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

AngioDynamics, Inc. (NASDAQ:ANGO)

F3Q10 (Qtr End 02/28/10) Earnings Call Transcript

March 31, 2010 4:30 pm ET

Executives

Doug Sherk – IR

Jan Keltjens – President and CEO

Joe Gersuk – EVP and CFO

Analysts

Jamar Ismail – Canaccord Adams

Jayson Bedford – Raymond James

Brooks West – Craig-Hallum Capital

Greg Brash – Sidoti & Company

Robert Goldman – CL King

Larry Haimovitch – HMTC

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the AngioDynamics 3Q 2010 financial results conference call. (Operator instructions)

I would now like to turn the conference over to Doug Sherk. Please go ahead, sir.

Doug Sherk

Thank you for joining us this afternoon for the AngioDynamics conference call to review the results of the fiscal third quarter of 2010, which ended on February 28, 2010.

The news release announcing the third quarter earnings crossed the wire this afternoon after the market closed and is available on the AngioDynamics website. We’ve arranged for a recording of this call, which may be accessed by phone. The replay will become available at approximately 6:30 PM Eastern Time this evening and will remain available for seven days. The operator will provide the dial-in information at the conclusion of today’s call.

In addition, the call is being broadcast live on the web at the AngioDynamics website. A replay of the call will also be archived of the AngioDynamics website.

Before we get started, during the course of this conference call the company will make projections or forward-looking statements regarding future events including the statements about revenue and earnings for fiscal 2010. We encourage you to review the company’s past and future filings with the SEC, including without limitation the company’s Forms 10-Q and 10-K, which identify specific factors that may cause actual results or events to differ materially from those described in forward-looking statements.

In addition, today’s presentation includes financial measures used to better understand our business that have not been prepared in accordance with the generally accepted accounting principles better known as GAAP. An explanation and reconciliation of these non-GAAP measures has been provided in today’s news release issued by the company and is available on the company’s website.

In today’s call, the company has reported non-GAAP EBITDA and EBITDA per share and has reviewed these measures as an internal analysis and review of operational performance. AngioDynamics uses non-GAAP measures to establish operational goals and believes that non-GAAP measures may assist investors in analyzing the underlying trends of the company’s business over time. Investors should consider these non-GAAP measures in addition to, not as a substitute for or superior to, financial reporting measures prepared in accordance with GAAP.

Finally, during the question-and-answer period today we’d like to request each caller to limit themselves to two questions and encourage callers to re-queue to ask additional questions. We appreciate everyone’s cooperation with this procedure.

And now, I’d like to turn the call over to Jan Keltjens, President and Chief Executive Officer of AngioDynamics.

Jan Keltjens

Thank you, Doug, and good afternoon everyone. Thank you for joining us for our third quarter conference call and with me today is Joe Gersuk, our CFO.

Overall, we're pleased with the progress during the third fiscal quarter. Our Oncology/Surgery business continued to show solid growth and our Peripheral Vascular business growth accelerated. We had a second consecutive strong quarter of NanoKnife IRE system sales and enjoyed increased clinical utilization.

We are also pleased today to report that we have extended our LC Bead US distribution agreement with Biocompatibles to the end of next calendar year. We continue to carefully manage our operating expenses, generated excellent operating cash flow and achieved $0.13 per share in earnings, and we're reiterating our guidance for the full fiscal year.

At the same time, our Access business unit continues to face a combination of difficult circumstances, which is holding back its performance. We are aggressively implementing strategies to address these drags in our growth and gross margin, and as a result we believe we will see sequential gross margin improvement in the fourth quarter, and I will review this in more detail in a few moments.

From a top line perspective, the quarter ended at 6% as compared to the year ago period. Factoring in the one less selling day than same quarter prior year, our organic growth rate was close to our year-to-date organic growth rate. Leading our growth was a 19% increase in Oncology/Surgery product sales, RF ablation, LC Bead and NanoKnife all were strong contributors during the quarter.

We are pleased with the extension of the LC Bead distribution agreement with Biocompatibles, and this partnership has been very successful for both parties, and our strategic goal is to ensure continuity of our leadership role in this therapy area beyond calendar 2011. NanoKnife generated over $700,000 in sales during the third quarter. Growing clinician interest in NanoKnife is reflected in the sale of five systems in the third quarter, bringing the number of active commercial NanoKnife sites to 11.

