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Urologix, Inc. (NASDAQ:ULGX)

F3Q10 (Qtr End 03/31/10) Earnings Call Transcript

April 27, 2010 5:00 pm ET

Executives

Stryker Warren, Jr. – CEO

Rebecca Weber – Director of Finance & Controller

Greg Fluet – EVP & COO

Analysts

Ernest Andberg – Feltl & Company

Operator

Good day, ladies and gentlemen, and welcome to the Urologix Inc. fiscal 2010 third quarter conference call. My name is Crystal, and I will be your operator for today. At this time all participants and in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

Statements made at this presentation may contain forward-looking statements that are made pursuant to the Safe-Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in any forward-looking statements due to risks and uncertainties. A detailed discussion of risks and uncertainties maybe found in Urologix recent Annual Report on Form 10-K for the year ended June 30, 2009, and other documents filed with the Securities and Exchange Commission.

At this time, I will turn the call over to Mr. Stryker Warren, Jr., Chief Executive Officer; please proceed sir.

Stryker Warren, Jr.

Good afternoon. This is Stryker Warren, and as the Chief Executive Officer of Urologix, I welcome you to this earnings call. We are pleased you are interested in the company and at its performance. Joining me are Rebecca Weber, Director of Finance and Controller; and Greg Fluet, Executive Vice President and Chief Operating Officer.

Before I share my perspective on the third quarter of fiscal 2010, I will ask Rebecca to review the financial results.

Rebecca Weber

Thank you, Stryker. Revenue for the third was $3.6 million, an increase of 8% over the $3.3 million reported in the third quarter of fiscal 2009. Revenue decreased 12% from the $4.1 million reported in the second quarter of this fiscal year.

The 8% increase in revenue over the prior year quarter is due to increased sales in all distribution channel, direct third party mobile and Urologix mobile service. The decrease in the revenue from the second quarter of fiscal 2010 is due to decreased sales in all distribution channels.

Revenue derived from the Urologix mobile service contributed 46% of overall revenue in the third quarter of fiscal 2010, compared to 48% in the second quarter of fiscal 2010.Revenue from catheter sales to direct accounts contributed 36% of overall revenue in the third quarter of this fiscal year, compared with 35% of revenue in the prior quarter.

And finally third party mobile revenue contributed 15% of overall revenue in the third quarter of fiscal 2010 consistent with the second quarter of this fiscal year. Cash and cash equivalents were $5.8 million as of March 31, 2010.

We utilized approximately $247,000 of cash in the current quarter compared to cash utilization of $897,000 in the third quarter of fiscal 2009 and cash generation of approximately $22,000 in the previous quarter.

The decrease in our cash utilization when compared to the third quarter of fiscal year 2009 is due to our improvement in our gross margin of 5 percentage points as well as a $283,000 decrease in our operating expenses. The increase in our cash utilization was from the prior quarter is result of lower sales as well as an increase in our day sales outstanding, our day sales outstanding at the end of the third quarter were 46 days up six days when compared to 40 days for the quarter ended December 31, 2009.

Our day sales outstanding is usually lower at the end of the second quarter of our fiscal year as many customers pay down their outstanding accounts receivable balance prior to end of the calendar year for taxes purposes. Management believes that the $5.8 million cash balance at March 31, 2010 will be sufficient to fund our operations beyond the next 12 months.

The net loss for the third quarter was $597,000 or $0.04 per diluted share. A reduction of 50% when compared to the net loss of $1.2 million or $0.08 per diluted share reported in the third quarter of the prior fiscal year.

However, the net loss increased when compared to the second quarter of fiscal 2010 net loss of $273,000 or $0.02 per diluted share. Gross profit for the third quarter fiscal 2010 was $2 million or 55% of revenue, a 5 percentage point increase when compared to the gross profit of $1.7 million or 50% of revenue reported in the third quarter of fiscal 2009.

