Aspect Medical Systems, Inc. (ASPM) Q2 2008 Earnings Call July 24, 2008 10:00 AM ET
Kathy Waller - Financial Relations Board
Nassib Chamoun - President and Chief Executive Officer
Michael Falvey – Chief Financial Officer
William Floyd - VP of Worldwide Sales and Marketing
Scott Kelly - Medical Director.
Imron Zafar - Deutsche Bank
Eli Kammerman - Cowen and Company
Isaac Ro - Leerink Swann Llc.
Maggie - Suntrust Robinson Humphrey
Welcome to the Aspect Medical System second quarter 2008 earnings conference call. (Operator Instructions) I will now turn the conference over to Kathy Waller with the Financial Relations Board.
Earlier this morning, we issued a press release outlining the results for the second quarter. If anyone has not received the release, you can call the Financial Relations Board at 312-266-7800 and Karen Drova, my assistant, will send you another copy.
Before we begin the call today, we would like to remind the participants that certain statements in this conference call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements include statements concerning the expected value and the benefits of the BIS monitoring, the expected benefits of our planned sales force increase, the long term effects of anesthesia, our plans to initiate new studies and the expected impact of those studies, our plans to execute on key business strategies in 2008, our expectations regarding the affect of the New England Journal of Medicine Article on our business, our expectations with respect to new product introductions and their impact on the future of our business, and our guidance regarding Q2 financial results and other projections we will make today, July 24, 2008.
These statements involve risks and uncertainties. Among the factors that could cause actual events to differ materially from these forward-looking statements in this conference call are those set forth under the heading "Risk Factors" in the Company’s annual report on Form 10-K for the year ended December 31, 2007 as filed with the Securities and Exchange Commission and the Company’s Form 10-Q for the quarter ending March 29, 2008.
In addition, any forward-looking statements represent our views only as of today, and should not be relied upon as representing our views as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.
During this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. The reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measure is available at the Investor Relations section of our website which can be found at www.aspectmedical.com under the heading non-GAAP financial measure.
With that said, I would now like to introduce you to Aspect's President and Chief Executive Officer, Mr. Nassib Chamoun. Nassib will begin the call today by presenting an overview of the second quarter of 2008 and then the call will later be open to your questions.
Nassib, you may go ahead now.
Joining me this morning are Mike Falvey, our CFO, Will Floyd, our VP of Worldwide Sales and Marketing, and Scott Kelly, our Medical Director.
I will begin the call by reviewing the highlights of the quarter. Mike will provide some additional financial details and our outlook for Q3. I will then discuss our plans and strategy for the balance of 2008 before taking your questions.
Compared with the second quarter of 2007, worldwide sensor revenue increased 15%, US sensor revenue increase by 10%, International sensor revenue increased by 36% and the Worldwide installed base of BIS sockets increased to more than 51,000 units, an increase of 18%. We are comfortable with our results in the US this quarter in the face of some challenging circumstances created by the article published in the New England Journal of Medicine and we are very pleased with the continued growth in our international market.
In the US, the article had a moderating impact on our sensor growth rates consistent with our own survey of 100 anesthesiologists and 100 CRNA as well as a recent independent survey of more than 150 anesthesiologists. In our international business, we have seen no evidence of an impact. We believe our US field organization did a great job reaching out to our customers following the publication and helping them to understand the study. Among our largest 150 customers, procedure penetration actually grew from 77% to 81% during Q2. Among our top 600 hospitals which together account for approximately 25% of all surgeries requiring general anesthesia in the country, our procedure penetration grew from 52% to 55%.
We still have more work to do to make sure we connect with all of our customers but given the broad dissemination and tone of the journal article, we are pleased with the progress so far encountering its impact. Our response shows the strength, experience and clinical knowledge of our sales team and points to the strategic importance of our sales force expansion plan. This morning, we announce that the New England Journal published several letters to the editor including one from Aspect in response to the Avidan article.
