Novadaq Technologies' (NVDQ) CEO Arun Menawat on Q2 2014 Results - Earnings Call Transcript

Aug. 5.14 | About: Novadaq Technologies (NVDQ)

Novadaq Technologies Inc. (NASDAQ:NVDQ)

Q2 2014 Results Earnings Conference Call

August 5, 2014, 08:30 AM ET

Executives

Elif McDonald - VP of Corporate Communications and IR

Arun Menawat - President and CEO

Stephen Purcell - CFO

Analysts

Margaret Kaczor - William Blair & Company

Jason Mills - Canaccord Genuity

Rick Wise - Stifel, Nicolaus & Company

Matt Miksic - Piper Jaffray

Ben Haynor - Feltl and Company

Operator

Greetings and welcome to the Second Quarter 2014 Financial Results Novadaq Technologies Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I’d now like to turn the conference over to Elif, Vice President, Corporate Communications and Investor Relations. Thank you. Elif, you may begin.

Elif McDonald

Thank you, Stacey. Good morning, everyone. Thank you for joining us today to review Novadaq Technologies second quarter 2014 financial results. On the call this morning, representing Novadaq are President and Chief Executive Officer, Dr. Arun Menawat and Chief Financial Officer, Stephen Purcell.

Before we start, I would like to remind you that certain statements made in this conference call may be considered forward-looking. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from those implied by such statements, and therefore these statements should not be read as guarantees of future performance or results.

All forward-looking statements are based on Novadaq's current beliefs as well as assumptions made by and information currently available to Novadaq and relate to, among other things, results of future clinical tests of the SPY, FIREFLY, PINPOINT and LUNA Imaging Systems, anticipated financial performance, business prospects, strategies, regulatory developments, market acceptance and future commitments.

Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this conference call. Due to the risks and uncertainties, including the risks and uncertainties identified by Novadaq in its public securities filings; actual events may differ materially from current expectations. Novadaq disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

With that said, I'll now turn the call to Dr. Arun Menawat.

Arun Menawat

Thank you, Elif. Good morning, everyone and welcome. I would like to take this opportunity to update you on some changes to the Novadaq team. As many of you know, Dave Martin recently decided to go back to sell-side as an equity analyst. We thank you for his service and his friendship and wish him the best on his return to Bay Street.

You’ve just heard Elif McDonald, who has recently joined us in the role of Vice President, Corporate Communications and Investor Relations. In addition Steve Kilmer has also been helping us doing this transition.

The agenda for today as usual is for Steve Purcell to highlight our 2014 second quarter financial results. After that I will discuss Novadaq's achievements in the quarter and the outlook for our strategic initiatives going forward. We will then have Elif provide an overview of the latest clinical publications and finally we'll open the call to questions.

Steve, please proceed.

Stephen Purcell

Thank you, Arun and good morning. Q2 '14 revenues of $11.2 million exceeded Q2 '13 revenues by $3.1 million a 38% increase. Product sales increased in the amount of $3.3 million due to an increase in SPY capital sales.

Royalty revenues in the quarter decreased by $198,000 as royalties were recognized only from da Vinci Si systems, while royalty revenues from the new da Vinci Xi systems are delayed until FDA clearance is received. Service revenues increased $53,000 mainly due to reduced TMR warranty sales.

Q2 '14 procedures performed using SPY technology systems increased by 39% year-over-year; however, SPY recurring revenues were 93% on our previous year due to sale of the lower priced kits to customers purchase capital systems.

In comparison to Q1 '14, revenues increased in the amount of $900,000 mainly due to an increase in SPY capital sales. Recurring procedure sales to hospitals increased by 13% over last quarter; however, revenues were 93% of Q1 '14 due to the lower priced kit.

Gross profit of $6.9 million in Q2 '14 increased from $5.1 million for the same period last year due to a 206% increase in SPY capital sales. In comparison to Q1 '14 gross profit is higher by 224,000, also due to higher capital sales.

Operating expenses of $11.5 exceed Q2 '13 expenses of $7.3 million. The $4.2 million expense increase includes an increase in sales and marketing expenditures in the amount of $3.7 million to hundred direct sales personnel and increased promotional spending to support our PINPOINT and LUNA sales program.

