IMRIS Inc. (NASDAQ:IMRS)
Q1 2014 Earnings Conference Call
May 13, 2014 04:00 PM ET
Kelly McNeill - EVP and CFO
Jay Miller - President and CEO
Josh Tanning - Cowen
Doug Miehm - RBC
Good day, ladies and gentlemen and thank you for standing by. Welcome to the IMRIS First Quarter 2014 Financial Results Conference Call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, May 13, 2014.
I would now like to turn the conference over to Kelly McNeill. Please go ahead sir.
Thank you operator. Hello, everyone, and welcome to our call. IMRIS’s first quarter 2014 financial results were issued after market close this afternoon. The news release, MD&A, and financial statements, as well as a link to the webcast of this call are available on our website at imris.com. With me on our call this afternoon is Jay Miller, President and Chief Executive Officer.
Please note that the comments made on today’s call may contain forward-looking information. These statements should be not understood as guarantees of future performance or results. Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to be materially different from those implied by such statements. Although such statements are based on management’s reasonable assumptions, there can be no assurance that actual results will be consistent with such statements. For further information on these risks and uncertainties, please consult the Company’s relevant filings, which are available at SEDAR.com or at sec.gov.
Now, I will turn the call over to Jay.
Thanks Kelly and good afternoon everyone. In the 2014 first quarter, we continued the work toward building a sustainable medical device company on top of our significant year of transition in 2013. We made progress in many areas during the quarter and we have more work ahead of us to achieve our goal of long-term growth and profitability. We are intently focused on the priorities that will get us there. As you saw in today’s earnings announcements, revenue in the 2014 first quarter was within our guidance range and we continue to expand our revenue base with VISIUS iMR, VISIUS iCT, service contracts, options, upgrades and disposables as [indiscernible] objective for our team.
Revenue from VISIUS Surgical Theatres for the 2014 first quarter was $5.5 million or $800,000 more than the same period last year, stemming from the timing of installation and delivering activity. Our business remains lumpy quarter-to-quarter as noted in the past. However revenue from VISIUS Surgical Theatres included sales from disposables, options and upgrades which rose $300,000 compared to the same period last year as a result of our expanded product portfolio, such as the new horseshoe headrest. I’ll say more about this in a minute.
In addition, extended maintenance contract revenue was $900,000 higher than the year ago period. This increase reflects additional extended maintenance contracts from a larger install base that have transitioned off warranty to chargeable service programs. We expect growing revenue contributions from services in the future as we build our customer base and strive to deliver A plus customer support. The Company’s net loss improved to $0.15 per share in the 2014, first quarter compared to a net loss of $0.18 per share in the same period last year.
We made significant strides in lowering operating expenses, mainly due to reduced expenses and research and development costs for MRgRT and other research projects as those initiatives near completion. Clearly our gross margins were not what we wanted them to be. The decline from last year stemmed from trailing project completion costs of new VISIUS iMR and MRgRT systems, and the integration of critical business processes that will enable us to achieve greater synergies and oversight in our customer programs and supply chain going forward. We are swiftly addressing the factors that impacted gross margins in the first quarter. For the 2014 full year we still expect to achieve gross margins of approximately 40%.
Turning to our bookings, one of our primary areas of focus in 2014 continues to be to improve bookings and to convert qualified customer prospects to new sales orders. New order bookings are $18 million in the first quarter resulted in an ending backlog of $110.4 million. We expect bookings to improve during 2014, although we continue to expect lengthy decision times in certain hospital systems, given the nature of capital equipment sales cycle.
As I noted before, our VISIUS Surgical Theatres iMR systems require a large capital outlay, generally in the range of $5 million to $10 million, depending on the product solution, theatre layout, and selected system option.