These letters from several clinicians and investigators from around the world largely echo the points we have previously communicated about the study and that we were outlined in a recent editorial in the British Journal of Anesthesia. First and foremost, this monitoring leads to a significant reduction in the incidence of awareness in high-risk patients. An alternative protocol of Delsing to predetermined anesthetic concentrations might also reduce awareness but it is difficult to adhere to and may produce other adverse outcomes if patients receive more anesthesia than required.
This alternative protocol is not standard practice and finally, much larger studies are needed to determine the relative impact of these interventions on all patient outcomes. Unfortunately, the Avidan article is a great example of the study in which the headlines announcing it bore a little resemblance to the data presented. Despite this, we believe that the controversy, engendered by Avidan’s provocative article may prove to be beneficial in the long run. Follow-up studies have already been commissioned that will more fully explore all of these issues.
We expect that some of these new studies will specifically address the concerns that have been raised about the Avidan study. We are particularly pleased that the two large awareness studies sponsored by the American Society of Anesthesiologist and the Foundation for Anesthesia Education and Research (FAER) will include multiple patient outcome measures beyond the incidence of intra-operative awareness to more fully characterize the impact of awareness interventions on patient outcomes. The anesthesia community will have the opportunity to look to these and other studies to help them to make a determination about what anesthesia care approach is best for their patients and an effort to both reduce the incidence or anesthesia awareness and improve outcomes.
To quote Dr. Cook’s letter from the New England Journal Today:
“A monitor will not alter the anesthesia outcome unless the information derived from it is acted upon.”
We are confident that the documented benefit of this guided care will be observed in these new studies. If this monitoring is actively used and incorporated into patient management.”
With that, I would like to ask Mike to review the financial results for the quarter in more detail.
In Q2, we were at the high end of our guidance range for revenue and we exceeded our guidance for GAAP and non-GAAP earnings per share. Our product revenue grew 9% to over $25 million reflecting the continuing shift in our strategy to develop strong utilization of our BIS technology within our customer base. Worldwide sensor revenue of $21 million grew to 15% rate over Q2 of 2007.
US sensor revenue of $16 million grew at a 10% rate over Q2 of 2007. We suspected this moderation in growth is partly due to the impact of the New England Journal Study. Pricing remains stable in the US with average selling prices declining by approximately $0.05 from last year and last quarter. International sensor revenue of $5 million continue to grow rapidly compared to Q2 of last year, international sensor revenue grew at a rate of 36%. International sensor pricing was slightly lower than last quarter and slightly higher than Q2 of last year reflecting small changes in regional mix.
Worldwide hardware revenue of just under $4 million declined 16% for the second quarter of 2007 as increases in OEM module and ancillary supplies revenue only partially offset a continued decline in monitor revenue. Monitor revenue of just under $2 million declined 35% from last year. US monitor unit sales declined by almost 70% from last year to 155 units. Coupled with the reduction in price, US monitor revenues declined 72% from Q2 of last year. The drop in US monitor revenue reflects our shift in emphasis from acquiring new customers to rounding out operating room penetration in our existing customer base.
Since we begin the strategy in the second half of 2007, we expect the year-over-year decline to moderate in the second half of this year. International monitor revenue grew nicely increasing 30% from Q2 of last year as we shipped a little of our 500 units in the quarter. OEM module shipments were strong in the quarter with shipments of over 1200 units a 16% increase over last year. Modular revenues were just under one $1 million a 15% increase from Q2 of 2007. In total, we shipped approximately 1900 monitoring module units during the quarter with our OEM partners accounting for over 65% of new units. Our partners continue to be an important component of our strategy to make our technology available and to meet our costumer’s need for integrated solutions.
As of Q2 of 2008, we estimate that Aspect’s worldwide install base of monitors and OEM modules exceeds 51,000 units including more than 2900 in the US and almost 2200 in the rest of the world. This represents a worldwide increase of 18% from the end of Q2 2007. With the 9% year-over-year gain in product revenue, total revenue declined 5% from the second quarter of 2007. The second quarter of last year included the recognition of over $3.5 million of deferred revenue relating to the discontinuance of our partnership with Boston Scientific. Beginning in Q3, quarterly results will be more directly comparably with current and past years containing principally product revenue.