An increase in research and development expense in the amount of $285,000 relating to increased amortization cost for intangible acquisitions as well as salary and benefit costs to support an expanded operation and an increase in administrative expenses in the amount of $228,000 comprising increased salaries and benefits, increased insurance coverage and foreign exchange variances.

In comparison to Q1 '14, operating expenses increased by $536,000 driven mainly by sales and marketing expenses for direct hires and promotional expenses, increased non-cash stock option expense due to new brands offset by lower professional fee and lower patent and trademark cost.

Interest expense is $5,000 lower than Q2 '13 as the National Research Council loan was fully paid. Finance income of $59,000 was higher than income of $18,000 in Q2 '13 due to the increased cash from the Q4 '13 public offering and lower income of $59,000 in Q1 '14 due to lower cash balances.

The change in the Q2 '14 non-cash warrant revaluation income of $10.8 million compared to a warrant revaluation expense of $7.5 million in Q2 '13 due to a quarterly decrease in company's share price. For Q2 '14 the share price decrease was $5.80 compared to a $3.55 share price increase in Q2 '13.

In comparison to Q1 '14, the quarterly non-cash warrant revaluation income increased by $22.7 million due to a decrease in the share price versus a share price increase in Q1 '14.

Income tax expense was nil compared to income tax expense of $25,000 in Q2 '13 and also Q1 '14. Net income of $6.3 million in Q2 '14 was $15 million higher than the net loss of $9.7 million in Q2 '13. The change resulted from lower warrant evaluation adjustment in the amount of $18.3 million, due primarily to the change in share price.

Higher gross profit in the amount of $109 million offset by higher operating cost in the amount of $4.2 million. In comparison to Q1 '14, net income increased by $22.4 million due to lower non-cash warrant revaluation expense of $22.7 million, higher gross margins in the amount of $200,000 offset by higher operating expenses in the amount of $500,000.

Cash and cash equivalents were $152.1 million at June 30, 2014, reflecting a decrease of $15.1 million compared to the cash position as at March 2014. Cash used on operating activities was $7.6 million, which included working capital utilization of $5.7 million, a decrease in long term revenue of $366,000 and cash burn of $1.5 million.

Working capital increases were driven primarily by increased receivables and inventories in support of our increased sales. Additionally the company invested $1.8 million in fixed assets of which $1.7 million was used in revenue generating equipment placed at institutions and the company also utilized $6.7 million of cash, inclusive of transaction cost for the acquisition of Aïmago.

Thank you, and with that, I will hand the call back to Arun.

Arun Menawat

Thank you, Steve. Over last few conference calls, they’ve all resolved around two major themes. First, while continuing to value our partner product business we're building our direct sales force and positioning PINPOINT and LUNA to take over as the leading growth drivers to Novadaq going forward.

And second, we're continuing to invest in our goal of building and maintaining a clinical ecosystem that provides relevant imaging solutions for use in multiple points throughout the patient care continuum.

In many respects, the second quarter served to illustrate our progress on both counts, but first let me go through the context behind the numbers. We achieved revenues of $11.2 million during the quarter and gross margin of 62%. Royalty revenues from Intuitive Surgical new robot are delayed at this point due to regulatory reasons.

Thereby about $200,000 of revenues are delayed. If we had recognized those revenues within the quarter, the growth rate would have been 41% and the gross margin would have been about 64%.

On the revenue mix front, Novadaq's strategy of investing in the direct sales organization resulted in robot, PINPOINT and LUNA sales growth that exceeded expectations again in second quarter. Combined sales of the two products reached $5.1 million compared to the $1.2 million in the same period last year and $4.6 million in Q1 2014.

This represents a growth rate of 11% sequential quarter-over-quarter. During the quarter 47 PINPOINT, LUNA and SPY systems were sold. To date, more than 100 PINPOINT and LUNA systems are installed under evaluation, representing the potential for future sales.

Exiting the quarter, total install base of FIREFLY systems is over 900 units and the total install base of standalone SPY technology systems is over 600 units.

Another key measure of our performance is the number of kits that were utilized or the growth rate of the number of patients treated during the third quarter. We estimate that 11,400 procedures were performed by hospitals during the quarter representing an increase of 13% over the last quarter.

The increase was driven primarily by utilization from PINPOINT, LUNA and FIREFLY and since these systems are sold as capital, the kit price for these systems is lower.

