Cardiovascular Systems' (CSII) CEO Scott Ward on Q2 2016 Results - Earnings Call Transcript

| About: Cardiovascular Systems, (CSII)

Cardiovascular Systems, Inc. (NASDAQ:CSII)

Q2 2016 Earnings Conference Call

January 21, 2016 4:45 PM ET

Executives

Jack Nielsen - Senior Director, Corporate Communications and Investor Relations

Scott Ward - Chairman, President and Interim Chief Executive Officer

Laurence Betterley - Chief Financial Officer

Analysts

Mike Matson - Needham and Company

Danielle Antalffy - Leerink Partners

Brandon Bryant - Bank of America Merrill Lynch

Charley Jones - Dougherty & Company LLC

Benjamin Haynor - Feltl and Company

Jan Wald - The Benchmark Company

Ben Andrew - William Blair & Company

Operator

Good afternoon. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the Cardiovascular Systems Inc Fiscal 2016 Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] Thank you.

I will now turn the call over to Jack Nielsen, Senior Director of Corporate Communications and Investor Relations. Please go ahead, sir.

Jack Nielsen

Thank you, Melissa. Good afternoon and welcome to our fiscal 2016 second quarter conference call. With me on today's call are Scott Ward, CSI Chairman and Interim CEO and Larry Betterley, Chief Financial Officer.

During this call, we will make forward-looking statements. These forward-looking statements are covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and include statements regarding CSI's future financial and operating results or other statements that are not historical facts.

Actual results could differ materially from those stated or implied by our forward-looking statements due to certain risks and uncertainties, including those described in our most recent Form 10-K and subsequent quarterly reports on Form 10-Q. CSI disclaims any duty to update or revise our forward-looking statements as a result of new information, future events, developments or otherwise. We will also refer to non-GAAP measures because we believe they provide useful information for our investors. Today's news release contains a reconciliation to GAAP results.

I’ll now turn the call over to Scott Ward.

Scott Ward

Thank you Jack and good afternoon everyone. It’s a pleasure to be with you on today’s call. Some of you may know me from my days at Medtronic, where I held a number of senior management positions, including President of their cardiovascular business. I have spent over 30 years in medical technology and the past 10 years in the coronary and peripheral artery disease markets.

So as a result of that I have a fairly deep understanding of CSI’s marketplace including its unique challenges and opportunities. As Interim CEO I have taken an active role in furthering CSI’s goals and objectives. I understand the importance of regaining our sales momentum, conserving cash, and addressing the uncertainties that influence our value.

The rapid expansion of our sales force and the implementation of a dual franchise strategy has been a major undertaking, and the related disruption has negatively affected our sales performance. We are focused on increasing our sales productivity and we are seeing some early signs of improvement as our sales team gains experience and executes our market development initiatives.

I am also aware of the importance of maintaining a strong balance sheet. Managing our cash position is a top priority for the Company. We are setting the Company on a balanced course to achieve sustainable revenue growth while reducing losses and establishing a pathway to profitability.

I will elaborate on these areas a little later on today's call, but first, let me summarize our second quarter results. Revenues of $41.4 million were about 3% below our guidance range and 4% below our second quarter results last year excluding revenue from the discontinued Asahi Guide wire contract.

Net loss of $15.2 million was greater than the same period one-year ago mostly from increased expenses associated with the expansion of our sales force. The loss was favorable to the guidance range however, primarily as a result of cost reduction initiatives.

Revenue fell short of our expectations primarily as a result of three factors. First, we continue to see some challenges in our sales force expansion and the transition to a dual franchise model where our sales representatives sell both coronary and peripheral applications. Changing the size and scope of any distribution channel can be precarious and this transition is taking longer than expected to execute.

However, as I said we are seeing signs of progress including gains in sales professional experience and a steady improvement in the cadence of daily sales. We are learning valuable lessons in this process and we have already incorporated improvements to the model that I will discuss in a moment.

Second, we are seeing increased competition for the treatment of peripheral artery disease. Other atherectomy providers are becoming more aggressive in their marketing and sales efforts and drug-coated balloons are garnering substantial attention by many physicians. This creates an additional challenge for a new sales force that is building its clinical expertise and physician relationships.