And since the last call in early January an additional 50 patients have been treated using the NanoKnife IRE system, bringing the overall total to 154 patients. Most importantly, the feedback from clinical performance we receive continues to inspire confidence in the future potential of this exciting technology. Our clinical development efforts for NanoKnife are progressing as well.

The protocol for an international multi-center pilot study on NanoKnife in the treatment of hepatocellular carcinoma, also called HTC or primary liver cancer has been approved and patient recruitment has begun. This study is being conducted under the supervision of Dr. Riccardo Lencioni of the University of Pisa School of Medicine, and Dr. Jordi Bruix of the Barcelona Clinic Liver Cancer Group of the University of Barcelona. The purpose of the trial is to study the safety and efficacy of IREs in the treatment of early stage liver cancer. The study will enroll 25 patients in up to 7 leading centers in 4 European countries, and follow-up will be every three months during two years with the primary end-point being CT or MR imaging at 30 days. This is a very important milestone in our IRE development program, and we look forward to keeping you updated on progress.

As reported before, we have submitted our proposal for IDE trials focusing on prostate and pancreas tumors through the FDA, and we are continuing our discussions with them and answering the questions we receive. In today's regulatory environment, it is hard to predict when this process will lead to an approved IDE study protocol, but we remain committed to pursuing IDEs in support of FDA approval for more specific labeling indications for NanoKnife.

We are also very pleased with the recent release of a book titled Irreversible Electroporation, published by Springer Berlin Heidelberg. The book is edited by Boris Rubinsky, a Professor of the Graduate School at the University of California, Berkeley, and the book’s capital one, by the book’s editor in combination with Dr. Gary Onik of the School of Medicine at the University of Central Florida, titled Irreversible Electroporation

First Patient Experience, Focal Therapy of Prostate Cancer. And another chapter by Dr. Kenneth Thomson of The Alfred hospital in Melbourne, Australia, titled, ‘Human Experience with Irreversible Electroporation.’

This book lends credibility to an extended awareness of IRE, and the benefit to the physician community that would be most interested in this technology.

In summary, we remain excited about the outlook for NanoKnife. Physicians have been generally encouraged by the efficacy and safety findings of this early stage, and as a result we continue to see strong interest from hospitals and physicians in acquiring the NanoKnife IRE system.

While capital equipment sales may fluctuate from quarter-to-quarter, we anticipate a growing installed base and increasing utilization, which will lead in turn to growing revenues, resulting in NanoKnife becoming a core growth driver for our company.

Moving to our Peripheral Vascular business, net sales increased an encouraging 8% in the third fiscal quarter, and growth was driven in particular by strong performance of VenaCure EVLT, Benephit targeted renal therapy systems, and our new Micro-Introducer kits.

We believe that our VenaCure EVLT laser ablation program is becoming increasingly competitive and gained procedure share in the third quarter. The Benephit renal infusion system also achieved a solid quarter and is meeting our initial expectations, when we acquired the product line one year ago.

The benefit for registry has made substantial progress, and we now have enrolled 18 patients at 6 sites with another 20 additional sites agreeing to participate, provided in independently managed clinical registry design to gather data on the clinical use of the Benephit catheter for targeted renal therapy. We hope to have at least 1000 patients enrolled during the next year.

The Access business revenue decreased 6% in the third fiscal quarter. We're battling the combined impact of the challenging market pricing environment and the delay in product launches. This combined with previously reported increased material cost since the beginning of this year for certain Access products drove the declines in our gross margins.

We expect to regain momentum in the Access business, primarily through the introduction of significant new products. We recently introduced the newly designed Centros self-centering, hemodialysis catheter with our proprietary Curved Tip Catheter Technology. Curved Tip is designed to reduce clots and fibrin sheathing by preventing contact between the catheter tips and vascular wall. Initial physician feedback has been positive, and we are gradually increasing this roll-out while we build our supply.

Although delayed by a combination of internal or external factors, other key new Access products are in the near term pipeline, and in the balance of this fiscal year, we expect to launch important new Smart Ports, as well as our Triple Lumen PICC, which will also be the first member of our new PICC family. Combined with the new central dialysis catheter, this positions us well for creating revenue growth from this business unit as we exit fiscal 2010 into fiscal 2011.

Throughout our businesses and regardless of the current market and regulatory environment innovation will remain a key growth driver in the medical device industry, and is one of our three focus areas. As we (inaudible) in prior years, thus far in fiscal 2010 we have launched now seven new products, and we continue to anticipate that there will be an additional 4 new product introductions this quarter for a total of 11 during fiscal 2010.

