Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Stereotaxis, Inc. (NASDAQ:STXS)

Q4 2009 Earnings Call Transcript

February 25, 2010 8:30 am ET

Executives

Doug Sherk - IR, EVC Group, Inc.

Mike Kaminski – President & CEO

Dan Johnston – CFO

Analysts

Mimi Pham – Soleil Securities

Amit Hazan – Oppenheimer

Tao Levy – Deutsche Bank

Charley Jones – Barrington Research

Spencer Nam – Summer Street Research Partners

Sameer Harish – Needham & Company

Vincent Gangi [ph]

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Stereotaxis fourth quarter 2009 financial results conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions) This conference is being recorded today, Thursday, February 25th, 2010.

I would now like to turn the conference over to Mr. Doug Sherk. Go ahead sir.

Doug Sherk

Thank you, operator, and good morning everyone. Thank you for joining us for the Stereotaxis conference call and webcast to review financial results for the fourth quarter and full-year 2009, which ended on December 31st, 2009.

Before we get started, we would like to remind you that during the course of this conference call, the company may make projections and other forward-looking statements regarding future events or the future financial performance of the company, including without limitation statements regarding future operating results, growth opportunities and other statements that refer to Stereotaxis plans, prospects, expectations, strategies, intentions and beliefs. These statements are subject to many risks and uncertainties that could cause actual results to differ materially from expectations.

For a detailed discussion of the risks and uncertainties that affect the company's business, and qualify the forward-looking statements made in this call, we refer you to the company's recent public filings filed with the SEC, specifically the Form 10-K for the fiscal year ended December 31, 2008. The company's projections and forward-looking statements are based on factors that are subject to change and therefore these statements speak only as of the date they are given. The company assumes no obligation to update any projections of forward-looking statements.

In addition, regarding orders and backlog, there could be no assurance that the company will recognize revenue related to its purchase orders and other commitments in any particular period or at all because some of these purchase orders and other commitments are subject to contingencies that are outside of our control. In addition, these orders and commitments may be revised, modified or cancelled, either by their expressed terms as a result of negotiations, or by project changes or delays.

And now, with that out of the way, I would like to turn the call over to Mike Kaminski, President and Chief Executive Officer of Stereotaxis.

Mike Kaminski

Thank you, Doug. Good morning everybody. On the call with me this morning is Dan Johnston, our CFO. Stereotaxis today reported a strong fourth quarter and a great 2009. During the quarter, we generated a significant increase in revenue, up 16%. Disposable service and accessories revenue grew 51%, setting another quarterly record of $5.1 million. The strong recurring revenue growth is due to both increased procedures during the quarter as well as pricing made possible with the introduction of both the ThermoCool RMT catheter in the year as well as the new CAAS [ph], both of which strengthened our value proposition. We generated our second consecutive quarter of new capital order growth in Q4.

New orders totaled $7.7 million compared with $6.3 million in the third quarter and $5 million in the second quarter, and we ended the year with $37 million in backlog that we expect to convert to revenue within an 18-month period. We anticipate that hospital budgets for capital expenditures will improve during 2010, resulting in growing customer orders. Our progress on key financial metrics was especially evident in the full-year review. Revenue grew 27%, reflecting a 54% increase in recurring revenue as well as strong performance of our Odyssey business, which almost doubled.

The 2009 gross margin percent increased to 66.7% of revenue, on the strength of Niobe pricing and the growth of recurring revenue as a percent of total revenue. We continued to demonstrate good expense control. Operating expenses declined 14% for the year. The net result was a 42% improvement in operating loss, moving us closer towards achieving breakeven. During the year, we launched eight new products and we now have a significant presence in North America, Europe and a growing footprint in Asia Pacific.

US pipeline activity for our Niobe systems continued to grow as 2010 progressed. During the year, we saw our first placements of Odyssey and non-Niobe or standard labs, demonstrating its broadening appeal as well as its potential to be a significant driver of future growth. On balance, we are very pleased with the financial and operational progress, and we are encouraged about the outlook for 2010. As we enter 2010, nine months after the launch of the magnetic irrigated catheter in North America, we believe we have made great strides in proving the safety and efficacy of our platform for complex ablations.

In total during the year, we had 31 papers, were added to the peer review literature and a multitude of scientific abstracts for presenting at key electrophysiology conferences. The ability of the magnetic catheter to address patients with AF was a subject of several abstracts and recently described in a publication by Professor Pappone and his colleagues in Italy. In a study of 25 patients, he showed that these patients had excellent long-term results. 90% of the paroxysmal patients were in sinus rhythm and off anti-arrhythmic drugs at one year. For the more difficult persistent AF patients, the success rate was 80% at one year. This data gives more support to our assertion that the precision of the magnetic navigation can lead to better long-term outcomes for those patients who have complex atrial arrhythmias.

