Novadaq Technologies' (NVDQ) CEO Arun Menawat on Q1 2016 Results - Earnings Call Transcript

| About: Novadaq Technologies (NVDQ)

Novadaq Technologies Inc. (NASDAQ:NVDQ)

Q1 2016 Earnings Conference Call

April 27, 2016 4:30 PM ET

Executives

Steve Kilmer – Investor Relations

Arun Menawat – President and Chief Executive Officer

Roger Deck – Chief Financial Officer

Analysts

Matthew O’Brien – Piper Jaffray

Rick Wise – Stifel

Charles Haff – Craig-Hallum

Margaret Kaczor – William Blair

Jeff Chu – Canaccord Genuity

John Gillings – JMP Securities

Ben Haynor – Feltl and Company

Joel Hurren – RBC

Operator

Greetings, and welcome to the Novadaq First Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Steve Kilmer, Investor Relations. Thank you. You may begin.

Steve Kilmer

Thank you, Danyal. Good afternoon, everyone. Thank you for joining us today to review Novadaq Technologies’ financial results for the first quarter of 2016. On the call today representing Novadaq are Arun Menawat, our President and Chief Executive Officer; and Roger Deck, our Chief Financial Officer.

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

All forward-looking statements are based on Novadaq’s current beliefs, as well as assumptions made by and information currently available to Novadaq, and relates to among other things, results of future clinical tests of the SPY, FIREFLY, PINPOINT and LUNA imaging systems, anticipated financial performance, business prospects, strategies, regulatory developments, market acceptance and future commitments. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this conference call.

Due to risks and uncertainties, including the risk and uncertainties identified by Novadaq in its Public Securities filings, actual events may differ materially from current expectations. Novadaq disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

With that said, I’ll now turn the call over to Dr. Menawat.

Arun Menawat

Thank you, Steve. Good afternoon everyone and welcome. The agenda for today is for Roger to highlight our 2016 first quarter financial results as usual, after that I will discuss the outlook for our strategic initiatives going forward. Roger, please proceed.

Roger Deck

Thank you, Arun, and good afternoon. I’d like to begin today’s call by summarizing our Q1 results compared to the same quarter last year. Revenues increased by 52% to $17.7 million in Q1 2016 from $11.7 million in Q1 2015. A major tier component and this overall increase in revenue was 71% year-over-year increase and direct revenue generated by the North American sales team.

This direct revenue increase is the result of a large sales expansion undertaken at the beginning of 2015, which had an increasing impact on sales as 2015 progressed and into 2016. As discussed in our Q4 results conference call, we again executed a sales expansion at the beginning of 2016, and I think this will again have an increasing impact over the year, particularly in the second half when some of the new recruits become more productive.

Gross profit as a percentage of sales increased by 7 points from 64% in Q1 2015 to 71% in Q1 2016, in total dollar gross profit increased by 59% year-over-year. Recurring revenue increased by 41% year-over-year, reflecting growth in imaging kit revenue, equipment service revenue and DermACELL. We expect year-over-year recurring revenue growth to continue in the 40% range, which exceeds the overall growth rate implied by our guidance, which is why we commented during our Q4 results conference call, the recurring revenue was likely to be our fastest growing segment.

During Q1 2016, we installed 50 devices, which is roughly in line with the number of devices sold in the quarter. A trend that started in Q4 2015 and continued in Q1 2016 is an increase in the number of new SPY Elite Systems being installed. As discussed previously, our focus for much of 2015 was on reinvigorating previously installed SPY systems.

Towards the end of 2015, we started seeing demand for new installations. And in the six months to March 31, 2016, almost 40% of new installs have been SPY Elite Systems. We have been directly marketing SPY Elite for just over 12 months now and we think the increase in demand for systems at new accounts demonstrates that some momentum is getting started. PINPOINT installs remained strong during the quarter.

I want to talk a little bit about our operating expenses as we have moved into 2016. Total operating expenses were $21 million in Q1 2016, representing an increase of 12% from the year ago first quarter and a 2% sequential increase from Q4 2015. Research and development expenses were lower than expected due to settlement proceeds of $625,000 recovered in an IP matter which was accounted for as a reduction of expenses.