Finally, cross-training our sales organization has temporarily reduced our productivity, but we expect performance to improve as experience grows. For example, the coronary sales cycle is proving to be long and often requires our sales professionals to be present during the cases. Increased sales coverage is required especially if the physician is new to our technology. We want to ensure great patient outcomes and we are pleased that our sales professionals are in demand to help serve these patients.

The upfront time investment with these doctors will drive long-term adoption of Diamondback. However, in the near-term the requisite level of attention and service diverts sales time and focus away from peripheral products, contributing to the decline in our peripheral sales. The good news is that while these factors are affecting our near-term growth these issues will be addressed as we complete the implementation of our sales strategy.

As our sales force matures, we expect to regain our traction in developing the large underserved market opportunity for treating peripheral and coronary calcified artery disease. Although we have seen a lot of changes in the sales force what hasn't changed is our product’s unique ability to safely and effectively treat even the most difficult calcified lesions in both large and small vessels.

In addition, we believe that preparing a vessel by removing calcified plaque prior to using a drug-coated balloon will enhance lumen volume and the amount and depth of drug uptake in the vessel. We anticipate that this vessel preparation protocol will ultimately evolve as the standard of care and provide a tailwind for increased use of CSI's Orbital Atherectomy Systems.

With that, I'll turn the call over to Larry, who will now provide a detailed discussion of our financial results. Larry?

Laurence Betterley

Thanks Scott and good afternoon everyone. Total revenues declined 4% to $41.4 million excluding Asahi Guide wire sales last year of $1.8 million. Device revenues were 92% of the total. We sold over 12,400 devices including over 2,100 coronary units. Coronary revenue totaled $8.6 million a 33% increase over last year.

Peripheral units declined 8%, peripheral product mix is estimated to be about 57% below the knee and 43% above the knee. Combined ASPs were down 1% from last year, with coronary down 1% and PAD down 3%. Both were up slightly from the first quarter of this year. Reorder revenues remained high at 97% of total revenue, up two percentage points from last year and consistent with the first quarter of this year. We added 46 new peripheral accounts and 60 coronary accounts.

Gross margin was very strong at 80.5% compared to 79.1% last year. The improvement was primarily driven by unit cost reductions. Going forward we anticipate that engineering enhancements and higher production volumes will continue to reduce unit costs. In addition, increased sales of the coronary device, which has a higher average selling price, should help maintain attractive gross margins.

Operating expenses rose 19% over last year primarily from planned investments related to the sales force optimization and expansion. Operating expenses were flat with the first quarter and 5% below our guidance this quarter due to cost controls, refinements to the sales model and timing of projects and studies. Cost controls were implemented to improve efficiency, conserve cash and set the stage for a pathway to future profitability.

Net loss was $15.2 million or $0.47 per share compared to a loss of $5.3 million or $0.17 per share last year. The loss was favorable to guidance as reductions in operating expenses exceeded the impact of lower revenues. Adjusted EBITDA was a loss of $11.1 million compared to a loss of $1.3 million last year.

At quarter end our cash balance was $65 million, cash usage in the second quarter was $11 million primarily from operations driven by the net loss. Our current cash level, debt capacity and the potential to finance our new $25 million facility in Minnesota should provide sufficient financial flexibility to execute our current strategy and reach profitability.

I’ll now discuss our financial outlook. For the third quarter of fiscal 2016 we anticipate revenue similar to the second quarter of this year with a range of $40.5 million to $42 million. This range includes coronary product revenue of about $9 million. While we see improvements in our sales force execution we expect that it may take until fourth quarter to begin seeing a favorable impact on our revenue from those activities. We expect gross profit as a percentage of revenues to be about 80%.

With our sales force expansion completed and cost controls in place, operating expense growth has subsided. We expect expenses to be down approximately 3% in the third quarter from the second quarter, reflecting cost management and suspension of the medical device tax. Net loss is expected to be in the range of $13.7 million to $14.6 million. This equates to a loss per share of $0.42 to $0.45 based on 32.8 million shares outstanding.

I’ll now turn the call back over to Scott for additional commentary. Scott?

Scott Ward

Thank you Larry. More than 18 months ago CSI began a process to simultaneously expand and cross-train its sales force. We begin the third quarter now with approximately 250 sales professionals and specialists in the field, with the majority cross-trained on both our coronary and peripheral products.