Ventricular tachycardia or VT, arguably the most complex of the arrhythmias is an application that is particularly well suited for the treatment with our system. Data published from Lifesic [ph] this past year demonstrated excellent acute results, with a statistically significant reduction in fluoroscopy compared to their own main cases. We have had many of our physicians tell us that Stereotaxis increases their efficiency and efficacy in VT cases due to the ability of the system to help create an accurate and detailed map without inducing additional arrhythmias.

Doctor Szili-Torok and his team from Rotterdam also recently published a very compelling series of patients with ventricular outflow track arrhythmias, who are treated with the Stereotaxis System. In his paper, he highlighted the precision of the diagnostic maps that were enabled by a consistent contact of the magnetic catheter. All of the patients in the small series were successful and the precise and informative maps created with the magnetic catheter allowed him to treat these patients with only one ablation leaving.

With this body of evidence, we are confident that we demonstrated our systems’ ability to deliver safety to the patients due to the significant reduced adverse events and lower X-ray exposure. Safety to the clinicians due to the reduction and X-ray exposure as well as orthopedic burden, efficacy for complex ablations at or above the success rates of the best clinicians in the world, and our leading physicians around the world of best summarize their value by stating that the Niobe platform optimizes every patient’s outcome.

We look forward to additional scientific data being presented on both AF and VT at the upcoming HRS meeting in May. In addition to improved safety and efficacy, we remain focused on delivering an efficient procedure for a clinician. There are several new products scheduled out in 2010, which will enhance the efficiency of the system. We expect to see a stepped improvement with the introduction of the new CARTO 3 RMT system, as well as the new Navigant improvements, which are engineered to reduce mapping times, improve accuracy and simply navigation. These products are due out by mid-2010 and will continue to strengthen our value proposition.

Importantly, we have now established 10 worldwide reference sites, which will afford us the opportunity to leverage the success and accelerate market awareness, adoption and capital penetration. Finally, patient demand to be treated on the Stereotaxis System is emerging as awareness of the safety and efficacy is becoming more widespread. A live procedure featuring the Niobe was broadcast on the Today’s Show on NBC early in the month and led to several hundred inquiries into the University of Cleveland, where the procedure was performed, within a 24-hour period following the broadcast.

The hospitals who informed us to pick several patients throughout North America have been scheduled for the procedure. We also were featured in a BBC documentary and individual hospitals such as Henry Ford in Michigan have advertised the Stereotaxis procedure in the Wall Street Journal New York Times, generating inquiries in the scheduling of procedures.

While we are pleased with our progress in 2009, we still have much work to do in 2010. The clinical adoption of the Niobe platform continues to be our central focus. We reviewed well and what we can improve, and as a result we have transformed our approach to driving clinical adoption from a process of on-site education and case support to a more comprehensive approach inclusive of the clearly defined clinical plan that focuses on continual learning, clinical and marketing support, and a mutual commitment to build a Stereotaxis magnetic treatment program.

This programmatic approach was launched at the beginning of this year and we expect that it will drive a stepped improvement in the number of sites that embrace this Stereotaxis technology, increased patient awareness and a substantial growth in the number of cases where Niobe systems are employed. This new approach aligns with our customers’ strategic initiatives to provide quality clinical outcomes, low patient referrals, recruit top clinical talent, and for them to be seen as the destination of choice for superior healthcare.

The systematic approach was a collaborative effort requiring an institutional steering committee, including both clinical and administrative champions as well as other elements such as the tailored regional marketing program. With this integrated approach, we are ensuring physicians and their clinical teams are able to quickly and successfully move through the clinical pathway allowing them to treat heart arrhythmias of various complexities. Although we are pleased with the record $5.1 million in recurring revenue during Q4, the fundamental change to driving adoption will result in Stereotaxis becoming a key part of the customers’ complex EP ablation program.

We have launched this programmatic approach at a handful of sites and we expect to see accelerating success on procedure growth to be reflected in the second half of 2010. Now, let’s turn to the Odyssey success story. To date, we have secured 15 million in cumulative Odyssey orders worldwide, primarily in Niobe labs. We have experienced a strong market acceptance of Odyssey and Niobe labs. We believe that the non-Niobe standard labs can also benefit from this Odyssey system, which is designed to optimize workflow improve productivity and help build world-class practices.