While we are pleased with our performance so far this year, I would still like to reiterate that we cannot predict revenues quarter-over-quarter at this point. As an illustration, our Q1 2014 sequential growth rate was 41% whereas Q2 sequential growth rate is at 38%.

If we look at the first half of 2014 and compare to the first half of 2013, the growth rate is approximately 40%. Going forward into the third quarter, we may experience a lower growth rate in the direct business due to seasonality. However, as we did in Q4 last year, we expect that growth will recover in Q4 to finish the year at our growth target of 40%.

As we transition from the company known from its partnerships for direct sales, one question that comes up from time to time that our agreements with LifeCell -- our main agreement with LifeCell automatically expires in about 15 months. To the best of our knowledge, LifeCell sales team is primarily selling the SPY Elite system in breast reconstruction and open GI surgery.

However, there are a number of other applications such as vascular interventional procedures that are also exclusively contracted to LifeCell where we believe that SPY Elite is not being used today and that these applications are clinically compelling.

Due to lack of progress under such agreements, we are utilizing the arbitration process prescribed under these agreements to achieve a resolution between the parties.

Now let me switch over to our growth strategies. First I have discussed -- as I have discussed in the past, we expect to continue to build our market creator status by providing doctors and hospitals with a fluorescence imaging based ecosystem that can be used in the full care continuum from the beginning of diagnosis to post operative care of the patients.

Second, we remain strongly aligned to the strategies that our products demonstrate level one clinical data in key applications and correspondingly deliver strong economic value proposition. From the long term prospective, we believe that significant opportunities lie ahead and I personally believe that 5 to 10 years from now, surgeons and doctors will wonder how they lived without fluorescence imaging.

In that regard, we consider ourselves to be at the early stages of our potential. As we like to share with you how we continue to focus on this goal and what steps we are taking towards achieving it.

First, we will continue to be in a nascent mode with respect to building out the sales team. We have approximately 60 direct sales professionals in the company and we are looking to add at least 20 additional professionals during the second half of this year.

It is not atypical for us to take 36 to 48 months to build a sales team and at this point we are at the 18-month mark. Similarly, we expect to continue to invest in our surgeon and administration education programs.

Second, we are pleased to have completed the acquisition of Aïmago SA, a Switzerland based company. We expect that the Laser Doppler technology of Aïmago will work in tandem with the SPY technology to provide the continuum care ecosystem particularly in wound care application.

Third, we are announcing two prospective multi-center studies using PINPOINT. The first study titled PILLAR-III is the next step from PILLAR-II. It is a randomized, controlled, parallel multi-center study assessing perfusion outcome with PINPOINT near infrared fluorescence imaging in lower interior reception.

Its primary endpoint is to demonstrate an improvement in postoperative anastomotic leak rate in low anterior resection procedures for colon and rectal tissue perfusion is evaluated using PINPOINT near infrared fluorescence imaging as an adjunct to standard surgical practice compared to surgical procedures performed according to standard surgical practice alone. We expect to enroll between 400 to 800 patients in this study in 15 to 20 centers in U.S. beginning at about 60 days from now.

The second study that I am particularly excited about is titled FILM, F-I-L-M. This study is about visualization of lymph nodes particularly in cancer surgery. It is a prospective open label multicenter study assessing the safety and utilization of PINPOINT near infrared fluorescence imaging in the identification of lymph node both in patients with uterine and cervical malignancies who are undergoing lymph node mapping.

The primary endpoint of this study is to assess the effectiveness of intra-operative PINPOINT in the identification of lymph nodes in patients with uterine and cervical malignancies who are undergoing lymph node mapping. We expect to enroll about 150 patients in this study in about seven centers.

The PILLAR III study is already visible on clinicaltrial.gov and we expected the FILM study will be visible this week. We believe that positive outcome from these studies may lead to outcomes based SDA labels and may become key drivers to make PINPOINT a standard of care in these respective procedures.

We estimate that 400,000 to 600,000 cancer patients are treated each year in these types of procedure in approximately 2,500 hospitals in the United States alone providing for a large potential opportunity for PINPOINT.

At this point, I’ll turn the call over the Elif to discuss the key clinical publications of this quarter.

Elif McDonald

Thank you, Arun. Evidence of the clinical value associated with the use of SPY fluorescence technology continues to build a medical literature.

