased to $11.5 million for the fiscal year or 36% of total revenue. Revenue from our GPO distribution channel increased 42% compared to fiscal 2012 and accounted for 54.5% of total revenue. The GPO channel has proven to be an effective sales channel for us because it provides the customer with a definitive pricing structure, which results in a shorter sales cycle for us.

We are pleased with the solid growth from these 2 categories during the fiscal year. Net cash provided by operating activities was $2.5 million compared to $914,000 in fiscal 2012. Our cash position now exceeds $10 million. We carry no long-term debt, which means we effectively run our business from internally generated cash flow. Our cash position remains very strong even after paying a $1.8 million onetime cash dividend to our shareholders during the second quarter. We are pleased with the progress achieved in fiscal 2013 in driving sales and profitability. The company is now appropriately configured and we look to the future with great confidence.

At this point, let me turn the call over to Wes Winnekins, our Chief Financial Officer, for a detailed review of the financial results for the fourth quarter and fiscal year. At the conclusion of Wes' remarks, I will provide you some additional background and then open the call for your questions. Wes?

Wesley W. Winnekins

Thank you, Gregg. For the quarter, we reported revenue of $9.1 million, an increase of 11% from the prior year's fourth quarter revenue of $8.2 million. Equipment and accessories revenue increased 10% to $6 million from $5.5 million during the prior year fourth quarter and accounted for 66% and 67% of total revenue, respectively. This increase is primarily due to increased sales of pulmonary equipment through our group purchasing organizations, competitive account conversions and higher average selling prices.

Supplies revenue improved to $1.7 million compared to $1.6 million during the prior year fourth quarter and accounted for 18.6% and 19.3% of total revenue, respectively. Comparatively, supplies revenue for the fourth quarter is up 8% from the quarterly average of $1.6 million for our first 3 quarters.

Moving forward, we remain focused on improving supply sales as they are an important component of growing our recurring revenue base in improving total gross margin.

Service revenue, which includes service contracts and time and material billings, increased 24% to $1.4 million from $1.1 million during the prior year fourth quarter and accounted for 15% and 14% of total revenue, respectively.

This increase for the quarter was primarily due to a 19% increase in revenue from extended service contracts and a 31% increase in revenue from time and material billings. Consistent with our selling strategy for supplies, focusing on service revenue growth, will increase our recurring revenue base and total gross margin.

Domestic revenue for the fourth quarter increased 15% to $7.6 million, from $6.6 million during the prior year fourth quarter. The increase in domestic revenue was primarily due to an increase in competitive account wins, service revenue, GPO and direct-to-customer system sales. Domestic revenue accounted for 83% of total revenue for the quarter compared to 80% in last year's fourth quarter.

International revenue decreased 4% to $1.58 million from $1.64 million during the prior year fourth quarter. This decrease was primarily driven by lower distributor sales in our Latin American and Asia-Pacific markets. International revenue accounted for 17% of total revenue for the quarter compared to 20% in the prior year fourth quarter.

Moving down the income statement. Gross margin was 57.8% for the fourth quarter compared to 55.1% for the prior year fourth quarter.

This 270 basis point improvement in gross margin is primarily due to improved pricing for equipment sales, higher rates for time and material service billings, as well as volume and product mix.

Overall, we expect to sustain margins in the mid-50% range absent significant changes in volume and product mix. Regarding operating expenses, fourth quarter sales and marketing expenses were $2.9 million compared to $2.5 million for last year's fourth quarter. This increase is primarily due to higher selling expenses attributed to higher customer sales for the quarter compared to last year. Fourth quarter general and administrative expenses were essentially flat at $1.2 million compared to last year's fourth quarter. Research and development expenses came in at $363,000, representing a decrease of $428,000 from last year's fourth quarter. This decrease is primarily due to a $294,000 expense reduction attributed to claims the company will be filing under the State of Minnesota Credit for increasing research activities for fiscal years 2011, 2012 and 2013. For the fiscal year, we have invested approximately $1.4 million in new research and development initiatives. For the quarter, capitalized software development cost totaled $150,000 compared to $161,000 for the same quarter last year.

When you add back the Minnesota expense claims of $294,000 and approximately $769,000 of capitalized software development cost for the year, we spent about 10% of revenue on research and development activities, which is where we target our annual spend. Going forward, we will continue investing in new product development to ensure our current products remain viable and competitive and our future product pipeline remains robust.