Turning to manufacturing margins and operating expenses: we did option to pass 123-R; we now report the full impact of share-based compensation expense in our income statement. To assist in comparison to prior year results and to provide additional information to investors, we also provide non-GAAP results, which exclude share-based compensation.
A full reconciliation of GAAP to non-GAAP results is available on our earnings release and on our web site. In total, share-based compensation added approximately $100,000 to our cost of revenue and $1.8 million for our operating expenses in the quarter. The discussion that follows excludes the impact of share-based expenses.
On a year-over-year basis with product revenue growth at 9%, product operating margin decline slightly to 4% as operating expenses grew at the 9% rate. In the second quarter of 2008, non-GAAP gross product margin declined slightly to 75.3% from 75.6% in Q2 of 2007. Growth in high margin sensors was offset by growth in more margin OEM modules. Operating expenses increased 9% from last’s year level with the largest growth coming in sales and marketing expenses for programs to support our strong international growth and on the US because of the creation of the sales force retention program that we noted on last quarter’s call.
Next quarter, we expect to continue to see increases as cost of our US sales force expansions begin to come on line.
In the beginning of June, we repurchased $10 million face value of our convertible debt creating a realized gain of just under $4 million. This transaction enabled us to adjust the balance sheet to reduce the EBITDA while maintaining in our view an adequate cash balance for future needs.
Pre-tax GAAP earnings of $3.2 million and pre tax non-GAAP earnings of $5.1 million was slightly below the prior year because the gain on the purchase of the bond this year partially offset realized revenue and higher net interest earnings in the prior year. After tax GAAP earnings of $1.9 million were favorable and after tax non-GAAP earnings of $3.4 million were inline with prior year because of lower tax rates due to a true up in the quarter as the gain creates a slightly lower full year effective rate. GAAP PPS of $0.10 and non-GAAP PPS of $0.17 are both favorable to last year.
Because of the unusual gain in the quarter, the outstanding shares are calculated treating the convertible bond as if it is converted to equity which results in slightly lower earnings per share than if it was treated as debt. To calculate this EPS we add back interest expense on the debt and include the shares underlying the debt and the share count. We expect in future quarters that earnings will return to a level that will dictate the convertible bond be treated as debt.
A note on taxes: as we mentioned in prior quarters, our GAAP effective rate is higher than the non-GAAP rate because of the treatment of incentive stock options or ISO. We expect that the full-year GAAP effective rate will be between 50% and 60% in the non-GAAP effective rate what would be between 35% and 40%.
Finally, the company ended Q2 2008 with cash, cash equivalents, and marketable securities of $107 million in debt of $115 million, and during the quarter we generated approximately $2 million from operating activities.
Our guidance this quarter is as follows: for Q3 we expect revenue to be within a range of $24.1 to $25.1 million dollars, and after tax earnings per share to range between a loss of $0.06 and a loss of $0.10 on a GAAP basis, and after tax earnings per fully diluted share to range between a loss of $0.01 and earnings of $0.03 on a non-GAAP basis after excluding the impact of equity base compensation.
Our guidance for Q2 product revenue corresponds to product revenue growth in the 7% to 11% range and would allow for US sensor growth in a high single digit range should sensor growth moderate further due to the response to the journals, adjustments made during the transition to an expanded sales force, traditional seasonal slowness or other factors.
On the spending side, we expect to see continued growth on sales and marketing spending as well as higher spending in clinical programs. We are providing wider earnings range and it is our normal practice to allow for some variability in hiring of new sales representatives.
I will now turn the call back to Nassib.
For the balance of 2008 the key elements of Aspect’s strategy are as follows: near term, our principle goal is to capture as much of the substantial untapped opportunity in the OR market as possible. In the US, we are moving aggressively to expand our sales organization. As we said earlier, we believe that an expanded US sales organization will become an important strategic weapon for the company. In total, we plan to expand our current field sales force from approximately 40 representatives to 55 to 60.