In the first half of 2014, 26 papers have been published encompassing a wide range of applications bringing the total number of publications featuring five to more 110. Today, I would like to highlight two of the papers published during the second quarter.

In the most recent seminars in colon and rectal surgery, Dr. Ihya Gorgun from the Cleveland Clinic in Cleveland, Ohio, published his experience utilizing PINPOINT subjectively measured tissue profusion during laparoscopic colorectal surgery. Dr. Gorgun reported that PINPIONT fluorescence imaging gives an absolute indication whether there is a profusion concern at the site of the anastomosis and allows tissue profusions to be adequately and adjectively evaluated.

He states that PINPOINT was easy to use in colorectal surgery. Dr. Gorgun’s report concludes that clinical apparent insufficiencies after intestinal anastomosis develop a 1.2% to 19.2% of all colorectal resection and anastomotically it's mainly for surgical revisions of 88% to 95% of cases.

Combining PINPOINT fluorescence imaging with sound clinical judgment may enable surgeons to significantly decrease rates of complication, infection and repeat procedures. Ultimately, this may help to reduce healthcare costs and more importantly improve patient outcome.

A second paper published by DeMeester and colleagues at the University of Southern California in the analysis of surgery featured the results of a steady of esophagectomy leak rate of after gastric polyp surgery involving five imaging technology in a 150 consecutive patients. Anastomotic leak rates following esophagectomy has been reported to occur in 20% to 35% of cases.

The authors concluded that intraoperative real time assessment of profusion correlated with the likelihood of an anastomotic leak. SPY imaging confirms the critical relationship between good profusion and anastomotic healing. The authors found that major leaks were significantly more common when the anastomosis was not placed in area of good profusion as indicated by SPY technology 15% compared to 0%.

With the clinical summary complete, I’ll now turn the call back to Arun. Arun?

Arun Menawat

Thank you Elif. At this point, I would like to ask the operator to open the phone lines for questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator instructions) Our first question comes from the Margaret Kaczor with William Blair & Company. Please proceed.

Margaret Kaczor - William Blair & Company

Good morning. Thanks for taking my questions. Arun may be if you can talk a little bit about or a little more about LifeCell. Are you confident that LifeCell can grow this year and kind of may be talk about the specific indications that you have of that?

Arun Menawat

Sure Margaret. We don’t explicitly breakout the revenues from LifeCell on a quarter by quarter basis, but the revenues from LifeCell compared to Q1 versus Q2 are slightly higher maybe in the range of about 8%.

So I think that the second quarter was certainly better than the first quarter and based upon the activities that I have seen so far in this quarter I think that we should see slight improvement in the performance of SPY Elite this year.

Margaret Kaczor - William Blair & Company

Okay. Great. And then you had mentioned that you have 47 PINPOINT, LUNA and SPY lead placement. I am guessing at a sequential increase in the commercial units of PINPOINT and LUNA in the quarter. So what happened at the SPY Elite sales, were there just more sales outrights to hospitals and that sold across that number a little bit higher may be talk us through that?

Arun Menawat

I just want to make sure that I understood your question properly Margaret. So the capital -- the number of units sold in the second quarter is definitely higher than that in Q1 and that is true for all three devices PINPOINT, LUNA and SPY.

Margaret Kaczor - William Blair & Company

Okay.

Arun Menawat

In particular I guess. Yeah. So all three of the devices did better in Q1 from a capital sales prospective in Q2 as compared to Q1.

Margaret Kaczor - William Blair & Company

Okay. That’s helpful. And then you had also mentioned that you had over 100 PINPOINT and LUNA systems that were installed as evaluation unit. So those are all new this quarter or you pulling some may be from Q1.

Arun Menawat

Right. So what I am trying to do is provide -- now that we are out there for about a year I am trying to provide a little bit more detailed on what the installed base consists of and I think that the way you might want to look at the 100 installed evaluation is really -- the third represents how many are being tested. That's the total number and it really is further in a way a predictor of what the future might look like.

So I think my view of that is it’s a pretty good lift. Many of the hospitals are evaluating and based upon the last three quarter, we do expect that these will become the future sales of the devices.

So, I think from here forward we will be able to provide to you how many of these devices are sold so we have a little bit more information and then we will provide to you, how many are under evaluation which will give you a bit of an indicator of the future.

