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Cardiovascular: Preliminary Fiscal First Quarter Financial Results Conference Call

The following excerpt is from the company's SEC filing.

C O R P O R A T E P A R T I C I P A N T S

Jack Nielsen

Senior Director of Corporate Communications and Investor Relations

Laurence L. Betterley

Chief Financial Officer

David L. Martin

President, Chief Executive Officer

C O N F E R E N C E C A L L P A R T I C I P A N T S

Mike Matson

Needham and Company

Brooks O’Neil

Dougherty & Company

Exhibit 99.1

Ben Andrew

William Blair

Bob Hopkins

Bank of America Merrill Lynch

Ben Haynor

Feltl and Company

Jan Wald
< br>Benchmark Company

P R E S E N T A T I O N

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 Preliminary Fiscal First Quarter Financial Results 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. If you would like to ask a question during this time, simply press star, followed by the number one, on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.

I will now turn the call over to Jack Nielsen, Senior Director of Corporate Communications and Investor Relations. You may begin your conference.

Jack Nielsen:

Thank you, Melissa. Good afternoon and thank you for joining us on short notice. With me on today’s call are Dave Martin, CSI President and 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.

I will now turn the call over now to CSI’s Chief Financial Officer, Larry Betterley.

Thanks, Jack. I’ll provide a high-level discussion of our preliminary fiscal first quarter financial results. Dave will then discuss the factors that contributed to our shortfall from guidance and the adjustments we’ve made to improve our future performance. Following our prepared remarks, we’ll open the call for your questions.

This afternoon we announced preliminary revenue for the first quarter of fiscal year 2016 of approximately $43.9 million, which is an 11% increase over the $39.5 million in the first quarter last year, excluding $1.9 million from Asahi guide wire sales in that prior period. Reorder revenue was 97% of total revenue. We added about 50 new peripheral and 50 new coronary accounts in the quarter.

Peripheral device unit sales increased 9% to over 11,000 units. Peripheral revenue was approximately $35.2 million, increasing 2% over last year, excluding Asahi revenue. Average selling price for the peripheral devices increased about 6%, year-over-year, but remained similar to the fourth quarter of last year.

ViaVid has made considerable efforts to provide an accurate transcription, there may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only.

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Coronary unit sales increased 76% to over 2200 units. Total coronary revenue was $8.7 million, a 75% increase. Coronary ASP was only down slightly from the prior year.

Net loss was anticipated to be in the range of $13.1 million to $13.9 million or $0.41 to $0.43 per share, compared to a net loss of $8.2 million or $0.26 per share last year. Expenses during the quarter were below guidance; however, lower than forecasted revenue resulted in a higher than expected net loss.

These preliminary results are subject to completion of our customary quarterly close procedures and review by our independent auditors. We’ll provide detailed first quarter results as well as second quarter guidance during our regular earnings announcement in three to four weeks. I will now turn the call over to Dave. Dave?

We seem to be having some technical difficulty. Dave and I are in different locations. So I will …

David L. Martin:

Hey Larry? Can you hear me now?

Laurence L. Betterley:

Yes, I can. Thank you.

Larry. Sorry about the blip. Hello, everyone.

First, let’s begin with what has not changed. CSI is uniquely positioned to capitalize on a multibillion-dollar calcified artery disease market opportunity, and we believe is still relatively untapped. Our technology is well suited to address this market, as supported by our robust clinical data. Calcium is one of the biggest complicating factors to a patient’s outcome, and our products can remove it in just a few seconds of treatment time. In addition, our small devices allow entry into difficult to reach areas of the body with use of smaller sheaths which has been shown to significantly reduce procedure complications. These factors are expected to provide for attractive revenue growth for many years to come.

As we’ve discussed before, we’ve been evolving our Sales Organization to capitalize on this tremendous market opportunity and efficiently scale for sustained growth and profit in the future. It’s a major undertaking, however, and it has been highly disruptive for our Sales Organization for these past two quarters.

In our fiscal fourth quarter we achieved our productivity goals per Sales Representative, but we began to experience higher than normal turnover, resulting in multiple open territories. While the pace of turnover slowed early in the first quarter, it increased in the back half, resulting again in multiple open territories. In addition, we experienced a decline in productivity and fell short of our goals.