Looking ahead, we continue to make progress on the development of key new products scheduled for release this year – sorry, for release in fiscal 2011.

To enhance our gross margin, we remain focused on manufacturing efficiency, cost containment and innovation. As a result of our move last week into our new facility, Albany, New York, we have opened up space at our Queensbury facility. This facility will increasingly serve as our manufacturing, engineering and distribution hub.

In the third quarter, we completed the manufacturing transfer of the benefit line to Queensbury, and closed the manufacturing facility in Fremont, California, leading to a net cost saving going forward. We are focusing on a number of vertical, specific vertical integration, consolidation and process improvement programs, and through these efforts we are optimistic that we will be able to lower the cost of manufactured products and rebuild gross margins.

We believe that with our focus on operational excellence, in combination with planned new product launches, volume increases due to growing sales in combination with significantly reduced inventories, our gross margin will start to improve, and we continue to expect a gross margin for fiscal 2010 of 59% to 60% of sales, and in the fourth quarter we expect to see initial results of some of these actions, and show a gross margin higher than our Q3 number.

In addition, operating expense control remains an important focus for the company. We successfully managed our expenses closely, to offset some of the pressures on gross margins and to preserve our operating profitability, as well as strong operating cash flow generation. We will continue to do this while protecting our strategic investments in R&D and clinical research to ensure future growth and profitability.

New product launches, continued momentum in oncology and Peripheral Vascular, operational improvements and strong expense management are expected to drive the results for the reminder of fiscal 2010. And our full year fiscal guidance remains unchanged.

To summarize, we are extremely optimistic about the outlook for AngioDynamics. Today we have nearly half of our businesses in two flagship franchises in interventional oncology and varicose veins. These have number one or number two positions in this space, are gaining market share and operate in global, high-growth markets.

The balance of our business is focused on large growth, and growing opportunities in vascular access and peripheral vascular disease. Our strategy is focused on fueling growth in interventional oncology and varicose veins, and launch substantial growth drivers in peripheral vascular and access through the introduction of new products.

We know what we need to do, focus on global growth opportunities, focus on significant product introduction including NanoKnife, and focus on improving operational excellence using leverage, while making strategic investments in future growth. Our financial position is strong. We've generated more than 11 million in cash from operations, but we ended the third fiscal quarter with almost $86 million in cash and investments.

With a lot of opportunity ahead, we are moving forward to capitalize on it to generate enhanced profitability and shareholder value. Before I turn the call over to Joe for a more detailed review of fiscal third quarter results, I would like to once again thank the increasingly strong AngioDynamics team for their continued hard work and dedication in delivering these results, and also like to thank our shareholders and our board of directors for their ongoing support and confidence. Joe.

Joe Gersuk

Thank you, Jan, and good afternoon ladies and gentlemen. Today we are reporting third fiscal quarter sales of $52.2 million, which is 6% growth over last year's third quarter and 7% growth on a daily sales basis, as there was one fewer sales day in this year's third quarter than a year ago.

Our growth this quarter was again led by our oncology surgery unit, which grew 19% to $13.7 million. The growth was led by strong sales of (inaudible) in RF ablation products in addition to $724,000 in NanoKnife sales. This was our second consecutive quarter of solid NanoKnife sales and brings year-to-date IRE sales to $1.5 million.

Five hospitals required a system in the third quarter, and we continue to be pleased with the commercial response to the technology. Peripheral vascular business unit sales grew 8% in the quarter to $22.4 million. This was an increase from 6% growth in the second quarter, and was despite some pricing pressure on disposable procedure kits this quarter.

However, we saw very strong unit volume growth in procedure kits to offset the price erosion and deliver strong sales growth. We also enjoyed another strong quarter with our new renal infusion system, posting $754,000 in sales with our Benephit TRT product. As Jan noted, we had a very strong quarter in the Access business with third quarter sales declining 6% to $16.1 million. We continue to see very price competitive markets for Fixed Ports and dialysis products and experienced 6% lower average selling prices across the business unit this quarter in comparison to price levels a year ago, as hospitals and other buyers of these products are aggressively seeking to lower their purchase cost.

While we are not expecting the pricing environment to improve any time soon, top line performance should improve in the fourth quarter with the availability of the Centros dialysis catheter and from the shipments of the triple lumen PCC and two new port products. This outlook assumes FDA clearance in the near future.