Margaret Kaczor - William Blair & Company

One thing Arun that we noticed is I think you had an about 70% close rate of those evaluation units this quarter may be. So if we plug that in a 100 as we are getting into Q3, you can come up with a pretty strong number. So is that is the right way to look at it?

Arun Menawat

Margaret, I think that the feedback definitely is positive, but I think where we are very, very -- where it's really, really unpredictable and believe me it's very unpredictable, is the timing of closing these deals and so because in most hospitals still they are not budgeted products yet. It will be another year before they become budgeted products and so I cannot tell you if they will close in the next six months or they will close in the next 12 months or may be even longer. But I do agree with you that the likelihood that we will close the year is pretty good.

Margaret Kaczor - William Blair & Company

Okay. Great thank.

Operator

Thank you our next question comes from Jason Mills with Canaccord Genuity. Please proceed.

Arun Menawat

Good morning.

Jason Mills - Canaccord Genuity

Good morning, everyone. Thanks for taking the question. Can you hear me, okay.

Stephen Purcell

Yes, very well.

Jason Mills - Canaccord Genuity

Very good. So I wanted to parse through these numbers a little bit. The total revenue number was quite a bit higher than ours and clearly that came from sale of units. But the way that you’re talking about PINPOINT and LUNA respective to the first quarter is a bit different, I just wanted to make sure I have the numbers right?

You just talked to a model of about 100 are out there in the field as evaluation units. So I think last question -- as of last quarter, could you give us that number as of exit of second quarter, both evaluation and commercial for those two?

Arun Menawat

So Jason the number of those evaluations converted into the capital sales. And so, the total number of systems out there is in the range of about 160 or so at this point.

Jason Mills - Canaccord Genuity

Okay.

Arun Menawat

But about 100 -- I think it could be 105. It could be 95. But it’s in that range. So what I would like to suggest is as we are an evolving company and as things do change for us rapidly and I also recognize that given that we have many products that it is bit of a difficult to model our company, but what I’m trying to do is provide more information in terms of how many devices we sold in each quarter and then give you an indication of how many we have under evaluations.

But I won’t consider that -- evaluations number will go up and down based upon what we close in a quarter. But my thought is evaluations are really – it’s hard to imagine utilization on those evaluations at this point. But the sold systems is where you want to look it as utilization is that’s where your question is coming from.

Jason Mills - Canaccord Genuity

Yeah. Both of those pieces of information are helpful. And then, as it relates to -- you gave some good information on the SPY Elite revenues sequentially. Clearly, FIREFLY had an impact as well.

So talk about just so that we can adjudicate the year-over-year and quarter-to-quarter system numbers a bit better. How many systems on average you typically will account for as it relates to Intuitive Surgical partnership on a quarterly basis say over the last four quarters and just how many did you realize this quarter given the timing with Xi?

Obviously that number went down and probably accounted for the difference in maybe what the street was modeling for you in terms of total system install base growth and what you reported. I’m guessing its coming from the Intuitive Surgical delay?

Arun Menawat

Yes. So in terms of the number of FIREFLY devices that we shipped in the second quarter is in the range of about…

Jason Mills - Canaccord Genuity

I’m sorry you cut out there. How much?

Arun Menawat

It’s in the range of about 90 systems that we shipped. But as you they buy from us and they ship on their own schedule.

I think for Q3 it’s likely a smaller number. And then, we recorded 53 royalty systems, which were the Si systems and we did not record any royalty on the Xi systems and our expectation is that when Intuitive Surgical gets the FDA clearance, they will turn those systems on because on the Xi is supposed to be standard. When they do turn those on then they will send us the royalty for those systems. So yeah, in some ways that’s basically a delay and it depends on when FDA clearance comes about.

Jason Mills - Canaccord Genuity

Okay. And last question from me just on utilization specific to PINPOINT and also if you have it for LUNA, just how is utilization on not the evaluation units, but the commercial units trending for both PINPOINT and LUNA in these early days here?

Arun Menawat

So let me broaden that a little bit. I think first, SPY Elite, the utilization is about 50, which is where it has been. For PINPOINT it is in the range of about 70 to 75. For LUNA it’s in the range of about 100 to 125. And that trend -- I think the systems that we consider to be commercial where they are using under the steady state. That’s where we are -- we think where they are right now.