Operating expenses for the quarter as a percentage of revenue decreased approximately 7 percentage points to 48.2% from 55% in last year's fourth quarter. Higher revenue is the primary reason for this positive result. Operating income for the fourth quarter was $875,000 compared to operating income of $7,000 in the 2012 fourth quarter.

We reported net income of $836,000 or $0.20 per diluted share versus net income of $790,000 or $0.20 per diluted share during the prior year's fourth quarter. It's important to note that during the fourth quarter of 2012, the company recognized $785,000 of its net income from discontinued operations, which included the $816,000 net gain we realized upon the sale of our New Leaf business in August 2012. As a result of the August 2012 New Leaf asset sale, the company has eliminated all revenues and expenses associated with its New Leaf business and presented the income from New Leaf activities as discontinued operations in our consolidated statements of comprehensive income or loss.

As of October 31, 2013, the company continues to carry net operating loss in general business tax credit forwards. The company estimates that the amount of net operating loss carryforward that is not limited is approximately $12.8 million. These loss carryforwards will expire in years 2018 to 2032, and related deferred tax assets are fully reserved.

Turning to the balance sheet. Cash and investments were $10.6 million at the end of the fourth quarter compared to $9.7 million at the end of our last fiscal year. As Gregg mentioned earlier, we generated cash of $2.5 million from operating activities. From this amount, we used $902,000 in investing activities, most of which relates to increases in capitalized software and purchases of property and equipment. We also used $685,000 in financing activities, most of which relates to the $1.8 million special onetime cash dividend we paid to shareholders in April 2013.

The company ended the quarter with no long-term bank debt and working capital of $15.4 million compared to $13.5 million at the end of our last fiscal year. That concludes my comments, so I'll turn the call back to Gregg.

Gregg O. Lehman

Thanks for that review, Wes. Let me now touch on a few additional items before we open the call for your questions. As I've indicated in previous calls an important strategic initiative for our sales team is to expand our market share by converting our competitor's customers into MGC Diagnostics customers. We operate in a fairly mature market that consistently grows at mid-single-digit rates. Internally, our goal is to grow at a higher rate and in order to do that, we must achieve significant competitive takeaways. Stepping up to meet that challenge the sales team converted 102 competitive accounts totaling $6.3 million of recognized revenue during fiscal year 2013. Included in this group of conversions are a number of highly recognized national health care institutions that has concluded that our products represent the best diagnostic solutions. It is important to note that many of our competitors are now attempting to compete on price by offering significant discounts. However, we continue to earn the business based on reliable products with data interface solutions and industry-leading customer service. We are pleased to be the provider of choice for many leading health care providers and we look to expand that list in the coming years. As it relates to our new forced oscillation technic product, or FOT, training of international distributor is now complete in the European market where the product has qualified for the CE Mark. We expect that the various distributors will commence marketing activities shortly and that initial stocking orders will be received in the near future. With respect to the FDA approval in the United States, we submitted our 510(k) application to the FDA earlier in the year. However, the recent government shutdown has delayed the final approval process. The FDA has resumed its evaluation, and we hope to hear from them in the near term. As Wes indicated, MGC Diagnostics invested approximately $1.4 million in new research and development initiatives. These investments, accompanied by our continued capitalized software development, are critical to the success of the next phase of our strategic plan. The anticipated result will be the introduction of new products, services and technologies, ensuring a market-leading future product and software pipeline.

For the seventh consecutive quarter, MGC Diagnostics was awarded MD Buyline's #1 overall rating in a number of evaluation categories, including pulmonary function products, service and support capabilities. We are pleased to be recognized as a market leader by the industry's leading independent industry analyst.

As we look ahead to fiscal 2014 and beyond, growing our business and driving consistent profitability are our main priorities. With 3 consecutive quarters of profitability under our belt, we are on our way toward the consistency that we seek. We maintain a strong cash balance with 0 long-term debt. This liquidity improves our ability to remain opportunistic in our pursuit of strategic partnerships, exclusive licensing arrangements and merger and acquisition opportunities that can strengthen our position within the industry. We have made great progress at MGC Diagnostics in the past 2 years in terms of becoming a competitive force in the market and enhancing shareholder value.