In our total US field organization, we will increase from 70 professionals to approximately 90 to 95. The expansion began this quarter and we expect that it will be completed by the end of Q1 next year. With the goal of having the new sales representatives fully up to speed in three to four quarters after hire. When the expansion is complete, we believe our sales force will allow us to better communicate the results of new clinical research, broaden the conversation with customers from awareness to the benefits of BIS guided titration and capitalize on new products such as our Bilateral Monitoring System and CVI.
A key element of our sales and marketing strategy this year is the increase use of clinical education. The clinical education programs we are now offering including peer-to-peer coaching in the OR and institution wide trainings have been well received by our costumers and these programs will remain centerpieces in 2008. Base on our evaluation of sensor utilization, in hospitals before and after these clinical education programs, we believe this strategy is very effective. In the product area, out near and mid-tem strategy will be to bring new products to the market that reflect ways in which anesthesia practice is evolving and that will give both our installed base and new costumers additional reasons for using Aspect Technology.
This quarter we will bring our first new product online, our Bilateral Monitoring System. As we have discussed in earlier calls, the Bilateral Monitoring System allows clinicians to track differences and brain function between the right and left sides of the head and facilitates advance monitoring applications both in the OR and ICU. Although the initial impact of the bilateral product on our top line, we will be relatively modest. We believe the product will give us access to a number of key opinion leaders and will facilitate expansion of our footprint in the ICU. CVI is Aspect’s composite variability measure of BIS and EMG and is designed to assess anesthesia professional to better assess and manage intra-operative pain and other somatic responses.
Based upon market research, this innovative product offering is highly valued by clinicians. Since our last earnings call we have successfully initiated a series of studies to further validate the relationship between CVI and patient responses to painful stimuli during surgery. These studies should be completed later this year and depending on the result as well as the completion of the required review by regulatory bodies we expect to introduce CVI initially outside the US by mid-2009. We also expect to initiate an expanded effort this year to demonstrate how our technology can be used by proponents of intravenous anesthesia and integrated with closed loop anesthesia systems that are beginning to emerge in Europe.
Clinical research will also remain a priority for the year. A key advantage of our on-going commitment to global clinical research is that Aspect remains closely engaged with anesthesia’s academic researchers and thought leaders. We also believe that this gives us an opportunity to assist professional societies around the world as they consider incorporating brain function monitoring as a part of clinical guidelines. Considerable research in both in the laboratory and in clinical practice is focusing on the potential adverse consequences of excessive exposure to anesthetics.
These data suggest that a range of negative outcomes including seizures, delirium, postoperative cognitive dysfunction, exaggerated inflammatory response, cancer recurrence, and even mortality, maybe associated with overexposure to anesthetic agents. In past conference calls, we have highlighted a number of our clinical research initiatives including: long-term outcome studies at the Cleveland Clinic, focusing on patients undergoing vascular or cancer surgery. A post operative inflammatory response study in an elderly orthopedic surgery population at Emery University, ICU sedation outcome studies at Duke University and Vanderbilt University and the multi-center pediatric awareness incidence study.
Investigations, examining the impact of anesthetic factors on postoperative delirium and cognitive dysfunction as well as a comprehensive statistical analysis of Medicare, med pars, outcomes files from 2001 to 2005 to identify anesthetic risk factors for post surgical mortality. We expect that a number of these studies will either be presented at scientific meetings or published in the coming year and we will keep you informed. It is very clear to us that the best what to encourage clinicians to adopt our technology is to continue to deliver clear scientific evidence that demonstrates that this monitoring enables them to provide the better patient care and to improve outcomes.
In the neuron science area, we have now presented results regarding ATR performance from our BRITE study at five major scientific meetings in the US and Europe and we are very encouraged by the response of psychiatric thought leaders who see the need for biomarkers to individualize depression treatments and improve outcomes. We also believe there could be an important role for Aspect’s Biomarker technology with promising new anti-depressant medications. This month Aspect is initiating collaboration with a major pharmaceutical company to explore our ATR indicator in a clinical study of a novel anti-depressant in Phase-II development.