This reduction in expenses will not recur in Q2 2016 or beyond. And some of the expense increases associated with our sales expansion in 2016 were not fully recognized in Q1 2016, so there will be a further sequential increase in operating expenses in Q2 2016. Overall, we think full-year operating expenses in 2016 will be in the range of 12% to 15% higher than in 2015 and that is an annual comparison.

As we reviewed our operating losses for 2015, we described large operating losses experienced in the first half of the year resulting from a large sales expansion at the beginning of the year and those losses were reduced in the second half as sales productivity improved. During our Q4 results conference call, we indicated that we are going to repeat this pattern to a certain extent except that the amplitude would be less and this is exactly what occurred.

Our operating loss of $8.4 million was a little higher than in Q4 2015, but it was quite a bit less than our loss of $11.3 million in Q1 2015. We expect to see a repeat of the pattern we saw in 2005 with reductions in operating losses through the year as productivity improves, particularly in the second half.

During these calls, we have never focused on our net loss, which has been dramatically impacted quarter-to-quarter due to the effect of share price movements on a warrant revaluation adjustment, but as of Q1 2016 we can report that we no longer have any warrants outstanding and there will be no further warrant revaluation. So the net loss will no longer be subject to that variability in the future.

That concludes my remarks on the Q1 financial results. I would like to turn the call back to Arun.

Arun Menawat

Thank you, Roger. Based on the figures that Roger just presented, we’re pleased with our performance in Q1. We have successfully maintained a healthy growth trajectory we established in 2015 and we feel well positioned to meet our targets in 2016. Our 2015 year-end call was only a few weeks ago. So I will keep my comments relatively brief this afternoon. I would like to spend my time today discussing some of the medium and longer term activities that we have outlined in our corporate presentation in January.

First, we said we have – we would increase our sales team by approximately 50% by 220 people professionals this year and that we would segregate the team into a surgery team and a diagnostic team for wound care. The management teams are completely in place and the segmentation has gone well. We have approximately 100 professionals in Q1, although not all of them were productive yet. In keeping with our goals, we plan to add about 20 additional sales professionals this year.

Second, we have been very busy lately with new product introduction, launching three new products in Q1. First, we introduced Color Segmented Fluorescence, or CSF, for PINPOINT early in the first quarter. I’m happy to report that we were already getting great reviews on this product, which has been sold as a software upgrade to our installed base and as an add-on option for new customers.

The second PINPOINT technology is our 5 millimeter scope, which we introduced a few weeks ago at the SAGES Conference in Boston. Third, we launched our SPY-Q Case Management software for LUNA two weeks ago at the SAWC Wound Care Conference – Spring Wound Care Conference in Georgia. And once again, the feedbacks we have gotten on this product have been pretty good.

During our year-end update, I also discussed our two multi-center level one clinical studies and I am pleased to say that both continue to progress very well. The FILM study is enrolling in six centers and we expect to have results on hand by Q4 of this year. In addition more than 175 patients have been enrolled so far in our PILLAR III study. And we expect results from that study to be announced in Q1 of 2017.

We remain confident that both of these studies will achieve their clinical endpoints and that the results will be – will drive future growth of our technology. And finally, we have discussed before we’re investing in research to add a number of other imaging molecules that when combined with our SPY technology will target the visualization of certain specific normal and abnormal and anatomical structures including cancer lesions.

We are on track for announcing at least one such molecule in late 2016. I wanted to be clear about this. These molecules will not replace what we currently do with ICG fluorescence but instead will add to it and complement our current capabilities and thereby add to our recurring revenue categories.

In closing, we’re reaffirming our revenue guidance for the year. We believe we have clear short, medium and long-term plan for growth. And we believe that we’re meeting or exceeding the targets that we set for 2016. This concludes my prepared remarks.

With that, I will turn the phone over to the operator and request that the lines be opened for questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Matthew O’Brien with Piper Jaffray.

Matthew O’Brien

Good afternoon and thanks for taking the questions. Either Roger or Arun just speaking about the commentary about new installs from SPY were you specifically talking about new installs into new hospitals where you not had a presence before or just second and third systems going into existing centers?

Roger Deck

For the most part these have been new centers and I think it’s really driven by increased focus by surgeons on some innovative new surgeries like nipple-sparing mastectomy in single stage operations. I think that’s what we continue to see at surgical meetings. And I think that there are I think the exposure of SPY in the context of those meetings is driving a broader and broader audience through the technology.