All in all, fiscal 2013 was a great year for MGC Diagnostics as we accomplished a number of our strategic goals. Today, we are more competitive, innovative and customer-driven than at any time in our company's history. The management team is working tirelessly to bring about this change. I thank all of our employees for their dedication and unselfish hard work to bring us to this point. There is renewed energy and optimism, which is evidenced by a very high level of employee engagement. We look forward to enhancing our leadership position within the cardiopulmonary diagnostic industry. With that, let me turn the call over to our conference operator, Amy, to commence the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jack Wallace at Sidoti & Company.

Jack Wallace - Sidoti & Company, LLC

Just want to talk a little bit about the competitive account wins in the quarter. It looks like there was 31 bringing you to 102 on the year. It's been a very successful year for you converting competitive accounts. What can we expect for next year? It's an incredible number so far this year. Has all the low-hanging fruit been picked? Is there more to come? How should I think about this going forward?

Gregg O. Lehman

Well, obviously there are a significant number of competitive accounts that we are still targeting and we do not consider this year to be just picking all the low-hanging fruit. I think there is still quite a bit of low-hanging fruit available. We are continuing to target competitive accounts. Our sales representatives are well-versed in where those accounts are, and are establishing relationships with those competitive accounts. So while I can't give you a significant number, as you know, I feel very confident that 2014 will continue to shape up in a year that we will experience the type of growth that our board and management team are expecting. So I'm very optimistic about 2014.

Jack Wallace - Sidoti & Company, LLC

Great. And you mentioned in the comments that some of your competitors have tried to lower pricing and that hasn't deterred to those accounts from going ahead and converting over. Have you seen other reactions from those customers? Maybe more R&D spend? Potential new products come into the market as reaction to the competitive accounts that you are winning?

Gregg O. Lehman

No, I think the main reasons are not based on price as you accurately pointed out, but more on the software interface that we provide, as well as the pipeline of next-generation software applications that we are showcasing, which are still in a Beta format. But I think by and large, customer response time to problems, as well as superior customer service, we have several reference accounts, which these competitive accounts call and talk to and that really pushes them toward a decision to go with MGC Diagnostics.

Jack Wallace - Sidoti & Company, LLC

And then in previous quarters, there were luminary account wins, and you discussed and maybe just alluded to their in your last comment, that these were accounts that also help bring in new business. Were there any luminary accounts wins in the quarter? And maybe what's the outlook on those?

Gregg O. Lehman

For Q4, yes, we had 3 what I consider to be luminary accounts. We don't have permission to name them at the present time. But we have others targeted in our pipeline for the next 4 quarters as well.

Jack Wallace - Sidoti & Company, LLC

Great. And then last question before I hop in the queue here. The Attachment Rate up significantly from last year, but it's still about halfway to where I believe you referenced the industry norm is in the mid-60s there. What is the path to 60-plus percent Attachment Rate as you're at 31% or 32% in the quarter?

Gregg O. Lehman

Well, one of the main initiatives that we embarked upon in 2013 was changing the commission structure for our sales representatives. So now they are rewarded through commission for selling, at the point of sale, extended warranties. Prior to 2013, they were not. I think, secondly, we have a very talented internal sales team that does a lot of follow up work. So the Attachment Rate is -- I think will continue to grow. We have, I think, trained our service reps, as well as our sales reps to explain why this is important particularly with health care reform really being implemented to a much greater extent in 2014, which simply means these hospitals will lose significant amounts of revenue if, in fact, some of these uninsured that are now hopefully they're able to register on the government's website. But if they're able to get insurance coverage. They are going to be doing a lot more diagnostic tests in 2014 than probably the 3 previous years. So they can't afford to be down, which is a great sticking point for us in selling extended warranties. The other focus is from an internal company standpoint, we look at this as a recurring revenue stream, which is like an annuity for us. And this will continue to grow as we've mentioned before, we take the cash in at the point-of-sale when we sell the extended warranty. We take 100% of that cash in, but we do not recognize any of that revenue until the 13th month when the factory warranty expires. And then it's ratably recognized over the term of the extended warranties. So if it's additional 12, 36 months or 60 months that recurring revenue stream starts to come in. So you will see in subsequent quarters that continue to increase, which is like an annuity stream for the company.

So prior to my management team and myself coming to the company, we had very little of these extended warranties as you knew from a fixed percent Attachment Rate. And so basically, every year, to hit our numbers, we had to go out and bring in a 100% almost close to 100% of the revenue back in with very little recurring revenue. So this has been a strategic initiative for the company. I think you'll see it continue to grow as new equipment comes on board. So I think just stay tuned. We've got a game plan and I think we're executing on it.