Preparations are continuing for the initiation of the pivotal study for our ATR biomarker, namely the RAPID study, which stands for Rapid Assessment for Prediction of Improvement in Depression. We are currently engaged in a productive dialogue with the FDA review team and we believe these upfront efforts should serve to streamline the regulatory process generally. However, since we anticipate that some protocol notifications will be required, the initiation of patient enrolment into the rapid trial will likely be delayed and we are now targeting Q4 2008 study start time frame. We will provide an update in Q4.
In the meantime, we are continuing to explore applications of our biomarker technology in the optimization of implantable and non-invasive neuro-stimulation treatments for depression and are pursuing pilot research with leading experts in this promising field of device based therapeutics.
Later this month, we will be presenting two posters related to our BIS AD measure of cognitive function at the Alzheimer’s Association International Conference on Alzheimer’s disease being held in Chicago.
Before opening the call for your questions, I want to leave you with the clear understanding about how we see the market for our core technology evolving and how we believe our strategy will help us to capture the considerable untapped potential. First, in the near term: We are making great progress on expanding our sales organization to generate incremental growth in our core business. Our goal is to increase the rate of growth in US sensor revenue to more than 20% by the end of 2009. We have learned over the past year that by focusing on our best in our largest existing hospital customers and by investing significantly in clinical education, we have the best chance of influencing those clinicians we have not yet incorporated BIS as a routine component of their practice.
An expanded US sales organization will allow us to increase the effectiveness of this approached, extend its reach to a larger portion of customer base and create more knowledgeable, loyal, and consistent, user of our technology. Second, in the intermediate and longer term we believe an expanded sales force in the US will give us the capacity to take advantage of new products such us our bilateral monitoring system and CVI. New markets such as the ICU and to better communicate the results of new outcomes research that enhances the value proposition for our technology.
Third, in international we have had a lot of success managing, training, and motivating multiple distribution channels in different countries, and regions of the world and these skills have become key factors in our success internationally. This will remain our focus in these markets. Thought leaders have also contributed to success as they have been instrumental in the establishment of monitoring guidelines already in place and sustain the UK and Australia.
Fourth, with regard to product development, our goal is to develop products that our customers are asking for. By doing so, we believe that existing customers will broaden their use of our technology and that potential customers will have new reasons to consider using BIS for the first time. And finally, we will continue in our efforts to build a persuasive case to encourage clinicians to adopt and utilize our technology. We are collaborating with clinical investigators, academics, and thought leaders around the world on additional outcomes research with the goal of expanding our value proposition. Concerns about the consequences of excessive anesthetic exposure are clearly gaining greater visibility but we believe that we have only seen the tip of the iceberg.
We will continue to address the issue of anesthesia awareness because that remains an important patient concern but our emphasis has shifted to the benefits of titration using this as a means of personalizing anesthesia for each patient and avoiding the adverse effects of too little or too much. Many of our customers have already recognized the value of BIS to assist clinicians to modulate exposure to different anesthetic agents based on the varying needs of each patient. Our goal is for all of our customers to do so.
With that I would like to open the call to your questions. Thank you.
(Operator Instruction) Our first question is from the line of Imron Zafar with Deutsche Bank.
Imron Zafar - Deutsche Bank
First question is on the partnership that you mentioned with the ATR device with the pharma company. Can you give us a little more detail on that? What the terms are? Whether you won’t receive or will receive any sort of payments or R&D Subsidy from them?
The answer is yes. The study will be funded by them. We will receive some modest R&D investment from them to compensate for our efforts to assist them with that study. However, that is about all I can tell you. We will be integrating this device in Phase II trials and evaluating the response from that drug. That is about all I can say. It is major pharmaceutical company and maybe at some point in the future we will disclose the name.
Imron Zafar - Deutsche Bank
Okay. Great and on the international business, obviously that has been very strong in the past several quarters. When are you going to just talk in a little more detail on, where you have seen the strength and maybe how sustainable that growth is that you have seen in the past few quarters?