Matthew O’Brien

Okay.

Arun Menawat

Matt, I think that what will be, overall what we’re saying is that breast surgeries and breast reconstructions has been the target market for us and we continue to see significant evidence that that particular application will drive to our standard. And so the renewed interest that you see is actually the momentum that we were building last year and we think we’ve seen quite a bit of evidence that it will – it is continuing.

Matthew O’Brien

Okay. And then as a follow-up. I know you added 15 reps in the quarter roughly or actually just about 20. I think a majority of those went into wound. And I don’t think we’re expecting much of a contribution there until the end of this year or so. Given what you put up here in Q1 in the top line and what you’re reaffirming as far as guidance goes. Can you just give us a sense for it and it looks like a lot of the metrics are moving in the right direction but your line of sight into the back half strength that you need to get to deliver the full year guidance. Plus I think you – Arun last quarter mentioned doing about $25 million in Q4 so actually you had a run rate for $100 million.

Arun Menawat

Yes. So yes, Matt, I mean generally I think as you said the overall number is good but if you look underneath the numbers. I think you know when I look at it we’re hitting on all cylinders to be honest, our recurring revenue is good, the utilization is good. The new salespeople will – we have a rigorous training program in place. They are not productive in Q1 but certainly we expect them to become productive in Q3, Q4 timeframe.

So generally what you’re saying where I think you heard that from Roger’s prepared remarks that we see a similar trajectory this year in terms of growth in revenues that we saw last year.

Matthew O’Brien

Okay, but you’re also seeing it on, there are sell side of things?

Arun Menawat

Yes, we are – on DermACELL I mean the reality in Q1 is that the recurring revenue came from all three sources they came from better more kits that we sold for SPY and PINPOINT, it came from more service revenues because the installed base has grown. And it came from DermACELL also. So I think as I said underneath the data. I think that all of these subsets have contributed. And with DermACELL Q4 if you just look at the Q4 run rate last year we were at about $6 million. So I think we do expect that it will grow at least at the same pace. This year as the overall revenues are projected to grow up.

Matthew O’Brien

Very helpful and thank you.

Operator

Our next question comes from Rick Wise with Stifel.

Rick Wise

Good afternoon, Arun. A couple of questions maybe just give us some color about – more color about some of the new molecules how do we think conceptually about the incremental ASP the impact of new molecules. I think the first one at end of this year. Just want to try to – try and get it what kind of potential revenue per procedure opportunity could look like with some of these new products definitely would be closer to DermACELL type revenue per procedure impact and just help us think through that.

Arun Menawat

Yes. So Rick, I think we are right now for example somewhere between 5 to 10 clinical studies with different types of molecules that are going on. Some are going on in U.S., some are going on in Europe. So, we’ve been at it for the last few years. And what we have done is we’ve kind of prioritized these molecules based upon the emergency of the need from what we hear from surgeons, the ability to get the regulatory as quickly as possible. And then also on the basis of risks and the clinical potential that they have.

So the first molecule that you will see from us is going to be more about further differentiation and segmentation of anatomy. It will have a component of certain types of cancer surgeries where it will be important. But it is primarily designed for us to go through multimodality instead of a single-modality imaging. And it will allow us to increase our presence in the types of procedures that were already in. And obviously our expectation is that we will be able to get that quickly on the radar screen with the regulatory agencies. And we can move forward with them at a rapid pace.

The next molecules are more likely going to be about cancer margins. And I think you’ve heard about the cancer margins as being one of the things that all these molecules are working on. And the price points in the cancer side I think can be pretty interesting in the sense that, if you just look at for example, breast cancer somewhere between 25% to 50% of those surgeries have to be repeated. And if we can theoretically obviously, if we can reduce that substantially, it is just a cost saving associated with reducing that repeat surgery is significant. So being able to charge in the $1,000 plus range is feasible. Having said that, I think those things are a little bit farther out. But the first molecule is likely to be more about anatomy.

Rick Wise

Got you. And couple of other quick ones, Arun. As you said we saw nice uptick in service revenue should we expect a similar ramp in service sort of recorded throughout 2016 as you start collecting on the warranty service contract, is that the right way to think about it?