Considering a worldwide market of more than 12,000 electrophysiology interventional cardiology labs combined, Odyssey represents a tremendous market opportunity. As a result, one of our key initiatives for 2010 will be to drive the market penetration of Odyssey in standard labs. To support this initiative, we recently hired Thomas Caris [ph] as the General Manager of Odyssey reporting directly to me. Thomas brings to Stereotaxis more than 17 years of healthcare IT experience and has held strategic leadership positions at companies like GE Healthcare and Siemens Medical Solutions.

On the sales front, and in order to maximize our sales opportunities, we remain focused on both Odyssey as a sales team, dedicated sales team targeting standard labs, while the Niobe sales representatives remain focused on driving EP penetration. These sales focus, individual focused areas have resulted in our standard lab prospects, doubling in the last 90 days. On the Odyssey development front, we recently expanded a first new (inaudible) by releasing an Odyssey Enterprise Link solution. The link allows customers to consolidate data sources from disparate systems in the lab and to aggregately use of clinical information that can be archived and networked for live collaboration, education and training within a single institution or across hospitals around the world.

Following the release of Odyssey in standard labs in the fourth quarter of 2009, we also announced the St. David’s Medical Center in Austin. It has been one of the first institutions to install three Odyssey systems. This installation at a very prestigious world-class site, we will begin our process of establishing reference sites around the world and will help us accelerate adoption and market penetration.

Finally, while it’s early in the year, I would like to review with you our goals for 2010. We expect the following: new capital order growth in dollars of greater than 40%; total revenue growth in the mid-20% range; Odyssey revenue growth of greater than 75%. Revenue growth will be decidedly weighted towards the back half of the year. Gross margins on average above 65% for the year; operating expenses of approximately $60 million [ph] per quarter.

And with that, I will turn the call over to Dan who will discuss our fourth quarter in more detail. Dan?

Dan Johnston

Thanks, Mike, and good morning. Revenue for the fourth quarter was $14.1 million, an increase of 16% over the $12.1 million in revenue from the prior year. Systems revenue totaled $9 million, and included revenue recognized on six Niobe, nine Odyssey, and four Cinema. As we discussed during our third quarter call, early in the fourth quarter, we learned that three customers had moved their installations of Niobe systems from the fourth quarter of 2009 into 2010.

In the US, three Niobe systems, seven Odyssey, and two Cinema were recognizing revenue in Q4. Recurring revenue grew 51% to a record $5.1 million, reflecting favorable pricing, growth in procedures, and a growth in our installed base. EP procedures grew 43% in 2009 to just over 7,000 with the rollout of ThermoCool catheter in Q1 2009. As Mike mentioned, new orders in the fourth quarter was $7.7 million. $4.5 million of these were for Niobe systems. We are also pleased that half of the new orders to Niobe came from the US. Backlog at the end of December was $37.2 million compared to $38.4 million at the end of September, reflecting the recognition of slightly more revenue in new orders.

Gross margin for the fourth quarter was $9.5 million or 67.3% of revenue. This represented 15% from $8.2 million in the fourth quarter of 2008 and this follows the 15% increase in revenue. Gross margin percentage for the quarter was slightly below last year’s quarter due to two offsetting items; strong recurring revenue which benefits overall gross margin was offset by lower Cinema margin, as we moved through our initial system placements. Niobe’s selling price remains strong and it was slightly above the fourth quarter of 2008.

Operating expenses totaled $15.3 million for the fourth quarter of 2009 compared to $13.2 million in the third quarter and $14.6 million in the fourth quarter of last year. In bridging the increase from Q3, we saw $700,000 increase in R&D spending on new product development. Compensation costs were lower in Q3 by about $600,000 as we reduced our bonus accrual in Q3 to reflect our expected 2009 payouts. Finally, we had about $400,000 in higher headcount and recruiting costs as we ramped up our clinical adoption in Odyssey activities for 2010. As such, I see the fourth quarter 2009 spend as a good prophecy for operating expenses going forward.

Our 2009 fourth quarter operating expenses are $700,000 higher than last year. However, the increase is actually related to non-recurring activity reported in Q4 2008, which had the effect of reducing overall expenses. Last year, non-cash stock compensation expense was lower by $1.8 million with the reversal of an accrual in this regard in the fourth quarter. The benefit was partially offset by $900,000 charge for severance, also taken in Q4 of 2008. As such, after these 2008 items, our operating expenses in Q4 2009 were largely the same as Q4 2008.