As it is been more than a year since the acquisition of the Benephit product from FlowMedica, we characterize all of the company’s 6% sales growth rate in the quarter as organic. On a year-to-date basis, reported sales growth has been 10% and organic sales growth has been 8%. From a geographic perspective, 89% of third-quarter sales were in the US, and 11% or 5.8 million came from international markets. International sales grew 8% in the prior year and 5% on a constant currency basis.

Continuing down the income statement, gross profit totaled $30.3 million in the quarter or 58% of sales compared with 61.1% a year ago and 59.1% in the preceding quarter. The 3.1 point margin decline from a year ago reflects the decline in average selling prices on Access products and some Peripheral Vascular products as mentioned earlier, as well as product cost increases on certain Access products. Jan reviewed some of our key strategies to improve our margin, and we expect to see modest sequential improvement in the fourth quarter.

Operating expenses were $24.7 million in the third quarter, a decline from the prior year, excluding the cost of the CEO transition recorded in the third quarter a year ago. Third-quarter expenses were also $1.6 million below the second quarter level, as we continue to mitigate the gross margin challenge with lower operating expenses. As a percentage of sales, total operating expenses were 47.3% in the quarter, the lowest level as a percentage of sales in two years.

The total investment in the IRE program for the quarter was $2.6 million in operating expenses, which includes R&D, sales and marketing and amortization of intangibles compared with $2.9 million a year ago. Including the sales revenue and operating costs, the net loss impact to the IRE program amounted to $0.05 per share in the third quarter compared with $0.07 per share impact in the third quarter a year ago.

After other income and taxes are taken into account, the result is 3.3 million in net income or $0.13 in diluted earnings per share compared with $0.08 per share a year ago or $0.15 per share excluding the cost of the CEO transition.

The tax rate was 38% in the third quarter and 30% a year ago. The lower prior year rate was the result of the reenactment of the R&D tax credit.

Turning to the balance sheet and the cash flow statement, we ended the quarter with cash and liquid investments of $85.8 million compared with $68.2 million at the beginning of the year. We enjoyed an extremely strong cash flow quarter, as the cash and investment balance increased by $11.8 million, and be generated $11.4 million in cash flow from operations in the quarter.

A significant contributor to the very strong cash performance was the $5.9 million reduction in inventories that we achieved this quarter. Year-to-date we have generated $23.8 million in cash flow from operations, and $23.7 million in EBITDA, which equates to nearly $1 per share. This is a clear indication of the cash flow potential of our business model in a difficult competitive environment, and while we invest substantially in our IRE technology.

And finally as indicated in the release, our guidance for fiscal 2010 is unchanged from what we provided at the end of the second quarter. One thing to keep in mind is that there are five more business days in our fiscal fourth quarter than they were in the third quarter we are reporting today.

With that I will now turn the call over to the operator to begin the Q&A session. Jeremy.

Question-and-Answer Session

Operator

(Operator instructions) And our first question comes from the line of Jason Mills with Canaccord Adams. Please go ahead.

Jamar Ismail – Canaccord Adams

Hi good afternoon. This is Jamar Ismail for Jason. My first question was going to be on the reduction in operating expenses, but I think you answered that, I was thinking whether or not you are going to cut NanoKnife standing. But looking at the $0.05 that is pretty much comparable with last quarter, can you give more details like what projects are being reduced in terms of SG&A and R&D?

Jan Keltjens

Yes, Jamar, this is Jan here. Good question. In our comments we actually said that we have leveraging operating expenses without cutting any strategic programs. So we are not cutting R&D programs, we're not holding back on investing in IRE. We're very much holding back on the more discretionary programs, holding headcount as far as we can et cetera, et cetera.

So it is the normal operational measures and the normal leverage that we can do without affecting any growth or any future potential for the company.

Jamar Ismail – Canaccord Adams

Okay. And my second question is on the venous business, can you just give us some color in terms of where do you think the venous market growth rate that is going out, and where you think your market share is?

Jan Keltjens

Yes. I mean it has gotten a lot more difficult since venous has taken up the public grid at least, and the results of venous under the wings of Caribbean [ph] are not being disclosed anymore. For the same reason of course we stopped doing it. There is a little bit of reading the tea leaf, but we actually believe the market continues to be very strong, and we have no reason to believe that our market growth in the mid-teens is not valid any more. We have not seen a noticeable slowdown in growth from that point of view. We continue to be very excited about the potential, the long-term potential of this market and increasingly excited about our performance in that segment. So it has been a very strong franchise for us.

Jamar Ismail – Canaccord Adams

Okay. Thanks a lot. I will get back in queue.

Jan Keltjens

Okay.

