Endo, You raise a very important factor that Andersongordon's fiscal projections will have a difficult time incorporating. I agree with you that the question put to Arun, (Will you be firing the least productive salespersons?) is central. Arun's response was not crisp but he seemed to say "yes." So where are the sales coming from and which sales are we talking about? I believe Roger told us the sales in DermaCell were very minor and Arun countered that they were increasing. Arun's projected sales and increased productivity for its DermaCell sales team is questionable. Repeatedly firing that sales force prevents the team from building relationships with surgeons and medical institutions and is counter productive, not to say brutal. The sale of the SPY system and related technology is the future of NVDQ's revenue. Arun mentioned that Rick just returned from a sales/training tour of Japan. That points to an additional and expanding market, as well as a focus for Novadaq.
During the Q & A, a very astute question was asked of Arun that I believe he did not clearly understand. The question will have an impact on your numbers. It related to the fact that at some point a bell curve will need to be applied to the overall performance of the sales force. For example, there is sure to be about 10% of the sales force that substantially outperforms the rest and 10% that substantially under performs. Where the analyst was going I believe is that at some point, productivity will be enhanced through the simple act of separating the chaff from the wheat. Also, salesmen territories will be reconfigured to be more productive. Net, net we could see increasing revenues with a decreasing sales force.
Novadaq gittin jiggy on its way to $6. I have been saying this for over a year.. I say it will happen. Arun says NVDQ is the next ISRG. Who do you think is right?
Sentiment: Strong Sell
Base case (Sales rep productivity 1.0, Sales Reps reach $1.5M annual sales in 2.25 years)
There will be a continuation of learning and experience and confidence that the 80 sales reps have that will take them from .5 sales per quarter per rep in Q3 to .9 sales per rep in Q1 2017 where it stabilizes.
Q3 $17.0 Rev Net Income(loss) ($10.0) EPS ($0.18)
Q4 $19.2 Rev Net Income(loss) ($8.9) EPS ($0.16)
Q1 16 $21.8 Rev Net Income(loss) ($7.7) EPS ($0.14)
Q2 16 $23.9 Rev Net Income(loss) ($6.6) EPS ($0.12)
Q3 16 $25.7 Rev Net Income(loss) ($5.6) EPS ($0.10)
Q4 16 $27.9 Rev Net Income(loss) ($4.5) EPS ($0.08)
Q4 17 $36.7 Rev Net Income $0.2 EPS $0.00 Breakeven
Best case (Sales rep productivity 1.55, Sales Reps reach $2.0M annual sales in 2.0 years)
Learning takes them from .8 sales per quarter per rep in Q3 to 1.4 sales per rep in Q1 2017 where it stabilizes and new sales reps will be added.
Q3 $21.4 Rev Net Income(loss) ($7.8) EPS ($0.14)
Q4 $24.6 Rev Net Income(loss) ($6.0) EPS ($0.11)
Q1 16 $28.4 Rev Net Income(loss) ($4.3) EPS ($0.08)
Q2 16 $31.3 Rev Net Income(loss) ($2.7) EPS ($0.05)
Q3 16 $33.8 Rev Net Income(loss) ($1.3) EPS ($0.02)
Q4 16 $36.8 Rev Net Income $0.4 EPS $0.01 Breakeven
Q4 17 $49.2 Rev Net Income $7.0 EPS $0.12
Worst case (Sales rep productivity .6, Sales Reps reach $1.0M annual sales in 2.0 years)
Learning takes them from .3 sales per quarter per rep in Q3 to .5 sales per rep in Q1 2017 where it stabilizes
Q3 $13.8 Rev Net Income(loss) ($11.7) EPS ($0.21)
Q4 $15.3 Rev Net Income(loss) ($10.9) EPS ($0.19)
Q1 16 $17.1 Rev Net Income(loss) ($10.2) EPS ($0.18)
Q2 16 $18.5 Rev Net Income(loss) ($9.5) EPS ($0.17)
Q3 16 $19.8 Rev Net Income(loss) ($8.8) EPS ($0.16)
Q4 16 $21.3 Rev Net Income(loss) ($8.0) EPS ($0.14)
Q4 17 $27.7 Rev Net Income(loss) ($4.8) EPS ($0.08)
Q2 18 $37.7 Rev Net Income $0.4 EPS $0.01 Breakeven
Well here it is as I see it. Please forward any questions or comments
All of the variable listed in part 1 are use in the cases following although some like GM start out at the lower end 66.5% and end at 70.5% Q4 2018. I will modify these as time goes on and recalibrate the assumptions depending on future quarterly performance and managements outlook. The key driver for the entire model as it incorporates both revenues and costs linked on the drivers of the model can be monitored with Medical Device Additions as the sole input. Because of Rogers statement in part I, I believe and the model concurs that the critical variable to NVDQ is directly Medical Device Additions and what management can do to impact this. Certainly the studies showing efficacy and financial benefits will be part. As will the acceptance by the medical community ("Standard of Care" and medical society acceptance), but the "600 pound Gorilla" in the room is Sales Rep Productivity. How well they are at communicating to the surgeons, how well they have access to and can convince the VAC " Value Assessment Committee" of the hospitals and arrange financial arrangements tailored to the customer will determine whether these professionals will sell .5 or.75 or 1.0 direct systems per quarter. I have a limit of about 1.5 per Rep per quarter. After that the company will have to increase their number of reps as there are limits to individuals time and traveling and face to face per client requirements. Currently the model started with 575 Q1 and 611 Q2 "Direct Systems".
The actual process is to introduce through trial/rental/lease agreements and once a threshold level of uses per quarter are reached the hospital converts to a system purchase and a lower kit cost that favors the hospital. Once this conversion is made NVDQ considers the System as a "Direct System".
Now that the models ASSUMPTIONS and structure and "critical" lever have been identified now for the results.
The model for forecasting NVDQ's performance based on the old information that was given and the fact that we are no longer looking at primarily a technological driven innovation company but, as Arun has stated, the transition to a marketing / manufacturing medical equipment and services driven company with the emphasis on "marketing", forced me to go back to the drawing board and rebuild from scratch what seems to be a recentered business model that had "technical innovation" as the primary driver of results to one whose performance will be driven by the success of "marketing". I refer to the KEY statement made by Roger Deck in the latest Q2 CC opening remarks..
"During the quarter we had 80 sales professionals up from 78 in Q12015. Each of them delivered annualized revenue of over $600k compared to about $450k in Q1. We've previously indicated we expect the average direct sales/revenue per sales professional will increase to the $1M to $2M range over the next 2 to 3 years."
ASSUMPIONS: (all growth rates are quarter over quarter)
1)GM Gross margins are in the 65%-70% range and will tend toward the upper end as volumes increase and the fixed expenses are spread over more units.
2)P/I Rev Partnered / International Revenue will grow 3%
3)RR/D Recurring Revenue per Direct System will grow 6%
4)K Kit Sales will grow at 9%
5)S/D Service Revenue per Direct System will grow at 0.2%
6)RR Royalty Revenue will grow at 3%
7) Selling and Distribution costs are made up of a fixed portion ($12.9M) and a variable of 15% of sales
8) R&D Research & Development cost grow at 1%
9)ADM Administration costs grow at 3%
10) Taxes are negligible for the next 4 years as there will be no positive earnings or the earnings will be offset by accumulated losses
With GM at ~67.5% once the companies fixed cost can be covered the sales drop down to the bottom line earnings. After 4 years taxes will begin to take their ~30%-40% cut of the earnings and the Net Margins of ~30% be the cap.
Endo - There are a couple of flaws in your thinking - first, there were far fewer shares outstanding 2+ years ago, so the $9 per share today represents a much higher value than two years ago and second, your comparison to two years ago is arbitrary, as if the valuation then was not subject to the same speculation we are dealing with now. I'm guessing two years ago, we would have bet the company would be profitable by now (or at least cash flow positive) and we are probably 2-3 years away today from NVDQ reporting a profit.
Bottom line, you have an unprofitable company that is valued at roughly 10+times annual revenue. No doubt, if the revenue growth was the 50%+ we were expecting (we all thought 40% was conservative), the share price today would seem like a bargain, but they still have to prove they can generate that level of growth - so far they haven't. The way I see it, the market is so impressed with the technology and their competitive position, they don't think there is much risk of Arun blowing it (otherwise we would be trading in single digits), but they aren't yet convinced he will reap the full potential of the technology.
I never believed the $20 share price was rational for where NVDQ was at the time, but I believe it has the potential to be $50+ in 5-7 years, so I didn't want to sell. If I knew it was going to dip back down below $12, I probably would have sold and bought back in, but that kind of foresight is beyond me. Given the revenue revision and the weak PR/IR, I'm thankful we are trading above $10.
Hi Endo...Thanks for your insights.
I'd guess the decline is because Arun has raised expectations that weren't met or exceeded.
The salesforce is in place, new systems have been developed, the economy is doing better than almost anyone expected and the best we have produced is a weak mediocre with a decline in the bottom line.
Top that off with almost nonexistent PR action and we come out looking lame when we should be kicking assets uphill.
OK, so let me see if I am in sync with how you believe this is playing out. When the pps hit $13 yesterday Institution X began selling its shares. When the stock fell below $11, it finished selling and the price stabilized.
Now over the next 6 to 10 days it begins covering its large short position slowly moving the stock back up. At the end of the time frame, it has eliminated its short position profitably and now owns the shares at a lower average price. Is that your sense of it?
You would think that the institutions that have held over the past year would not be selling after the recent CC.
On the other hand, 90% of the stock is owned by institutions and their is not a great deal of retail interest in this stock. it is possible that a hedge fund senses something about the company that escapes our own analysis and is increasing their bets even at this low pps level. The short position has increased by 40% over the past two months and the number of shares short at 6.6 million is larger than the number of shares outstanding that are not owned by institutions. Given that, you indicate that it could be an institution with a large block of shares and a large short position selling the shares. That scenario does fit with the above variables.
I doubt that after the cc any institution is selling. NVDQ will be profitable in 2016 no real competition in sight and marketing expenses will be kept at current level, so if you hold it up to now why sell? The only institution to sell is the one who holds a short position as well that's why the price stayed at 10.9 for 30 min to my opinion.
Over the past year, the most fundamental cause for the substantial decline of the pps was the uncertainty surrounding spy elite. That situation has been stabilized now. Uncertainly surrounding marketing expenses and productivity have also stabilized. Pinpoint and Luna sales are growing at a very acceptable rate.
In spite of all of this, when you eliminate the 124 million cash position, the remaining enterprise value of the company just slipped below $9 per share or where the stock was over 2 years ago. One of only two explanations come to my mind. One, the shorters are running this down hard or a large institutional owner is selling out of a large position or a combination of institutions were not happy with the recent earnings and are actively selling. Anyone else have any thoughts on this?
I would agree that #4 is critical. If they can hold marketing expenses constant from now through 2016, they could be profitable in 2016. Also, do not underestimate the potential of the Japanese marketplace. Those folks demand the very best in medical treatment and we do not have any marketing expenses there. Also, the marketing expenses inherent in recurring income is very modest. The absolute key is an existing sales force that remains professional and successful. That has always been the key when companies in the medical industry cross the bridge from research to business development.
Thanks Endo for letting Steve know. Your certainly represent the more serious side of this MBs constituents well, both in contributions and to the company. Again, THANK YOU.