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Stereotaxis Inc. (NASDAQ:STXS)

Q4 2010 Earnings Conference Call

February 28, 2011, 4:30 pm ET

Executives

Greg Gin – IR

Mike Kaminski – President and CEO

Dan Johnston – CFO

Analysts

Spencer Nam – Madison Williams & Company

Steve Lichtman – Oppenheimer & Co.

John – Collins Stewart

Jose Haresco – JMP Securities

Klaus Von Stutterheim – Deutsche Bank

Sameer Harish – ThinkEquity Management

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Stereotaxis Fourth Quarter 2010 Financial Results Conference Call. During today's presentation, all participants will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator instructions) This conference is being recorded today, Monday, February 28, 2011. At this time, I’d like to turn the conference over to Greg Gin. Please go ahead, sir.

Greg Gin

Thank you, operator, and good afternoon everyone. Thank you for joining us for the Stereotaxis conference call and webcast to review the financial results for the fourth quarter and full year of 2010, which ended on December 31, 2010. Let me remind everybody that associated slides are available on the company's website at www.stereotaxis.com.

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

For a detailed discussion of the risks and uncertainties that affect the company's business and qualify the forward-looking statements made in this call, we refer you to the company's recent public filings filed with the SEC, specifically the form 10-K for the fiscal year ended December 31, 2009. The company's projections and forward-looking statements are based on factors that are subject to change and therefore these statements speak only as of the date they are given.

The company assumes no obligation to update any projections or forward-looking statements. In addition, regarding orders and backlogs, there can be no assurance that the company will recognize revenue related to its purchase orders and other commitments in a particular period or at all, as some of these purchase orders and other commitments are subject to contingencies that are outside of our control. In addition, these orders and commitments may be revised, modified or canceled either by their express terms, as a result of negotiations or by project changes or delays.

Now, I would like to turn the call over to Mike Kaminski, President and Chief Executive Officer of Stereotaxis.

Mike Kaminski

Thank you, Greg. Good afternoon everyone. Thank you for joining us today on our fourth quarter and year end 2010 conference call. With me today is Dan Johnston, our Chief Financial Officer. I will start our prepared remarks with a review of the highlights for the full year in the fourth quarter and discuss recent business developments and then Dan will discuss the financials. Afterwards we will open up the call for questions.

In 2010, we achieved significant progress towards our goal of establishing the Niobe robotic platform as the new standard of care for EP intervention of medicine and the emergence of Odyssey as a clinical networking platform for all interventional suite. In 2010, we executed on multiple fronts.

First, we generated 24% growth in recurring revenue to a record $22.9 million. Second, we continued momentum in the new capital orders that confirms that we are making progress on our key initiatives to drive stronger Niobe reference sites and expand our Odyssey business in the standard labs.

Third, our gross margins reached a record level of 71%. Fourth, our persistent focus on reduced operating expenses resulted in substantial reduction in both operating loss and net loss compared to 2009 and demonstrated a commitment to get to breakeven.

As we enter 2011, we are more optimistic than ever about our platforms' ability to drive value in EP ablations. As part of our year end review, we thought our webcast format would help illustrate trends around key metrics. I will start with a review of the three revenue legs to our platform and then turn it over to Dan to walk through the financial results and analysis.

Our top operating initiative continues to be driving adoption of the Niobe platform in our installed base. As we look at our company today, we believe we have crossed the chasm into the early majority and are now entering a much more predictable ramp to Niobe usage and clinical adoption.

Let me start by reviewing the total utilization and EP growth rate for the year. As you can see by the first slide, in 2010 we completed a total of approximately 8,900 EP procedures, a 26% increase from the approximate 7,000 EP procedures performed in 2009. Additionally, this bar makes it readily apparent that – of the importance of the irrigated catheter introduction to our customers and its impact on the utilization starting in 2009.

While we are pleased with the 26% growth in our overall adoption, we believe we can do better. And a deeper look into the adoption trends gives us several important insights.

In the next slide, we can see the differences in adoption by type of procedure. As we have highlighted in the past, our platform can be used in any chamber of the heart for both complex and simple ablations.

This graph highlights the use of the Niobe for complex procedures over the past several years. The procedures performed in 2010 for complex left-sided ablations grew at a significantly higher rate than compared to the right side EP ablation procedures.

We have forecasted ablations to represent, on the left side, the lion's share of usage, since the platform aligns well with customer interest to address the most challenging cases. In 2010, complex ablations grew 43% to a total of approximately 6,100 procedures, the same metric is up 56% per year over the past three years.

In 2010, it became very apparent that the Niobe has tremendous value for VT. This is a catalyst for driving further interest in adoption for all complex ablations, including AF, which is a much larger market.

Additionally, by subtracting the 6100 from our total EP ablations you can deduce that approximately 32% of the procedures are for simple ablations, which represents a stable number for the past year. We are pleased that we did not see the cannibalization initially expected of simple ablations after the release of the irrigated catheter. We have also analyzed the procedure growth by installation date.

Slide six illustrates a clear picture of what the adoption challenge is that we face. The red part of the bar graph represents utilization insights installed in 2007 or later, and in the blue are sites installed before 2007.

In 2010, we grew utilization of complex ablations for sites installed after 2011 by 57%, the same metric for the past three years of 76%. This data shows that we have made significantly more progress diving adoption in sites installed around the time frame of the release of the magnetic irrigated catheter.

Importantly, this confirms the success of our focused clinical adoption efforts, which to date primarily support new installations in those sites that are committed to go through the learning curve. And sites that have been installed prior to 2007, the delay in the recall of the irrigated catheter clearly had a negative impact on momentum in Niobe excitement, commitment and ultimately, adoption. However, we are making progress and generating growth in these accounts as well as you will see in the next cut of data.