Arun Menawat

Yes. I think we’re starting with small numbers obviously. This is the numbers that are right out in our financial statements, I’m sure you’ve seen that. Recently nice percentage pick up from Q4 to Q1 whether we’ll repeat and exactly that percentage, it’s a little bit hard for me to predict today. But I think that it’s an area where the revenue stream is definitely starting now. It’s associated with some of the capitals that we sold last year. And so, it is – you’re going to see that ramp pretty consistently through the year.

Rick Wise

Thanks, Roger. And Arun, last from me.

Arun Menawat

Sure.

Rick Wise

General question. Just any competitive updates on SPY Elite and for post phages, the react in the market…

Arun Menawat

Sure.

Rick Wise

Maybe it accounts one or characterize the hedge if you will. Thank you so much.

Arun Menawat

Yes. No, I’m happy to. So I think with respect to SPY Elite, we continue to feel very confident that there is no serious competitor threat. There have been – as I’ve said before, there have been a number of relatively smaller companies that have been in the market, but we – our strategy generally is we actually aggressively request head-to-head comparisons, and we win those all, win those very, very easily. And as we begin to update our softwares and so on, I continue to feel pretty good about SPY Elite and it remains major component of our revenue in our growth.

On the PINPOINT side, as you know Stryker has introduced their product. And having said that to be very honest, we have not seen any impact of that introduction on our pipeline at the moment. We have certainly done number of head-to-head comparisons, and we have gotten very, very positive reviews on those comparisons. So at this point, I think so far at least we have not seen any impact on our trajectory on the company.

On the LUNA product, with the new software that we’ve just introduced, which is a highly patented software, not only there is no competitor, I think that it’s going to be a long time before anyone can come up with some intelligent software like this one. So I really think – in general, we’re going to be humble, we’ll always watch out and make sure that we don’t become overconfident about these things. But in general at the moment, we feel pretty good about it.

Rick Wise

Thank you so much.

Operator

Our next question comes from Charles Haff with Craig-Hallum.

Charles Haff

All right. Thanks for taking my questions and congratulations on a nice quarter. Yes, question for you on DermACELL, you were kind enough I think last quarter to share with us the number of accounts that you had for DermACELL in the quarter. Would you be prepared to give us an update on that?

Arun Menawat

Charles, certainly that number of accounts is increasing. And as I mentioned, the revenues when we finished last year was certainly had – in Q4 exceeded our expectations. We have increased the accounts in Q1. The only thing is when you increase the account, the revenues are not significant from the new accounts generally. So I think it’s probably not as meaningful number, and so we’ve chosen not to put out. Last year we thought we should do it because that was the strongest of our revenue.

I can also tell you that we are – we’re certainly on the radar screen of the market leaders who are in that space. They look at DermACELL as the most critical competitive product to which sort of helps us in the sense that it raises the awareness. That’s what we do. But – I mean, if that’s okay, I guess that’s about where I would like to go with it.

Charles Haff

Okay, sure. And then in terms of international growth versus U.S. growth, I’m wondering if you have that split for us.

Arun Menawat

Yes. So, I mean in our numbers you see the partnered and international bundled. And the partner numbers are primarily into the surgical revenues. And they are – they go – they grow up very slowly for us because effectively they represent license revenues. And you can see the license revenue deals on a separate line in our financial. So you can split them out.

The international revenues in Q1 were not quite significant for us. I really didn’t expect them to be great in Q1. But I do expect that you will see international revenues in the rest of this year grow, at least at the pace of the overall growth of the revenues we’re anticipating, and maybe in the second half pick up some momentum as well in the – there are number of hospitals for example in Japan that have the devices under evaluations at the moment, number of hospitals in China, UK, Germany. They’re all coming together, but they don’t show up in revenue yet.

Charles Haff

Okay, thank you. And then a question for you on wound. I know that you’ve kind of said that you’re just getting rolling there and expect most of your improvement to come in the second half. But in terms of the salespeople, I think last update you said you had 10 salespeople on the specialty wound side, hope you did get to 20. Where did you end up in the first quarter for the wound sales force?

Arun Menawat

Yes. We’re not quite at 20, we’re probably – pretty close. We should be there within the next few weeks. But I would – my guess, Roger, I think it’s at 15 or so.

Roger Deck

I think it’s a little bit higher than that. It’s probably 16 or 17. I think there’s the hire dates and then the other thing is that we’ve had two fairly major trainings, one was at our national sales meeting in January. And we’ve got quite a few people, quite a few new hires and I’m talking about both sides of the shop.

Arun Menawat

Yes.

Roger Deck

In that respect, I mean, we have another training going on next week. And I think that’s when most people come back from training, the teams are largely full. They will be fully trained by the end of next week.

Arun Menawat

Yes.

Charles Haff

Okay.

Roger Deck

And I think that’s why in Q2 I think we’re going to start to see a little more…

Arun Menawat

We’re going to see some installs in Q2. The next week’s training is primarily focused on wound side actually.

Charles Haff

Okay. And would you like to characterize the types of salespeople that you hired. Has it been kind of in line with your expectations or you seeing any nuances too, the types of wound specialists that you’re hiring relative to your initial expectations?

Arun Menawat

Yes. The caliber of salespeople that we’re getting this year, and it really started late last year, has been really – we are very, very pleased with it. The wound side is ultimately new, but I think that the people that we’re getting, there been couple of visits as I made for example with the salespeople have been very, very impressive, Charles.

I think that the word is definitely out that we’re growing that – some of our salespeople did very well financially last year, so good caliber of resumes that we’re getting is pretty good.

Charles Haff

Okay, great. Thanks for taking my questions.

Arun Menawat

Yes.

Operator

Our next question comes from Margaret Kaczor with William Blair.

Margaret Kaczor

Good afternoon guys. So I know you guys have pulled back on some of the DermACELL details, but anything additional you can give in terms of a sequential basis? And revenue in Q4 was it up double-digits or did you end up seeing some seasonality, where it may have been down sequentially?

Arun Menawat

Good question, Margaret. So, please don’t misunderstand, we’re not trying to hide any information on this. I think there is no question that the DermACELL product is turning out to be a product of choice by many, many surgeons. And we are definitely seeing that we are in the radar screen of the competition of the leading company. And so we’re trying to be a little bit controlled in what we say for that reason.

Having said that, primarily we are selling DermACELL in the breast surgery cases. And this point actually speaks of the overall strength of our business actually, because breast reconstruction typically are somewhere around 10% to 15% lower in Q1 as compared to Q4. And the rationale, there’s actually a rationale because obviously cancer doesn’t wait for any timing. But the reality is that many, many patients who get breast surgery, spend all of their deductible dollars first in getting those cancer removed and radiation and so on. So typically they delay the reconstructions until after all that is done. And so, that is why we’ve seen more volume in Q3, Q4. So I think if you count for that seasonality, we did well in DermACELL.

Margaret Kaczor

Okay, that’s helpful. And then in terms of as we look at the constant progression in recurring revenue per direct system, are you guys looking at that as being happy at that 7% number where you guys were in the first quarter or are you targeting something higher and lower? And then how should we think about that in 2016 what would you be happy with?

Roger Deck

Are you telling that overall sequential recurring revenue growth was that the question.

Margaret Kaczor

Year-over-year growth.

Roger Deck

Year-over-year, so I think that the way I would tend to look at it, is I should try and look at the 40% year-over-year recurring revenue growth level. That’s what I think that, that’s kind of what our goal is what we think is achievable and that’s a little bit higher than what’s implied by the guidance.

Arun Menawat

Yes.

Roger Deck

So that’s kind of where we are.

Arun Menawat

So I mean, Margaret you saw I mean last year we were talking about how capital revenues were growing and what we were saying is as that the – the installed base grows you’ll begin to see recurring revenue growth rate will pick up. And so we are starting to begin, we are beginning to see the impact of the installed base growth from last year. And so that is what Roger is saying as we are expect that the recurring revenue will grow at a faster pace this year than overall revenue which we obviously think that’s pretty good.

Margaret Kaczor

My question was really just and regard so the number that you guys disclosed which is the recurring revenue per direct system so should we just look at it on a total revenue basis instead of that per direct basis.

Arun Menawat

Yes.

Margaret Kaczor

Okay. So one more question from me, and we’ll move on but the new molecule that you guys are discussing can you give us a general idea of what surgical specialty you will start with I know you described it as multimodality but will it be immediately multimodality and will you need additional clinical data to drive that adoption or can the docs pick it up pretty quickly? Thanks.