With regard to interest expense, the fourth quarter of 2009 includes a $900,000 non-cash write-off for the value of warrants that were issued to guarantee a portion of our 2008 credit facility. With the execution of our new 2009 credit facility, the unamortized cost in the previous deal needs to be written off. We reported improved operating loss for the fourth quarter of $5.8 million compared with the loss of $6.4 million in the fourth quarter of the prior year. Our net loss was $6.7 million or a loss of $0.14 per share for the recent fourth quarter versus a net loss of $7.5 million or $0.20 per share in the fourth quarter a year ago.

Average shares outstanding for the fourth quarter were 48.4 million compared to 36.7 million in the same quarter last year, reflecting an issuance of 7.5 million shares as part of our follow-on stock offering completed in October and 4.4 million shares issued late in December of 2008. Importantly, we continued to lower our cash burn. We used $2.9 million in cash during the quarter compared to $4.5 million last year. For the year, we used $23.8 million in cash versus $30.3 million in 2008. Our operating team did a great job managing on investment in inventory in the fourth quarter. Inventory decreased by $2.6 million from September 30th, which had a positive impact on our cash burn.

For full year, revenue grew 27% to $51.1 million compared with $40.4 million in 2008. Gross margin dollars for the year increased 30% to $34.1 million and represents 56.7% of revenue. This compares favorably to the gross margin of $26.2 million in 2008, which was at 64.9% of revenue. Operating expenses decreased 14% from the prior year, reflecting the success of our strong expense control efforts. The result was a 42% reduction in the operating loss to $23.8 million from a loss of $41 million last year. And that loss for 2009 was $27.5 million compared with a loss of $43.9 million in 2008. This equates to a net loss per share of $0.63 in 2009 versus $1.20 per share in 2008.

Now, turning to the balance sheet, cash and investments totaled $30.5 million at year-end. Included in this was approximately $28 million in net proceeds received from the follow-on stock offering completed in October. Total bank and other debt was $23.7 million at the end of December, with $10 million drawn against the working capital lineup with Silicon Valley Bank. Finally, you recall that in October, we increased our working capital line with the bank to $30 million from $25 million and extended the maturity of the line through March of 2011.

With that, I will turn it back to Mike.

Mike Kaminski

Thank you, Dan. We are very pleased with the significant progress we made in many fronts in 2009, but more importantly, we look forward to the expansion and opportunities ahead of us in 2010 and beyond. We are committed to delivering value to our customers and shareholders. We have a lot to accomplish in 2010, but our objectives are clear and we are focused on the successful execution. The objectives are driving clinical adoption in the Niobe platform, continuing to revitalize the North American Niobe orders, growing Odyssey in the standard labs, and bringing the company to operational breakeven and becoming self-funding in the next two years.

I want to thank all of the Stereotaxis’ employees for their hard work and dedication in achieving this past year’s results and look forward to working with them this year. With that, I would like to open it up to any questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) Our first question comes from the line of Mimi Pham with Soleil Securities. Go ahead please.

Mimi Pham – Soleil Securities

Hi. Good morning.

Mike Kaminski

Good morning, Mimi.

Mimi Pham – Soleil Securities

In terms of your new orders, I think you've broken it out – Niobe and Odyssey – I think you had four units last quarter and second quarter. Can you give us the Niobe new order breakout for this quarter?

Mike Kaminski

You are talking about international versus North America?

Mimi Pham – Soleil Securities

No. Just in terms of – you gave us your total new orders including Niobe and Odyssey, but you didn't break it out.

Mike Kaminski

So, it’s $4.5 million I believe in Niobe and the balance in Odyssey. And half of the Niobe came from the US. So, we saw an uptick in the US activity this quarter.

Mimi Pham – Soleil Securities

Okay. And then, I guess, you alluded to it in your guidance of – for new orders in total to be up 40% and Odyssey to be greater than 75% growth. Is that what you said?

Mike Kaminski

Yes.

Mimi Pham – Soleil Securities

So, what does that mean, I guess – I didn't do the math, but what do you – where do you see Niobe new orders heading throughout 2010?

Mike Kaminski

Let me make sure I understand the question. Yes, we think there will be a recovery in the US, a significant recovery. Europe will continue to grow and it has been a nice growth year of 2009 and it will continue in 2010, and Asia is just an emerging opportunity for us.

Mimi Pham – Soleil Securities

And when – I am sorry.

Mike Kaminski

Yes, so that’s order rate for Niobe.

Mimi Pham – Soleil Securities

Okay. And for the US recovery, can you – is it something where, I mean, based on some of the activity you're seeing at your reference sites, is that something we can start seeing tick up first quarter, second quarter?

