Aspect Medical Systems, Inc. reported that revenue reached $25.3 million for Q1 2009, a 4% increase from $24.4 million in Q1 2008
Sensor revenue increased 5% to $21.6 million
Total revenue increased 4% to $25.3 million
Installed base of monitor and module units grew 19% and exceeded 58,800
GAAP loss from operations was $61,000 compared with a loss of $141,000 in Q1 2008, and non-GAAP income from operations was $1.5 million compared with $1.8 million in Q1 2008
GAAP earnings per diluted share was $0.10 compared with a loss per share of $0.01 in Q1 2008, and non-GAAP net income per diluted share was $0.16 in Q1 2009 compared with $0.06 per diluted share in Q1 2008
Repurchased $7 million in face value of 2.5% convertible senior notes due 2014 at a discount, resulting in a $3 million gain and ending cash and investments of $76 million and convertible notes outstanding of $58 million
With the adoption of Statement of Financial Accounting Standards No.123(R), or "SFAS No.123R", as of January 1, 2006, Aspect began reporting non-GAAP financial results that exclude the impact of stock-based compensation. See below under the heading "Use of non-GAAP Financial Measures" for a discussion of the Company's use of such measures. The reconciliation of GAAP (U.S. generally accepted accounting principles) to non-GAAP measures is contained in an attached table.
"We were very pleased with the improvement in our operating margins in Q1. We substantially overachieved our goal for operating income in the quarter despite a difficult economic environment and we remain confident we will be able to continue to improve operating margins for the remainder of the year," said Nassib Chamoun, President and CEO of Aspect.
"On the revenue side, while international sensor revenue growth remained impressive at 17% compared with Q1 of last year, U.S. sensor revenue grew only 1% as hospitals continued to clamp down on spending. Despite this, we believe our U.S. sales force expansion was the right decision. At a time when hospitals are under significant financial pressure, our expanded sales force has helped us to stay close to our customers, to protect our existing business, and to encourage new customers to adopt. Moreover, as the findings from our ongoing research assessing the impact of anesthetic management on patient outcomes become public, and as new products are introduced, we expect that our expanded U.S. sales force will be in a great position to leverage these developments."
Revenue increased by 4% in Q1 2009 as compared with Q1 2008. Revenue growth was driven by a 5% growth in worldwide sensor revenue. U.S. sensor revenue increased 1% in Q1 2009 compared with Q1 2008 due to a 1% increase in units sold. U.S. sensor pricing was up 1% in Q1 2009 as compared to Q1 2008 and was offset by a 1% reduction due to commissions to OEM partners related to sensor sales. International sensor revenue increased 17% in Q1 2009 as compared with Q1 2008 due to a 19% increase in sensor unit volume. Worldwide equipment revenue declined by 2% in Q1 2009 as compared to Q1 2008 due mostly to an 8% decline in monitor and module unit sales.
Q1 2009 GAAP net income was $1.9 million, or $0.10 per diluted share, compared with a loss of $235,000 or $0.01 per share in Q1 2008. Q1 2009 non-GAAP net income was $3.0 million, or $0.16 per diluted share, compared with $1.1 million, or $0.06 per diluted share in Q1 2008. Q1 2009 GAAP loss from operations was $61,000, after the impact of stock-based compensation, and Q1 2009 non-GAAP income from operations was $1.5 million compared with a Q1 2008 GAAP loss from operations of $141,000 and a Q1 2008 non-GAAP income from operations of $1.8 million. GAAP and non-GAAP gross margins improved to 76.5% and 77.0%, respectively, in Q1 2009 as compared with GAAP and non-GAAP gross margin of 73.4% and 73.9%, respectively, in Q1 2008. The increases in GAAP and non -GAAP gross margin were primarily due to favorable manufacturing variances and Q1 2009 cost reductions. Q1 2009 GAAP and non-GAAP operating expenses increased by 7% and 11%, respectively, compared with Q1 2008 due mainly to increases in sales and marketing expenses as part of our sales force expansion and one-time charges in general and administrative expenses to support shareholder matters. GAAP operating expenses grew less than non-GAAP due to the Q1 2009 reduction in stock-based compensation expense.
At April 4, 2009, the Company had cash and investments of $76.2 million and debt of $58.0 million, which consisted of 2.50% convertible senior notes due 2014. At December 31, 2008, the Company had cash and investments of $83.5 million and convertible notes outstanding of $65.0 million. The outstanding debt decreased by $7.1 million during Q1 2009 due to the Company's repurchases at an aggregate repurchase price of $3.8 million.
Outlook for Q2 2009
The Company's outlook for Q2 2009 is as follows:
Revenue is expected to be within a range of $24.0 million to $25.5 million;
GAAP net income per fully-diluted share is expected to be within a range of a $0.01 loss per share to $0.01 income per share; and Non-GAAP net income per fully-diluted share is expected to be within a range of $0.04 to $0.07.
All non-GAAP amounts are exclusive of stock-based compensation. See below under the heading "Use of non-GAAP Financial Measures" for a discussion of the Company's use of such measures. See attached table for the reconciliation of GAAP to non-GAAP items for Q1 2009 and guidance for Q2 2009.
Use of non-GAAP Financial Measures
In addition to disclosing financial results calculated in accordance with GAAP, this earnings release contains non-GAAP financial measures that exclude the effects of share-based compensation and the requirements of Statement of Financial Accounting Standards No. 123(R), or "SFAS No. 123R".