This past year, we’ve published and discussed our value for VT procedures and why the distal tip control provides superior safety, efficacy and efficiency. We believe slide seven demonstrates that the market agrees with us. The same kind of pre-and post-2007 installs demonstrates that our VT procedures grew 38% in 2010 or two to three times the market growth.

We are even more pleased that, as seen by these two charts, utilization grew in both groups and significantly faster than the market rate. This fact and the general market feedback gives us confidence that we are poised to make our technology the standard of care for VT.

Lastly, on utilization, let's look at the data on usage per side. Over this time frame, we’ve installed several new Niobe systems throughout the world. The chart on this slide shows usage by installation date and we can clearly see that the adoption per site per week has grown throughout the period.

We are now performing approximately three cases per week per site for complex ablations at site installed in 2007 or later. In this time frame, the top one third of our users in Europe average approximately four cases a week and in North America 2.2 cases a week.

To summarize, we believe we are near the tipping point for our technology to be widely adopted, led by sites installed after 2007. In the U.S., we have achieved 23% share of VT patients and 15% of the AF procedure volume in our installed base. Overall, in the market we estimate that we have 4% of the total VT market and continue to build this critical mass of users.

Let me briefly turn and discuss the importance of the recent expansion and extension of our longstanding partnership with Biosense Webster. First, as you have seen, it's imperative that we ensure long-term uninterrupted supply of catheters that supports our efforts to drive adoption of our technology.

We have seen firsthand the impact of what happens to adoption when supply is disrupted. Second, it provides us a path for catheter innovation, which will continue to strengthen our value proposition.

Biosense is a market leader in providing technological advancements that improve patient care. And we expect to leverage their very thorough innovative process and significantly invest in development of next-generation irrigated magnetic catheters.

Third, as part of the agreement, Biosense agrees to pursue an expanded indication in the U.S. for magnetic irrigated catheters for the treatment of AF. This will allow us to enhance our support and promotion of our platform for this indication.

Fourth, with the strength and commitment of Biosense commercial organization, we will greatly enhance our ability to establish our Niobe robotic platform as a standard of care for EP interventional medicine.

We have also advanced the body of scientific evidence that supports our value proposition. During the year, we had a record number of presentations at several AF and VT conferences and a total of 33 new peer-reviewed publications. This substantial volume of data, of presentations and publications, is a testament to the high level of interest in our technology and the importance to interventional medicine.

In the fourth quarter, we continued this trend. At the second annual VTVF meeting held in Berlin in November, Dr Nakagawa presented excellent clinical outcomes with a 50% reduction in mapping time versus conventional methods for patients with scar-related VT. There have also been several new publications on the clinical utility of the magnetic navigation.

Professor Karl-Heinz Kuck [ph] from Hamburg, Germany, published results of a series of patients that included both paroxysmal and persistent AF and noted an excellent 70% freedom from AF at 1.5 years after ablation with significant reduction and radiation exposure.

Another interesting paper from Prof. Pedro Bagata [ph] in Brussels compared the results using several different approaches to AF ablation. When they compared their magnetic case results to their manual case data, they noted the same freedom of AF at more than one year and fewer complications and a shorter procedure time.

As noted in last week's press release, clinical applications continue to surface outside of EP for our platform, such as renal ablation for hypertension. While there is no regulatory approval for this application and our clinical focus remains on EP ablations, it is gratifying to see the medical community performing research that could broaden the use of the technology.

We are confident that we are on the right path to achieve our goal of becoming the standard of care for complex oblations. We're investing in product enhancements, establishing advanced training centers and we have shifted resources to increase site support, to field management and our plan has required new personnel, leadership and more robust processes, all of which are in place as we enter 2011.

Next, let's look at our capital part of our business model. While we are disappointed with the Niobe revenue in 2010, we believe it reflect the softness of incoming orders in 2009 and a one-time event with an imaging partner.

Conversely, the incoming orders in 2010 reflect a growing interest and adoption of the Niobe platform, fueled by the excitement in the installed base. The next slide highlights the incoming capital orders by quarter over a three-year period.

As you can see, our total incoming orders bottomed out in the second quarter of 2009, driven by both low utilization of our system and the weak economic condition, particularly in the U.S., at that time. However, since the second quarter of 2009, we have experienced a consistent recovery of incoming orders from all markets, including the U.S.

In 2010, we secured $41 million in new capital orders, equating to a 48% growth for the year over 2009. The growth in Niobe incoming orders is more apparent when separated from the total.

As you can see by the next slide, the Niobe new orders bottomed in Q2 2009 and remained flat until the first quarter of 2010. Since this time, orders every quarter have grown for the year and finished 41% over 2009.

Importantly, our sales pipeline of prospective customers continues to strengthen. At the beginning of 2011, our pipeline has over 200 accounts which are moving through a decision process in the next two years, which provides us comfort that the Niobe will continue to grow in orders and revenue.

Additionally, the Niobe interest has grown in all geographic markets, especially in Asia, as we are just entering this fast-growing market. I'm happy to announce that last week our partner received regulatory approval for the magnetic ThermoCool catheter in China.

We have seven systems installed in China awaiting this product introduction. This milestone is critical to driving success in the installed base and to capitalizing on the tremendous growth in EP procedures forecasted over the next 10 years.

Now, let's turn to the Odyssey product line. Odyssey has developed a significant momentum in the marketplace among customers and industry leaders due to its truly innovative offering for integrating, recording and networking synchronized data anywhere in the world. Odyssey maximizes efficiency by delivering consolidated views of labs that enabled enhanced training programs.