In addition to the capital equipment purchase, most of our customers enter into equipment service contracts that generally span four to five years. At this stage in IMRIS’s growth, a few orders for our systems can have a significant impact on our quarterly results. Therefore we continue to anticipate revenue and bookings variability from quarter-to-quarter. However, we are working to mitigate that by further expanding our range of products and services and we expect the volatility to lessen over time. We are excited about our progress in developing image guided intraoperative technologies for the Surgical Theatre.
The VISIUS iCT is the first and only ceiling mounted intraoperative CT available. We believe the iCT offers the highest radiological quality images and the seamless surgical workflow making it a category dominating product. Our sales team is concentrating their efforts on hospitals and surgical centers with the greatest ability to benefit from neuro and spine surgical applications.
In addition we heard very good news about the new CT reimbursement rule set by the Centers for Medicare and Medicaid service or CMS. The new CMS rules allow higher reimbursement for high quality low dose CT and IMRIS has the only intraoperative CT with state of the art dose management.
In February we received FDA clearance on our next generation VISIUS Surgical Theatres that integrate some latest high field Aera 1.5T and Skyra 3T MR scanners to bring unequal intraoperative imaging quality to the surgical suite. We have already completed our first installation of this technology in a full room hybrid operating suite known as the Center for Surgical and Innovation Dartmouth-Hitchcock Medical Center in Lebanon, America. This is the first operating suite in the world with both VISIUS iMR and iCT modalities able to serve multiple operating rooms without moving the patients.
Now I’d like to review several clinical highlights in the quarter that speak to the strength of our technology and its clinical and financial benefits. Capital equipment budgets continue to be a challenge but the clinical results from our installed base of customers get better and stronger every day. We were pleased that our Cleveland Clinic neurosurgical team published a study in April in the Journal of Neurosurgery validating the effectiveness of our VISIUS intraoperative MR. We concluded that iMR significantly enhances the amount of complete reception in brain tumors and leads to better patient outcomes. The results reinforce previously published evidence that IMRIS Systems with high field iMR guided surgery are more effective in achieving complete reception in conventional surgery using neuro-navigation and direct visualization alone.
Meanwhile neurosurgeons at Le Bonheur Children's Hospital in Memphis, Tennessee, completed their first cases using our horseshoe headrest, the world’s first MR-safe and CT-compatible horseshoe headrest. It can be used to position patients from neonatal to adult during neurosurgical procedures. The recently launched horseshoe headrest makes iMR possible for the youngest and most fragile patients. As an example, one of the first neurosurgical cases at Le Bonheur Children's Hospital with our headrest involves a four month old baby.
In the past surgeons would not have had an iMR option for this child but with our headrest they were able to completely remove the tumor. Parts of the horseshoe headrest also add to our disposable product portfolio. This further establishes IMRIS’s capabilities to develop tools that speak case to case transition and optimize patient headwind. We expect to continue to grow our disposable process in 2014 and beyond. Consumable products are key revenue drivers for IMRIS that we expect will enhance our longer term profitability.
In another clinical example, the University of South Florida neurosurgical team at Tampa General Hospital completed initial cases in April using a recently installed VISIUS intraoperative MR. This system provides the most advanced surgical suite in the Tampa Bay area. The tumor VISIUS Surgical Theatre features a high field MR that travels to the patient using ceiling-mounted rails. The fully integrated suite allows the scanner to move between an operating room and a diagnostic room, providing on-demand access to high resolution MR images, before, during and after procedures without moving the patient from the OR table.
And in an example of our technology enabling new surgical application, Cook Children's Hospital in Fort Worth, Texas, did their first pediatric laser ablation procedure on a brain tumor in their IMRIS VISIUS Surgical Theatre. The procedure combined the navigation technology of the ClearPoint Neuro Intervention System with intraoperative MR. Together, these technologies allowed accurate placement of laser catheter with thermal ablation of the tumor and the VISIUS iMR allows the complete procedure to be done in an operating room, again without moving the patient. With more installations coming online and the number of procedures growing steadily, we estimate the volume of VISIUS patients treated will achieve 17,000 by the end of this year. This represents a 30% gain in one year over the previous eight years as intraoperative MR and CT utilization expands to improve outcomes in a growing number of neurosurgical applications.