The 5 percentage point increase in gross margin as compared to the prior fiscal year third quarter is a result of increased production volume to meet increased demand. Gross profit as a percentage of revenue, decreased by 2 percentage points when compared to the 57% reported in the second quarter of fiscal 2010.

The decrease in the gross margin over the prior quarter is primarily due to an inventory adjustment. Operating expenses decreased 10% to $2.6 million when compared to the $2.9 million reported in the third quarter of fiscal 2009 as a result of continued expense management.

Operating expenses remain consistent with the $2.6 million reported in the second quarter of fiscal 2010 increasing $35,000 or 1%. As mentioned in the previous quarter, we are planning to increase our investment in certain areas of the business but only in those areas where we have identified clear resource needs to support the growth of the business.

I will now turn the call back over to Stryker.

Stryker Warren, Jr.

Thank you, Rebecca. As I have previously observed when sharing quarterly results in comparisons, while the quarter nor does not year make, this one is both confirm strength and presented challenges and Urologix's continued revenue growth as compared to this quarter of last year and continued improvement in our operational efficiencies.

These strengths are the result of the efforts of our committed personnel the quality of our product and the recognition of the clinical distinction of high energy High Energy, Cooled ThermoTherapy. However, as stated in the press release the third fiscal quarter presented a number of challenges as well which I will discuss in more detail shortly. Our third fiscal quarter 2010 continued to demonstrate the results of the ongoing process begun two years ago.

These results have become most evident in the past year on a comparative basis. Our 8% improvement in sales is compared to the same quarter of last fiscal year as demonstrative of priorities and focus on product, sales and marketing and customer services as well as heightened comparative effectiveness discussions.

The continued adoption of a CTC advanced catheter family designed to optimize patient comfort without comprising durability coupled with an enhanced treatment algorithm and the opportunity to demonstrate the advantages of Cooled ThermoTherapy with new customers contributed to this positive comparison.

Our objective is to continue to illuminate to our urologist customers and patient benefits enabled by Cooled ThermoTherapy when compared to other treatment options including product, maintenance BPH medication.

Well it represents the most challenging sale based upon the ad budgets of Big Pharma; we will litigiously compete against the alpha-blockers based upon pre-reviewed literature demonstrating superior relief of symptoms in flow rates when one compares Cooled ThermoTherapy to medication.

Our marketing efforts designed to raise the awareness of Cooled ThermoTherapy retrieving option early in the BPH patient management protocol, our focus to find new urologist broadly as well as specifically our urologist customer's referral days.

The BPH patient population prescribed medications is large in growing. The main menu recognizing the side effect profiles of these drugs are not minimal. The costs are not nominal and the efficacy is not assured. Then our BPH medication are often particularly unhappy of experiencing the sexual side effects associated with the 5-alpha reductase inhibitors and alpha-blockers or any other array of other troublesome side effects as I've showed in the past drugs are not the panacea nor or are they devoid of drawbacks.

We are however realistic that we live in a society where many consider drugs the answer. Relative to BPH drugs, we intent to prove in time that friends do not let friends do these drugs, and we intent to identify the clear difference provided by Urologix treatment option as well as other energy devices that can show absolutely no durability.

After the prior three quarters of sequential growth, we were not successful despite our intent in our efforts in overcoming the headwinds experienced in the third quarter of this fiscal year to achieve that sequential growth mark for the fourth time.

There were two main trends that affected the performance of this quarter. The first is a general decrease in volume for many of our accounts, which contributed the majority of the sequential decline. The second is the return of some customers to a competitor who reentered the market at the end of our second fiscal quarter.

The decrease in revenue per customer was caused by the compounding of multiple factors. The third quarter of our fiscal years of time when we have historically experienced some sequential declines in the past. However, discussions I had personally in the field with urologist dramatized their beliefs the effects to the economy on their patient population as exacerbating what is the typically slow start to any calendar year due to the reset of Medicare in commercial insurance deductibles.