Odyssey empowers hospitals to build exposure by sharing clinical capabilities with referring docs and promotes consultation around the world for best practice sharing. To date, approximately 160 Odyssey systems have been sold in more than 20 countries, including Vision, Link, Interface and Cinema products.

Since 2007, Odyssey has accumulated over $25 million in orders, including sales in Niobe and standard labs. In 2010, revenue growth exceeded 100% over 2009. Standard lab sales provide the greatest opportunity for Stereotaxis with more than 16,000 interventional labs worldwide representing an estimated $1 billion addressable global market.

While our Odyssey sales focused was largely on the Niobe labs through 2009, we began to add the sales emphasis for standard labs in 2010. This trend has driven a significant percent of all the standard lab sales towards multiple lab deals, including some customers who have already acquired Odyssey labs in the past.

In addition to St. David's, who bought in 2009, The Ohio State University is another example of a leading institution that received an early installation of Odyssey and later acquired additional labs due to the benefits they experienced with the product in their Niobe suite. OSU is committed to purchase an additional Odyssey Vision and Cinema and three additional labs in their EP department to provide a common platform for viewing, recording and collaborating at their center.

A wide array of customers are adopting the Odyssey due to its alignment with major hospital initiatives from smaller community hospitals to world-class medical institutions. Odyssey has seen growth in penetrating leading institutions and territories, including such areas as Mt. Sinai in New York City, Johns Hopkins University, Cornell Medical University, New York University, all of which have ordered multiple Odyssey labs with Cinema for their institution in the last 12 months.

In December, we announced Siemens as a global reseller of the Odyssey Cinema following a strong interest in connecting their suites to a Siemens’ Artis zee large display labs. The combined offering enables consolidated information from Siemens' large displays to be remotely viewed live or playback after the procedures to promote consultation and enhanced patient care.

The Siemens reseller relationship further validates that the Odyssey opportunity is broader with all the leading industry partners. While Odyssey has seen a significant growth to date, a majority of the 2500 oral IDP labs and 9000 IC labs represent an untapped opportunity to drive sustained growth for the foreseeable future.

The results of 2010 and the exponential growth in our sales pipeline validate that we do indeed have the right product value to drive into the standards lab offering. The following graph demonstrates 2010 orders for standard labs.

On market traction albeit early, Odyssey's value is apparent in the following areas. Leading teaching centers value the recording and networking infrastructure to advance learning. Large commercial institutions value enhanced physician workflow through a consolidated user interface on a single display which can be linked to their offices. All locations value leveraging the Internet to message the quality of their programs to the consumer.

Our competitive advantage stems from four important points. First, we understand cath lab integration, a robotic platform footprint that requires this expertise. As a result, we have an ability to integrate disparate equipment into a seamless workflow.

Second, Odyssey has an open architecture with cath lab technology. Third, we have a patented ability to use a single keyboard and mouse to integrate different pieces of technology efficiently. And lastly, we use a unique method to compress and store data that allows high-quality images to be stored and sent real-time over the Internet without loss of quality.

Now, let me turn to the importance of new product development. We remain focused on improving the value of our products through innovation. In 2011, we will launch an exciting list of advancements focused on improving and extending our platform.

We expect our planned introduction and rollout of the Vdrive robotic arm to extend the capabilities of the Niobe platform and positively impact the utilization of our product for AF. Early results of the Vdrive have shown an improved stability, precision of movement and improved cath lab efficiency for LASSO use in AF procedures.

In the sites where we are performing the initial testing for the Vdrive, we have seen that the Vdrive has already become the standard of care for their magnetic AF procedures. Additionally, we have Niobe improvements scheduled to be introduced at HRS, which, along with Vdrive, will greatly enhance our robotic value proposition. Lastly, the Odyssey platform will have a major release designed to enhance data management for webcasts, along with several feature enhancements which are scheduled to ship in the second half of this year.

In summary, looking ahead into 2011, we are on track to achieve our goal of becoming a standard of care for EP complex procedures, driving adoption, securing catheter supply, investing in new products which enhance our value and expanding our global footprint will continue our success for years to come. The strategy is sound and the execution is key and everyone in the company is up to the task.

Now, let me turn the call over to Dan for a more detailed look at our fourth-quarter analysis. Dan?

Dan Johnston

Thanks Mike. Good afternoon. Revenue for the fourth quarter of 2010 was $14.5 million compared to $14.1 million in the fourth quarter of 2009. System revenue was down about 7.5% to around $8.3 million in the fourth quarter 2010 versus just under $9 million in the fourth quarter of last year, driven primarily by recognizing revenue on one less Niobe versus Q4 of 2009.

We recognized revenues of $5 million in Niobe systems and $3.3 million in Odyssey systems. Of the five Niobes recognized to revenue, two systems were in North America and three were placed in Europe.

As Mike had indicated, new capital orders in the backlog for the fourth quarter 2010 totaled $11.4 million including $8.3 million for seven Niobes. These seven new systems are regionally broad-based with two systems in North America, two to Europe, two into Asia-Pacific and one into the rest of the world.

Recurring revenue grew $1.1 million or 22% from last year's fourth quarter to set another record of $6.3 million. The component of recurring revenue that is driven by disposables grew 26% from last year's fourth quarter. Sequentially, recurring revenue grew 9% from the third quarter of 2010.

For the fourth quarter of 2010, gross margin continues to be strong and increased 12.8% to $10.7 million from $9.5 million in the fourth quarter of 2009. While about one fourth of the gross margin dollar increase was due to the increase in revenue, the balance relates to a 620-basis point increase in gross margin percentage. As a percentage of revenue, the growth in the fourth quarter of 2010 gross margin percent to 73.4% primarily relates to improved Odyssey pricing versus last year's fourth quarter combined with good cost controls across all product lines.