And I think as more surgeons and more physicians come out. I do think there is a long-term upside to those numbers. And I certainly think there is significant upside to SPY Elite that can be done. But that’s where we are at this stage.

Jason Mills - Canaccord Genuity

And how does that compare Arun to let’s say quarter-over-quarter or year-over-year in those areas?

Arun Menawat

I think for SPY Elite it’s pretty much consistent. It hadn’t really changed much. For PINPOINT, I think quarter-over-quarter is little bit difficult to determine, but certainly compared to a year ago, it’s up about from about 50, 60 to about 72. And SPY Elite was really new about this time last year, so it’s kind of hard to compare. But I guess, the other way you might think about it Jason is that it certainly is in the realm of what we've been expecting for these products.

Jason Mills - Canaccord Genuity

Okay. Thanks and I’ll get back in queue.

Arun Menawat

Thank you, Jason.

Operator

Thank you. Our next question comes from Rick Wise with Stifel. Please proceed.

Rick Wise - Stifel, Nicolaus & Company

Good morning, Arun.

Arun Menawat

Good morning, Rick.

Rick Wise - Stifel, Nicolaus & Company

If I could talk -- start with maybe you commentary about full-year growth in the second half mix between third and fourth quarter, I just want to make sure I’m understanding, are you saying again that you’re comfortable with your full-year 40% guidance growth goal overall. Is that what you’re saying and as we look at -- actually just start there Arun?

Arun Menawat

Yeah. I think what I’m saying is for the year I’m comfortable with the 40% number. But for Q3, because it’s typically a summer fall quarter, typically capital, because it becomes even more unpredictable. And so my expectation is that maybe in the third quarter our growth in rate might be 35 or something. But as it happened in Q4, I think we’ll recover that in Q4 and for the year it will be fine.

So for the first half if you look at the first half we’re at 40%. So the question is are we going to be three in each quarter and all I’m saying is going to be backend loaded for the year.

Rick Wise - Stifel, Nicolaus & Company

Right, so third quarter is the softest of the year and fourth quarter stronger, but still $0.40 second half growth is what you are looking for overall. And remember you are not ready to give 2015 guidance and I appreciate that your comments has to limited, but when I’ve seen that three consecutive numbers for 2015 well above that kind of $0.40 target growth rate.

Is there some reason why we should be just thinking broadly can actually that growth can accelerate in 2015. I appreciate the large developments are falling into place with sales force and other initiatives, but is 2014 going to be a faster growing year?

Arun Menawat

Let me answer it little bit differently. As we did last year, definitely we will do the full analysis at the end of the year, because we want to have full data, full-year performance before we do anything related to the next year, right. But I do think that what the strategy in terms of where we are today?

I feel good about where we are today, number one. Number two, I think that the management team that we’ve build in sales, I continue to be very impressed with it and I think that over the long haul we should be able to build a great sales team. And I equate that to the fact that it took us about four years for us to build Product Development and R&D team and I feel pretty good about our Product Development and R&D team at this point.

And I think that as the sales team evolves their growth rate it should be there. And the third point is that I would very stronger encourage every analysts and every investors to consider is that is in my remarks as I said, we really do see ourselves in the early stages of potentially very big opportunity and really we are focusing on those key things.

One is we are focusing on building our great sales team. And second, we’re going to focus on these two large multi-center studies. We’re going to invest number in the order of about $5 million of cash. And I think if we can achieve both of those goals we should be able to get major portion of that opportunity and really that’s how I’m looking at.

Rick Wise - Stifel, Nicolaus & Company

Thank you, Arun. Couple other questions, and I what I am trying understanding, what percentage of your installed base today is capital and can you give us your average 2Q kit ASPs based on the – I want to make sure, we’re understanding?

Arun Menawat

Sure. Our installed base as I had mentioned at the end of Q1 call, that our installed base is changing and slipping more towards capital as compared to the only placement. SPY Elite primarily still is placed, but the LUNA and PINPOINT are primarily sold. But if you look at the -- our installed base including SPY Elite, about somewhere between 25% to 30% of these installed base is of the sold systems is capital, sold capital, whereas about 65% – sorry, 70% to 75% is still in the – it is placed and most of the placed are SPY Elite systems.

The average price per kit is down somewhere – PINPOINT and LUNA is in the range of about $200 and for SPY Elite it is down to probably closer to about -- to us it’s in the range of about $400 at this point.