Arun Menawat

Sure. So Margaret I would like to wait to get the clinical information to you which should be within the next six months. So I think it would be better to wait to go through that. I just would like not to give any competitor, any head start on these things. But I will definitely address your second question I do anticipate that it will have fairly fast regulatory pathways and that was one of the reasons why we picked it because it will be fast to the market and I think you will see in less than six months you will see quite a few clinical studies going on in this so we will outline the whole regulatory pathway and so on in the second half this year.

Margaret Kaczor

And is that for Methylene blue or is it something else would you prefer not to disclose.

Arun Menawat

I would prefer not to disclose at the moment.

Margaret Kaczor

Thank you.

Operator

Our next question comes from Jason Mills with Canaccord Genuity.

Jeff Chu

Hi, good afternoon. This is actually Jeff Chu filling in for Jason. Arun, I appreciate your commentary on your growth expectations this year for DermACELL but I was just wondering looking ahead and considering that DermACELL wouldn’t procedures again with SPY, but you are impressively constructing calculate to approximately $100 million in annual sale what’s preventing your sales, sales folks from catching a lion’s share of that opportunity.

Arun Menawat

Sure, Jeff. In terms of technology, in terms of opinion leaders. In terms of ease of use. I think we’ve crossed all those hurdles. We have most people have [indiscernible] actually think that its a better product. The primary hurdles that we face relate to the long-term contracts that exist in hospitals. So in many situations where our product is already qualified.

We’re basically getting a relatively small portion of the business. Because there are existing contracts that basically require the hospital to purchase a certain percentage of their breast tissue from other company. And as these contracts come to renewals and finish line. We’re obviously prepared to bid in the future. So I think this relates more to a competitive situation as compared to any technical or reach issue. And so that is also one of the reasons why we are being a little bit more confidential about it.

Jeff Chu

Great. On the capital side your capital revenue was a little bit ahead of our estimate. Are you getting a higher ASTM capital sales and perhaps you can help us understand what if anything you knew regarding the economics on the capital sales Q1 relative to what you’re seeing in last year.

Roger Deck

There’s no discernible change in our ASP for capital. What changes the ASP to a certain extent is mix because our PINPOINT generally carries a slightly lower ASP than the other products but I commented in my remarks that we installed about 50 device, we sold about 50 devices as well. And so I think that if you just look at our capital revenue you’ll see that’s roughly in line with the sort of ASPs that we’ve sometimes talked about in the past.

And last question from me, your gross margin is once again above 70% and above our submit but how sustainable is this and what’s driving this improvement in the gross margin. I don’t think it’s improved very much in the last four quarters. There was a big step up from Q1 so it’s a big change from that quarter what really happened in 2015 is really our volume just increased overall, so we got much better utilization of our overhead. And that sort of continued through time I think in terms of sustainability I think quite a few times we’ve said that it could creep back down to the 70% level and that sort of takes account of the possibility that we will be selling some more DermACELL which generally carries a lower gross profit but I think that 70% still seems like a good number for us.

Jeff Chu

Great thanks for taking the questions.

Operator

Our next question comes from John Gillings with JMP Securities.

John Gillings

Hey, guys, can you hear me, okay.

Roger Deck

Yes, John, go ahead.

John Gillings

Okay, great. So first I want to just talk about the Arthrex agreement a little bit. I know that that you previously said that’s going to be kind of backend loaded. But I just wanted to get a sense of. Are there any sort of contract minimums baked into guidance or any way that you can kind of put a floor on what that contribution would be.

Roger Deck

There are no minimums in the contract. We are – we expect Q1 really building relationships at the day-to-day working levels so their sales professional versus our sales professional getting to know each other bidding together in certain situations. That is exactly what we expected would happen at this time. So there is not a whole lot to report on it. And I think its kind of consistent in the sense that they have not seen much of a threat from their competitors at the moment either. So I think it is kind of coming along based upon what we expected. We’ve certainly had some success but it hasn’t been any major agreements or anything like that so far.

John Gillings

Okay, thanks. And then next I just wanted to hit on PINPOINT a little bit and you mentioned kind of the competitive dynamics earlier and how you haven’t seen any impact from the new 1588 camera Stryker also called out their new camera as a strong contributor to growth so I was wondering is there maybe a little bit less overlap then people were thinking given the PINPOINT maybe more of a premium product that would be used in more complex cases, given that it seems to be fairly strong growth for both of you how should we think about that?