Operating expenses in the recent fourth quarter were $14.1 million compared to $15.3 million in the fourth quarter of last year. The decrease in R&D is due to the fact that much of the heavy lifting for Vdrive was completed late in 2009 and while Vdrive investment continues, today the level of spending is lower. Sales and marketing spending is about $0.5 billion higher as a result of rebalancing our spending priorities towards more market-facing activities.

In addition, G&A costs are lower on administrative cost savings and currency gains. Within G&A, about $600,000 of these savings are being invested back into additional training activities. The net result was continued improvement in the reduction of our operating loss to $3.4 million in the fourth quarter of 2010 compared to an operating loss of $5.8 million last year.

Other income includes $1.5 million in income from the federal therapeutic discovery grant that was awarded to the company in Q4 of 2010. The balance of the other income includes the mark-to-market gain related to the outstanding warrants we have, which must be adjusted quarterly under derivative accounting rules. The impact of other income on our loss per share is just under $0.04.

Interest expense is lower on lower average borrowing and lower non-cash interest cost. We reported net loss for the fourth quarter of $2.5 million or a loss of $0.05 per share versus a loss of $6.7 million or $0.14 per share in the fourth quarter a year ago. Average shares outstanding for the fourth quarter were 52.5 million shares compared to 48.4 million shares in the same quarter last year, reflecting the issuance of 4.6 million shares as part of our follow-on stock offering completed in November of 2010.

Now, recapping the full year, 2010 revenues increased 6% to $54.1 million from $51.1 million in 2009. Gross margins grew over twice as fast at 13% to $38.5 million or 71.2% of revenue compared to $34.1 million or 66.7% of revenue in 2009. For the full year, the expansion of the gross margin percentage is attributed to strong product mix combined with strong pricing and cost control within recurring revenue.

Operating expenses for the year were down about $500,000 versus 2009, much like the fourth quarter, the reduction – the reduced investment in R&D was driven by lower Vdrive spending combined with the consolidation of certain Minneapolis R&D activities into our St. Louis-based R&D functions.

Sales and marketing spending is higher by about $1.5 million, which is the result of rebalancing our spending priorities towards more market-facing activities. While G&A spending is flat year-to-year, within G&A we have reduced administration costs by $1.5 million and reinvested this amount into training activities.

Operating loss for the full year 2010 declined over 20% or just under $19 million from $23.8 million in 2009. The analysis of other income for the full year is similar to the fourth quarter, including $1.5 million in income from the federal therapeutic discovery grant and the balance relating to the mark-to-market gain related to the outstanding warrants.

Life-support quarter interest expense is lower in the whole year versus 2009 based on lower average borrowings and lower non-cash interest cost. The 2010 net loss was $19.9 million compared to $27.5 million in 2009. On a per share basis, the loss per share was $0.39 per share in 2010 versus $0.63 per share in 2009.

Moving on to our backlog, Mike has discussed the order patterns already related to our backlog. Our active backlog at the end of year stands at $43 million, which is flat with September 30 and about $6 million higher than last year end.

In the fourth quarter, we moved two Niobe systems to inactive backlog as the projects were not advancing to our satisfaction. For the full year, new capital orders to backlog are at 48%, to $41 million versus $27.7 million a year ago. The dollars backlog is split about 75% for Niobe and about 25% for Odyssey products, which is very similar to what we were at year end 2009.

Moving on to liquidity, on a full-year basis we continue to make progress reducing our cash burn, which includes cash used in operations, capital expenditures and the repayment of the Biosense advance. We have historically included the repayment of the Biosense advance as part of our cash burn as operationally, the advance is reduced as we earn royalties.

For 2010, our cash burn was $21.7 million compared to $23.8 million in 2009. The 2010 year-to-date cash burn includes $5.5 million in repayment of the Biosense advance, so absent these payments the Biosense, which would be the more classic measure of cash burn, our 2010 total cash burn was $16.2 million, which is $5.6 million less than in 2009.

Now, turning to the balance sheet, cash totaled $35.2 million at year end and total debt was $28.9 million. Last year, at this time, we had cash of $30.5 million and total debt of $23.7 million.

Finally, I'd like to give you our first look at 2011. I would like to break this down by product line as growth characteristics and the predictability of each of these product groups varies. From a base of about $21.9 million in 2010, we expect the midpoint of our range for Niobe to be around $26 million.

Niobe will grow in the high-teen percentage for 2011. We recognized revenue on 21 systems in 2010 and we expect to place between 23 and 25 systems in 2011. This increase reflects the increase in our current backlog of Niobes which stands at 27 systems versus 23 a year ago.

The forecasted revenue per system for 2011 is about the same as 2010. The largest variable in how many systems go to revenue is the nature of today's backlog versus 2010 beginning backlog. At 30%, our Niobe backlog is an Asia-Pacific region today. At the beginning of 2010, that number was about 10%.

Variability in construction cycles in Asia-Pacific is greater. However, we do have a potential upside as we have success with our expanded distributor strategy in Europe and if accelerated worldwide adoption efforts.

We expect Odyssey and the Niobe Lab to follow Niobe growth from a base of about $6.2 million in 2010 that would put Odyssey in the Niobe lab in the low $7 million range. Odyssey outside the Niobe lab grew over 200% in 2010 versus 2009, which was not a full year of activity. Of a 2010 base of $3 million, we expect Odyssey outside the Niobe lab to grow between a 110% to 150% to the high $6 million range. So those three elements combine to grow systems revenue just under 30% to about $40 million for 2011.

For 2011, we expect procedure recurring revenue to grow in the mid-20% range, much like the growth in 2010 versus 2009. We are optimistic with the success and clinical adoption that we could do better. However, until we see a stronger inflection point, we believe the guidance is more prudent at this level from a base of $11.7 million in procedure revenue is expected to be in the mid-$14 million range for 2011.

The software and service component of our recurring revenue is expected to follow the growth of our installed base in 2010 over 2009, which is in the mid-teen percentage. Off of 2010 base of $11.3 million we see software and service portion of recurring revenue to be about $13 million in 2011. Adding this all up, we see recurring revenue between $27 million and $28 million combining this with systems revenue of about $40 million the midpoint of our revenue guidance for 2011 just under $68 million or about 25% growth over 2010.

New capital orders grew in 2010 around 48% over 2009. Today, we see 2011 new capital orders growing in the mid 30% range. This level of systems order growth combined with the mid- teens growth is expected in recurring revenue in 2012 keeps us on a path to breakeven. From a gross margin perspective, the systems in the backlog have similar pricing in 2010 systems, and recurring pricing also looks firm. We have slightly higher cost in upgrading the operating system in 2011, and we are projecting that our higher margin recurring revenue streamed to grow a little faster – a little slower than systems. So the mix works against further gross margin percentage expansion.

All that said, we have planned for margins to remain just under 70% and high 60% range. We see operating expenses for 2011 in the $52 million to $63 million range as we invest in new products, new markets and develop our technology in robotic navigation and Odyssey.

With that, I will turn it over to Mike.

Mike Kaminski

Thank you, Dan.

Dan Johnston

Operator, we are ready to open up to questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And our first question is from the line of Spencer Nam with Madison Williams & Company. Please go ahead.

Spencer Nam – Madison Williams & Company

Good afternoon. Thanks for taking my questions. I just have a couple of questions here. First of all, in terms of looking at your – it looks like 2011 is very encouraging in terms of the backlog and overall business growth. But I am curious how do you guys think about the opportunities beyond and whether 2011, if you guys can reach that plateau or at that level, is repeatable in 2012 and beyond, and if so, what gives you the confidence?

Mike Kaminski

Now, you are talking about specifically the capital piece of our business?

Spencer Nam – Madison Williams & Company

Yes.

Mike Kaminski

And if you look Spencer, we are beginning to really see traction, let me break into both legs of capital. The Odyssey Standard Lab is a really tremendous opportunity for the company. And what we are seeing is a growing interest in not just Niobe rooms but Niobe hospitals. When people buy Niobes they are considering the one robotic suite and the other two or three suites they may have in that hospital, but we are also seeing independently a non-robotic hospitals are growing interest just to buy Odyssey. That is almost an untapped market with 16,000 labs. So it’s really about execution into that market and getting a global footprint.

On Niobe, it’s the sales pipeline continues to build, the interest in the pipeline – we are expanding. I think I talked about last time how Asia is just opening into a big growth opportunity. Europe continues to be, and the U.S. continues to have a nice churn of a number of ET labs getting new x-rays, which is the lead for our final. And so we continue to see a robust market obviously driven by the market growing.

Spencer Nam – Madison Williams & Company

Right. I appreciate that. So I wanted to maybe do a quick follow-up on that. On Odyssey, where you talk about the growth in non-Niobe labs, how would you describe the dynamics at this moment? Are you guys making a strong push to these labs, or are you actually getting some increased interest from labs knocking on your door for more information/interest in adopting? And also, with those labs, the non-Niobe labs, that is, I’m curious as to how – typically, how the system’s placement works out for them. What is the typical number of Odyssey systems that they are interested? Can you guys share any of these details?

Mike Kaminski

Yes. So, let me address your first question. We have both. Primarily, it’s – word is getting out on Odyssey in a very favorable way. As a result of that, our leads are getting easier to come by, right? We go to conventions. People want to – so it is an easier market process to follow up on market interest right now. We are expanding the number of Odyssey salespeople in the channel, so that helps a lot. And having a global footprint with Siemens also allows us to get leads that we wouldn’t have gotten before that period of time.

So, I think our first mover advantage is paying off, and it really is seen by the kind of growing word as you go to conventions about people coming by and saying, “I have heard about Odyssey and I want to hear more about it.” So it’s got pull. And now the byproduct of that we are seeing a little bit. Let me diverge a second – is that it opens up the door for more Niobe conversations as well. So as we go into these EP labs, it gives our salesperson an opportunity to say, “Hey, have you thought about Niobe?” And maybe that wasn’t top of mind, but it does re-open that door.

Now, to your last point, thus far incoming orders bandwidth is probably averaging about three Odysseys in a standard lab deal. Is that right?

Dan Johnston

Yes, that would be right, David, (inaudible) share of cinema.

Mike Kaminski

So it’s probably somewhere between two to three Odysseys in a cinema. So the average order size is roughly $600,000 to $700,000. That could be my estimation. (inaudible) some numbers on it. That would be pretty close.

Spencer Nam – Madison Williams & Company

Okay. All right, that’s helpful. Final question – in terms of the supply issue with your optics supplier, are you guys still feeling pretty good about the issues being resolved by second quarter?

Mike Kaminski

Yes, I think everything is on track to get done, and I didn’t hear of anything, Dan there?

Dan Johnston

No.

Mike Kaminski

So I think it’s still going to – that – we will still feel that impact expense in our first quarter.

Spencer Nam – Madison Williams & Company

Great I think that’s it. Thank you.

Mike Kaminski

Thanks, Spencer.

Operator

Thank you. And our next question comes from the line of Steve Lichtman with Oppenheimer & Co. Please go ahead.

Steve Lichtman – Oppenheimer & Co.

Thank you. Hi, guys.

Mike Kaminski

Hi, Steve.

Steve Lichtman – Oppenheimer & Co.