As I mentioned on the 2013 fourth quarter call, six hospitals have performed approximately a 1,000 cases each using the VISIUS iMR. Each hospital [indiscernible] the VISIUS iMR with lowering reoperation rates by giving a surgeon better overall visualization without moving their patient and ensuring more complete surgical results reducing. Reoperation rate is a very important ROI metric of safe cost containment hospital environment.
The top neurosurgical hospitals are doing more than increasing the number of procedures completed in the suite. They are also expanding their types of applications and conditions other than various brain tumors that they treat. The list includes epilepsy, Parkinson’s disease, stroke intervention, aneurysm, Chiari malformation and additional neurological procedures using deep brain stimulation, RF and laser ablation and other interventional technologies with iMR. Further the recent addition of VISIUS iCT to our regulatory cleared portfolio broadened our solution into spinal condition, trauma and intricate reconstructions.
We see tremendous market opportunities with the VISIUS iMR and iCT products and we continue to make progress in our other exciting and innovative systems that are in development and moving towards commercial launch with our OEM partners. Our efforts remain centered around enhancing the capabilities of VISIUS Surgical Theatre so that our surgical suites can accommodate wider spectrum of procedures.
To this end, we continue to be excited about our advances in developing a second generation image guided robotic system. The SYMBIS Surgical System, that’s the first surgical robot in the world that is compatible with both MR and CT imaging systems. We believe that combining the state of the art imaging of our VISIUS Surgical theatres and the SYMBIS micro-surgical robotic system will lead to neurosurgical procedures that haven’t been possible before. We are driving hard to achieve the goal of seeking initial regulatory clearance to perform a simple procedure using a SYMBIS by late this year or early 2015. We have also completed nearly all the work in co-developing our MR Guided Radiation Therapy or MRGRT system with industry leader Varian Medical.
We are combining IMRIS’s proprietary IMR technology with Varian’s TrueBeam system to enable the use of MR during radiotherapy treatments for cancer. Our two companies have been collaborating with Dr. David Jaffray, a world renowned radiation therapist and a team of the Princess Margaret Cancer Centre in Toronto to develop a system. The team has researched the use of MR and radiation therapy and studied how the MR and radiation treatment technologies can be compatible. We remain very confident about the possibilities for MRGRT and believe that interests in the Varian’s IMRIS MRGRT product will build as clinical results are gathered at PMH. For the remainder of 2014, we are committed to executing our strategic plans in order to set the stage for growth in 2015 and beyond.
IMRIS now offers a broader product range, including a growing disposable business and we plan to continue building momentum for our VISIUS iCT and service sales. We also anticipate market excitement around the development of our second generation SYMBIS MR and CT-compatible robotic system. Our strategic priorities for 2014 continue to include increasing market penetration and order bookings by making it easier for our hospital customers to purchase our VISIUS IMR in today’s cost containment environment and change the build momentum for our VISIUS iCT and service sales in the U.S. and Europe, striving to deliver A plus customer support, selling our expanded portfolio product offerings for options, upgrades, disposables and services into our satisfied installed base of customers, advancing the development and commercialization of our SYMBIS MR and CT-compatible robotic system and enhancing the Company’s operating efficiencies with an emphasis on controlling costs and increasing gross margin.
Now, I will turn the call over to Kelly to review the financials. Kelly?
Thank you, Jay. Revenue in the 2014 first quarter came in at $8.2 million. Revenue for the quarter increased marginally compared to the same quarter last year. In the quarter, service contract revenues increased by 49% to $2.7 million. Revenues from these contracts will continue to increase, as more of our VISIUS Surgical Theatres transition from warranty and onto service agreements.
First quarter gross profit decreased to $1.9 million, yielding a gross margin of 23.6% versus 37.4% in the prior year quarter. The first quarter gross profit as a percentage of sales reflects basically unfavorable project gross margins compared with the same period last year due to higher installation costs as a result of additional cost overruns on certain installations, higher service cost at a customer site and in not achieving anticipated synergies through operations.