Roger Deck

Yes, I mean that is pretty consistent with what we’ve been saying for more than a year that if you look at our corporate presentation from several years ago. We have positioned our company to really go after complex cases where you can really show significant economic benefits. And so I think that we continue to focus on that basis and we’ll continue to justify the acquisition of our devices based upon improved outcomes. And so I think that is the reason why we’d probably don’t see much and we’ve always felt that there are really two channels here, there is this technology based, outcomes based channel which is what we focus on. And then there is an infrastructure where lap chole procedures or regular day-to-day type procedures where there may not be a significant, clear outcome benefit but it’s nice to have. There could be in the infrastructure domain.

So I think that that could very well be and I think we’ll see over time how it grows. But at least the moment when the colorectal surgeons or when these complex surgeons – surgeons who are doing complex surgery when they do a comparison they want to be able to do continuous surgeries, they want to be able to see the details, they want to be able to use the new software to be able to make better decisions. And that’s where we see the differentiation.

John Gillings

Okay thanks. And then last one from me I just want to turn to LUNA for a second. So some of the clinicians that we’ve spoken with about LUNA say that it’s a little bit more nuanced to use in wound than may be using SPY technology in like a breast recon procedure. And so the LUNA score is obviously going to be very helpful. But as you send these direct reps out into the field, are they going to be in a position to fully train the surgeons, are they going to rely – need to rely on peer-to-peer mentoring. May be just help us understand a little bit better how a new clinician in wound care really gets up to speed on LUNA and can really fully utilize it in their practice?

Arun Menawat

Yes, so I think the answer is really many of those things I have described. So first of all, I think that was the kind of feedback we were getting that people felt that this is compelling technology, they really wanted to use it, they want to make it standard. But at the same time you are in a diagnostics setting, you don’t really have the time or the inclination to interpret the images. And so converting that into a number has been received quite positive because this thing all I really need to do is understand what the number is and how can I influence that number?

So that is the first step. The second step is, I think as you said, we need to make sure that everybody is educated and the protocols have been properly written. And to that extent, for example, there is actually a CME credit program that we sponsored – sponsored, for example at AWC, where hundred plus physicians were there in the presence and what this new LUNA score is all about and how it relates to understanding the diagnostics status of the disease. And how it relates to, for example, oxygen therapy which is one of the big things that they do frequently, with all presented and guidelines, in terms of initial proposals were presented, as well.

So the idea is that we – this is exactly why we’re saying that it’s going to take another few, another quarter at least before we can get there. But I think that we have key opinion leader established that are now getting the software, we have education program established and then more certainly the sales people team is fully trained to educate them. And that definitely is part of our core agenda in the first half of this year. And it will really continue for the long haul.

John Gillings

All right, thanks guys, that’s all we have for today.

Arun Menawat

Thank you.

Operator

Our next question comes from Ben Haynor with Feltl and Company.

Ben Haynor

Good afternoon gentlemen. Thanks for taking the questions. Roger just looking at productivity year-over-year for direct revenue per average rep I see it up almost 35% in Q1. Is that more of a function of the lower performing quartiles of sales people improving that performance, or is it kind of a across the board where everyone is becoming a little bit more productive?

Roger Deck

Okay, so I’m not sure I’ve got your reference because I guess the way we talked about productivity during last year we were just looking at the direct revenue per sales rep. And that actually – we didn’t report it, we haven’t talked about it quite the same way this quarter, but if we did it would have been actually down a little bit because our direct revenue is down little bit and we have had some hires. So I’m not sure what your reference is in terms of that increase. Can you just?

Arun Menawat

Sure. So what I’m looking at is I think you had 62 sales guys at the end of 2014, 78 at the end of Q1. So taking the average you get 70 sales guys and then I’m just dividing the direct revenue – this whole direct revenue by that number for both periods, Q1 last year and Q1 this year. Does that make sense?

Ben Haynor

Got it. Go ahead.

Arun Menawat

So I think that the way we would suggest you to look at it is 100 people in the denominator because we had about 100 or so in Q1. and the reason I’m saying that is because we’ve tried and worked hard and we’re really proud of the fact that we’ve kept all of the metric the same for the last fourth quarter and this one is the fifth quarter, so we can compare exactly the same way. And historically when we presented that metric it is based upon all of our sales people. The reality is that there’s a subset of them that is effective sales people versus full compliment. But since historically we would always compare full compliment that is what we would suggest as you divide that by 100.