Hey, Imron, this is Bill. Yes, we are firing on all cylinders right now, internationally. First and foremost, we have a very tender organization over there. They have a lot of strong distributors in addition to our direct people. Regionally, Europe is doing very well. Middle East, Africa, very well, Latin America, very well and Asia Pacific, extremely well. So, all the regions are doing a strong and we see that as being very sustainable. We are looking at how we can continue to support them. They are very excited about this new products coming out and many of them are going to be international first. So our international team is knocking on out on the park right now.
Imron Zafar - Deutsche Bank
Mike, a couple of questions for you, quickly, I have seen some of your convertible debt in the quarter. Is that something that you – we should expect to continue going forward given that this kind of what your data is rating?
You know, I think that is something that we are going to look at from time to time. I mean, as we mentioned when we announced that transaction, we view it primarily as a balance sheet management exercise. And what we need to always balance is our cash requirements and what we feel as a prudent cash balance and then from time to time we do look at the opportunity to buy down some of that debt particularly in recent months with the debts rating at such a discount. So we thought that was a nice move to make during this quarter. It is something that we will consider in the future but we will probably not want to be disclosing that in advance but rather revealing that after the transactions happen.
Imron Zafar - Deutsche Bank
Got you, okay. And my last question is on SG&A. Q1 to Q2, there was quite a jump in SG&A expense so I know you said some of that was employee retention and some of that was disappointment in your international business. I am wondering the deltas between Q2 and Q1. How much of that is sustainable incremental spend? I know going forward it is going to be and also be expanding your sales force but of the increase from Q2 to Q1 how much of that is going to be recurring and how much of that would be one time?
If you look at the change on a non-GAAP basis quarter–to-quarter almost half of the growth was that sales force retention program which will be in place again or you will see a similar expense in Q3 and then it starts to drop off. On the other hand, as we start to ramp up for sales force expansion, you will see that spending come on line. So I think you will actually see maybe a slight increase in the growth rate on a year-over-year basis in Q3 but that retention program by its nature is one time for two quarters but then our sales force expansions starts to kick in.
Our next question is from the line of Eli Kammerman with Cowen and Company.
Eli Kammerman - Cowen and Company
Our first question is: how far along the way in adding the additional 15 to 20 reps are you today?
I am not going to give you a specific numbers but let me just tell you, first of all it is going extremely well and we are actually ahead of our plan. We have got the management in place. They have all been trained. We have a very strong pool of candidates, interesting right now with the economy the way it is, we have seen an enormously strong talent pool. Our interview processes is really core competencies for the script we put many through it. We have a systematic training program and we have already put many individuals through that program. So, do not forget to we had to replace territories where the management was promoted but, I can tell you when that we are in the double digits for adding people already thus far. So it is going very, very, very well. And we are a little ahead of plan which is nice to say.
Eli Kammerman - Cowen and Company
Okay. That is great. Next question is. What is it specifically about the bilateral sensor that makes it especially useful for the ICU but not quite as useful in the OR?
Well, the primary application of our core technology in the operating room is to help the clinician titrate the anesthetic effect level where we did not need the individual hemispheric information. There are clearly a select number of surgical procedures in the high-risk patients where the clinician will want that information. In the ICU, those types of patients are at a much greater fraction of the patient population. People that have suffered neurological injury, status post major surgical procedures, strokes, and things like that. So, it is really kind of an enriched population where the additional information will benefit the clinician.
Eli Kammerman - Cowen and Company
I see. Okay. Thank you for that answer. And then, finally, regarding this closed loop anesthesia investigation. is this a system that is analogous to the new system that change age of (unintelligible) for sedation in physician’s offices or is this more of an OR type system?
The development of these systems is clearly aimed at the operating room. There is the application from J & J for procedural sedation in a variety of environments but where we see the thought leaders from the clinical investigations is improving anesthetic delivery for the very large population of patients undergoing general anesthesia. The secondary application that would be a direct extension is to facilitate ICU sedation which is a much more challenging environment that procedural sedation.
