Misonix, Inc.
Q3 2018 Earnings Call Transcript

Published: 8 May 2018

[Operator:]

Good day, everyone, and welcome to the Misonix Third Quarter Fiscal Year 2018 Earnings Conference Call. Today's call is being recorded. And at this time, I'd like to turn the conference over to Norberto Aja, Investor Relations. Please go ahead.

[Norberto Aja:]

Thank you, operator, and good afternoon, everyone. Thank you for joining the Misonix Fiscal 2018 Third Quarter Conference Call. We'll get to management's comments momentarily as well as your questions and answers, but first, I'll review the safe harbor disclosure. In addition to historical facts or statements of current conditions, this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which involve risk and uncertainties. These statements can be identified by the use of forward-looking terminology, such as expects, believes, estimates, projects, intends, plans, seeks, may, will, should or anticipates, or the negative or other variations of these or similar words, or by discussions of future events, strategies or risks and uncertainties, including future plans, strategies, performance, developments, acquisitions, capital expenditures and operating results of the company. Such forward-looking statements reflect the company's current expectations and beliefs but are not guarantees of future performance. As such, actual results may vary materially from expectations. The risk and uncertainties associated with the forward-looking statements are described in today's news announcement and in the company's filings with the Securities and Exchange Commission, including the company's reports on Form 10-K and Form 10-Q. Misonix assumes no obligation to publicly update or revise any forward-looking statements. Today's call and webcast will also include non-GAAP financial measures within the meaning of the SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in today's press release as well as on the company's website. With that, I'd now like to turn the call over to our CEO, Stavros Vizirgianakis, President and CEO of Misonix. Please go ahead.

[Stavros Vizirgianakis:]

Thank you, Norberto, and good afternoon, everyone. We appreciate you joining us on today's call to review our fiscal 2018 third quarter results and progress across our growth initiatives. Joining me on the call today is Joe Dwyer, our Chief Financial Officer. Misonix delivered another period of strong financial performance in the fiscal third quarter, while maintaining healthy gross margins and a strong balance sheet. The ongoing successful execution of our strategies to grow the top line, coupled with our continued cost management initiatives, resulted in record fiscal third quarter revenue and a positive operating income and net income. In addition, the progress we are making in positioning our leading ultrasonic surgical platform as standard of care is reflected in the 45,000 year-to-date surgical procedures, which have been performed with our products. Overall, third quarter results were driven by robust growth in equipment sales across our U.S. business as well as across our international markets. In addition, we continued to generate double-digit revenue growth in our consumables business in the U.S. What made this quarter somewhat unique was the $4 million in incremental license revenue from our agreement with our Chinese partner. While the license revenue led to an overall revenue increase of 73% compared to the fiscal third quarter of last year and 45% growth in revenues on a 9-month basis, it is important to note that even without the benefit of this contribution, our growth would have still been in line with our expectations. When excluding the $4 million of license revenue, product revenue for the fiscal third quarter grew by over 17% compared to the third quarter of fiscal 2017, and by 24% on a 9-month basis, and Misonix would still have generated record quarterly results. As such, we're extremely pleased with the progress we made in fiscal third quarter and believe our financial performance highlights the underlying strength of our business and its inherent potential as various initiatives implemented in the first half of fiscal 2018 continue to take hold. Taking a look at our business, we continue to see growth across all 3 of our core products

[Joseph Dwyer:]