Operator

Thank you. And our next question comes from the line of Jayson Bedford with Raymond James. Please go ahead.

Jayson Bedford – Raymond James

Hi, good afternoon. Thanks for taking the question. Just on the Access business, where are you seeing the weakness? I think you kind of said broadly, but I'm just kind of curious is it fixed ports or dialysis, meaning is one having a bigger impact than another?

Jan Keltjens

Well, Jayson, good afternoon. You know it is a good question, and I would love to say there is one significant culprit. But it is really, it is across the board. If you want to get a little color within that, I would say probably within the three, dialysis is probably the least worst or best or whatever you want to call that. But I think there is significant room for improvement in all three areas. And again what is really exciting is of the four launches that we will start benefiting from and that is on the near term horizon, there is one significant launch in each of those three segments.

Centros will help us shoring up the dialysis segment; a couple of new ports will shore up the port segment, Smart Ports; and then of course, the first, while the triple lumen PICC, first PICC of the new generation will help that segment. So we think we can actually stop bucking the trend in all three buckets.

Jayson Bedford – Raymond James

Okay. And then when you talked about kind of a push out or timing of launches here, did you expect a greater contribution or launch of Centros earlier in this third quarter. Is that what kind of contributed, I know you guys don't guide quarterly, but obviously there was a little bit of weakness relative to where the Street was and I am just trying to figure out if that was because of Centros or was it due more to some of the PICCs and ports that got pushed out?

Jan Keltjens

Yes, it is a bit of combination Jayson. I think pricing actually continued even a little stronger than we anticipated a quarter ago. We did anticipate that the tough pricing environment was going to stay around. But if anything, it got a little worse I would say. But the other one is I would say, all three of the above, I think we would have anticipated the Centros to kick in a few weeks earlier. You know, regulatory approval has been delayed across the industry a little bit against historically what we are used to. And it is a little bit here and a little bit there, and that kind of took the shine off the Access business at least in the quarter. While shine off is kind of an understatement I guess, but that gave us strong headwind there.

Jayson Bedford – Raymond James

Okay. That is fair. I will jump back in queue. Thank you.

Jan Keltjens

Thank you, Jayson.

Operator

Thank you. And our next question comes from the line of Brooks West with Craig-Hallum Capital. Please go ahead.

Brooks West – Craig-Hallum Capital

Hi, can you hear me?

Jan Keltjens

Absolutely Brooks, we can. Welcome.

Brooks West – Craig-Hallum Capital

Great. Thanks for taking the questions. On the new product launches Jan, you said that there was some risk on FDA, can you give us of the four products that are pending launch, kind of where those are in the process, and what risk there might be there?

Jan Keltjens

Well, FDA approval is a binary process at the end of the day. So it happens or it doesn’t happen. I think most of the risk is behind us. To be very honest, there is one product where we still need approval. But again Q4 is not contingent. It would be – if it happens even on schedule, it would be that late in the quarter, it would not really help us drive Q4. So I think all that is accounted for in the maintained guidance from that point of view.

Brooks West – Craig-Hallum Capital

So just to clarify, three of the four products are already approved, and you are just waiting for it is probably a 510(k) approval on the fourth?

Jan Keltjens

Centros is approved. Obviously it is in the market.

Brooks West – Craig-Hallum Capital

Yes.

Jan Keltjens

We actually just received PICC approval, but we are not quite ready for launch. So we are waiting for the port approval, and you know nothing is normal in this day and age, but one would expect that is fairly straightforward.

Brooks West – Craig-Hallum Capital

Sure. And then if I could get, on IRE, I guess a couple of questions there, Joe, can you break out what is disposables versus capital in that 724 number, and then can you also give us, you know, how many of those are commercial versus clinical cases?

Joe Gersuk

Well, the majority of the revenue, more than half of it was probe [ph] sales this quarter, unlike last quarter where more of it was generators, but we don't break down the specifics of the revenue mix there. And all five of the hospital we sold in the quarter are commercial sites.

Jan Keltjens

And if I can add to that actually, all 50 procedures done in the quarter are commercial procedures. Right now today we have no active clinical programs that are sponsored by the company. So every single bit of activity in the field is pure commercial activity.

Brooks West – Craig-Hallum Capital

Great. And maybe I can sneak one more in; can you give us any light on how the hospitals are getting reimbursed for these procedures?

Jan Keltjens

Yeah, the hospitals are billing under the traditional RF ablation codes. It is what they are using and getting reimbursed, and they are pretty healthy reimbursement rates.