Operating expenses for the 2014 first quarter were $8 million, down $2.8 million from last year and largely in line with our plans. This is primarily due to higher expenses incurred in 2013 related to our relocation costs and other costs which arose from the timing of adding new employees, while existing employees are under severance and retention plans as we relocated our operations to Minnesota. The decrease is also due to reduced technical spending associated with our image guided surgical robotics program and the development of the MR guided radiation therapy program.
The net loss for the 2014 first quarter was $7.9 million versus a net loss of $8.4 million in the prior year quarter. The year-over-year decrease in the net loss was due to lower operating expenses, partially offset by lower gross profit and higher interest expense.
Looking at the balance sheet, we had cash, restricted cash and accounts receivable totaling $25.8 million in March 31. Total order backlog at the end of the quarter was $110.4 million, an increase of $8 million from the prior year quarter. At March 31, 2014 we have sold our crocks [ph] into 82 surgical suites and 48 diagnostic rooms to 57 customers worldwide and with 63 of those surgical suites are installed and 19 are in the delivery phase. Of the surgical suites sold, 59 are in the United States, 5 are in Canada, 13 are in Asia Pacific and 5 are in Europe and the Middle East.
Turning to the 2014 financial outlook, our reduction in the order backlog year-over-year particularly in new systems orders has had a negative impact on our ability to convert that backlog into revenues in 2014. We believe we will be able to mitigate some of the shortfall on the conversion of the 2013 backlog with the introduction of new revenue sources in iPT systems orders, upgrades and disposables, each which offer more immediate revenue opportunities in 2014. As a result of these revenue opportunities, we continue to expect to deliver revenues in the range of $44 million to $46 million.
As we review, our current order pipeline, we’re optimistic about continuing to also build our order backlog in 2014 that will result in meaningful growth in 2015 revenues. IMRIS’ quarterly revenue profile in 2014 will also again vary depending on the underlying systems of each period as Jay said. We anticipate that second quarter revenues will be in the $3.5 million to $4 million range and similar to prior year’s the strongest quarterly revenue performance will again occur in the second half of the year. Overall, we continue to expect much improved gross margin performance from the prior year and as Jay mentioned earlier, a full year forecasted gross profit as a percentage of sales in the 40% range. We do expect quarterly gross profit as a percentage of sales will continue to vary through 2014 depending on the timing of underlying systems installations in each of the quarters. We anticipate based on our operating plan the total cash and non-cash operating expenses in 2014 to be approximately $33 million which is consistent with previous guidance.
Thank you. I’d now like to open up the call for any questions. Operator?
Thank you, sir. (Operator Instructions) Our first question is from the line of Josh Tanning with Cowen. Please go ahead.
Josh Tanning - Cowen
Hopefully first if you could just talk about the traction you had in iCT. So I know you don’t typically break out what the order book has consisted of between iCT, iMRI or any other line items but can you just talk a little bit directionally about the success you’ve had so far. I know it’s still early days with the iCT launch.
Yes, no problem Josh. Our iCT pipeline continues to build and as I mentioned earlier we sold one of everything. So we did have an iCT deal this past quarter. We expect that momentum will continue. We’ve got very competitive product. We won a deal that was a real dog fight versus the competition and we’re excited about the prospects going forward. It is very clear that we have the highest quality, best dose management product on the market, period. And we expect going forward we’re going to gain more and more share.
Josh Tanning - Cowen
And if you think about the quality of your backlog here at a 110 million relative to beginning of last year, how should we be thinking about it just in terms of quality and the risk of any orders falling out of backlog.
The risk of orders falling out of backlog is very, very small and the reason we can say that confidently is typically with the deals we take, we get deposits that can range anywhere from 20% to 30% typically. So we have a lot of confidence in the stability and quality of our backlog.
