Until the Q3 results come in and confirm the upbeat talk given by Arun at the Canacord Growth conference, the speculators will have sway. Profit taking is to be expected as Endo stated, but without hard results there will be limited upside.
That being said I would refer you to my NVDQ Model rework scenarios. I am now placing my estimates between the Base Case and Best Case with a leaning towards the Best Case end.
Your welcome. It would have been nice if I could have included graphs. They tell the story in a picture and lend themselves to an "envelope" around Revenues, Earnings etc.
Von this is the first real positive presentation Arun has done for...well all the way back to the time ISRG was sued and NVDQ fell in concert. $24 all the way to $9.60. All cylinders as the new "Marketing/Operations" driven company!!
My thoughts concur Mr. B. Very encouraging. Now to nail it they have to have the numbers this coming quarter validify their claims. When they do that, the short flows will reverse in strength.
It will be interesting to watch this mornings Canacord conference for any new or reassuring confirmations of NVDQ's progress on the marketing front. If the case is made the shorts will most likely reverse their flows and try to back out before the October Q3 conference call. I like what I saw yesterday as it would support this hypothesis, though the volume were too small to be a confirmation.
The steady selling of late does support the hypothesis that one or more institutions are selling out or reducing their holdings. The pattern seem to be there is low selling pressure for a period (2-15 minutes) then as the price drifts up due to the mismatch in Bid/Ask spread...wham! Someone comes in and sells 500-2000 shares and drives the price back down to the range it had before or even a tad lower. Unless there is a compelling story told at Wednesday's Canacord Growth conference, this pattern may hold and the price of NVDQ hover at these levels until the institution selling ceases or the next earnings are released.
This is how I see it Endo. Your blog fits this scenario.
In a number of the CC's and Investor Presentations Arun talked about the cost effectiveness of their technology being able to cut costs and add clinical value. Since the price for the NVDQ Systems is around $250k vs ISRG Da Vinci at $1.5-$2.5M including initial stocking, he felt there would be many more "cost sensitive" hospitals and national health programs that would adopt their technology. It is very early in the game and he certainly would not put any quantitative projection forward but he has said repeatedly that the International market is as big or bigger than the domestic (US) market. I haven't sighted a specific reference but they do exist if your willing to go back into the archives.
It would be a good question to pose at the upcoming Canacord Growth conference. Drop them an e-mail and they just might do it.
Bob I was a little leery about setting it higher due to the disappointment of the domestic marketing performance. Once I see evidence that the foreign vendors are doing better I will up the growth rate. To put this in perspective at 3%QOQ the P/I rev is $3.0M out of $17.0M total for Q3 2015 and $4.3M out of $45.3M for Q3 2018. If change the P/I rev growth to 9% QOQ Q3 2015 becomes $3.2M out of $17.2 and Q3 2018 becomes $8.9M out of $49.9M. The eventual # will probably be closer to the 9% than the 3%...to this we agree. In the long run, Arun is leaning towards the International being as big or bigger than the US market....we will see.
Endo, what I heard from Arun on the "removing the least productive salespersons" issue was that he was not considering this but saw an ever increasing market that needed to be covered and even these "less productive" persons would be used. Later (my thoughts) much later when we have 50% or greater market penetration ($1-2 Billion in sales) he would then as any company does consider replacing the weaker sales persons through attrition or market territory restructuring.
For my modeling, this is what I would deem a "secondary (15%)" model force. Currently I am trying to get the "primary (85%)" forces properly identified and interdependencies qualified, with initial quantified relationships estimated and later calibrated as data comes in.
Thanks for the reply. Vince and Endo , keep me on my toes.
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.
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.
My thought too. Arun needs a good person who can assess the key points needed to be brought out at these CCs. Not just data but critical data and connect the dots for the analysts and market.
Anticipate what the questions that matter to the understanding of the companies strategy not just its past performance but future looking positioning. What are they doing that will keep Stryker on the sidelines? What happened to the "Integrated Suite of Products and Services" that will revolutionize the way healthcare is assessed, diagnosed, implemented and monitored to bring efficacious knowledge to the industry in a cost saving way that has never been done. Sell the Vision Arun. You have the technology, you have the potential before you, first tell us then show us how you are making it a reality. Novadaq could be worth $20-$40 Billion if it does this and the medical community understands it.
Thanks Endo. I would expect the market to see the CC the same way if they were analytical and did their homework tomorrow---$13.00-$13.50 by close. But I have given up on trying to predict the market.
Went back and Arun stated a 33% increase per sales person from Q1 to Q2 that would imply a $450k per employee in Q1 increasing to $600k in Q2. The goal to increase to $700k per employee by Q4 is still very doable with a new marketing staff (less than a year old on average).
As to the $2.5 million reduction in overall 2015 Revenues, they lost around $1.2 million (14% vs 25% expected growth) in Q1. Also there were systems not serviced and a few even lost because of neglect in Q3 & Q4 of 2014 that have ongoing impacts. I suspect the trajectory of Q3 and Q4 are still very close to that originally proposed. The bulk of the remaining shortfall seems to be in the slow start to the DermaCell sales. It sounded like the introduction process and approval by the hospitals will prevent material revenues for the next few quarters.
The gross margins were real and all of the rental to capital sales conversions were equaled by new rental placements. The average sales per salesperson bumped up from $350k to $600k on an annual basis with a target of $1,000k as experience and efficiencies of the sales force are realized. Since the gross margins are ~70% the additional $400k per sales person goes directly down to the EBITA. ~2/3 goes to the after tax earnings (shareholder) and 1/3 goes to Uncle Sam. The closing remarks in he Q&A session expressed cash flow neutral by the end of the year. If they were ~$8 million negative that would indicate an additional $100k for each of the 80 sales reps in Q4. Is that doable? Based on the Q1 to Q2 improvement of $250k I believe it is.
This is very good news. We now have a path to cash flow neutrality with positive earnings just over the horizon--maybe Q1 2016.
Check my $350k per sales rep recall. Is this how you others heard it? Please correct me if I have erred.
The revenue is right on the positive cusp at $15.06 million.
The gross margins jumped up above 70% which bodes well as they should only get higher with greater revenue to spread the fixed costs over. It will depend on the conference call story.