This slowdown was reportedly not isolated to BPH, but it was across all the disease stage these urologists diagnose and treat. Winter weather in certain parts of the country also resulted in higher cancellation inertia rates particularly with our Urologix mobile service.

These seasonal advances were not the sole contributors affecting customer utilization. The majority of patients treated with Cooled ThermoTherapy are in the Medicare population. We heard of multiple reports from the field were confusion around the potential for global Medicare cuts driven by the sustainable growth rate formula caused temporary disruptions in physician practice patterns among some urologists is a field reimbursement cuts.

Moreover, we are in the midst of our third temporary fixture delay of the 21% decrease attributable to the sustainable growth rate formula. The most recent fix will last until June 2, 2010. We believe Congress will act before this deadline to extend the fix further, but there is no guarantee, and this is been a year of many legislative surprises. Never before has there been such uncertainty which has lead to acrimony amongst many physicians I have spoken to which is unlike anything I have witnessed since the early 1990s when that administration planned healthcare reform.

This is clearly affecting the psyche of the urologist as one would expect we are doing all we can to demonstrate CTTs virtues clinically and economically for both patient and neurologist associated with proceeding with treatments despite the uncertainty.

We also felt the impact this quarter from a competitor returning to the market. Over the last few quarters we have capitalized on the opportunity provided by their market withdrawal to service many of their accounts during that period of time.

Our efforts were focused on exposing many of their customers both direct and third party mobile customers to the effectiveness and to the quality of Urologix's product offering. We are pleased that the majority of these customers have recognized the value provided and it continues to choose Urologix.

A decision based largely upon efficacy and I believe our staff are superior and contribute toward product loyally and switching costs. Some did return to the competitor for various reasons and one of those was price.

The impact of those returning was felt in the third quarter but we continue to target this competitor in those accounts with an emphasis on clinical results they will absorb with the patients they have treated with Urologix's high energy Cooled ThermoTherapy during this period and those accounts continue with Urologix's with a period of one to comparative effectiveness battle in many instances and I am particularly gratified to recognize the belief amongst these customers that microwaves are not all alike.

We remind the urologist to the patient results matter that simple, we continue to drive attention when we discussed our five year durability data presented in last year's AUA Meeting as well as our prior pre-reviewed publications presenting four and five year results which substantiate both efficacy and durability.

Categorized between medication and surgery we intent to continue to take market share from other minimally invasive BHP options as well as been seen as an earlier solution in the treatment paradigm were most commonly watchful waiting is followed by medication.

Urologix's will exhibit at this year's AUA in San Francisco at the end of May and we expect all who attend will walk away with a better understanding of these clear differences and treatment choices.

Our sales force is maturing stable and well supported both in terms of sales management and ground support from the application specialist on the mobile route and our clinical specialist responsible for training.

Also from the air-cover our growing portfolio marketing initiatives provides. The consultative sales are our modus operandi, and it continues to be become stronger with time and with enhanced tools.

Our clinically oriented story with approved statements to support it; on the business side, the sales efforts continue to be complimented by aggressive and thoughtful expense management. With our focus on using our resources to responsibly invest in and grow the business.

This is noticeable not only in our improved gross margins but in our reduced operational expenses. We have been diligent in managing all aspects of the business that are under our control and I think the operating results and balance sheet reflect this conscious attitude. The summary statement is more than the company's positioning.

It's the conviction and that a singular core for singular core Urologix as leading technologies supported by exceptionally impressive clinic evidence and technology capable delivering value to the patient, physician and payer.

We rise daily recognizing; we must be diligent in expressing our message. CTT is an effective, safe and cost effective treatment option that can provide long-term superior clinical outcomes. It is our attempt to continue to demonstrate through deeds rather than words that Urologix is the reliable choice, reliable product, reliable outcomes.