Mike Kaminski

Yes, I think we will see it earlier in the year, in the first half of the year; you will start to see the US come back. We are seeing a lot activity now. I think it’s fairly consistent with what you have heard from other companies. We are giving meetings that we haven’t got before. They are starting to be activity and proposals, more activity and proposals, more activity in site visits. So, all the trends are in a positive way in the US.

Mimi Pham – Soleil Securities

Okay. And then last question, just you talked about EP procedures grew 40% in 2009 versus 2008 to 7,000, can you – I guess you also sometimes give us these utilization breakouts at your top reference sites in the US and Europe, can you talk about how that’s going?

Mike Kaminski

Yes. So, we have, I think last time I mentioned that 25% of Europe and 10% of the US are running, I believe it was around three cases a week, I think I mentioned foreign too. But if I just did the data and kind of – we have progressed out a little further. So, we have increased the number of sites. It’s now about 20, it’s in the mid-20s, 22% to 23% of total sites in Europe and the US are using it more than three cases a week.

Mimi Pham – Soleil Securities

Okay. Great. Thank you very much.

Mike Kaminski

Thanks Mimi.

Operator

And our next question comes from the line of Amit Hazan with Oppenheimer. Go ahead please.

Mike Kaminski

Hi Amit.

Amit Hazan – Oppenheimer

Thank you. Hey, good morning, guys. Just a couple from me. I wanted to ask first about the gross margin on recurring revenue was that – is it quite nice in the quarter, I think one of the better gross margin numbers you've had in a while there. So I'm wondering if you can just give us a little bit of color as to the sustainability of that number and what's driving that.

Dan Johnston

Hi Amit, Dan here. I think the sustainability is good. I don’t think we will see the increases. I think what we are seeing here is some pricing that we impacted in 2009 over 2008. And that’s kind of a one-time opportunity until new products are released down the pike. So, I think it’s sustainable, but I am not sure that it will continue to increase the same rate that it increased in ’09.

Amit Hazan – Oppenheimer

Okay. All right. And then I just – I wanted to jump to, kind of, the broader question of profitability and ask again kind of to walk us through what you are doing or can do from an operating expense savings perspective and how we should be thinking about getting to, kind of, cash flow breakeven for you and timing of that?

Mike Kaminski

Dan walked through the mechanics of the income statement on that, but you know, we are mindful of balancing driving growth in the company and controlling expenses. So, we are shifting as you would expect into spending money in the commercial operations, which resulted in market penetration and adoption and being careful of what we spend in G&A and making sure that the R&D investments are lined up; it will translate to products that will drive revenue in the next two to three years. So, with that said, Dan can walk through the mechanics of getting the breakeven.

Dan Johnston

Yes, I mean, I think our thoughts on that are pretty similar to what they have been in the past. To us a breakeven quarter is probably something like a $23 million revenue quarter, and as you think about that as a 65% margin, which is a little – it’s not quite as good as what we have done, but just to be conservative, that gives you about $15 million in margin. And then currently, like I said in the call, I think we feel like the burn rate or the OpEx rate is going to be right around 15 maybe a little bit higher than that in 2010. And again, that kind of reflects on the investments that Mike just spoke about. So, that’s kind of what it looks like. So, it’s probably looks like something like 10 Niobe, 20 Odyssey, you know, 10 Cinema, that’s what kind of the quarter would like for us. Is that helpful?

Amit Hazan – Oppenheimer

Yes. That's great, actually. And then just a last one from me, back on the recurring revenue side, I wonder if you can break it down, even generally, just to give us a sense of what part of the growth in recurring revenue that you see in either over the quarter or even over 2009 has come from benefit from new products and pricing or mix versus volume?

Dan Johnston

The volume number is probably about a third to maybe 40% of the increase from year-to-year. The rest is pricing and new products rolling out.

Amit Hazan – Oppenheimer

Okay. Terrific. Thanks very much guys.

Mike Kaminski

Thank you.

Operator

And our next question comes from the line of Tao Levy with Deutsche Bank. Please go ahead, sir.

Tao Levy – Deutsche Bank

Good morning.

Mike Kaminski

How are you?

Tao Levy – Deutsche Bank

I am good. A quick question on your guidance first. The capital order growth in excess of 40%, does that include Odyssey?

Mike Kaminski

Yes, that’s all capital orders.

Tao Levy – Deutsche Bank

So, if I look at the quarter – and you broke that down with 3.2 million of Odyssey orders in the quarter and about – I mean, I guess the math gets you to 4.5 million of Niobe. So, pretty much the last three quarters, you've seen this 4.5 million of Niobe orders. Is that the pace that you're going to be on for the next –?