Just the first couple questions on the pipeline – the Niobe improvement that you mentioned at HRS – could you go through that a little bit? And then could you also remind us what Vdrive adds in terms of new disposable revenue when it hits here in the U.S.?

Mike Kaminski

Yes, so on the products, Steve, we are going to keep them a little bit veiled just so we have a nice introduction at HRS. But I tell you, the areas we are addressing, our Niobe’s ability to move more real-time, the ability to hook up a broader set of disposables with Vdrive, and then integrating the data with Odyssey and having an ability to webcast that very seamlessly across the Internet. So if you think of those three platforms, we’ll do big splash at HRS. And we are pretty excited about its impact, and I think you will see some significant move forward on that.

Now, for Vdrive, in Europe it’s running about $700 per case. And we are going to look at that model as we roll it out globally. So it’s an additional $700 in Europe thus far, but it’s pretty early.

Steve Lichtman – Oppenheimer & Co.

Okay, great. And then – I apologize if I missed this, but on the sales force, any plans to grow headcount here in 2011?

Mike Kaminski

Yes. The two significant investments in the field are – one is, we are doubling the staff in Asia so that – it was a small staff, but we are going to add some manpower in China. We are expanding into Korea and some other areas. So we’re putting a more substantial foot forward. And then the Odyssey channel – and the Odyssey channel globally, but in different aspects. One is the ability to really drive a standard lab sale, and secondly is the infrastructure to support some of the Odyssey needs which are unique, which are around IT and its ability to talk to the IT department of the hospital.

Dan Johnston

Hey Steve, I would also add to that, that we’re going to try to leverage in Eastern Europe, Pierre, our new sales guys’ distribution relationships and we’re probably going to do that more through a distribution channel than organically with our own people. But he has a pretty good Rolodex of contacts and we see penetrating further Eastern Europe that way.

Mike Kaminski

Dan’s right. That will be headcount as much as it will be – definitely, it will strengthen our channels’ coverage throughout the Eastern bloc.

Dan Johnston

It’s one of the things that, with regard to range in Niobe that we have offered this year, that’s probably an upside. We’ll see how fast that grabs hold.

Steve Lichtman – Oppenheimer & Co.

Hey, great. And then just lastly, you mentioned, Mike a few things regarding Biosense. I just wanted to follow up on two of them. One, you mentioned Biosense pursuing an additional indication for magnetic irrigated catheters for AF. What’s the timing on that, and really what do you see as the potential upside for that? And then secondly, you talked about the commercial organization for Biosense. How are they going to get involved or increasingly involved as a result of the new agreement?

Mike Kaminski

Okay. So the timing of an AF indication the – it’s still a little bit unknown. We have there’s two primary steps. One is, we need to have a formal meeting with the FDA, and then there will be some preclinical testing that has to go on. And that will be a result of what the formal meeting says, and that meeting hasn’t taken place. So we’re looking at facilitating that in the upcoming months so that we can get a cleared roadmap of what’s it’s going to take to get that approved.

On the commercial organization, to your second question, with Biosense engaged, we clearly have an ability to get in front of a broader set of customers. And we worked at Boston. You can see some of the collaborative efforts that they can introduce us to folks who weren’t considering Niobe or have already considered it and maybe warned at the time. But, as importantly, they can help us drive our installed base through a training program. And in fact, it’s pretty synergistic with their rollout of Carto 3 and our rollout, that out of our new training process, we can bring in a joint training, a very collaborative joint training process that can leverage both the companies.

So, I think it can help us drive the installed base adoption and it can get us exposure at a more rapid pace than we could individually.

Steve Lichtman – Oppenheimer & Co.

Hey great. Thanks, guys.

Operator

Thank you. Our next question is from the line of Tao Levy with Collins Stewart. Please go ahead.

John – Collins Stewart

Hi. This is John in for Tao.

Mike Kaminski

Hi, John.

Dan Johnston

Hi, John.

John – Collins Stewart

Just to follow up a little bit on Vdrive, it sounds like most of the people who are using it, like it, but can you give us a little more color on – do most of the hospitals that have a Niobe use Vdrive already, or is uptake going to be maybe a little bit more measured than that?

Mike Kaminski

Yeah. It will be more measured, and it’s only approved in Europe at this time. So – and we are just now, John, rolling it out. And we began the process at Boston; it’s just now kind of rolling out. We anticipate it will hit probably more midyear than now as it goes in. Obviously, there’s a capital component which will have to be timed with the availability of capital monies. But I think, for those sites that use lassos, it makes a lot of sense. And you can see that what it provides is the stability of a lasso, kind of a micro-movement and positioning of a lasso and a real efficiency of the case [ph]. So it really adds a lot of value to the physician being able to do a whole remote procedure.

John – Collins Stewart

So it would be fair to say that the incremental revenue per procedure would be weighted more towards the back half of the year?

Dan Johnston

Yes. John, in fact, I didn’t mention it in the guidance, because we have actually assumed it would be zero. So, I think it’s a potential upside for us.

Mike Kaminski

We have taken, because we didn’t know the uptick of Vdrive, we have taken it out of our financial guidance.

Dan Johnston

We still have decisions to make with regard to how we are going to price this disposable and the capital as well. So there’s still some open switches in that regard from going to the market perspective.

John – Collins Stewart

Okay, that’s helpful. And then just maybe one more thing on guidance and that will be it for me. It looks like margins will be down a little bit next year based on guidance. Can you guys maybe give us a little sense, kind of walk through the components and make up that difference?

Dan Johnston

Yes. It’s really nothing to do with price in the marketplace, but the recurring revenue stream is growing slower than the capital revenue stream. And there’s a spread of 10 or so margin points there. So, we get a little bit of an adverse mix impact by recurring revenue growing slower than capital. Frankly, the recovery of capital is a real win for the Company, though, and it will drive more disposables the following year. So, some of it is a little bit timing related.

And I would certainly characterize – I think we are pleased with the high 60s, around 70%. It has been a little bit stronger of late, because we have done a nice job of taking some cost out of the systems. And we just had some better pricing, especially in the fourth quarter. So, some of it is mix. We are installing a new version of Navigant. It’s in the plan for 2011, and that will drive higher cost of goods sold. We really didn’t see that in the contract and service – I should say the service and software element of recurring revenue, so that will happen in 2011. That happens every couple of years, and so that gives us a little higher cost of goods. It’s not a pricing issue; it’s more of a COGS element.

So, those are really the two big dynamics. The pricing of our Odyssey systems and our Niobe systems in backlog are very similar to what we have realized in the past.

John – Collins Stewart

Okay, perfect, thanks.

Mike Kaminski

Thanks, John.

Operator

Thank you. Our next question comes from the line of Jose Haresco with JMP Securities. Please go ahead.

Jose Haresco – JMP Securities

Hi, guys, can you hear me, okay?

Mike Kaminski

Yeah.

Dan Johnston

Yeah. How are you?

Jose Haresco – JMP Securities

Good. A quick question here – so I know that you’re seeing a lot more penetration, or at least fast uptake in the complex cases. One, would you expect that to continue? And, at what point would you expect to see, I guess, a pull-through from complex to non-complex from those accounts that might have started in VT, but eventually migrate down the path to different procedures?

Mike Kaminski

So, Jose, the answer is yes, we expect to continue. If you go to why, it’s – if you look in the U.S., we are at 23% of the complex cases in the installed base. So we’ve got a long way to grow. The answer to your second question is, it depends on the account, and here’s why I say that. We have accounts now that are maxed out on our system in just complex cases. So there’s no capacity to do simple.

Now, if that’s not the case, then what we have seen historically is, once they get over a certain amount -- I believe my estimate would be about 50%, then they consider opening up if they haven’t maxed out the lab to simpler cases. So, we do think that there’s an opportunity to grow, but it really depends on kind of the capacity of the lab and the interest of other physicians to come in, and it’s a little bit of a complex algorithm that makes that up.

Jose Haresco – JMP Securities

Okay. On the – you’re expecting capital to grow next year at a fast rate (inaudible) disposables. Could you give some qualitative sense as to what gives you that confidence? I assume most of it is going to be back-end load the year. And we do see the backlog grow, but is it going to be a huge gap between the two growth rates, or it’s just a couple of percentage points between capital and –

Dan Johnston

No – yes, Jose, and I apologize. We will have this posted on the web on our site; you can see the overall growth rate. We’re looking at, on the systems side to be somewhere – we have ranged it from about 22% growth to 35% growth. And those are fairly – that’s a widespread, but it’s really driven by whether you sell 23 or 25 Niobes. It’s as simple as that. And, to the extent that we can overachieve that with the Eastern Europe effort or whatever, maybe faster penetration in Europe, there may be some upside to that. But it’s really – we have a lot of confidence around it because we did 21 systems to backlog this year, in 2010, I should say. So you start thinking about 24 systems. That’s actually about the increase in my current backlog.

So really, if my backlog converts at the same kind of rate that it did in 2010, we should be able to get to the Niobe number. I did qualify that a little bit, that the backlog is a little bit more Asia-Pacific-focused in 2011 than it was at the beginning of 2010. There’s a little more risk there, a little less certainty with regard to construction cycles and whatnot. But again, I think we’re pretty comfortable in that overall number.

Mike Kaminski

The big opportunity, to answer the second part of your question, I believe, is really the non-Niobe lab, where we grew it basically about 200% in 2010 off of what really wasn’t a full 2009. But the visibility there is not as much in backlog because those systems tend to move through backlog fairly quickly. We are judging more of that based upon the past growth rate and looking at what’s in the funnel coming close to orders. So that’s a little less based on revenue history, our backlog, but – funnel progression.

Jose Haresco – JMP Securities

Okay, last question here – on Vdrive, I know it’s still early days out in Europe. Any sense for whether we are seeing any incremental time savings for use of the product?

Mike Kaminski

Yes, definitely. I don’t know. I can’t quantify that right now, but that’s one of the main comments they come back with, is the simplicity of positioning and use. And particularly, if you think about the timing, with the Carto 3, you can now see the Lasso, right, because they have opened up the opportunity to see all the different products. So with that, the physician can sit remotely and see the diagnostic instruments. It really opens up an efficiency of workflow there.

Dan Johnston

You would think, Mike, with four pulmonary veins, there’s got to be four trips into the procedure room that are avoided, so that’s going to be, I don’t know, 10, 20 – 25 minutes apiece – I don’t know what it would be.

Mike Kaminski

Yeah. I don’t know if we’ve quantified it, but I just happened to see the physicians last week in Asia; I was traveling there. And I ask them, are you using it as your standard? And they responded, absolutely. It’s a simple type of case so much, it makes it very intuitive just to move devices around and really be able to micro-move the lasso within the pulmonary vein around it to make it a very straightforward case.

Jose Haresco – JMP Securities

Thank you very much.

Mike Kaminski

Thank you.

Operator

Thank you. (Operator instructions) Our next question is from the line of Klaus Von Stutterheim with Deutsche Bank. Please go ahead.

Klaus Von Stutterheim – Deutsche Bank

Hi. I’ve got a couple of questions. Did you say before what the reason for – why the utilization rate in Europe is almost twice that of the U.S.?

Mike Kaminski

Hi, Klaus.

Klaus Von Stutterheim – Deutsche Bank

Hi.

Mike Kaminski

In Europe, there tends to be – now, this is a macro statement. There tends to be a lot of volume through fewer labs. So if you think about – and I have always used the example of Cleveland Clinic, I believe, has seven labs and does about 2000 ablations. Lasik [ph] has three labs and does 2,000 ablations. So you tend to drive more volume through a single lab. And so, as a result of that, we have fewer physicians to train and the adoption cycle is a little easier. Now, that’s not to say they can’t get there, but we have to train more physicians to get there. So, the challenge is a little greater at stake. So historically, a physician will contribute more cases in Europe just because of that phenomenon.

Klaus Von Stutterheim – Deutsche Bank

Okay. And so at what utilization rate does this become a financially interesting, if not profitable, proposition for the hospital?

Mike Kaminski

Well, what hospitals have modeled back that I’ve seen is roughly 40 incremental cases a year they can look at justification of a capital expenditure. And again, you have a lot of different dimensions that are coming into that. You have a growth rate in the market. Obviously, you have to factor in their incremental growth of an asset rather than adding another lab, so you have capacity and efficiency. We also think safety – we have a 0.1% adverse event rate, and from what we hear in third parties is, an adverse event is very costly for hospitals. And in this market, I think it was just published through a recent paper that the cardiac tamponade rate is 3% and the vascular injury can be higher, as much as double that.

So you have a lot of money associated with extended length of stays. So hospital administration looks at it for different reasons. Obviously, I think they view a clinical value, a financial value and a strategic value for why to invest in the platform.

Klaus Von Stutterheim – Deutsche Bank

And then the other question is, you said, if I remember correctly, quote, on the path to breakeven, and I think at some point you said that this year you expect to have a breakeven quarter. Is that still true?

Mike Kaminski

Yes. If you look at Dan’s guidance that he just went through, obviously we think it will be – first quarter will be low because of some of the constraints we mentioned. So the last half of the year will be pretty strong revenue growth. And I think we’ve shown our margins are strong and our OpEx is in control. And we’re going to strategically invest in a couple of various where we think are necessary to continue the growth of the company.

Dan Johnston

I think it will come down, Mike, to how Q3 –

Mike Kaminski

Yes, it will be the loading of those two quarters and installation, and I think –

Dan Johnston

If they are even, that will probably lessen the likelihood of actually having a breakeven quarter. But if it’s more back-half loaded to Q4, it increases that probability. But we are really not thinking in terms of guiding in that sense right now just because it’s too soon to call the pattern.

Klaus Von Stutterheim – Deutsche Bank

Sure, okay, thanks.

Mike Kaminski

Thanks Klaus.

Operator

Thank you. Our next question is from the line of Sameer Harish with ThinkEquity Management. Please go ahead.

Sameer Harish – ThinkEquity Management

Hi, guys. Good afternoon.

Mike Kaminski

Hi, Sameer.

Dan Johnston

Hi, Sameer.

Sameer Harish – ThinkEquity Management

Hey, I just wanted to ask, you guys recently put out a press release on hypertension patient that was used with a Niobe system. Can you give us any details in regards to potential clinical path there or trials that you may have planned for 2011?

Mike Kaminski

Yes, we don’t have any trials. This was done – we don’t have any trials planned. This was done – obviously, it’s not an approved indication for our product. But the physician doing this had had a protocol and was participating in the other renal ablation trial. And he wanted to try our system on that. It didn’t require us to do anything, basically. We didn’t even know if he was doing it. It was a ThermaCool product, I believe, Niobe platform. He did the patient, made a comment to us that it was very simple, that allowed him to – in the renal artery, it requires kind of a corkscrew ablation, and he performed it very well.

And, obviously, on the follow up, the patient did well. So it’s nice to see our platform without any product modifications is beginning to be looked at by the physicians to say how can I expand the use beyond EP ablation. So we’re encouraged by that. I think it’s early for us. We are still focused on EP ablations, obviously. I think you’ll see at HRS, we’ve got a lot of good things coming on that, and the physicians obviously can try it outside of that for research purposes.

Sameer Harish – ThinkEquity Management

So, no incremental R&D expenditures for 2011 on hypertension?

Mike Kaminski

No.

Dan Johnston

No.

Sameer Harish – ThinkEquity Management

Okay, got, it. And then lastly, just in terms of follow-up on guidance – forgive me if I missed this – but, can you just give us a sense on your expectations for first quarter? Are you kind of looking at first quarter of 2010 from the previous year, kind of looking at a similar seasonality, or should we be thinking of it any differently?

Dan Johnston

Probably – if you looked at the first half versus the second half of the year, that would be the typical seasonality. Q1 may be a little more difficult just because we won’t have any Philips – or this imaging partner, I should say, business flowing through. So, it could be a little weaker than historical. And it’s always a little bit challenging in the sense that there’s usually a push at year end but I’m not expecting there to be a very strong quarter.

Sameer Harish – ThinkEquity Management

No, that’s great color, I appreciate it. Thank you, guys.

Mike Kaminski

Thanks, Sameer.

Operator

Thank you. And gentlemen, there are no further questions at this time. I would like to turn the conference back over to you for any closing remarks.

Mike Kaminski

Thank you, everybody, for attending the conference call. We expect the next call to be right around HRS, at the beginning of May and we look forward to talking to you then. Thank you very much.

Operator

Thank you, ladies and gentlemen. If you would like to listen to a replay of today’s conference, please dial 1-800-406-7325 or 303-590-3030, using the access code of 441-1034 followed by the pound key. This does conclude the Stereotaxis fourth quarter 2010 financial results conference call. Thank you for your participation. You may now disconnect.

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