Rick Wise - Stifel, Nicolaus & Company

Are you seeing higher utilization on these lower price kits, is that driving utilization?

Arun Menawat

Rick, I think that certainly the anecdotal data suggest that that is true and all of the conversations that we have with surgeons where they’re being asked to maintain or keep their operating costs low I think that they certainly are preferring this model, most hospitals that we go to we present fee-per-use model, but they are beginning to recognize the technology and they are certainly are flipping over to general site.

Having said all that, I do think that recurring revenues are really, really important to us. And as I said at the Q1 call, what you are really seeing is that as we grow the installed base and as we grow, you will see that capital dollars are increasing at faster rate than the utilization is or the kit dollar start.

But over time, you will see that we’re introducing many, many new applications and we will be introducing news disposables in those kits. And as we introduced those new disposables, the kit prices will go up over time. And so, I at this stage my message to the sales team is build the installed base and I’m not as focused on the -- obviously price are always matters, but certainly I think that as we build the installed base, we will be able to introduce new things into the kits to really get the kit prices up.

Rick Wise - Stifel, Nicolaus & Company

Yeah. My last one here. Was your wound care chain partnership goals, I know you had hoped to sign a contract, any hope that we could foresee that yet in 2014? Thank you.

Arun Menawat

Yeah. I think that we are in conversions with a number of these companies and they are at different stages. And so my best guess is that I still think by end of this year we will get one of – at least one of these.

Rick Wise - Stifel, Nicolaus & Company

Thank you, Arun.

Operator

Thank you. Our next question comes from Matt Miksic with Piper Jaffray. Please proceed.

Matt Miksic - Piper Jaffray

Hey. Thanks for taking the question.

Arun Menawat

Good morning, Matt.

Matt Miksic - Piper Jaffray

Good morning. So maybe just sort of level-set some of the direction across your business lines that we've talked about so far. Appreciate the additional disclosure around sold systems and some of the metrics you provided are helpful, but just directionally, maybe if we could step through the setting, not so important, but still pretty important in terms of a big part of your business is LifeCell.

So sequentially, you mentioned the growth rate. Can you talk about maybe some of the factors that impacted Q1 being stocking, or destocking I should say and lower capital sales, maybe what the trajectory from Q1 to Q2 look like and are we like catching up here in Q2, are we back to a steady run rate? And then I had a couple of follow-ups on the other lines.

Arun Menawat

Sure. Matt I think on the inventory side yield, that was a onetime thing that’s behind us and I think that the inventory levels are stable and so the chips that we probably went through the hospitals in the second quarter and from the perspective of where I think that SPY Elite can be a better product I think that the utilization part of volumes remains confident and from that perspective I think it can be a better product, but the growth really came from a primarily higher capital sales in this quarter.

Matt Miksic - Piper Jaffray

Okay so something more in line with sort of the middle and the back of last year?

Arun Menawat

That’s right. That’s right.

Matt Miksic - Piper Jaffray

And then just looking forward, just to make sure we're thinking about procedure and kits and utilization correctly, even though steady state hasn't changed on a per site basis, despite the destocking in Q1, in terms of the procedure number that you provide, given that that's an estimated utilization number and not a revenue number per se, should we see that to kind of steadily improve or are we going to see any hiccups around stocking/destocking?

Arun Menawat

I don’t exact you will see anything significant as you saw in Q1.

Matt Miksic - Piper Jaffray

Okay.

Arun Menawat

I think that the reason we call it estimated because there are some adjustments we do have to make. The absolute number -- I think the number of kits is pretty much right on because we know how many kits are shipped, but in some cases we might use not, not more than one patient or two kits and so on, so there is a little bit of an estimation, but I would say expect number of kits to continue to go up quarter-over-quarter.

Matt Miksic - Piper Jaffray

Okay. And then, again, not to focus on your partner alliance, but just to get this question out of the way as it pertains to sequential trends, we have two numbers I guess that are associated with Intuitive.

One is you provided, which was systems shipped to the company, subsystems delivered, which is around 90. The new systems put into use, did that just dip? I mean was that a sort of a -- is that kind of half, just to get a sense, because of what happened with the Xi launch and the delay of approval onto Q3.

Arun Menawat

Yeah, that’s exactly right. That they are dipped into half. Yes.