Brooks West – Craig-Hallum Capital

Okay, great. Thank you. I will jump back in line.

Jan Keltjens

Thank you.

Operator

Thank you. And our next question comes from the line of Greg Brash with Sidoti & Company. Please go ahead.

Greg Brash – Sidoti & Company

Good morning Jan, or sorry, good afternoon Jan and Joe, thanks for taking my call.

Jan Keltjens

Good afternoon.

Greg Brash – Sidoti & Company

Curious what – you know, you are reiterating your revenue guidance here. You need pretty strong sequential growth just to hit the bottom end there, the $214 million; it looks like you need around 12% sequential growth. Is there anything, what is giving you the confidence that you will see the sequential growth here in the fourth quarter other than the five extra selling days?

Joe Gersuk

Well, yes, first thing is the five extra selling days which is a very significant number. You know, you are talking about 9% more selling days in the fourth quarter than in the third. But secondly are the new products that we are talking about as well. Those should be contributing, and lastly the fourth quarter is seasonally very strong for us. It always has been and it is our annual commissions’ plans and various other factors that always seem to bring us this strong fourth quarter.

Greg Brash – Sidoti & Company

Okay. And then just on the PICC and port side, it looks like you will be launching two new products this quarter. I know one of your competitors mentioned during their year-end that they were seeing possibly some improved procedure volumes, curious if you are seeing any of that or you know is it at least holding steady and most of the decline is coming from pricing at that point or do you think maybe you are losing a little bit of share, just a little more color on that would be helpful?

Jan Keltjens

Greg and I think both is true. I think we have to assume we're losing share. We also assume that there is at least procedure growth in the market place and maybe even revenue growth, and the fact that with a 6% negative revenue development, 6% price erosion, it means that our volumes have been virtually flat. So we have to assume we're losing share.

I think with due respect, I'm not sure where – we're certainly not the market leader. I think those other parties are there, and I think you got your quotes from that as well that are really the market leaders. And we like to believe their arguments. Again as happily we would be to come up with any excuses, but I think the market is not one of them. I think the market is holding up. Procedures are good. Volumes are good. And keep in mind the procedures for PICCs and dialysis and ports and all that kind of stuff are to a large extent non-elective procedures. So the volume is driven by the prevalence of oncology, diabetes, and every single model we see, we believe the market continues to develop from the procedural point of view. So yes, we're losing share, and yes, we can do better, and yes we will.

Greg Brash – Sidoti & Company

Thank you.

Operator

Thank you. And our next question comes from the line of Robert Goldman with CL King. Please go ahead.

Robert Goldman – CL King

Thanks. And good afternoon guys. Also had a couple of questions on IRE. The first and not too detailed here, but it is important I think in tracking some trends, I had thought and correct me where I am wrong that the revenue on probes [ph] per procedure was something in the order of $5000, 2.5 probes per procedure at $2,000 each. And if I multiply that by the number of procedures we had in the quarter, which you say was 54, I would get a revenue number considerably less than the 50% of NanoKnife sales?

Joe Gersuk

Yes.

Robert Goldman – CL King

Would you correct my math on that?

Joe Gersuk

No, your math is perfectly fine. It is all about what you put into the math. And I say there is two things. You are correct in that we have said that we have approximately $5,000 worth of disposables per procedure. However, we also said early on in the game these numbers spring up and down a little bit, and we were frankly a little favorable to that average, but we don't want to give that guidance because these things may jerk up-and-down a little bit.

Secondly, the way we report procedures is pretty much from conference call to conference call, whereas the revenue we book is very much in the fiscal quarter. So we can't really tie those numbers out. Of course, always a bit of a stroking effect up and down. There are some other dimensions in the revenue as well. So I think the most honest way to track the performance of IRE is really looking at the procedures, and it is almost like a data point in itself, and 50 procedures in the last 90 days is far above anything we have seen in previous quarters, and is a marked step up, and we have every reason to believe that is a beginning of a trend from that point of view, and we said the revenue – people continue to jerk back and forth a little bit, and again there is three elements in there, disposables, service agreements as well as the capital component of the equipment.

Robert Goldman – CL King

Okay. And if I could ask one more follow-up, if the generator sales were something in the order of $350,000, and you sold five, I guess that is about $70,000 each. And could you give us a sense of what the obligation is on the part of the customer in acquiring a generator at that price under the program. In other words, what does that obligate them to do on consumable and utilizations?