Along with reliability, two other terms of equal importance to all of us involved with Urologix and those were quality and trust. I think we continue to make progress as what I receive by a way of feedback from the field is good product, good service and very good people. The market remains challenging in these uncertain economic times for the urologists.

Urologix is optimistic, confident and diligent. We intend to demonstrate this in our next quarterly and yearend presentation. Concluding Rebecca's and my comments we will now do your best to answer any questions you might have.

Question-and-Answer session

Operator

(Operator Instructions) Your first question comes from the line of Ernest Andberg with Felt & Company. Please go ahead.

Ernest Andberg – Feltl & Company

Hello Stryker, Rebecca.

Stryker Warren, Jr.

Hi, Ernie.

Rebecca Weber

Hello.

Ernest Andberg – Feltl & Company

I will ask the obvious question. Can you give us an idea of how your customers going back to the competitor was out of the market might have impacted the quarter, you said some, but clearly not all you kept the number. Can you give us some color?

Greg Fluet

Hi, Ernie. This is Greg Fluet. We're not giving an exact number on that because of the fact of the competitive dynamics in the market place. We've been tracking that very closing through our CRM system and have a good graph of all the accounts that we picked up during that time and watching the ordering patterns and the volume very closely.

Besides from Stryker's comments to that, it was a minority of the impact. We're not giving any more detail.

Ernest Andberg – Feltl & Company

Okay. And Stryker, you did say that Boston the competitor came back in and was using sounds like using priced to regain some market share that they had missed?

Stryker Warren, Jr.

No, I was referring to the fact that there were some customers that returned on the basis of price.

Ernest Andberg – Feltl & Company

Okay, fair enough. Rebecca, you made a comment about the gross margins being down sequentially from Q2 to Q3 due to an inventory adjustment. Does that relate to production levels, or was there an actual charge in the quarter for inventory?

Rebecca Weber

What that relates to is we did write down the value of some old replacement parts for some of our control units, that's the adjustment I'm referring to.

Ernest Andberg – Feltl & Company

Was that the difference between the two quarters about 200 basis points of gross margin?

Rebecca Weber

That's the majority of the difference.

Ernest Andberg – Feltl & Company

Thank you. Now get to the harder issue. I had suspected that or I knew that there is a seasonal pattern in Q1, and you indicated some challenges in the quarter if I look back over history there is a seasonal upturn in the June quarter that I judge is 5% plus or minus. Do you think that the market will respond accordingly as in the past or are the reimbursement issues still causing problems out on the front line in terms of utilization?

Stryker Warren, Jr.

Ernie, I'm not going to reference anything regarding the fourth quarter other than to say we all know that there are some unanswered questions out there, and I wish I could predict what Congress was going to choose to do. As I indicated that was an issue in this first calendar or the third fiscal quarter. I do not know what's going to happen on a go forward basis with respect to reimbursement.

Ernest Andberg – Feltl & Company

Fair enough. Rebecca, you mentioned that you would I'm not sure exactly your language, but judiciously increased investment where you though that was necessary going forward, does that mean that we might see an increase in user R&D or the SG&A line relative to where you were in Q3 or Q2?

Rebecca Weber

Yes. I think we mentioned probably in the last quarter call that our R&D expenses have been lower than historical. And as I mentioned too, we will not invest in other areas of the business unless we can get return for that investment and grow the business.

Ernest Andberg – Feltl & Company

I'm not sure what that answer map. Should we expect a trend operating expenses going forward?

Rebecca Weber

We are not going to provide any guidance on what our future performance is going to look like, our expense structure.

Ernest Andberg – Feltl & Company

Thank you. That's all.

Operator

There are no further questions at this time. (Operator Instructions) There are still no further questions. Mr. Warren?

Stryker Warren, Jr.

Crystal, thank you. To those of you on the call on behalf of the Board of Directors, senior leadership and Urologix employees, I thank our loyal shareholders for your continued interest in Urologix and it is our intent daily to create shareholder value and I wish you good health and a good day.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.

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