Josh Tanning - Cowen
And if you think about the gross margin headwind in this quarter it seems that you have a fix in play. I know it’s still early days in terms of getting actual installations from your multisource pricing strategy but was there any impact there and how should we think about gross margins with the multi sourcing pricing strategy? Does that create an eventual modest gross margin headwind?
Yes, fundamentally the multisource pricing will improve our gross margins because some of the lower margin pieces of the VISIUS Surgical Theatre will be purchased directly by the customer. So our gross margin rates should improve over time. Our gross margin issues in the first quarter were pretty straight forward, time to trailing costs of finishing some programs, integrating -- our process of integrating our bill materials into our ERP system. We had some expediting fees, to do the right things for some customers, to stay on schedule with them. We also had some bad luck and timing on the service side. Fundamentally we know the root cause of all of those issues and we have either fixed or have planned to fix this quarter, those issues. We don’t expect that we are going to have major issues with this going forward. It was a bad gross margin quarter. There’s no doubt about it. But we do know what the problems are or were and we do have fixes in place. And we are very confident that our gross margins will get better this year and we’re still confident in 40% for the year.
Josh Tanning - Cowen
And just lastly -- just on the full year revenue guidance, is it back half weighted. Can you just talk about what gives you the conviction that we’ll see that back half acceleration and I know a lot of it has to do with timing of installations but if you can just help us -- give a little bit more color on that so we can get a better sense of your confidence level there?
So we typically Josh, have a pretty good idea of when our customers want systems installed. So we have pretty good visibility into the next six, nine, 12, 15, 18 months in terms of installations which is how we feel confident in the revenue number for the year.
(Operator Instructions) Our next question is from the line of Doug Miehm with RBC. Please go ahead.
Doug Miehm - RBC
Two questions, and maybe you mentioned this and just want clarification. In terms of the backlog number, $18 million which is good, how much of that was service related.
Yes, we actually disclosed that in our MD&A. So $6.5 million is tied to service contracts.
Doug Miehm - RBC
$6.5 million, okay. And then did you also say that you expect that number, the $18.9 million to climb in successive quarters this year as well?
No, we didn’t say that but we expect that, I think -- over time we expect the backlog will grow but we didn’t say that we would expect bookings which I think is the number you’re alluding to. We did not say that we expected that bookings would climb over time. We do expect that bookings will be strong. We’re very confident here about strong bookings here in the second quarter and we expect bookings to continue to be strong through the rest of the year, the reason being and the reason I believe we are seeing bookings get better is probably economy driven, partly people are more comfortable with Obamacare but mostly the clinical data that our customers or potential customers are looking at gets stronger and stronger and stronger nearly every day. We’ve got a lot of procedures out there, a lot of customers that have a lot of experience and lot of understanding of the costs affecting this, of the product. Re-surgery rates are going down consistently. Their ability to do complete resections is going up consistently and there’s a lot of data around this, and these folks all talk. We’re not standard of care yet but every day that goes by our technology is becoming more and more standard of care and that’s helping us a lot.
(Operator Instructions) I am showing no further questions I’ll turn the call back to Jay Miller for closing comments.
Thank you George, I just want to reiterate my comments about gross margins, one more time. We know the root causes of our first quarter 14 gross margin issues and we have fixed or will very soon fix these issues and we expect our gross margin rate to get to the 40% by year end. We have a compelling line up of regulatory cleared and development stage products that will provide a strong foundation for the future. Our objectives are to drive sustained growth through the adoption of our products and services by customers, to continue operational improvements and enhance long term shareholder value. We have a talented team working to create a world class medical device company. Although we expect variability in our quarter to quarter performance at this stage in our Company’s development, I’m excited about the continuous stream of positive clinical results and the talent and professionalism of the IMRIS team. IMRIS has a bright future, excellent growth potential and cutting edge technologies to offer its customers. We look forward to updating you on our progress in August. Thank you.
Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. You may now disconnect.
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