Mike Kaminski

No, Niobe will – our full expectation is Niobe is going to pick up in 2010, too, and all the activity would suggest that as well. So, we are forecasting a strong uptick in Niobe this year. But I think what’s interesting about Odyssey is in many of the sales opportunities, once you go outside of the Niobe room, we have multiple lab deals that are getting discussed. For example, particularly – and a good example the St. David’s order where we had three systems, and there’s a lot of three systems deals so that the dollars associated with the standard lab deal and Odyssey can be quite significant.

Tao Levy – Deutsche Bank

And you talked about in the past whether the Odyssey – the time to record to revenues obviously a lot shorter. If you start, kind of, bundling a Niobe with several Odyssey, both in Niobe and non-Niobe labs, does it all get recorded at the same time, or can you start installing the non-Niobe Odyssey’s ahead of time and recording that to revenue?

Dan Johnston

It’s actually, Tao, there’s a – we have adopted a new accounting standard, which is just promulgated in the fourth quarter. And so, while it’s going to make it extra little easier for us to recognize revenue on the individual element that are bundled based upon establishing fair value. So, I think there’s going to be less delay and quite frankly hasn’t been much delay, but as we roll out new products like Cinema, there’s going to be less opportunity for delays. So, I think you are going to see it flow through faster.

Mike Kaminski

Yes, the book-to-bill time on Odyssey is very short, and I think we mentioned that. We took, I believe the timing, and this is roughly correct. We took St. David’s order in mid-September and began installing in beginning of October. So, it was from order to installation, was probably under a month.

Tao Levy – Deutsche Bank

And just so – I don't know if you might have mentioned it and I missed it, but the backlog that you have right now?

Mike Kaminski

Yes, $37 million for the next 18 months.

Tao Levy – Deutsche Bank

And that 40% growth, is that off of that number or your –?

Dan Johnston

No, 40% of the new orders that we took in, in ’09.

Mike Kaminski

’09; 2010 over 2009.

Tao Levy – Deutsche Bank

Okay, great. Thanks a lot.

Mike Kaminski

Thank you.

Operator

Thank you. And our next question comes from the line of Charley Jones with Barrington Research. Go ahead please.

Mike Kaminski

Hi Charley.

Charley Jones – Barrington Research

Good morning. Thanks for taking the questions, Mike. Sorry. Do you guys think that the pickup in the Niobe orders in revenue in 2010 is more a result of the availability of your reference sites and clinical data, or do you think it's more economically driven?

Mike Kaminski

It’s a little of both Charley. I think that if you look at have a strong reference sites, that will obviously be a positive indicator. And Europe has led the way on that, and what I have done is looked at the percent penetration of our new order rate to the X-rays we placed in Europe, and it’s about twice as high as it was in the US, because I think we have led the way with reference sites. So, as we pick up and establish reference sites in the US, I fully expect it will at least get to that rate and as the economy continues to show signs of improving, I think that will help as well.

Charley Jones – Barrington Research

Any expectation – to bring it up – about the number of X-ray systems that will go into EP labs or new EP labs or redone EP labs in 2010 either in the US, globally, or split up?

Mike Kaminski

We are triangulating a number still between 250 and 300 and depending, and we get that through our partners.

Charley Jones – Barrington Research

And that’s worldwide?

Mike Kaminski

Yes, worldwide, but half of them in the US and half – most of the, the lion’s share of the rest is in Europe and then bounce sprinkle. And China is coming up obviously with a very strong market.

Charley Jones – Barrington Research

Sorry, if you've already talked about any of these, but can you give us your assumption for procedure growth in 2010?

Dan Johnston

Yes, we are thinking it right around 25%.

Charley Jones – Barrington Research

And what percentage of revenue do you expect Odyssey to be, and could you split it up between capital and service?

Dan Johnston

I can’t break the service out between Odyssey, the service part of Odyssey, but you know, Odyssey as a percent of capital, in ’09 was about 15% of the total capital. If you just looked at capital not 15% of the total, but of the capital, which is about two-thirds. You know, that’s going to grow, because we see the order rate in Odyssey substantially above the Niobe increased order rate. So, you know, the 40% new orders that were forecasted for 2010 is from a percentage perspective, Odyssey is probably, you know, over double what we are expecting as the growth rate from Niobe.

Charley Jones – Barrington Research

Okay, that’s helpful.

Dan Johnston

It will shift.

Charley Jones – Barrington Research

And what was the effect of ASP's in your recurring revenue in 2009 as a result of the new catheter advancer, and could you remind us when you put that into place?

Mike Kaminski

It started rolling out in first quarter, and our average revenue per case is north of $1,000, and that includes both the price of the catheter advancer as well as the royalty we received from.