We’ve done a thorough review of our sales optimization plan and we’ve identified necessary adjustments to improve our execution going forward. None are a major factor. Individually and together we believe we have a—we will have a significant impact. First, we accelerated our hiring in the first quarter to ensure that we’re entering second quarter at planned levels. Second, we’ve expanded our sales training at the field level to better supplement the excellent corporate-level training that Representatives receive and better equip Sales Management to drive education in their Regions. Third, we simplified our sales process and messaging to improve sales effectiveness in efficiency. Fourth, we adjusted our compensation to recognize the additional time required to initially establish the coronary business while also providing a high level of service to our peripheral customers and to provide appropriate incentives to meet those objectives. Finally, we made some Management changes to provide the necessary skill sets and culture needed to drive our next phase of growth.

Our Vice President of Marketing, David Veino, has now assumed leadership of our Commercial Sales Organization. Before joining CSI, David led several sales organizations, most recently as the global vice president of sales and marketing at Globus Medical. Before that, he was Global Sales Director and Marketing Director at Stryker. David has the skills and style needed to implement the next phase of our commercial strategy. We believe these adjustments will result in better Sales Force stability and increased productivity going forward.

In closing, CSI has a unique technology that addresses a multibillion-dollar market opportunity in the treatment of peripheral and coronary calcified artery disease. We continue to believe that the best way to drive adoption is to grow and cross-train our Sales Force to serve our mission by defeating calcium from heart to heels. We offer patients, physicians and payers a technology that delivers a clinically and economically superior value proposition. We believe we’ve addressed the immediate challenges related to our sales optimization strategy and we’ve positioned our Sales Force for future success. The vast majority of our optimization effort is expected to be completed by the end of calendar 2015. Our recent performance, behind this we see no change in the market opportunity, our ability to serve the millions of patients that could benefit from our unique orbital atherectomy technology is in place.

That completes our prepared remarks. We will now take your questions.

At this time I would like to remind everyone, in order to ask a question, press star, then the number one, on your telephone keypad. We’ll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Mike Matson with Needham and Company. Your line is open.

Mike Matson:

Hi. Thanks for taking my questions. I guess I’m not even sure where to start. I guess I’ll start with the Sales Organization and the changes, Dave, that you talked about. So, the one that I’m kind of interested in is the—where you changed the compensation structure. Is that because it was just taking these Reps longer to kind of gain traction with the coronary products that is the peripheral Reps that were trained on coronary?

Yes, it is. You nailed it. We’ve nailed outcomes. Outcomes in coronary and peripheral are fantastic and we’ve spent a lot of time on our training on outcomes. What we need to identify—what we have identified now and what we’ve remedied is the fact that establishing new relationships for a new Representative or an old one in a new territory, a new smaller optimized territory, takes longer than we thought. So you’re exactly right. It’s establishing those relationships, delivering that additional service that comes with small territories, and the sales that result from those relationships that we underestimated.

Okay and just as far as your thesis goes that you can do this with a single Sales Force selling both the peripheral and the coronary products, and that there’s a significant degree of overlap between the customer base, I mean does any of this change your thinking on that?

No, we’ve got a lot of confirming evidence to the opposite. One is, for Sales Pros new and old who are qualified and trained to sell both, the outcomes are dynamite. The coronary outcomes continue to be better than the great results we achieved in ORBIT II. The peripheral outcomes are extraordinary and, you know,

we’re seeing it in the enrolment; in fact in other places in LIBERTY 360 we’ve got over 600 Rutherford 4, 5 and 6 patients enrolled in that study by our current Sales Force and our current Operators. Many of them now are from a pedal approach or a tibial approach, so we’re mastering the clinical part of it. But where we’re in position to catch up, is recognizing that it takes weeks, perhaps—you know, certainly weeks longer to establish that new relationship, the rapport in the procedure room, even for a veteran representative to do that it takes longer. Some of the evidence also to support the hybrid model, one Sales Force, one vascular expert Sales Force, is we do have, for those people who were trained early on, some of those people are doing a million dollars a quarter. So our premise that one Sales Force servicing a small geography, eliminating travel, increasing service, allowing us to get to 2 to 5, perhaps even $7 million territories, that premise is alive and well. We can deliver outcomes and revenue. But at this point in time we need to get there. We need to get people seasoned, and in country so to speak, and familiar with their labs, their referral doctors, the physician operators, in a way that we can translate that into customer acquisition, and that’s where we’ve slowed—the pace of customer acquisition has slowed during this transition. But it’s just a snapshot in time. We’re very confident that we can achieve our goals by year end, and at that point in time the dilutive nature of what we’re doing should grow a very large vascular Sales Force with our very large opportunity. The dilutive nature of that, as measured by time in front of a customer, will be behind us.

Okay, and then one final question. Just to what degree, I mean it sounds like, the way you’re explaining the issues, it’s mostly sort of self-inflicted or execution issues. But obviously there’s been concerns about the external environment in...


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