Thank you, Stavros, and good afternoon, everyone. I'll begin by reviewing our financial results in greater detail. Looking at revenue, fiscal 2018 third quarter revenue grew by 73% to $12.4 million, which is the highest revenue quarter in the company's history, surpassing the prior record revenue quarter, which was our previous quarter. If you exclude the $4 million of license revenue from Q3, this was still our best quarter and record. Revenues were largely driven by healthy growth across consumables and equipment revenue. Consumables product revenue, or recurring revenue, grew by 12% to $5.9 million as we continued to redeploy our assets and drive consumables sales, supported by strong growth in BoneScalpel. Excluding the $4 million in license revenue, consumables revenue represents 70% of total revenue, in line with our expectations and the focus we've devoted to developing this important revenue stream. Overall, equipment revenue grew by 33% to $2.5 million, driven by 112% growth domestically and 20% internationally, largely as the result of strong sales in our SonaStar product line. Domestic revenue increased 23% to $4.9 million, while international product revenue grew 11% to $3.5 million. Gross profit margin for the fiscal 2008 (sic) [2018] third quarter was 79% and the back of the $4 million in license revenue. The gross margin and product revenue alone for the third quarter was 69%, in line with our expectations. We're very pleased to see continued growth across our product revenue lines as well in our domestic and international markets, while maintaining healthy gross margins. Looking at operating expenses. The third quarter saw an increase of 16% in total operating expense to $7.6 million compared to the third quarter of last year. The increase is primarily driven by an $800,000 increase in R&D for the development of our next-generation products and to a lesser degree by a 24% increase in selling expenses, principally related to the ongoing build of our sales organization and variable commissions on higher revenue. Offsetting these expenses was a 23% reduction in G&A expenses resulting from an $800,000 decrease in professional fees. This led to income from operations of $2.2 million compared with a loss from operations for the third quarter of fiscal 2017 of $1.5 million. And as Stavros mentioned, we recorded $4 million of license revenue for our -- from our agreement with our Chinese distributor. A brief -- as a brief background, we entered into a license and manufacturing agreement with our partner in October of last year, in which we licensed, manufactured and -- for licensed manufacturing and distribution rights of our SonaStar product line across China, Hong Kong and Macau. In exchange, we will receive a minimum of $11 million, $5 million of which has been paid already, and the balance coming from minimum royalty payments of $2 million per year in 2019, '20 and '21. The $4 million of license revenue represents the payment for the technology we transferred to them during the third quarter. We reported net income of $2.2 million or earnings per share of $0.23 for the quarter ended -- fiscal -- third quarter fiscal 2008 compared with a net loss of $100,000 or $0.02 per share in the prior year period. It's important to note that on a year-to-date basis, our net loss per share of $0.65 for the first 9 months includes a $0.58 loss per share related to the tax impact we recorded in our second quarter. Taking a look at adjusted EBITDA, we're pleased to report another quarter of positive adjusted EBITDA. The third quarter adjusted EBITDA was $4 million, a significant improvement over fiscal 2017 third quarter EBITDA of $500,000. As we mentioned in the second quarter, when we first introduced the adjusted EBITDA metric, we believe it's an important measure to show our cash earnings run rate given that our income statement contains quite a few non-cash items. We define adjusted EBITDA as earnings before interest, depreciation, amortization, taxes, non-cash compensation expense and R&D expenses for the nexUS project. We exclude nexUS-related expenses as they are not typically part of the company's R&D run rate. As Stavros mentioned, we're also raising our revenue guidance for fiscal 2018. On the back of our continued strong performance and improving results, we're increasing our prior guidance for the total revenue -- prior guidance from $31 million to between $35 million and $36 million or an annual revenue growth rate of between 28% and 32%. Moving onto the balance sheet, we ended the quarter with $12.3 million in cash and no debt. Our healthy balance sheet allowed us to generate $500,000 of cash from operations during the third quarter, comparing favorably to cash used in operations of $700,000 in the third quarter of last year. And our working capital increased to $18.3 million or a working capital ratio of 6x, reflecting our operational discipline and ability to meet short-term obligations. In closing, we remain hyper-focused on further improving our financial performance but in a disciplined, prudent and sustainable way. The Misonix team has worked hard to improve every aspect of the business, while investing in our business and our people. And our recent results reflect the proofs of that tremendous effort. As we look forward, we believe Misonix is focused in the right areas to continue to drive future profitable growth. Stavros?

[Stavros Vizirgianakis:]

I think now we'd move to our Q&A session.

[Operator:]

Thank you. [Operator Instructions] And we do have a question, and that comes from Michael Kaufman with MK Investments. Please go ahead.

[Michael Kaufman:]

Hi, Stavros. Great quarter. And question I have is, you have a lot of transient activities going on in terms of a $800,000 hit for a new product. You have the onetime royalty payment. And the question is, as you see yourself moving over time, what is the expense-to-revenue model that you're driving towards? And what kind of revenue levels are you likely to reach that when you start having some steady-state activities?