Operator

Our next question comes from Paul Nouri at Noble Equity Funds.

Paul Nouri - Noble Equity Funds

So you've got around $10 million in cash right now. Do you plan on making any acquisitions? Or buying back some shares?

Gregg O. Lehman

Well, our share repurchase program expired at the end of the fiscal year. However, as I mentioned in my comments, Paul, we are continuing to be very opportunistic and looking for strategic partnerships, the exclusive licensing arrangements or M&A transactions that would add to our product and technology portfolio. We, of the executive team, primarily led by Todd, Wes and me, are continuing to look at potential opportunities. So we have cash. Our stock is trading much higher and we have no debt. So we have a lot of levers we can pull for potential financing opportunities if we find the right transactions.

Paul Nouri - Noble Equity Funds

And I guess, international was down for the quarter. Was it down for the year too or no?

Gregg O. Lehman

No. It was up for the year.

Paul Nouri - Noble Equity Funds

Is there anything additional you're doing on the international front to...

Gregg O. Lehman

Yes, there is. We're actually continuing to look at our international independent distributors. We've touched on this in previous conference calls. We've changed out several. We continue to strengthen the distributors that we have in the fold, and we think Canada is a great example, where we're really starting to see some new growth and sales traction. I think you'll continue to see that in Western Europe. And we're very confident that Asia-Pacific, as well as the Middle East and Latin America will continue to grow. One of the disadvantages that we're needing to address is obviously the tariffs and the VAT tax that we get charged for shipping completed equipment outside of the United States. So if we could find assembly opportunity in some of our emerging international markets, that would keep our cost of goods at a reasonable rate and allow a lot more margin for the distributors to mark up the product and sell it in various tenders that they're bidding on. So we really focus this year more on really shoring up our domestic sales team and some key distributors that now in 2014 will be focusing very much on OUS distributorships and strengthening those partners that we have.

Paul Nouri - Noble Equity Funds

And is most of your international revenue equipment? Or is it a similar balance for the U.S.?

Wesley W. Winnekins

Yes Paul, this is Wes Winnekins. Most of our revenue internationally comes from equipment sales, but we also realize supplies revenue from our distributors. Service revenue that distributor sells, they keep 100% of.

Operator

Our next question comes from Brooks O'Neil at Dougherty & Company.

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

So you mentioned, Gregg, in your prepared remarks the success you've had with the GPO channel. And I'm curious, if you could give us sort of a sense of where you think you're at with that? Have you tapped that opportunity? Do you still see big upside 2014 and beyond through that channel?

Gregg O. Lehman

I think, we probably will not see as rapid of growth in the next couple of years as we saw in the last year in particular. However, we still think there's a lot of upside potential with GPOs. As you might surmise, most of the GPO contracts are 3-year contracts. So in 2014, we will have a few of those renegotiating with us, and I think we'll get better terms. We have not been able to pass along the 2.3% medical device tax, but we are getting more aggressive in terms of negotiating with the GPOs. But we still think it's a very, very effective sales channel, but I think it will grow, but more modestly in 2014.

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

Okay. And then secondly, you've discussed both in your prepared remarks and in response to questions a little bit about product development. But can you share with us sort of conceptually or broadly some of the areas that you're particularly seeing opportunities for further product development and innovation in your lineup?

Gregg O. Lehman

Yes. Yes, without getting into too many specifics, there -- we're looking at, what I call, next-gen software platforms and it's a long-term process because the platform really needs to be, what I call, cutting-edge technology that is able to have a bidirectional flow of data between our equipment, our software and electronic medical records. So the specifications that have been developed by a number of our hospitals we're adapting to that with the next-generation of software. So that's, I would say an intermediate-term project that we have several FTEs and our software development team working on as we speak. I would also say that we've had several iterations of our BreezeSuite software, which is the current platform that we're on. We have about 2 more versions that will be released on quarterly releases that will go to the market in 2014. Our hospitals are aware of this. And by the time our new platform comes out, we will then do -- it will be available on all the new equipment going forward after the commercial release. But then there will be a phase in of existing equipment. We still have an initiative for lifecycle planning with older equipment over 10 years of age and we will continue that initiative of upgrading our current clients that have older equipment with new equipment that will have newer versions of the software. In addition, one of our customers that we showcased last fiscal year, Frontera, out of Texas, we're designing a new cart for some of their mobile testing units that has adaptability to our existing product line our Ultima cart series that we have. So we're planning on finishing that in fiscal 2014. We've messaged that again to the market. But then we're also -- and I would be remiss if I didn't say we're not -- we're going to be content with that. We are looking at what we call game changing technology. Probably all of our competitors are trying to do the same thing and we're in very stealth mode, but we're working very diligently and will continue to spend approximately 10% of our revenue on those types of developmental projects in our R&D pipeline. So under Todd Austin's leadership, I think, it's highly focused, it's very strategic. We've messaged that to our customers and our board. So I think, we're very on target. So yes, it's the lifeblood of the company, Brooks, and we're not going to just rest on our laurels based on competitive takeaways and organic growth.