Matt Miksic - Piper Jaffray

Okay. And then one comment you provided in the press release and you mentioned in your remarks was that there was some increase or some of the growth in volumes in utilization you attributed to this quarter to FIREFLY. Is there some -- I know that we don't think about utilization in FIREFLY as a real driver or have not in the past. Is that changing?

Arun Menawat

The number of kits that we are -- it's not material, the FIREFLY number of kits that we shipped of FIREFLY is not material, but the number of kits definitely is growing and maybe will continue to grow, but certainly majority of the growth came from PINPOINT and LUNA.

Matt Miksic - Piper Jaffray

And then a follow on to that. I guess the growth that there is, is a slight improvement in utilization, I would suspect it's a good deal that's around general and cholecystectomy. Can you give a sense of where the uptake has gone since the PILLAR II data? That was a pretty significant result, certainly enough for you to move forward to PILLAR III, as you talked about.

Can you give us a sense maybe of what the trajectory of your utilization on PINPOINT for cholys has been and whether that's going to kind of simmer until you get the new system approved later in the year or whether you're starting to see that pick up as a results of the data.

Arun Menawat

Matt you’re talking about FIREFLY or are you talking about PINPOINT?

Matt Miksic - Piper Jaffray

I am talking about for U.S. for PINPOINT. Your new software system that you talked about in sort of stages.

Arun Menawat

Oh yes. I think that the primary use is settling in to general GI surgery procedures and on gynecological oncology procedures and that is the reason why we were announced those two multicenter clinical studies.

Matt I think both of those -- there is enough data already to show that we have significant clinical value in those applications and that’s where primarily where the sales have been. Then I think if we can get to these multicenter studies that we should be able to drive both of those applications to standard of care.

Matt Miksic - Piper Jaffray

Okay. That’s helpful. And then finally, just looking at the balance and I've been hopping back and forth here between this call and another call, so I apologize if you gave this color, but one of the things that we're all trying to figure out, I think, is which -- PINPOINT and LUNA are both moving pretty quickly.

Could you give us a sense of which was a bigger part of those sold direct systems in the quarter, or I should say, sold and placed? I assume that PINPOINT has a bigger part of the sold, but in total what's the mix look like in the quarter?

Arun Menawat

Sure, I can give you a bit of a color -- Matt you might remember this from our early days when we had -- we started with SPY Elite and FIREFLY and it was a band of 60-40 and FIREFLY were a bit ahead in that band at the time and I interestingly enough the same trend is going on. It’s that PINPOINT is in the 60 -- it's a 60:40 mix approximately and PINPOINT is a little bit ahead right now. So we will see how LUNA is doing in the next quarter or two, but certainly right now the PINPOINT team is ahead.

Matt Miksic - Piper Jaffray

Great. I'll hop off there. But thanks so much for the additional color.

Arun Menawat

Thank you, Matt.

Operator

Thank you. Our next question comes from Ben Haynor with Feltl and Company. Please proceed.

Ben Haynor - Feltl and Company

Good morning, everyone. As far as the number of sales people, if I recall it correctly, I think you're thinking exiting the year around 100 at least earlier this year and I believe you said now you expect to exit with around 80. Why the change there?

Arun Menawat

These are estimates Ben, I definitely would love it if we can get to a 100. I think that our sales management team is extremely busy and sales team is extremely busy with the level of activity between the evaluation system out there and the number of deals that are out there.

So I think my number of 20 is just being a little bit realistic and on the point but yeah, I think you’ve got a good point. If we can get to a 100, we think we will be a good caliber people. We certainly will go for it.

Ben Haynor - Feltl and Company

Okay. That’s helpful. And then I just had one housekeeping question. What was the TMR revenue during the quarter?

Arun Menawat

Actually the TMR revenue for the quarter was slightly down compared to Q1. It’s about $600,000.

Ben Haynor - Feltl and Company

Okay. Great. Thanks for taking the question.

Arun Menawat

You’re welcome.

Operator

There are no more questions at this time. I would like to turn this call back over to Dr. Menawat for closing comments.

Arun Menawat

Thank you so much. I would like to thank you all for your participation today and interest in Novadaq. I would also like to thank the Novadaq team for their ongoing contributions to the company and I look forward to talking with everyone at the third quarter conference call. Thank you.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.

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!