At this point we believe our sales channel is the proper size to serve our current markets. This has been an arduous journey, but at this point our sales expansion and territory alignment is complete and we are now focused on enhancing sales productivity.

During the first half of this fiscal year we launched initiatives to improve certain areas of our sales strategy including hiring and retention, training, sales process, compensation structure and management effectiveness. These actions are now beginning to have a favorable effect on our selling processes, clinical acumen and our customer relationships.

As I mentioned earlier, we have gained additional valuable insights over the course of this sales transition. Our general strategy is still focused on having sales professionals trained to sell both applications of our technology in small no travel territories enabling them to develop deep account relationships and achieve higher productivity leading to profitability for CSI. We’ve seen this approach worked very well for fully trained and experienced sales representatives. However, we have learned that a one-size-fits-all approach isn't optimal in every territory.

In some areas, a more flexible approach is warranted. This flexibility may include creating teams to better cover and penetrate accounts, or dedicating a sales representative to focus on a particularly strong peripheral or coronary opportunity, utilizing a clinical specialist to enhance case coverage, or teaming new reps with more seasoned professionals to accelerate their growth.

Applying these approaches can minimize disruption, accelerate the development of selling skills and core competencies, enhance customer relationships, and improve sales. We are encouraged by the early results of this more flexible strategy. In time, the size of this channel will provide the coverage necessary to create strong customer relationships, driving sustainable penetration and revenue growth in both the coronary and peripheral franchises.

Regarding our clinical studies I am pleased to announce that we have nearly completed the 1,200 patient enrollment in our groundbreaking LIBERTY 360 study. This is our prospective, observational, multi-center clinical study evaluating acute and long-term clinical, quality of life and economic outcomes of endovascular device intervention in patients with distal outflow peripheral artery disease.

Patients will be followed for a minimum of two years or more post enrollment. We expect to share a 30-day data from the LIBERTY 360 study next fall. Near-term, our COAST study was accepted as a late-breaking presentation next month at the CRT conference.

COAST is designed to support approval of our second-generation coronary device in the United States as well as commercial approval in Japan, which is expected in fiscal 2018. We anticipate that data from these and other studies will continue to build on our existing clinical data set and further demonstrate that our orbital atherectomy technology is safe and effective in removing calcium and improving patient outcomes.

Before I close I want to provide an update regarding the Department of Justice False Claims Act investigation. In December, the U.S. District Court granted our request to extend the time to file a response to the relator’s complaint. We continue to cooperate with the DOJ and its investigation and we are discussing a possible resolution with them.

Finally, I’d like to update you on the condition of our Chief Executive Officer, David Martin. Dave is continuing his treatment plan and remains in good spirits. He still intends to return to CSI in March. Dave and everyone at CSI appreciate your prayers and your words of support. I can certainly assure you that they really do make a difference.

In closing, I understand the restructure of our sales force and its effect on our financial performance is top of mind for everyone. The Diamondback is a great product that addresses large underserved market opportunities, but it will only reach its full potential if it is effectively marketed. That is why we implemented the dual franchise strategy and why we continue to enhance it.

As someone who has a fair amount of experience leading medical technology organizations, I know these transitions are challenging and can take time to gain traction. I believe that CSI is on the right path to generate consistent revenue growth and profitability in the future.

So as we look to the future, we are excited about some important milestones that will propel our success over the course of the next 12 months to 24 months including improving our sales rep productivity and the resumption of topline quarterly growth, reducing quarterly losses and demonstrating a pathway to profitability and positive cash flow, maintaining a solid cash position through cost containment, debt capacity and the financing of our $25 million Minnesota facility, pursuing a potential resolution with the Department of Justice, clinical data presentations like LIBERTY 360 will support increased adoption of orbital atherectomy and the submission of the [indiscernible] in Japan in calendar 2016 will potentially lead to commercialization in fiscal 2018.

We look forward to updating you on our progress and that now completes our prepared remarks and we’ll move on to take your questions. So operator, if you would please proceed with the Q&A. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Mike Matson with Needham and Company. Your line is open.

