SonoSite Inc. (SONO)

Q1 2010 Earnings Call

April 26, 2010 4:30 pm ET

Executives

Kevin Goodwin - President & Chief Executive Officer

Mike Schuh - Chief Financial Officer

Analysts

Peter Lawson - Thomas Weisel Partners

Abigail Darby - JPMorgan

Greg Brash - Sidoti & Co.

Greg Chodaczek - Boenning & Scattergood

Presentation

Operator

Good day everyone and welcome to the SonoSite Q1 2010 earnings results conference call. As a reminder today’s conference is being recorded.

At this time I would like to turn the conference over to Mr. Kevin Goodwin; please go ahead sir.

Kevin Goodwin

Thank you operator, and good afternoon to everyone on the call. This is Kevin Goodwin, President and CEO of SonoSite, and along with me today is Mike Schuh, our CFO.

This conference call contains certain projections and/or forward-looking statements regarding future events, or the future financial performance of the company. Except for historical information discussed during this call, the statements made today contain forward-looking statements that involve substantial risks and uncertainties.

Actual results could differ materially because of factors listed in the management’s discussion and analysis section of the company's 2009 Form 10-K, and in other filings and reports with the SEC. We do not undertake any duty to publicly update any forward-looking statements.

Okay, moving onto the call. During the call I will cover revenues, margins, operating expenses and profitability in that order, and then I will touch on two strategic initiatives, and provide for you an update on our outlook for the year. Let me start with revenue.

Worldwide Q1 revenue came in at $56 million, up 8% normally versus 2009. The Cardio Dynamics or CDIC revenues were $3.2 million in the quarter, which was down sequentially from Q4 of 2009. The comparables with the prior year are somewhat cloudy due to the fact we have an overlap on accounting period and seasonality. So with that in mind, core revenues of SonoSite were up 2% if you exclude CDIC, and this included a 4% currency gain for the quarter.

Now underneath those numbers, these are the following dynamics we think are important. Our US hospital revenues were up 12%, which was better than expected and order booking rates were up by more than twice that rate. Our US enterprise revenues were off 59% as planned, due to the lumpiness of that channels revenue profile.

Moving over to international, our international revenues were up 8%. The majority of that was currency gain, but we saw a broadening performance improvement across the international business, with 14 out of 17 regions either equaling or exceeding their forecast. With the above in mind and 40 quarters of historical booking data, we have upgraded our expectations for the year to a target of about 10% to 12% revenue growth.

As the year progresses, we expect our US enterprise channel to improve quarterly, and we expect our primary care division, with it’s ICG and ultrasound sales to make steady improvements. There’ll also be a steady flow of new products as always, to help us along on the revenue growth line.

Cardio Dynamics revenues were below forecast, but we anticipate stable performance from here. We attribute the below forecast performance to the fact that we’ve been modifying and restructuring the sales channel since the fourth quarter, and that process continues. With that said, we’ve had some good indications early on from our market development in the primary care space for ultrasounds, and we are cautiously optimistic in the mid-term about potential growth in that sector.

Now certainly healthcare reform and the new economy, or if you want to call it the new healthcare economy, have been obstacles in this sector. We do see improvement down the road and we are going to keep investing our sales channel there.

I am going to move over now to gross margins. Our pricing was actually improved in the quarter and I’ll call it stable overall. Gross margins came in at 70.9%, up 320 basis points versus the prior year. Excluding the impact of currency, gross margins were up 210 basis points. Cardio dynamics added 30 basis points to the gross margin. In the marketplace we continue to maintain a price in premium, based on our five-year warranty and other value added things we do.

I’m now going to move over to operating expenses. Our overall OpEx came in at $37 million, up 11%. $4.3 million of this came from Cardio Dynamics acquisition. Excluding the Cardio Dynamics cost, total OpEx was $32.7 million or down 2%. Now inside this $32.7 million we had a $500,000 variance for the quarter, and with this in mind we plan on further scrutinizing our operating costs quarter-by-quarter from here on out, as we intend to bring our OpEx in at 57% to 59% of revenues, given our stated objectives on operating margins.

Moving into the profitability; first with Earnings Before Interest and Taxes or EBIT. EBIT was $2.7 million, up 68%. Excluding the Cardio Dynamics impact, EBIT was up 183%; and most importantly, we expect the Cardio Dynamics acquisition to be cash flow positive for the year.

Moving down to Earnings Per Share; EPS was $0.08 a share versus $0.05 last year, up 60%. Both quarters had some one-time items in them, both this year and last. Finally EBITDA, we consider this as an increasingly important metric as it is a good cash flow surrogate. EBITDAS for the quarter was $5.4 million, an increase of 4%. The EBITDAS comparisons were negatively affected by changes in stock compensation year-over-year. In Q1 2009 we had stock comp of %2.5 million, versus $1.5 million this year of Q1 2010.

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