[Joseph Dwyer:]

I could speak to that. I think we -- Michael, we haven't given guidance for our next fiscal year, but we do expect double-digit revenue growth. If you look at our current operating expense run rate, which is running around $28 million a year, $28 million, maybe $29 million. That's going to be a little lumpy from times as we make investments, but the investment in our next-gen product, nexUS, will be essentially finished at the end of this fiscal year, beginning of next. So that goes away. And -- so we believe that we'll get to a point where we're in consistently positive EBITDA territory. We just can't really describe without guidance as to how much that will be and when that will be.

[Michael Kaufman:]

Just a further point on that one. If you're going to transition to a new-generation product, what is likely steady-state R&D expense going to be? Of course, it's going to be an uptick, but kind of where do you see that moving? When do you finish the product? And from -- looking forward toward the transition, you're going to have to probably replace the current generators or sell the current generators with the new generator, which I'm sure is much more robust. And the question then is, would you think about either a use charge or some sort of fee for the generator to kind of moderate the impact of turning the whole customer base over? And could you segment the old generators and the new generators by selling some of them or putting them in third-tier markets and then having your high-use customers all with the new generators?

[Stavros Vizirgianakis:]

Michael, I'll attempt to answer most of the question. I think in terms of R&D expense, we would see it along the historical lines, around about $2 million a year. That would probably be steady-state going forward. I think with nexUS, although this is a revolutionary product, it's not going to replace everything that is currently installed in the marketplace today. So I think it's going to exist alongside existing products in the market. At this stage, it's a little bit difficult to give color as to what that rollout will look like. We are planning to launch the nexUS product portfolio at NAS, which is going to be in October of this year. So I think before that, on a call, probably close, that we will outline some of the strategies that we've come up with regards to the nexUS product. But I think that we wouldn't have to worry about it cannibalizing existing products. I think it's going to exist alongside products. It is going to offer a lot more functionality to users, but there are going to be numerous instances where people may stay on the existing platforms.

[Michael Kaufman:]

Sounds very good. Thank you very much.

[Stavros Vizirgianakis:]

Pleasure. Thank you for your interest and you support.

[Operator:]

And no one else is in the queue at this time. [Operator Instructions] And we have a question from Roger Lowen.

[Unidentified Analyst:]

I wonder if you could explain your thinking concerning your shelf filing.

[Joseph Dwyer:]

Sure, this is Joe. The company had not previously had a shelf registration in place. We felt it was good housekeeping for the company to do so. We don't believe that we need the shelf for -- to fund working capital or to fund losses or to fund any particular investments other than possibly M&A activity in the future. I guess, from a shareholder point of view, that we want to be able to balance what is the best deal for shareholder, if we do raise money, is it to use debt, which could be quite expensive for companies of our size, or to issue shares in the public market. So we've got it out there. It's there if we need it, and we may tap on it at some point but don't have any current plans.

[Stavros Vizirgianakis:]

Roger, thank you for your question. Just reiterating on what Joe has had to say. I think we've started indicating to the market that, in order to augment organic growth, we are looking for some strategic acquisitions. So I think it's just a question of really seeing that the company is ready should an opportunity arise in the marketplace that we have options available to us. So I think it was more housekeeping and getting ready for the future than anything else.

[Unidentified Analyst:]

Well that sounds like some good forward planning to me, and I do have another question. I wonder how the SonicOne is doing with the tremendous potential for diabetic people.

[Stavros Vizirgianakis:]

Absolutely. SonicOne has picked up significantly. I think, since we launched the product, there've been a number of modifications that we've made. If we now look at how we look at the wound care market, I think before we believed that debridement was debridement, was debridement. And, in fact, when we look at the management of wounds, what we've learnt as we were -- in fact, had to develop two tools in the range because, in order to remove the heavy exudate from the wound, you'd need to perform a debridement with our SharpVac product, and then what we -- you then have to do as a second step is actually prepare the wound bed, and that would be using the SonicVac product. So we're now marketing the products in conjunction with each other, really setting a new standard for wound care in the marketplace. We're seeing growth at this stage in the mid-teens, and I think that is as a result of having a young sales force. I think we've got a number of evaluations on the go at the moment. There's a lot of data that we've published on our devices in the last couple of months. So I think as the market gains more awareness and acceptance of the device, we can certainly expect this market to accelerate significantly. We've also launched the market strategically in a couple of international markets, and the response over there has been pretty encouraging. Again, it's been a very, very phased strategy that we've taken to the marketplace. But in terms of the domestic market, we're growing this business in the mid-teens at the moment.