Mike Matson

Hi, thanks for taking my questions. I guess I just wanted to start with your balance sheet position, so you’ve got $65 million in cash. You burned $11 million this quarter, you mentioned having some debt capacity. So can you maybe walk me through how much debt capacity do you have right now and what sort of cash outlays do you have for the headquarters. And then if there was some sort of DOJ settlement, how would you fund that?

Laurence Betterley

Yes, this is Larry. I’ll take that. First of all, with the expansion of our sales force behind us we are not expecting to increase expenses so as our topline grows we’re going to be able to have that flow to the bottom line and improve our losses as we go forward and that will take down the burn rate substantially over time.

From a debt capacity standpoint I expect we could probably bring in about $30 million on the term debt side plus a line of credit. The facility is – the cost of the facility is around $25 million so we should be able to finance that in the $20 million, $25 million range.

Mike Matson

Sorry, that’s $30 million plus another $20 million to $25 million or…?

Laurence Betterley

Yes, the facility financing would be incremental to any debt capacity.

Mike Matson

And how much do you still have to pay for the – how much cash do you still have to pay out for the facility?

Laurence Betterley

The facility is paid for.

Mike Matson

All right. So moving on, I guess can you maybe talk about I guess your sales force I mean so you're definitely stable now in terms of the number of reps that you have, you are not adding any more and then the cross-training is that all now fully completed and how much that was still going on in the most recent quarter that you are reporting?

Scott Ward

Yes. Okay, it’s a good question. So I’ll take that. I would tell you that our sales force expansion now is complete, our cross-training is complete obviously as we bring on new sales reps and replace reps we will be continuing some training, but the cross-training is complete. That continued to be a relatively intense effort throughout Q2.

As we now head into our third quarter the disruption from the expansion, the territory realignments as well as cross-training is now complete and behind us. What’s really critically important now is to assure continued stability for this group and allow them the time to simply gain experience and develop more productive and effective relationships with our customers. So that really is the key as we go forward now.

Mike Matson

Okay, all right. And then just the pricing I think you – Larry, I think you said it was – coronary was down 1% and PAD was down 3% year-over-year is that correct?

Scott Ward

That’s correct. When you combine on those it was about a 1% decline. The reason that was a lower decline as we had a greater proportion of coronary revenues which have higher average selling prices.

Mike Matson

Okay. That makes sense. All right, that’s all I have. Thank you.

Laurence Betterley

Thanks.

Operator

Your next question comes from Danielle Antalffy with Leerink Partners. Your line is open.

Danielle Antalffy

Hi, good afternoon guys. Thanks so much for taking the question. Scott, I just wanted to dig a little bit deeper if I could on the impact of the sales force ongoing sort of transition that you have now completed and sort of what was more impacted, did it bring about an issue of adding new accounts or were you seeing reorders actually decline at existing accounts. Where were you seeing the impact from the sales force most prominently?

Scott Ward

Yes, actually it is largely just the quantity of reorders from existing accounts. We retained most of our accounts. We saw our revenue per account decline, which it really would not be unexpected. We nearly doubled the size of this channel in a very short period of time. We realigned a lot of territories, we changed a lot of relationships and we also did a lot of cross-training which took people out of their territories for some amount of time.

We have a great product I mean Diamondback is a best-in-class product, but these are also difficult patients to treat and our sales reps have to be present in most of these cases to assure that our products get used and get used properly. So that sales coverage, the training and education of our organization is really important and it does make a difference as we’ve seen now Danielle.

Danielle Antalffy

Okay. That’s actually really helpful. Thanks for that color Scott. And then as we think about sales force productivity, sales force ramping to full productivity levels I know you believe you’ll start to see productivity improving in the fourth quarter of this fiscal year, but when can we or how quickly can we expect the recent ads to ramp to full productivity and get to the sort of run rate that we were seeing pre-all of these issues?

Scott Ward

I think actually as we move through the third quarter here and we get towards the end of third quarter we will start to see the resumption of sequential growth. The performance of this sales organization is right now and largely dependent on providing greater time and tenure in the territories. So I really think with time Danielle we will see continuous improvement in the performance of this organization.

Danielle Antalffy

Okay. That’s helpful. Thanks so much you guys.

Scott Ward

Thank you.

Operator

Your next question comes from Robert Hopkins with Bank of America Merrill Lynch. Your line is open.