Our next question is from the line of Isaac Ro with Leerink Swann Llc.
Isaac Ro - Leerink Swann Llc
Hey. I think they have taken the question. Just for a thought could you maybe tell us a little bit about what you are sales people are hearing around possible CapEx for non- reimbursed items like Dev [ph]? I know that it is a lower price AST route. It is a lot about the capital pooling. We are just wondering what they are hearing.
Right now we are really not hearing too much about that. We are such a small percentage of the cost of the anesthetic and in general to the operating rooms. Do we hear cost restraints, sure but it really has not been a major issue for us to at this point.
The classic one is that the cost of our technology is less than the cost of the single suture used by the surgeon. So, in many ways, it is really beneath the radar screen.
And also, if you think about it, you will probably see the impact first on the OEM side where they are selling a much higher ticket item but if you look at the numbers over the last three or four quarters it has been surprisingly strong. I expected a little bit of a deep off there as we shifted our focused to look more at existing customers but the OEMs have been extremely successful over the last year in continuing to place our BIS modules.
Isaac Ro - Leerink Swann Llc
Okay, and then just maybe they are trying to ask the question like that in a different way. Has there been any change to evaluation period through your technology among your new accounts since the New England Journal study? Are they meaningfully longer?
No. I don’t see the evaluation says any longer. We did see a pause but in general, we have not seen that. What we have also done is we just cut such a standardized process with regards to doing the introduction to technology. It really is, for many years of finally fine tuning this. So when we go in we know how to mobilize the key opinion leaders. We know how to do the right hands-on training. We know how to bring in the right speakers and I have not seen a change in that.
Isaac Ro - Leerink Swann Llc
And then just lastly, is there any element to commodity prices that can hurt your gross margins going forward and, specifically regarding input cost for the sensors?
I think the biggest impact from commodities would be on the energy side and not so much in the cost to good sold. I mean, it is very little product cost there. If we see it at all, it would be more in our operating expenses and that is nearly going up as a result of travel cost and potentially energy cost for running the facility here. But I think compared to a lot of other companies, our exposure is pretty low.
And yes, as you may know Isaac, we have introduced our broadened line, some new technology and more advanced automation that has and we will continue to contribute to the efficiency and the (unintelligible) of our manufacturing. And to the extent there maybe some slight material cost increases. They are definitely being offset by the automation and improvements that is being put in place. So, things have held up pretty well.
At this time, Jonathan Block with Suntrust Robinson Humphrey, please go ahead with your question.
Maggie - Suntrust Robinson Humprey
Hi. This is Maggie in for John. I have a question on the guidance of the 20% by the end of 2009. Is that sensor unit or is that revenue?
Hi, Maggie, this is Mike. So, we have said it is 20% revenue growth by the end of 2009 but together with that we said that we would expect sensor pricing to be fairly stable, maybe a little bit down. So, the difference between revenue and unit growth should be fairly narrow.
Maggie - Suntrust Robinson Humprey
Okay, great and then just looking through the model. If you did not repurchase your convertible debt, we are estimating about a $0.03 loss for the quarter. Does that sound right?
On the non-GAAP side we probably would have been about a penny above our guidance or about 6 tons was my estimate and you are right on the GAAP side it would have been at the bottom of our guidance, a loss of $0.03. The difference in top end to the bottom end actually had to do with the effective tax rate because our income is so low on a GAAP basis we have some unusual things happening with our tax calculations.
There are no further questions at this time.
Thank you all for your questions this morning. I will close by simply reiterating our confidence in the future. Aspect’s vision is to build a leading brain monitoring franchise with businesses in several major markets. In our core business, we have built a solid foundation and we believe we are making the right investments to capture more of the unrealized opportunities. And in the neuroscience area, we believe that the product that emerged from this area have the potential to become a meaningful part of our future. Thank you all for your questions this morning. Mike and I are always available to answer any further questions you may have. Have a good day.
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