Operator

[Operator Instructions] And our next question comes from Mark Stiefel [ph] at Stanfall [ph] Capital.

Unknown Analyst

Here's my question. $14 million of SG&A is a huge percentage of $31 million of revenue or maybe this year coming up, it's going to be $15 million of SG&A and $35 million of revenue. And I don't think that's your fault. I think it's the fault of a relatively small revenue base. And when I look at comparable deals out there, I see a med device company with, let's say, 10% growth or even high-single digit growth and 55% gross margins would easily sell for 2x revenue to a larger acquirer who could eliminate a bunch of that SG&A, or spread it out over a larger revenue base. So my question is, if this company and tell me if you think I'm wrong, could be sold next week for $19 or $20 a share which is what that would be, including the cash you've got on hand. Why is it a better deal for you to keep running it as a stand-alone entity at $13 a share?

Gregg O. Lehman

Well, that's an interesting question. So let me take that. And your observation is right. We've -- over the last 2 years, we have cut SG&A, G&A in particular, and as a percent of revenue, it should continue to drop, but we have to have an infrastructure as a manufacturing company and to continue to support our growth objectives. So all that said is, I think we are right-sized. Wes is continuing to work on process improvement, overhead reduction, but more importantly we're now tackling a value engineering of our existing product line to cut our cost of goods. And so that's an ongoing initiative. But to your real question, I think we have kept our head down and really focused on getting this company on track, getting the right product mix, getting the right technology mix in our equipment line and my thought is, we're not actively trying to sell the company. But as we continue to succeed, obviously, shareholder exit could be one of 2 things. We could continue to execute in subsequent quarters. I think, the stock will take care of itself. And we've had some shareholders that have had a nice exit based on their cost basis. But I would be remiss, if I didn't say somebody is probably going to take a look at us down the road to -- and it probably would not be a financial buyer, be more of a strategic buyer. But I don't think that time is here yet. I think, we have some other initiatives. We need to complete. We're even looking at getting into some complimentary and adjacent markets in our 3-year strategic plan that we just approved in August. So I think, once we continue to not only execute financially, but show that the strategy has legs, all of that potential M&A activity will take it -- it will take its own course. I think, people will knock on our door. We don't have to actively seek it.

Unknown Analyst

Okay. Then let me ask you sort of a specific question, maybe about incremental SG&A. It seems that incremental SG&A seems sort of high relative to incremental revenue. So at what point, do you get some real operating leverage there? I mean, is there a rule of thumb? I mean, let's say, you did another, I don't know $3 million in revenue this year. How much SG&A, do you have to add to get $3 million of additional revenue?

Wesley W. Winnekins

Yes. This is Wes Winnekins. We won't have to add any additional infrastructure to accomplish in your example $3 million of additional revenue.

Unknown Analyst

What about sales guys? I mean, sales commissions?

Wesley W. Winnekins

Yes. Sales commissions obviously would follow the growth of revenue. So the way we've got the plan, the commission plan set for FY '14, it's going to be comparable to what we spent in FY '13.

Unknown Analyst

So what does that mean? I mean, you basically have salaries, right, and that's the same. So let's say your sales staff sells an extra $3 million worth of stuff, how much extra commission do they make on top of whatever their salaries were last year?

Wesley W. Winnekins

Commissions are driven by the quotas that are given to a salesperson each year, right? So if we -- the sales that we achieved in FY '13 of roughly $20.5 million, allowed us to grow the topline about 17%. So as we -- our objective is to continue growing the company this year. So as a function of setting an appropriate quota for FY '14 to better manage the commission spend that we'll experience this year.

Unknown Analyst

So -- again, forgive me for belaboring a point, I just want to get specific here. On another $3 million of revenue, what could we expect to fall down to the operating line? Let me get that specific.

Wesley W. Winnekins

Yes. We don't provide guidance, Mark. And so it's tough for me to give you that level of granularity.

Unknown Analyst

Well, okay. I mean, I'm not looking for revenue guidance, but I'm trying to figure out when you really start getting some operating leverage here? Because you're getting a little bit, but with your gross margins, I would have thought you'd have more.

Wesley W. Winnekins

Yes. I think, under your hypothetical example of $3 million in revenue growth. I would say that a good portion of the margin associated with that revenue is going to fall to the bottom line.

Unknown Analyst

Would you define a good portion?

Wesley W. Winnekins

I mean, our margins for this year in total was roughly 56%. I'm not saying that we're going to see incremental selling expenses tied to that $3 million of revenue.

Unknown Analyst

Okay. Well, that's what I'm asking. Good, yes. So in other words, most of the gross margin would fall down to the operating line. Is that a fair statement?

Wesley W. Winnekins

Yes. That's a fair statement.

Gregg O. Lehman

That's fair.

Operator

Our next question comes from Shai Dardashti at DCM.

Shai Dardashti - Dardashti Capital Management

Early in the call, you mentioned that other competitors are trying to compete based on price. I'd like to please understand the dollar amounts involved per transaction? So what's a typical price point of a product and what's a typical discounting that the peers are trying to undercut by?

Gregg O. Lehman

Oh, well, different product lines have different ASP. So our body box, which is a body plethysmograph has an ASP of roughly $50,000, give or take some. I think, we're seeing some competitors that actually have -- they start out with lower ASPs by about 10%. And then on top of that, we've seen in some cases where they may discount another $5,000 or $6,000 or throw in some free software. But at the end of the day, Shai, if the competitor tries to do that and they own the existing account, but they're having difficulties in terms of service or software updates, for the provider who's running these pulmonary clinics, that's kind of a moot point because they're just saying it's not about price at this point in time. So even if competitor comes in at $10,000 less than ours, we haven't lost those accounts.

Shai Dardashti - Dardashti Capital Management

And I'd like to please just follow up. What is the range of ASPs? So $50,000 is one number. How wide is the bell curve?

Gregg O. Lehman

Well, most of our -- most of the product sales are the higher-priced body plethysmographs. But then we have our cart series which I referenced, which has an ASP of $18,000 to $20,000. And then we have our lower end products like spirometry that are about $5,000. So that's kind of a product mix. And one customer doesn't just buy one product. They may buy a product mix, so it's all over the landscape. There's not really an average that would be meaningful. Part of the sales also involves extended warranties, service and disposable. So it just depends on what the customer's configuration is and no 2 are alike.

Shai Dardashti - Dardashti Capital Management

So it sounds like there's an ecosystem, there's an iPad, an iPod and an iMac, and everything is interconnected. Is that basically how this tends to work?

Gregg O. Lehman

Yes. That's pretty accurate.

Shai Dardashti - Dardashti Capital Management

And then I guess there's Apple and there's Microsoft. How many different networks or how many different ecosystems exist?

Gregg O. Lehman

This is interesting because if you just look at where we're connecting our equipment to from cloud computing into electronic medical records, there's probably -- we probably run into a half dozen different systems unique to various hospitals and hospital systems. So we need to have the connectivity to import and export data from all those half dozen systems. So as an example, we have to configure our software to really map into the ecosystem that we're coming into. So again, it's not a function. In terms of the equipment and the functionality of the equipment, a lot of our competitors do the same type of tests. The differentiator is the software ecosystem if you refer to that, ours, I think has a very, very sophisticated, what I call, pathway to be able to pull data from EMRs as well as push data to EMRs and also to remote diagnostic's stations that pulmonologists and cardiologists have set up in their offices. We're actually looking at a new ecosystem that would be morphing some of our equipment and technology into home-based diagnostics and more handheld diagnostics. So that's where the future is going for, I think a more cost-effective treatment of care. So we're looking at other providers, learning how to map to their systems and it's an ongoing process. I wish, it would be as simple as just Apple, Microsoft, HP. I wish, it was that simple, but it's not.

Shai Dardashti - Dardashti Capital Management

If I could ask you to name names, who are some of the other systems out there which you particular respect, and which you run into often times?

Gregg O. Lehman

You mean in term -- when you say systems, are you referring to hospital systems?