[Unidentified Analyst:]

Well, that also is very encouraging. And my last question really relates to what I've observed with Intuitive Surgical, where they were able to work with universities and medical students to use their devices, which of course did extremely well. And I wonder if there's any thought given to introducing the BoneScalpel and SonicOne to university students who are learning to work on various matters.

[Stavros Vizirgianakis:]

Absolutely. I think it's really critical to the success of any new technology that we expose people to it at an earlier stage rather than later. And actually as we speak, this week, we were working with AR Institute over in Singapore to incorporate the use of BoneScalpel into the spinal training program. So young surgeons coming through the ranks are now going to be exposed to BoneScalpel as part of the training regimen. And I think -- we're looking at the same opportunities for the wound products because we think debridement is really the first step in wound management. So we've got a number of programs on the go. What I can try and do is, when we update our deck again, is to give the investors a little bit more color as to what we're doing from a training perspective. But certainly, a big focus area for us because we believe the earlier we can catch surgeons, the easier it will be to influence behavior over time.

[Unidentified Analyst:]

Well, thank you very much. That is encouraging.

[Stavros Vizirgianakis:]

Thank you, Roger.

[Operator:]

And Michael Kaufman with MK Investments has a follow-up question.

[Michael Kaufman:]

Hi, Stavros. On the wound side, just kind of jogged my mind. You had done a lot of work to, of course, justify the BoneScalpel. Where do you stand on having a good package around the wound care products, both in terms of healing efficacy and maybe success rate and wound bed preparation progress that could help drive the adoption of the product and payment by providers because of the potential savings?

[Stavros Vizirgianakis:]

Actually, a number of initiatives under development for the wound. We have a study that -- where we've shown that with the use of the wound debridement product, we have a higher rate of graft uptake where our product has been used for debridement. There's also a significant study which has just been published recently in the last couple of weeks that [PIN] university have actually done. We've shown on -- these previous wounds which just wouldn't heal, these are literally wounds that are over 1-year old, we've had a success rate of over 66% using the ultrasonic wound debridement. So I think we're in the process of getting all the data together and putting it into a format that can be easily understood by everybody and one that our representative can actually show to the different VAC committees. So quite a bit going on, and again, we hope to put that onto the website and update the deck as well. So you'll see the latest publications, but 2 very meaningful bits of information that we've recently got out on the wound side.

[Michael Kaufman:]

I, kind of, peek at the new deck, but anything you could do to add some meat to the bones in terms of the key products and the product attributes would be helpful I think to future investors?

[Stavros Vizirgianakis:]

Sure, we'll definitely look at that. I'm sure we can add on some things.

[Joseph Dwyer:]

We'll have a new deck on the website later this evening. Thank you, Michael.

[Operator:]

[Operator Instructions] And it appears there are no other questions. So I'd like to turn it back to the CEO of Misonix for any additional or closing remarks.

[Stavros Vizirgianakis:]

Thank you. In summary, the improvement in our fiscal third quarter financial results confirms that we are on the right track towards successfully meeting our goal of achieving sustainable growth and profitability while enhancing long-term shareholder value. We're pleased with the progress we've made in fiscal 2018 to date and expect for the fiscal fourth quarter to continue on the strength as we further capitalize on the many growth opportunities across our platforms. As always, we thank you for your interest in our company. I'd like to take this opportunity to thank our talented and dedicated Misonix team for their hard work and dedication, our customers for their business, our partners for their constructiveness and our shareholders for the confidence you've placed in us with your investment. Thank you very much.

[Operator:]

Thank you very much. And that does conclude our conference for today. I'd like to thank everyone for your participation, and you may now disconnect.