Brandon Bryant

Hey guys this is Brandon in for Bob. Just first off, wondering can you talk about the growth split and peripheral between above the knee and below the knee?

Scott Ward

Yes, I can talk about that a little bit. We had a decline in peripheral I know it was fairly evenly spread between the two applications.

Brandon Bryant

So below the knee was down as much as above the knee is what you are saying?

Scott Ward

Yes, it was fairly consistent.

Brandon Bryant

Okay, thanks. And then with regard to pricing just kind of wondering what you guys are assuming in guidance going forward I mean as the forward-looking thoughts on pricing changed at all it seems like PAD decline improved a little sequentially, but still I mean above the kind of 1% to 2% that you guys are seeing before?

Laurence Betterley

Yes, I think what we saw the 3% decline year-over-year that has been a fairly consistent number, a lot of it is driven by the mix of office-based labs, which are more price-sensitive than we’ve had in prior year. Hospitals have been actually very consistent. The offsetting impact of that as I mentioned earlier is that our coronary product has a higher ASP, so as that mixing increases that has a favorable effect. And we have not seen a lot of decline in that though, I would anticipate we’ll see some decline over time.

Brandon Bryant

So do you expect the mix to office-based labs kind of continuing like is the 3% to 5% more of the norm and guidance going forward or is this still low single-digits like previously?

Laurence Betterley

Yes, I think in that 3% range can always change of course you don't know exactly what’s going to happen, but I would say 3% overall would be a reasonable number 3% to 5%.

Brandon Bryant

Okay. Thanks Larry. And then just last one on turnover I know last quarter I think you guys said 17 people have left mostly in the back half of the quarter, can you just talk about how that evolved in Q2. I mean I think I asked in the last call a similar question and I think it was down significantly I’m just wondering if you could comment on that and how that turned up the full quarter?

Laurence Betterley

It is down, it has been trending down and so we still had turnover in the quarter, I’ll just say we had about 10 voluntary earlier in the quarter. So it has been trending down and we do feel that we're on the right track there, still little higher than we would like, but it's definitely been improving.

Brandon Bryant

Great, thanks guys.

Operator

Your next question comes from Charley Jones with Dougherty. Your line is open.

Charley Jones

Hi, good afternoon and thanks for the time.

Laurence Betterley

Hi, Charley.

Charley Jones

I was hoping to talk a little bit about how the quarter shaped up, did you see procedures kind of soften in the back half of the quarter or was it increased competitive activity were there any kind of – it sounds like you obviously had more time required in the procedural room, but I was wondering if you could talk a little bit about what you saw from your competitors and where the pressure came from, if it was completely self-induced or if there was a little procedure softness out there, too?

Scott Ward

Actually Charley we saw really improved cadence in our sales probably beginning in early to mid-November and that was actually quite encouraging. We saw very healthy, stable, steady sales for really the last two months of the quarter and that gives us confidence because it gives us the sense that we have a lot of the variation that we've been working through, we are working out of the system and so that stabilization obviously gives us confidence going forward into the next quarter.

Now as we think about competition certainly drug-coated balloons have made a difference in the market, it's just changed the market dynamic, we’re seeing more trialing going on out there as I said in our prepared remarks, but we are confident that in time, the utilization of orbital atherectomy will become standard of care in combination with drug-coated balloons for the treatment of calcified lesions, but for the time being the trialing that’s going on drug-coated balloons are getting some increased let’s say at least share of mind.

And I guess from a competitive perspective when we have so much transition underway, we are a bit more vulnerable to our competition. I don't – we didn't see our competition do anything new or different wasn’t really any new tactics there. We continue to be very confident that the Diamondback has distinct competitive advantages and that will do very well in this market as we reduce the instability in our sales channel. So I guess to answer your question just ever so briefly. Actually we saw a fair amount of stability in the second half of the quarter which gives us confidence going forward.

Laurence Betterley

I'll just add on to that. As Scott said, we had a nice progression in our daily cadence of sales. What didn't occur is we didn’t see the uptick at the end as steep as what we have experienced in some other quarters. So that was lower. So it wasn't just back-end loaded. There was a good cadence. And we've seen a good start to this quarter from a cadence standpoint as well.

Charley Jones

Thanks for that. I guess a follow-up on kind of the bigger picture question again. So as you look at these competitors new segment in term of atherectomy players and then balloon players and maybe atherectomy and balloon players and coronary and peripheral?

Are you seeing the propensity of using your system with the balloons increasing or decreasing as they’ve kind of gone through this maybe a year period of time of trialing and you are starting to see them come down one side or the other, where you can start to market that. And then are you seeing competitive increases where you are a little bit more vulnerable from their guys with the balloons as well? Or is it just kind of everybody a little bit here or there? Thanks.

Scott Ward

Well, I think since we have this unique competitive position as being really the ideal atherectomy product to treat calcium. Remember that the balloons are focused principally on the treatment of lesions in the SFA. In that segment of the market, we do believe that over time physicians will begin adopting the use of orbital atherectomy as a vessel prep procedure prior to the administration of a drug-coated balloon.

So in that particular segment we do expect to see some tailwind there, we expect that to grow over time. We don't expect to see drug-coated balloons have a very large effect on our markets either below the knee or in the coronaries anytime soon.

Charley Jones

I guess finally, did you finish up the transition, the training faster than expected? Do you not train some of the people as a result of change in strategy being more dynamic? And do you have differing commission structures in different markets as a result of being more adaptive here? Thanks a lot for the time.

Scott Ward

So actually the training and education has been underway and our sales organization has been a very planful and deliberate process. I would not say that it happened earlier than we expected. I think it basically has finished about right on schedule. And like I said I mean as we are going to continuously be refining and fine-tuning, but the cross training that's been underway is now largely complete and that has been done about on schedule. I think as we – what was the rest of your question? You had – the second part of your question was…?

Charley Jones

Well, I guess when we look at the commission structure do you kind of [have the report] to a slightly different commission structure [Multiple Speakers].

Scott Ward

Right, I am sorry, we have a single compensation plan across the organization that has been being fine-tuned obviously as we have changed roles and responsibilities for our sales reps, but all of our sales organization has a common compensation structure at this time.

Charley Jones

Thanks for all your time.

Scott Ward

Okay. Thanks.

Operator

Your next question comes from Ben Haynor with Feltl and Company. Your line is open.

Benjamin Haynor

Good gentlemen, thanks for taking the question.

Laurence Betterley

Hey Ben.

Benjamin Haynor

First for me, can you walk through kind of in broad strokes you expect for outside the U.S. kind of product introductions on both the peripheral and coronary side? I know you mentioned potential launch in Japan in fiscal 2018, is that for just coronary or should we expect peripheral there as well and then what about Europe?

Scott Ward

So right now our efforts are focused on preparing for the submission of the [shown in] ultimate commercialization in Japan and that is the extent of our international efforts. We will continuously evaluate opportunities outside the U.S., but frankly right now, we have a tremendous opportunity in the U.S. that demands all of our focus and really that's where our effort is and we think with the right level of effort there, we can get this Company back on track and do great things. So that’s where we’re at right now.

Laurence Betterley

The thing I would add to that Ben is in Japan we maybe able to do somewhat of a parallel process so the peripheral isn’t dramatically later than the coronary approval, it won’t be a whole new process. In Europe, as we’ve said before we’re moving slowly on that, the reimbursement is – it’s not great in Europe. We’re moving forward there with clinical studies and building our reimbursement story there before we try to…

Benjamin Haynor

Okay. And that’s helpful. And then in terms of kind of the in-office time that reps have, particularly when you get new accounts beginning to ramp up. If an account has been with you for six months, a year, how does that time go down or do reps still need to be in there on a regular basis to kind of hold hands of the docs?

Scott Ward

Yes, over time they don’t have to be there to hold hands with the physicians necessarily, but in many cases our physicians prefer to have our sales representatives present and that is especially true as we look at our coronary applications of our technology and that’s because often times these are very difficult cases to treat and frankly the physician's value our participation. So it is true that over time in the peripheral side it may not be as necessary for our reps to be present. Frankly, with the size channel that we have, we consider it to be a real competitive advantage that our reps have that cath-lab.

Benjamin Haynor

Okay, great. And then just following up a little bit on – I think that was Charley’s question. You mentioned stabilization and step up in utilization or daily ordering pattern starting in kind of early to mid-November. With regard to the guidance offered at the end of fiscal Q1, did you just expect a bigger step up going into the end of the year, the end of the calendar year, then materialized? Or what was the delta there?