Ben Haynor

Okay well I guess what I’m getting at is, if you look at the sales people that were on Board and productive at the beginning of last year to what they look like at the beginning of this year?

Arun Menawat

Yes, no I think obviously we have not published those numbers explicitly in terms of effective sales people versus year-ago versus effective sales people this year. But obviously we have that information and then measure it in many different ways. Sales people who have been with us more than six months, or sales people who have been trained for at least four months and things like that. And since we are got published I think we can certainly tell you we feel pretty good about the productivity rates that we see in those who have been with the company more than six months.

Ben Haynor

Okay so that’s helpful, we’re now looking for it. And then on the new imaging molecules, you mentioned that we will see something more and above six months. When do you plan to talk to the regulators and get more clarity on the potential approval fast that you can follow there?

Roger Deck

So we have been in conversation already on that. So we have a fair idea it doesn’t mean we know exactly what the path really will be at. We do want to present a lot more data to them. But we have certainly been in conversation with regulators already.

Ben Haynor

Okay that’s helpful. And then lastly from me on those tissue contracts that you see out there are they generally shorter term contracts or it’s a year or two, are they more like something like a perfect symmetry where it might be four, five, six years?

Roger Deck

I think that they are generally about two to three years and I also think that they are an impairment that administration will use if they want to. But we do have experienced that the contracts, if you can get enough interest at the hospital they generally do a have a way of working through those contracts and finding a way to use our product. But as Arun suggested that’s just one of the sort of institutional impairments that sort of limit the how quickly we can get this taken up.

Ben Haynor

All right, that makes sense. That’s it from me. Thank you very much gentlemen.

Roger Deck

Excellent.

Operator

Our next question comes from Joel Hurren with RBC.

Joel Hurren

Hi there everybody it’s Joel on for Doug here. So most of my questions have been answered there. I just have one quick question, on the new SPY system installed that you’re starting to see and you saw at the end of 2015. Would be able to kind of perhaps add some color and characterize the kind of accounts you see in those are those existing accounts are you seeing a mix of existing and new accounts? How is that looking?

Roger Deck

I would say, so this is Roger for the most part they are new accounts. They go across the range, they could be teaching institutions or community hospitals. But I think the way the question was earlier, I think was a good one, are these follow-on devices at existing accounts. And I think for the most part I’d say the answer is no. There are new accounts who are interested in making SPY a part of their practice. So that’s what we’ve been seeing so far.

Joel Hurren

Okay thanks. And then are you seeing any interest in terms of people or accounts adding a second SPY system?

Roger Deck

Sure we have, I think, we talked about some of those last quarter. And usually it’s out experience so far is more been way you have the hospital group that may have a number of different locations and where they’ve had good experience. In one location in some cases they’re deciding to standardize on the product, Mayo is an example of that. I think we talked about earlier. And then we continue to have a number of hospitals where volume just dictates that they need to have additional devices. I think that we’re going to see more of that as we still sold some of the devices in 2015 and we’ve seen that with a lower kit price volume goes up and I think that’s going to drive further devices as well.

Joel Hurren

Perfect thank you very much.

Roger Deck

Thank you.

Operator

And our next question comes from Matthew O’Brien with Piper Jaffray.

Matthew O’Brien

Thanks. Just a quick follow-up question Arun.

Arun Menawat

Sure Mat.

Matthew O’Brien

I want to make sure I clear off the DermACELL commentary that you had, I think you said you exited Q4 in a $6 million run rate, but then do you expect that run rate to grow kind of in line with the rest of the recurring business about 40%, which would only get to about $8.5 million in revenue. Was that right, or was it the run rate a little bit higher than that Q4 we should expect something closer to about $10 million in DermACELL revenue in 2016?

Arun Menawat

Yes, no Mat I think somewhere between $8.5 million, to $10 million, $11 million range, is probably reasonable to expect. So $10 million is not a bad number to think about.

Matthew O’Brien

Okay thank you.

Operator

This concludes our Q&A session for today. I would now like to turn the floor back over to Dr. Menawat for closing comments.

Arun Menawat

Thank you for your participation, we are looking forward to updating you in our next Q2 conference call. Thank you so much.

Operator

Thank you, this does conclude today’s conference. You may disconnect your lines.

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