Joe Gersuk

As we have talked about before, there are two programs here that we are running. One would be the outright purchase of a generator, and in which case there is no absolute obligation to purchase any probes if they choose to pay the price for the generator, they can – they are only obligated to buy a service agreement with that, which will get them training and service over a year and that cost, the service cost would be amortization over the year.

The other program would be one where the generator is bundled with the probes, and there is a commitment to buy a certain number of probes over a two-year period of time. But if it is just a generator purchased outright, there is no further obligation. And all of that revenue is recognized at the time of the shipment of the product.

Jan Keltjens

And to add to that, if there is an outright purchase of capital equipment, it is always at a price level where it is profitable to us, and I think we said before, even at the lowest price levels we have seen that we are perfectly happy to continue to sell them at that level.

Joe Gersuk

Yes and the last point would be to chime in further would be to say our prices are above 70,000 a generator. That math is not exactly right. We have not sold any below the listed price that we are selling them for under this new program.

Robert Goldman – CL King

And can I ask one follow-up or should I get back in queue.

Jan Keltjens

Sure. Go ahead.

Robert Goldman – CL King

Could you give us a sense then regarding an idea how the customers are buying the generators. Of those five, how many were bought outright not tied to any consumables contracts?

Jan Keltjens

Those five – those five were outright generator purchases.

Robert Goldman – CL King

Okay. Thank you very much.

Joe Gersuk

Maybe to clarify that, possibly one exception, I would say also may be to add on to that in general, our preference is – never a big fan of these long-term purchasing commitments. At the end of the day, physicians need liberty to choose patients for which they want to use this system. Obviously it is also their choice where they want to use it.

We had this generic indication, soft tissue ablation indication, and then within that context we are working with physicians and saw this as a genuine pull from the market. From a strategic point of view and I want to clarify this once again, as a company we are lasered focused on getting these IDE trials started, and get more specific indications. And we are quite excited about the anecdotal results we see, and if anything we get more confident about the potential of this. But there is (inaudible) and that is working through the IDE trials, get the specific label indications, and then aggressively start developing the market. This is full.

Jan Keltjens

And Bob let me correct one point, two of the sales were outright generator sales in the quarter, two of the five.

Robert Goldman – CL King

Just two of the five, okay.

Jan Keltjens

Yes, thank you.

Robert Goldman – CL King

Okay. Thank you very much.

Operator

Thank you. And our next question comes from the line of Larry Haimovitch with HMTC. Please go ahead.

Larry Haimovitch – HMTC

Good afternoon. Jan, on the Biocompatibles deal, can you discuss it? I realize there will probably be some sensitivity to discussing a lot about it, but can you talk about where the terms of the deal, the gross margin split and so on, pretty much similar to previous years, or was there any noticeable change in that agreement?

Jan Keltjens

Well, Larry, and by the way good afternoon. Great question and I can talk as long as you can want on this, but I'm not going to say a lot. The only thing I will say is from a margin point of view, no real difference from that point of view. But as always, you know, well, not as always, but we made a couple of agreement. Again want to focus on; I think also on the Biocompatibles side, you would hear some of those stories. This has been a very, very successful relationship. It has been a great performance to the benefit of both companies.

I think both companies have recognized this all along, and as relationships mature, and projects become more substantial, so do agreements evolve. And that is what we went through, and it has been a very, very cooperative spirit, we are quite pleased with the extension, and I'm sure again hear the same on the other side of the table.

Larry Haimovitch – HMTC

Were you hopeful Jan of extending it even longer, and perhaps they were willing to do that or were you just shooting to have a one year extension and be happy with that.

Jan Keltjens

We are very happy with this extension. I think this gives us what we need, and we look at this as a long term relationship from that point of view, and we are excited about this space and committed to this space.

Larry Haimovitch – HMTC

But you are vulnerable in the event that they decide to go direct. And knowing you, I am sure you must have some alternatives in your mind in case that is the way it goes. A year from now you will be probably in the same position of trying to negotiate to extend it again.

Jan Keltjens

If you want to avoid the vulnerability, of course, I would strongly recommend to get out of the medical device industry, so could a factory burn down, and there is a couple of things. And yes, without being let us put it this way, we are in the business of managing risk. This is a factor. But I think also sometimes we have to focus on the positives. This has been a great relationship. It is the strongest product out there in the market place leading in terms of clinical evidence, and I'm not sure we gave the detail here. But this is now a – about five years or so relationship between the two companies, first starting with RITA, then when we acquired RITA, we became the owner of that agreement. This is like the fourth amendment. So it is not unusual to go through this kind of amendments for different kinds of reasons.