Laurence Betterley

I think the sales in the quarter did continue to consistently progress and like I said yes we didn't see a large uptick at the very end of this quarter which we might experience. And that was driven by a lot of the factors that were covered shortfall in general, new sales reps, new territories, the cross-training, the time spent [indiscernible].

Benjamin Haynor

Great. Thanks for taking the questions, gentlemen.

Operator

Your next question comes from Jan Wald with Benchmark Company. Your line is open.

Jan Wald

Thank you. Good afternoon everyone. I guess a lot of my questions have been answered, but I want to go back to a comment that Scott made which was time in tenure is important for the sales reps and actually I believe that's true.

Just trying to ferret out a little bit about where things are in that process you said they’ve stabilized, but how many of the relationships have been formed and are strong enough really to carry you forward in improved sales, increased sales those kinds of things, how many are sort of in development at this point, it's a new sales force just a lot of them which has been cross-trained and may have been with the old docs is part of the PAD business, but just want to get a sense for where that is?

Scott Ward

Okay, so that’s – it’s a great question and it’s insightful because I know Jan, that you appreciate how long it takes to develop these relationships. If you look at our sales organization with a major expansion that we’ve had roughly 20% of our sales organization has less than six months in territory about 35% of our organization has less than one-year of experience in their territories.

So a large amount of our future growth and the stability of this organization is dependent on having that portion of our sales team continue to gain experience and have to form deeper relationships with the customers in their territories.

Now the other thing that I’ll point out as we look at this dual franchise strategy, roughly two-thirds of our sales organization is focused on that dual franchise strategy and now by when we talk about flexibility, what we’re really talking about doing is driving decision-making deeper into our organization to give our regional managers to basically empower those managers, to optimize sales productivity as they best see fit.

So if they think that it's going to be most beneficial for them to dedicate a rep in our particular area to peripheral they can do it, if they want to dedicate a rep to coronary they can do that, if they want to bring on a clinical specialist to increase case coverage they can do that. It's their job to basically optimize productivity at a local level. So we think that flexibility will reduce the amount of time that it takes to basically increase the overall experience of our organization.

So with those items there is not much you can do to accelerate the clock, but those few things that we are doing we think can help our productivity here in the short-term and we also think it’s going to help us to be really develop a much better relationships with our customers.

Jan Wald

Thank you, that’s very helpful. I guess also just wanted to go back to drug-coated balloons and the impact they are having on you. Do you think this quarter how much - I guess in terms of how much of an impact the sales force challenge had versus whatever DCBs trialing was going on, do you think it was mainly the sales force and a little bit of trialing do you think somebody asked this question before, but I’ll ask it again.

The atherectomy market itself is – do you think it's strong or do you think it’s weakening. And then competition I'm sure they went out and took some advantage of your weaken position, but are you going to be able to get that back with the sales force that you have and what are going to do that?

Scott Ward

So I can’t characterize with perfect clarity of the impact that drug-coated balloons have had on us. I feel quite confident that they have had some effect. I do believe that the majority of our sales challenges are related to the disruption that has occurred in our channel related to the expansion of our channel, but nonetheless I mean drug-coated balloons right now very popular in the market and there is a lot of trialing going on. I do anticipate that that's going to continue into the coming quarter and it will take a little bit of time for this to settle out.

Like I said, I do think that over time the utilization of orbital atherectomy in conjunction with drug-coated balloons will actually be an important opportunity for us and one that contributes to our growth going forward. I wish I could be more specific for you on that it's difficult because it's just a very dynamic market condition right now.

Jan Wald

Okay. I guess I was just looking for – I knew it had to be qualitative and it would just be kind of like what the sales force feedback was. They are losing, but I understand. That's it, thank you very much. I appreciate the time.

Scott Ward

Yes, thanks.

Operator

We have time for one final question and that question comes from Ben Andrew with William Blair. Your line is open.

Ben Andrew

Good afternoon. Thanks for taking the questions. First, Scott, talking about kind of the last time we spoke, you were kind of headed out into the field to talk to customers, talk to the salespeople. What kind of feedback did you get as you met with customers, just talking about the organization, talking about what’s happened, talking about the market? Maybe just speak about the strategic side a little bit in terms of your outlook for the overall space?

Scott Ward

Ben so I am really glad as you brought that up because you know I came on Board here – I mean, actually I have been the Chairman here for a while and I've been on the Board for a while. There is nothing quite like actually you know coming on Board and being part of the company it's not the way you'd like it to happen but it actually is a great opportunity to really get close.

So what I did actually when I started into this role I actually started out in the field and during the course of the past six weeks I have traveled extensively throughout the United States and I visited many, many of our customers I've attended cases and I’ve met with a lot of our sales representatives and our sales managers. A few observations based upon that because actually I have to say that experience has been very inspiring for me.

It calmed my anxiety and really focused my attention on what would be required at a local level in order to drive success. I can tell you that what I've seen in the field is that our sales reps and our sales management team are dedicated, committed, they are passionate to this opportunity. Yes they’re young, they're young but they will be successful with the right amount of training and the right amount of time in territory.

This organization can be very successful and CSI will get back on track based upon the success of this group. I also was really impressed with our customers and as I visited both coronary and peripheral physicians, physicians have focused on the treatment of patients that have coronary and peripheral artery disease. What I found is they really depend on Diamondback.

Diamondback is indeed a best-in-class product that does really make a difference in the quality of care. These guys depend on this product to not only get to the lesion that they want to treat, but also to prep that vessel and to optimize the vessel for whatever they are going to do next, whether it be drop a drug-coated balloon, drop a stent or in the case of below the knee just open the outflow, so they really do depend on it.

The other thing that I found is that reimbursement and coverage, while it’s a concern, it’s not a barrier for us right now either for our business or for our customers. In my world that's always a plus having a product that is seen as an economic benefit in the cath-lab is impressive.

So I think our customers are really motivated to use this product to improve the quality of care. I am convinced that they're going to adopt this technology for their patients. I think we will see that like I said with drug-coated balloons and other things.

I think our coronary opportunity is a great opportunity. It will take a while to develop, but as more and more physicians focus on the treatment of these complex lesions, these heavily calcified lesions, as we see those patient aggregate, let’s say, more into the top 200 accounts. We’re going to see those physicians’ really adopting atherectomy and orbital atherectomy to improve their ability to drop stents perhaps in the future to drop a bioresorbable scaffold and other things.

So I guess when I look at it in total Ben I am really encouraged. I fully acknowledge that we have some work to do. We’ve got some work to do and we’ve got some time that its going to take to get these reps onboard, but with a sales organization that’s going to be 250 reps strong and with a best-in-class product like we have a very strong unmet medical need, and a highly motivated customer group. I think the future is bright for CSI. I really do. I think the strategies are right on.

Ben Andrew

Okay, thank you for that Scott. And the last question for me and maybe Larry can jump in, whichever, but looking at the reps, you talked about a third of them are so being onboard for less than a year. If you just look and I’m sure you got the analytics on this – if you looked at the productivity of the reps onboard for over a year and of the decline that you saw either on a territory basis or rep basis or customer basis are you seeing a real differential there that supports the view that in fact we are still seeing growth in Diamondback at established reps.

Laurence Betterley

Yes, but in addition to new reps, even the established reps with taking on the coronary, they are building relationships as well on the coronary application. So it is just with the new reps, but in general our veteran dual franchise reps do have a higher productivity than new reps and newly trained coronary reps. So, yes we are seeing definitely a spread that favors the veterans.

Ben Andrew

What I'm really trying to get it Larry if you look at a center that’s using peripheral has been established customer, the rep hasn't changed for a while are you seeing volume growth there?

Laurence Betterley

Yes, those accounts are stable and growing and like I said the productivity of that group is closer to what our historical peripheral productivity had been.

Ben Andrew

Okay, thank you.

End of Q&A

Operator

I will now turn the call back over the Scott Ward for final comments.

Scott Ward

Okay, thanks. Well thanks everyone and thanks for joining us today. We certainly appreciate all the insightful questions, like we’ve said we are going to be very focused on executing the plan now, we believe that we have a very strong plan in place to put the company back on track and we are looking forward to updating you on our progress next quarter. So thanks everyone. Good afternoon.

Operator

Ladies and gentlemen this concludes today's conference call. You may now disconnect.

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