Surmodics, Inc.
Q3 2010 Earnings Call Transcript

Published:

  • Operator:
    Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the SurModics F3Q 2010 earnings conference call. (Operator instructions.) This conference is being recorded today, Wednesday, July 28th, 2010. I would now like to turn the conference over to Phil Ankeny, Interim Chief Executive Officer, Senior Vice President and Chief Financial Officer. Please go ahead.
  • Philip Ankeny:
    Thank you, Brian. Good afternoon and welcome to SurModics F3Q 2010 conference call. We appreciate you joining us today. Our press release reporting quarterly results was issued earlier this afternoon and is available on our website at www.surmodics.com. Before we begin it is my duty to inform you that this conference call is being webcast and is accessible through the investor relations section of the SurModics website where the audio recording of the webcast will also be archived for future reference. I will remind you that some of the statements made during this call may be considered forward looking. The 10-K for fiscal year 2009 identifies certain factors that could cause the company’s actual results to differ materially from those projected in any forward looking statements made during this call. The company does not undertake any duty to update any forward looking statements as a result of new information or future events or developments. On today’s call I will address the company’s quarterly financial results, then I will highlight quarterly achievements and finally open the call to your questions. I will begin by reviewing key Q3 financial results and then provide commentary around select highlights. For the Q3 of fiscal 2010 revenue was $18.6 million, up 1.4% sequentially. Operating income was $2.2 million. We had a net loss of $0.9 million and diluted loss per share was $0.05. And cash flow from operations was $4.4 million. Included within our Q3 GAAP results was a $2.6 million non-cash investment impairment charge in connection with our strategic investments, the majority of which related to our investment in an early-stage medical device company, which like many start-ups in recent times has been unable to secure sufficient financing. In addition, we had a $0.2 million non-cash asset impairment charge associated with fixed assets. Excluding these asset and investment impairment charges, non-GAAP results for the Q3 were as follows
  • Operator:
    Thank you. We will now begin the question-and-answer session. (Operator instructions.) Your first question comes from the line of Ross Taylor with CL King. Please go ahead.
  • Ross Taylor:
    Hi, I just have two or three questions. Most of these relate to the financials. But can you remind us why the R&D revenues that you get don’t match up real well with the R&D expenses related to your customers? And I guess what I’d look at is in the June quarter last year your R&D revenues were much higher than your R&D expenses related to customer programs, whereas in this quarter it was the reverse – the R&D revenue was less than the R&D revenue related to customer programs.
  • Philip Ankeny:
    Yeah, let me attempt to help you on that, Ross. It’s a complicated exercise because the way we mange the R&D organization is really as a consolidated entity. And so we don’t manage to a customer R&D expenses and an "other" R&D expense the way it shows up in the P&L. Our organization is quite flexible, where scientists and engineers an others are able to work on both customer programs as well as internal projects, and it really depends on their level of activity in any particular quarter, how individuals spend their time and how it might, how their time might get allocated. And then at the end of each quarter there’s an accounting exercise where an algorithm is applied to the total costs in R&D and allocation of overhead between the two lines of customer-funded R&D as well as the other R&D line. So some of it is just an accounting algorithm but the biggest factor is really all about where the costs reside. And if you look at the combination of the two lines year-over-year you’ll notice that there’s an increase there of the sum of the two lines, mostly as a result of the facility coming online and being allocated. So that overhead of the facility is being allocated into these R&D lines whereas previously it has been in SG&A before the facility was on stream. So that explains a little bit of the numbers themselves, but you know, in general I wouldn’t read too much into the actual expenses relative to the revenue, the R&D revenue, because the costs are largely fixed.
  • Ross Taylor:
    Okay, that helps a lot. And I know you don’t want to forecast much or at all, but would you expect the R&D revenue’s going to head back up here in the September quarter? Or can you make any comments about that?
  • Philip Ankeny:
    You know, it’s always very challenging to know exactly how much work our customers are going to need from us in any given period, and they’re largely in control of those timelines and what they ask us to do. Based on what we see our customers doing now we think there’s strong potential that that could increase sequentially, but again, it really depends on how the programs unfold.
  • Ross Taylor:
    Okay. And the license fee of $1.25 million that yo mentioned, can you say whether that was related to a new agreement or whether it was related to accomplishing development milestones for an existing partner?
  • Philip Ankeny:
    Yeah, it was on an existing agreement.
  • Ross Taylor:
    Okay. And can you talk or do you have any color as to what category that might be in or what market?
  • Philip Ankeny:
    It’s a Cardiovascular customer.
  • Ross Taylor:
    Okay. And final questions, did you give out any numbers in terms of how the hydrophilic royalties performed in the quarter? I might have missed that.
  • Philip Ankeny:
    The only commentary I did include was that it did grow again, both year-over-year and sequentially.
  • Ross Taylor:
    Okay, that’s all my questions. Thank you.
  • Philip Ankeny:
    Okay. Thank you, Ross.
  • Operator:
    Thank you. Our next question comes from the line of Suraj Kalia with Rodman & Renshaw. Please go ahead.
  • Suraj Kalia:
    Hey, Phil.
  • Philip Ankeny:
    Hello, Suraj.
  • Suraj Kalia:
    Phil, forgive me if I missed it – the impairment loss in investments, did you mention what investments those were?
  • Philip Ankeny:
    No, we did not. We’re not at liberty to disclose which investment that was.
  • Suraj Kalia:
    And Phil, the reason the impairment happened, is it the normal, conventional way impairment is recognized or was there some other mitigating factor that caused you all to recognize it now?
  • Philip Ankeny:
    No. It’s a normal accounting exercise of looking at the value of our holdings.
  • Suraj Kalia:
    Okay, fair enough. And final question, Phil, Ophthalmology, if I can remember correctly you said revenues were $1.1 million, down 68% and you said it was in the normal R&D cycle. Given the number of customers if I remember there were close to ten at least that I remember Bruce had mentioned. Was there a change in the number of customers? Is it a change in the breadth of the products? What’s really changed this quarter?
  • Philip Ankeny:
    You know, really the only change is just the phase of programs that we’re in and it was not concentrated in any particular customer either. We’ve had multiple customers whose activity was considerably less in the quarter than it was in the Q2. So it’s just normal ebbs and flows and these things always happen.
  • Suraj Kalia:
    Okay. Thanks again, Phil.
  • Philip Ankeny:
    Yep. Thank you, Suraj.
  • Operator:
    (Operator instructions). Our next question comes from the line of Richard Rinkoff with Craig Hallum. Please go ahead with your question.
  • Richard Rinkoff:
    Thank you. Phil, you guys seem to be stuck on the revenue line and you seem to be stuck at a very low EPS per quarter, like $0.10, $0.11 per quarter. How long are we going to stay there and should we just assume that 2011 is going to be whatever you just reported multiplied by four and then add a little bit more? How do we get material growth here?
  • Philip Ankeny:
    Yeah, that’s a fair question. We don’t provide guidance. I’d remind you and others that we’ve been fighting the continued decline in CYPHER® which has definitely continued, but because of the minimum royalties that are baked into that agreement it won’t hit zero. And the hydrophilic portfolio continues to grow which we think is a wonderful trend. So the royalties and license fees were actually, even if you back out the one-time items were a healthy number this quarter. And really the weakness was just in the R&D revenue. So a lot of it is just timing of the activities we’re doing and admittedly R&D was a weak number this quarter. And so you know, we align our expenses the best we can but we need to be able to support the customers as their programs kick into higher gear, and so we don’t eliminate expenses quarter-to-quarter when activity lets up a little bit.
  • Richard Rinkoff:
    You said in the prepared comments R&D was down 34% sequentially and it was not unexpected. At what point was it not unexpected, and if you knew at the beginning of the quarter why didn’t you suggest that? And why can’t you give guidance for this quarter since you seem to know the direction of these things?
  • Philip Ankeny:
    Well, I guess the characterization is unexpected. It was not a guidance concept; it was more a phenomenon concept, more that the fact that it went down is not an unexpected thing because over time it, our revenue, R&D revenue does fluctuate considerably on a quarter-to-quarter basis. So that was more what we intended to say with that word “unexpected.”
  • Richard Rinkoff:
    Mm-hmm. And when you get a quarter with very low R&D revenue can you ever recover that? Or is there a maximum capacity R&D revenue you could ever book?
  • Philip Ankeny:
    There’s a capacity to it because there’s really, it’s function of how many people we have that might be able to work on behalf of a customer program.
  • Richard Rinkoff:
    And what might that number be?
  • Philip Ankeny:
    You know, I mean we’ve had R&D revenue quarters in the past that have been quite a bit larger, so our capacity is definitely higher than where we are now unquestionably. I mean we’ve had quarters that have been almost double where we are today.
  • Richard Rinkoff:
    Would that represent maximum capacity then? $6 million, $7 million?
  • Philip Ankeny:
    I don’t know that that’s maximum but it’s you know, it’s in that neighborhood definitely.
  • Richard Rinkoff:
    And the line fizzed down a little bit at the beginning of the call. Did you say that one-time license fee was $1.25 million or did I hear it wrong?
  • Philip Ankeny:
    Correct.
  • Richard Rinkoff:
    $1.25 million. Okay, thank you.
  • Philip Ankeny:
    Alright. Thanks, Rick.
  • Operator:
    At this time I am showing no further questions. Please go ahead with any closing remarks.
  • Philip Ankeny:
    Thank you, Brian. I want to thank everybody again today for participating in this quarter’s conference call, and I’ll look forward to speaking with you on our Q4 and full-year conference call later this fall.
  • Operator:
    Ladies and gentlemen, this concludes the SurModics F3Q 2010 earnings conference call. You may now disconnect.

Other Surmodics, Inc. earnings call transcripts: