I need to spend time looking carefully over all the info from the CC. As far as salespeople, I mostly liked what I heard. Over half are meeting the original $1-2M goal. The top 50% of the surgery salespeople are $1.25M (annualized over second half of 2015) and the top 25% are actually at $1.6M (annualized). However, he said the bottom 25% "lagged by a meaningful amount" and also had a comment about salespeople turnover and the fact that the length of time employed does not correlate with sales numbers.
As a shareholder I really want them to be more aggressive weeding out poor salespeople. However, training is expensive so I agree with giving them a proper amount of time to prove their worth, but they really need to work on the bottom 50% who are not relatively new to Novadaq. It is imperative that they gain market share before there is competition in this market and I'm not convinced that this particular management team is up to the task.
OK, I think you may be right there. I couldn't find the last time Arun stated his "40% revenue growth for the foreseeable future" generic statement. It wasn't in the Q3 '15 CC, possibly it was during an investor event in the second half of last year.
We had 36.9% revenue growth last year and their guidance indicates it will slow to 32-35% next year. My point is their growth is not accelerating back up to 40%+ like I and many others expected in 2016, or at least certainly in the second half of 2016.
You are going to have to revise your model again as they just lowered projected 2016 revenue growth to $84-86M, which is 32-35% revenue growth over 2015,less than the previously stated 40%+ growth for 2016. No wonder this is getting slammed.
What do you think the chance is Arun presents "preliminary unaudited results" at the JP Morgan Health Conference next week, like he did last January? I like the idea of a blowout Q4 being released just a few days before January options expire. Sounds like a fun week!
In the Q3 conference call Arun stated that 40%, including cost of sales, was denominated in the Canadian dollar, so it's definitely helping.
I wouldn't use the word "catalyst" for Novadaq though. IMO it's grossly undervalued right now, due to short selling, the lack of investor relations' ability to provide information, or whatever other reasons. We'll see if Q4 results can catalyze the abandonment of the shorts. I don't entirely agree with GSA's optimistic projections but it looks like it should be a hell of a quarter. If that can't cause some positive movement it's going to be another few quarters.
So $17.0M, with a 74% margin and ($0.07) loss per share. Capital sales up 18.5% sequentially. Sounds like a beat to me, so I'd like to say the shorts lose, but you know how this goes... What looks like a sure thing (short squeeze) rarely comes to fruition.
I want to add a couple of notes I took:
-15% of this year's growth is due to ending the LifeCell agreement, due to the fact there is no 50-50 splitting of revenue. The analyst asked why they felt confident growth will pick up in the second half of 2015 going forward and Arun said they think the LifeCell transition is over and the large number of new salespeople are just becoming productive (this last 1/2 sentence is my paraphrasing of Arun's statement).
-In 12 to 18 months utilization will be a bigger driver. This will be interesting to see how quickly revenue from kit sales starts to gain on capital sales as Novadaq will eventually be making more revenue off the "razor blades" than the "razors".
-This fall their introducing a generation of new products and upgrades.
-Arun mentioned something I've never heard before, that there are 3-4 other companies with approved products that may eventually be competitors. We all new about Stryker, but I'm not really aware about the other companies. He did seem to not be too concerned with them, as Novadaq has a lot of IP for the other companies to overcome here, but we need to get the growth up to keep the first-mover advantage.
So, guidance still stands at $65M in revenue in 2015, for year-over-year 40% revenue growth. I think this is possible, but they missed badly in Q1 2015 and had no idea about what was going on with LifeCell in Q4 2014, so I doubt the $65M forecast.
Q1 2015 revenue was $11.9M, while the projections given to us by Arun at the end of 2014 were in the range of 25-35% revenue growth ($12.9-13.9M). In yesterday's call it was mentioned that the growth so far in April has accelerated to around 35%, but that they thought it would end up a little lower than that for the quarter.
Let's say that would get us to $26.5M in the first half of 2015, assuming around 30% revenue growth in Q2. Could Novadaq bring in $38.5M in revenue in the second half of the year? I'm sceptical. I understand that more sales staff will become productive as the year progresses, but we would have to see numbers in the 50% revenue growth range in Q3 and nearly 60% in Q4 to hit $65M. With 10% of SPY Elite accounts now "dead", I doubt their ability to regenerate sales momentum to hit $65M.
I now question the decision to create a direct sales team. Arun has said he thought a salesperson could generate $1M in revenue annually after a year or so of experience. It is clear that this is not happening. The question becomes whether the leadership of direct sales is not qualified for building out the team.
Looking back at it, from a technology perspective rather than as a Novadaq investor, I think it would have been better if they would have been purchased. Investors may not have captured the true potential of Novadaq's technology, but the products would have been assimilated into an existing sales force rather than a new group that is not penetrating the market well. While we may eventually recapture the potential Novadaq once had I feel that current management is not qualified or experienced enough to capitalize on the products' potential market and we are letting the first mover advantage slip away.
You always present great info, but your projections are always far too high in the time frame you mention. They will not have revenues of $2B by 2022, not with Stryker entering the market by the end of 2015. The question is what percentage of that possible $2B market will they have.
My greatest fears with Novadaq are 1.) the fact that it appears management is possibly not doing any better than average in managing their growth; 2.) Stryker already has distribution networks in place so could see greater growth than Novadaq at some point in the not-to-distant future; 3.) and most worrisome to me, I'm concerned about whether Novadaq will be able to protect all of their IP from Stryker and other future competitors. I absolutely do not want to see any long-term, expensive legal battles with Stryker over IP, and this is definitely on my radar.
Novadaq is still very promising, but I think we'll have to wait until Q4 2015 results to see if management has been able to get us back on track. I fear that the slow build out of the direct sales team may have cost us a lot of market share.
While it wouldn't be in the best interest of Novadaq or its shareholders to sell, if they would have done so already they would likely have not lost as much market share as they inevitably will to Stryker.
I wanted to mention that the product is called DermACELL, not Duracell. Arun thought Q1 revenue from DermACELL could be a "few hundred thousand" from the hospitals that are testing it, increasing more in the second half of the year.
Also, regarding Arun's comment calling this year the year of execution, I believe this is in relation to the fact he called 2014 a transition year. This seemed to be because of the transition of recurring revenue being a larger part of the revenue stream.
Finally, they are very difficult to model. Not only because it's in its early growth stages with a lot of new products, but also because the terminology Arun uses changes frequently and they don't provide consistent metrics, something Arun mentioned will change in 2015. We shall see.
What are people feeling about the call?
I'm glad they explained the revenue hits because of ending the contract with LifeCell. I like that huge growth in PINPOINT/LUNA. I like the sales mix numbers for 2015 (90% direct revenue and 10% of the revenue should be international).
I need to investigate Stryker's entry into the market. I also was surprised that LifeCell let 25% of the SPY Elite base get to a point where it needs to be "revived" (Arun's words).
Thoughts from you guys?
I appreciate you posting your response from IR yesterday. Hopefully after a few more quarters it will be easier to model the productivity of the new sales team.
You're correct. On November 7, 2013 Novadaq entered an agreement with Swissray Asia to become the exclusive distributor of Novadaq products in Australia and Indonesia as well as other SE Asia and Oceania countries. It said that there has been an agreement on minimum annual purchase commitments but Arun has never mentioned these publicly, to my knowlege.
They also have an agreement with CHC Healthcare to distribute their products in China and Taiwan, once again with minimum annual purchases required. CHC hoped to begin importation into Taiwan as soon as they receive government approval, possibly by the end of Q2 2014 and in China possibly by Q3 2014.
So, Novadaq is moving ahead on the international front. Maybe he will address any approvals in the next CC. I really would like to see an agreement to distribute in Japan, but maybe that is covered by the Swissray Asia agreement. Japan is a huge sales opportunity, just like it is for Intuitive, and I'd like to see the approval process get started there ASAP.
The main revenue driver is going to be PINPOINT and LUNA. Novadaq doesn't get much revenue from Intuitive and while it sounded like LifeCell had good procedure numbers their inventory purchases were way down.
I was a little surprised by the $4.6M in PINPOINT and LUNA sales. That's up 39% just from last quarter. The direct sales team is starting to ramp up sales. Arun said 65 salespeople at the end of Q1, about 70 as of the CC and "triple digits" by the end of the year, with a long-term goal of 150-200, with a transition from capital sales to utilization sales. I think as these salespeople get up to speed (which Arun said was 9 months to get to "productive stage"), we are going to see rapidly-expanding revenue growth, likely starting a bit in Q3 but by Q4 for sure.
I guess with the share price dropping so much so far this quarter we should see non-cash warrant revaluation expense decline quite a bit, so the Q2 loss might not be as bad. I really think that Q4 is where Novadaq finally may become profitable, but with a 50%+ increase in current salesperson numbers by the end of the year, that may get pushed back into 2015. However, even with the less-than-ideal revenue numbers I am very excited about the next few years.
Novadaq has also mentioned that equipment sales can take more than a quarter to close, so Q1 may not be as affected by the ACA as Q2 or Q3.
Yeah. I think that they pre-announced January 14th because they were presenting at the JP Morgan Healthcare Conference later that day.
At last week's RBC Capital Markets Healthcare Conference Arun mentioned to Doug Miehm that there will be a "phase III-type trial" beginning soon and they will discuss that in the Q1 CC. This must be the next stage of PILLAR he's referring to.
I know I heard/read that figure of each salesperson contributing $1 million in revenue annually about a year after hire, and you've mentioned it on here a number of times, but when I went back and tried to find that exact comment by Arun I couldn't find it.
Do you remember where it came from? I didn't see it in any of the presentation notes I made, so maybe a quarterly CC? I'm thinking it may have been 6-9 months ago that he mentioned it? I'm just trying to get a grip on future revenue. Thanks!
I think of it as dilution also, especially when it comes to the future beyond a few years, because that is what it is. However, if they use this money wisely, I think it greatly increases the odds of a bright future, whether by extending their first-mover advantage or purchasing technology, intellectual rights, etc. that will make it more difficult for a competitor. If they use the money exceptionally wisely it could make the company something it wouldn't have been without it, which could actually produce the same share price, just a larger market cap.