Charley Jones – Barrington Research

So it's just probably up 30%, 40% interest on price alone?

Mike Kaminski

Right. Volume, I think Dan mentioned, was up 43%.

Charley Jones – Barrington Research

All right.

Mike Kaminski

And EPE and the balance was price primarily.

Charley Jones – Barrington Research

So we'll have a little bit of a tailwind Q1, Q2, kind of winding down Q3 –?

Mike Kaminski

Yes.

Charley Jones – Barrington Research

On price, okay, thanks a lot.

Mike Kaminski

Obviously there could be some more products coming as we get into the midyear from us.

Charley Jones – Barrington Research

Okay, thanks a lot. I appreciate it.

Mike Kaminski

Thank you.

Operator

And our next question comes from the line of Spencer Nam with Summer Street Research Partners. Go ahead, sir.

Spencer Nam – Summer Street Research Partners

The first question is the expense line for 2010 seems a little higher than expected. Where is this increase coming from?

Mike Kaminski

Yes, so, we are – Spencer, we are investing in clinical adoption, which includes training. We are in that, as I mentioned a programmatic approach, and I think it’s fundamentally going to drive and inflexion point, which I think you will see more in the back half of the year. You know, we will continue to drive our normal improvements, but then you will see, I believe that will translate into an inflexion point. We are also investing at Odyssey standard lab channel development, so that we have elected to make sure that our current capital sales force stays focused on Niobe penetration in EP labs and bundling the Odyssey when that opportunity emerges. But I didn’t want them to run around hospitals where there wasn’t a Niobe opportunity. So, we have elected to start developing and investing in a small sales force to focus on standard lab sales, and most of the time, they will be looking outside of Niobe hospitals, and making sure that we flush through the opportunities there as well.

Spencer Nam – Summer Street Research Partners

When you say small sales force, what's the order of magnitude?

Mike Kaminski

I think when fully staffed, we have allocated seven positions there for the year. Most of them are in North America, we have some – we have one or two in Europe and then we will cover Asia from North America.

Spencer Nam – Summer Street Research Partners

So if we look at Q4, the Odyssey backlog buildup – it seems like there was clearly a huge demand from non-Niobe customers, and this increase of Odyssey sales people, you guys believe, will even accelerate this current, sort of, ramp up here? Is that how you guys –?

Mike Kaminski

Yes.

Spencer Nam – Summer Street Research Partners

Are we trying to sort of you know, trying to make a better quality if you will?

Mike Kaminski

Yes, very much so. And I think you can see it. I mentioned that, just separating and focusing the channels. We have seen the immediate benefit in the pipeline for Odyssey standard labs, doubling in the last 90 days. And in that pipeline, what’s interesting as I mentioned earlier is it’s not one customer, one lab. I don’t know what the average is, but it’s – there’s many customers in there that have multiple lab opportunities they are discussing. So, I clearly think that just early results would suggest there’s a large market opportunity. The reason I wanted to focus a channel on that is to make sure that we didn’t put at risk what we believe the Niobe growth can be, by having them being distracted and running after every Odyssey opportunity. So, we think it’s a right investment to maximize both parts of the business, and early indicators are Odyssey does have a tremendous opportunity.

Spencer Nam – Summer Street Research Partners

Okay, great. Thank you very much.

Mike Kaminski

Thank you.

Operator

And our next question comes from the line of Sameer Harish with Needham & Company. Go ahead please.

Mike Kaminski

Good morning Sameer.

Sameer Harish – Needham & Company

Good morning. Thanks for taking the question.

Mike Kaminski

Sure.

Sameer Harish – Needham & Company

You know, I just wanted to verify, I guess, in terms of the guidance – the new capital orders, – are you forecasting new order growth of 40% that will track into recurring – or recognized revenue over 18 months or actual recognized revenue growth of 40%?

Mike Kaminski

No, new order growth that will go into backlog, we are projecting total revenue growth in the mid 20s.

Sameer Harish – Needham & Company

Got it, okay, okay. So, in terms of procedure growth, you actually – so that would be in excess of the actual recognized revenue growth for capital equipment, 25% versus –?

Mike Kaminski

Yes, sure.

Sameer Harish – Needham & Company

Perfect. And you touched on it just now, but other than the investment in the sales force that you're doing for standard labs for Odyssey, is there any other major investments for 2010 CapEx or other hires in other areas?

Mike Kaminski

Yes, the hires, we are adding clinical support staff, clinical adoption staff and training. And I think if you look at as a percent or an investment, you know, the installed base grows, so you do need some staff to grow with that. But we are accelerating beyond that, because we think we can fundamentally do a better job of driving adoption in a more programmatic approach. So, I think it’s a key area for an investment. The benefit will be accelerated adoption curve. Like I said, my expectation is you will see more of that.

Sameer Harish – Needham & Company

And just in terms of our modeling, does most of that fall within the sales and marketing side versus G&A?

Mike Kaminski

Yes.

Sameer Harish – Needham & Company

Okay.

Mike Kaminski

Some of the trading falls into G&A, but the – most of it will be marketing, sales and marketing.

Sameer Harish – Needham & Company

Got it. And as far as, you know, existing capacity for Odyssey, can you just talk about what you have in existence today, and in order to hit that 75% growth number, do you have to expand on current manufacturing or invest in that?

Mike Kaminski

No, we are in good shape – you never have infinite capacity, but that’s not a constraint of the business right now.

Dan Johnston

Yes, lot of the assembly, I mean the major components are assembled, we buy assembled offsite, we just put final assembly here. So, it’s really not that intensive for us.

Mike Kaminski

It’s similar to our other process. We believe then obviously leveraging a vendor base and then assuring quality standards are met by doing final assembly check and then shipping it up.

Sameer Harish – Needham & Company

Okay. And, finally, can you update us on the rollout for the irrigated catheter and physician training? Have you been able to expand to any new sites, and can you give us an indication of what utilization you would like at the sites that have ramped up on irrigated?

Mike Kaminski

I mentioned earlier, I think Mimi asked the question. If you cut [ph] sites in this percent, we hit I think 22%, 23% right in there in total, now this is Europe and US, are now doing greater than three cases a week. So, we continue to progress on adoption of those sites. I believe the majority of the sites and the US have rolled out obviously I think even last call, we mentioned all the sites in Europe were rolled out. We are going back through actually and looking at this programmatic approach as the main trust of 2010 and with that, to reconstitute the learning curve and many of the sites that have been rolled out already. So, it’s kind of a new approach, I think it’s a much more effective approach in the sense of assuring that they get through the learning curve and getting the more independent use. And if you think of the classic change from education and case support to programmatic approach in driving adoption where they truly implemented this part of the standards, that’s the path we are taking and I think as a result of that, we will see the ThermoCool much more engrained into each site.

Sameer Harish – Needham & Company

Okay. Thanks for taking the question.

Mike Kaminski

Yes, thanks.

Operator

(Operator instructions) And our next question comes from the line of Vincent Gangi [ph] with Private Investor. Go ahead sir.

Vincent Gangi

Thank you, good morning.

Mike Kaminski

Good morning.

Vincent Gangi

I have some confusion on the concept of backlog. Am I to assume that the 4.5 new orders of Niobe is then added to the backlog and it takes a period of 18 months from book-to-bill?

Mike Kaminski

No, the Niobe, yes, the new orders are added to – capital orders are added to backlog. The Niobe falls into two buckets. Classically it takes somewhere around one year from book to bill. The Odyssey is much shorter than that. And there is a bell-shaped curve around that one year. There are some that are much quicker than that and some that are waiting on a new wing to a building that take longer than that.

Vincent Gangi

And is the backlog only to Niobe?

Mike Kaminski

No, capital orders only. So, it would be both Niobe and Odyssey.

Vincent Gangi

Okay. Also in prior conference calls, you had mentioned arrangements with Novartis and also a financing arrangement, has any of those arrangements resulted in orders?

Dan Johnston

We haven’t, yes, I think you are referring to some leasing arrangements.

Mike Kaminski

Yes.

Dan Johnston

We have not executed any arrangements like that. Every sale so far has been a pure sale through a traditional manner.

Vincent Gangi

And nothing from – through Novartis?

Dan Johnston

No, I think it’s RTS.

Mike Kaminski

RTS out of Chicago.

Dan Johnston

Yes, the financing house.

Vincent Gangi

Okay. And just a comment I like what you have done with your Website, it looks very nice.

Mike Kaminski

Thank you.

Dan Johnston

Thank you.

Operator

And there are no further questions at this time. I will turn it back to management for any closing remarks.

Mike Kaminski

Well, thank you everybody for participation this morning, and we look forward to our call in early May. Thank you.

Operator

Ladies and gentlemen, that does conclude your conference for today. If you wish to listen to a replay of the call, you can dial 1-800-406-7325 or 303-590-3030 with the access code 4207018 and the pound sign. Thank you for using ACT Conferencing. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Stereotaxis, Inc. Q4 2009 Earnings Call Transcript
This Transcript
All Transcripts