So we – I think both parties kept it right on the long-term goal there, and that is where I would like to focus on as well.

Larry Haimovitch – HMTC

Yes, I want to ask one more quick question. I will get off and get back in queue, and that is congratulations on all the cash you generated, that is fantastic. Has the board considered the possibility of a share buyback, is that in the realm of possibility or is that cash most likely to be used for product acquisitions or company acquisitions?

Jan Keltjens

(inaudible) split second. But we are not going to go in that direction. We think that share buyback, dividend payments, we think we got better use, better sources for this kind of cash to really fuel the business going forward, and that is what we are focused on. Obviously it is fair to assume that we are developing a potential license acquisition pipeline. We have used the last 12 months to really get a better understanding of the business, where we are, where we need to be, keep a note of the grindstone and get innovation going again.

We are coming of a multi-year draft in launching products. We think we will hit the 11 product launches this year. We think we got a couple in the hopper for next year. Organic growth rate has picked up for the year to date about 8% assuming, and obviously we assume we will meet our guidance. It will certainly hang in at that kind of a level. We think we did good work on shoring up the foundation of this company, built the management’s strength, built to the team’s strength also to really go after acquisitions, and do them well. And I think that is what we are focused on as a management team with full support of the board.

Larry Haimovitch – HMTC

Great, Jan. Thanks very much. Happy Holidays and Happy Easter!

Jan Keltjens

And same to you Larry, Happy Easter!

Operator

Thank you. (Operator instructions) And we do have a follow-up question from the line of Greg Brash with Sidoti & Company. Please go ahead.

Greg Brash – Sidoti & Company

Thanks for taking my follow-up. Just curious, some of this discretionary spending that you are holding back on, could you quantify how much you were holding back and should we expect those costs come back sometime in fiscal 11?

Jan Keltjens

Well, I'm not sure there is a lot of value in going through details where we are holding back. But I would say by and large Greg, holding back on discretionary spending. One thing may be at a very high level, maybe one little titbit, our headcount today is probably a hair below what it was at the beginning of the year despite 10% revenue growth. So that has been a significant element I would say, and that is across many, many areas.

The second thing I will say is the way we are holding back these expenses is not moving expenses from one quarter to the next. I think these expenses are – have gone away, and we don't expect to catch up effect neither in R&D nor in sales and marketing or G&A from that point of view. So I think it was a clean, real clean and frankly kudos to the management team here, and people in the organization, a clean, real, proactive management of expenses in areas where it does not affect our future from that point of view.

Greg Brash – Sidoti & Company

Okay, that was very helpful Jan. Just one more from me, the Centros, when exactly did that launch in the third quarter and did it have any impact on sales?

Joe Gersuk

It was just in the last week of the quarter that it launched and it was a negligible impact on the third quarter sales revenues.

Greg Brash – Sidoti & Company

Okay, good. Thanks Joe.

Jan Keltjens

We presented this first time at the SIR meeting in Tampa, which I believe was two weeks ago.

Joe Gersuk

Just to chime in on Jan’s last comment with regard to the expenditures and actually we look at the nondirect labor headcount in the company as one of the metrics that we follow and it has actually been flat now for four consecutive quarters. (inaudible) is to trim, as well as not hire replacement people. So, we are operating at a substantially lower level of headcount than we would have had the gross margins been higher or the sales been higher.

And then secondly, with regard to the marketing programs, we cut back on a number of marketing programs, and you go to virtually any trade show today, and you'll see a lot fewer people exhibiting and it is just I think a big trend in the industry where there is a lot less expenditure going on in marketing programs. So we don't think that any of these are things that are going to hurt us in the longer run.

Operator

Thank you. And management, I show there are no further questions at this time.

Jan Keltjens

Okay. Well, thank you, Jeremy. I thank you all on the call for your interest in AngioDynamics. We will continue to provide updates on our progress, and I look forward to talking with you again during our fourth quarter fiscal 2010 conference call somewhere in July. Thank you very much, and have a great evening and balance of the week.

Operator

Ladies and gentlemen, this concludes the AngioDynamics 3Q 2010 financial results conference call. If you would like to listen to a replay of today’s conference please dial 1-800-406-7325. For international participants, dial 1-303-590-3030 and enter the access code 426-3674 followed by the pound key. ACT would like to thank you for your participation. 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: AngioDynamics, Inc. F3Q10 (Qtr End 02/28/10) Earnings Call Transcript
This Transcript
All Transcripts