Shai Dardashti - Dardashti Capital Management

I guess, just the software ecosystem, the software network effect. The other -- if you're trying to break in, who currently has a foothold?

Gregg O. Lehman

Well, I think -- every one of our competitors have -- has their own brand of software. So I don't know that that's really something that we have to worry about. I worry more about, for example, if the hospital's on an epic platform that we know the configurations of their epic platform as a lot of hospital use epic and so we have to be able to map to that. But we can -- I can actually -- if you want to get granular in terms of the number of systems, I can set up a time for you to talk to Todd Austin, our EVP of global marketing and software, because his team actually does all the heavy lifting for that.

Shai Dardashti - Dardashti Capital Management

It's perfect. Let me actually please just touch upon lifespan and lifecycle. How long do these typical installations last when they're in the field? Is it 5 years, 20 years? How long is the lifespan of a machine?

Gregg O. Lehman

Lifecycle planning should really be 5 to 7 years. However, as I've mentioned when I got to the company, we didn't do lifecycle planning and we had equipment, a lot of equipment, well over 10 years in the market. Some of it 15 and 20 years, and we just can't continue to support that with software and parts. So I think all of our competitors would probably -- ideally like to have 5- to 7-year lifecycle planning just from the efficiency and efficacy of supporting aged equipment with next-gen equipment. So our goal is to really start to upgrade all the systems in the market over 10 years. We'll probably get down to 7 or 8 years within the next 24 months.

Shai Dardashti - Dardashti Capital Management

And if I could ask you to whatever degree you're comfortable disclosing, how would you describe the breakdown of the installed base? What percent are new and what percent are vintage? Like in the past 6 months versus they've been out there for 5 years or more?

Gregg O. Lehman

I really don't know that number. I think one of our directors, department heads is the keeper of that and off the top of my head. I'd hate to speculate and be wrong. So I don't know. As we have thousands of equipment -- pieces of equipment around the world, so to give you that much granularity -- if I had it, I'd give it to you, but I don't have it right at the top of my head.

Shai Dardashti - Dardashti Capital Management

And my very last question, I'd like to ask about frequency. How often do you typically interact with a customer account? Is it once every 2 years? Or is it once every week? How often the customers write you checks and call you on the phone?

Gregg O. Lehman

Again, I don't that if there's any average. But I look at our service logs and I know our response time is, close to 90% of all of our calls are addressed within 2 minutes. But in terms of frequency of touches -- one thing that I think is pretty admirable, our sales reps actually continue to work with those accounts. And once the installation is complete and the training, they probably stop in just to say how are we doing once a quarter in some of the bigger accounts even more than that, where there's multiple installations. Our service technicians really only touch the account if there's an issue that needs to be addressed and we usually get to those within a day. But again, it's a very low frequency, but I would say the main touch point is the sales rep because they also help with the installation, so they are trained and a lot of our sales reps have clinical background as well. So that's really the touch point, which is very unusual. Usually after the sale, they never see the sales rep again, but not in our case. There is interaction depending on software releases with our inside sales and technical support teams. So if we have quarterly software releases, there will be a contact each quarter by our service team and our technical support teams. So I would say on a good average would say there's somebody touching that account either by phone or in person once a quarter.

Shai Dardashti - Dardashti Capital Management

I'm reading every conference call transcript going back several years. I believe at this time, it must have been 2 years ago or 3 years ago, around Christmas, a former employee called up to ask about Asia and China opportunities. I think it was December probably 2012 or 2011. Do you have any comment of how the China initiative, is or is not evolving?

Gregg O. Lehman

Well, as we mentioned, Asia-Pacific was down for the quarter but up for the year. We -- since that call, we added a full-time international sales rep who is our employee in Tokyo, Japan. He is working with Japanese distributors as well as Chinese distributors and even going so far as Eastern Europe. So we're actually upgrading some of those distributorships and I think with the release of some new products, particularly our FOT product, you will see greater traction in the Asia-Pacific markets. But yes, when that call was made, we really didn't have a strong presence there, but we're -- we have some initiatives that we'll strengthen during this fiscal year.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Gregg O. Lehman

Thank you, Amy, and thank you, all, for participating on today's call. We really look forward to talking with you again at the conclusion of the current quarter. Have a great day and a wonderful holiday season.

Operator

The conference has now concluded. Thank you for attending. You may now disconnect.

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