Stock-based compensation related to stock options, restricted stock and other stock-based awards is excluded from the Company's non-GAAP costs of revenue, non-GAAP gross profit margin, non-GAAP gross profit margin percent, non-GAAP product margin percent, non-GAAP total operating expenses (research and development, sales and marketing and general and administrative), non-GAAP income from operations, non-GAAP operating margin, non-GAAP income before income taxes, non-GAAP income before income taxes per diluted share, non-GAAP income tax expense, non-GAAP effective income tax rate, non-GAAP net income, and non-GAAP diluted earnings per share:
Stock-based compensation expenses consist of expenses for stock options, restricted stock and other stock-based awards under SFAS No.123R. The Company excludes these stock-based compensation expenses and the related tax effects from non-GAAP measures primarily because they are non-cash expenses, because of the complexity and considerable judgment involved in calculating their values, and because they have in the past and are expected in the future to be driven by a different set of factors than other expenses in these categories.
– The manner in which management uses the non-GAAP financial measure to conduct or evaluate its business:
The non-GAAP financial measures used by management and disclosed by the Company exclude the income statement effects of all forms of share-based compensation. Reconciliations of the GAAP to non-GAAP income statement financial measures for the three months ended April 4, 2009 and March 29, 2008 and expected net income per diluted share for Q2 2009 are set forth in the financial tables attached to this earnings release and the reconciliations to those GAAP financial measures should be carefully considered.
The Company applied the modified prospective method of adoption of SFAS No. 123R, under which the effects of SFAS No. 123R are reflected in the Company's GAAP financial statement presentations for the three months ended April 4, 2009 and March 29, 2008. Gross profit, gross profit margin, product margin, costs of revenue, total operating expenses (research and development, sales and marketing, general and administrative), operating income, operating margin, net income before taxes per share, net income and net income per share (referred to as earnings per share, or EPS) are the primary financial measures management uses for planning and forecasting future periods that are affected by share-based compensation. Because management reviews these financial measures in a manner calculated without taking into account the effects of SFAS No.123R, these financial measures are treated as "non-GAAP financial measures" under Securities and Exchange Commission rules. Management uses the non-GAAP financial measures for internal managerial purposes, including as a means to compare period-to-period results on a consolidated basis and as a means to evaluate the Company's results on a consolidated basis compared to those of other companies. In addition, management uses certain of these measures when publicly providing forward-looking statements on expectations regarding future consolidated financial results. Management and the Board of Directors will continue to compare the Company's historical consolidated results of operations (revenue, costs of revenue, gross profit margin, gross profit margin percent, product margin percent, research and development expenses, sales and marketing expenses, general and administrative expenses, total operating expenses, operating margin, income before income taxes, income before income taxes per diluted share, income tax expense, effective income tax rate, operating income as well as net income (loss) and earnings per diluted share and (loss) per share), excluding stock-based compensation, to financial information prepared on the same basis during the Company's budget and planning process, to assess the business, make resource allocation decisions and to compare consolidated results to the objectives identified for the Company. The Company's budget and planning process culminates with the preparation of a consolidated annual budget that includes these non-GAAP financial measures. This budget, once finalized and approved, serves as the basis for allocation of resources and management of operations. While share-based compensation is a significant expense affecting the Company's results of operations, management excludes share-based compensation from the Company's consolidated budget and planning process to facilitate period to period comparisons and to assess changes in gross margin, net income and earnings per share targets in relation to changes in forecasted revenue.
Profit-dependent cash incentive pay to employees, including senior management, also is calculated using formulae that incorporate the Company's annual results excluding share-based compensation expense.
– The economic substance behind management's decision to use such non-GAAP financial measures:
The Company discloses non-GAAP information to the public to enable investors to more easily assess the Company's performance on the same basis applied by management and to ease comparison on both a GAAP and non-GAAP basis among other companies that separately identify share-based compensation expenses. In particular, the Company believes that it is useful to investors to understand how the expenses and other adjustments associated with the application of SFAS No. 123R are being reflected on the Company's income statements.
– Why management believes the non-GAAP financial measure provides useful information to investors:
Management believes that each of the non-GAAP measures reveals important information about the economic model of the Company and the Company discusses each of these items with the public on a regular basis on both a GAAP and non-GAAP basis. The Company discloses this information to the public to enable investors to more easily assess the Company's past performance and estimate future performance on the same basis applied by management and to ease comparison on both a GAAP and non-GAAP basis among other companies that separately identify share-based compensation expense. In particular, the Company believes that it is useful to investors to understand how the expenses and other adjustments associated with the application of SFAS No. 123R are being reflected on the Company's income statements.
– The material limitations associated with use of non-GAAP financial measure as compared to the use of the most directly comparable GAAP financial measures:
The non-GAAP financial measures disclosed by the Company are not meant to be considered superior to or a substitute for results of operations prepared in accordance with GAAP. The non-GAAP financial measures disclosed by the Company may be different from, and therefore may not be comparable to, similar measures used by other companies.
Although these non-GAAP financial measures adjust expense, and diluted share items to exclude the accounting treatment of share-based compensation, they should not be viewed as a pro-forma presentation reflecting the elimination of the underlying share-based compensation programs, as those programs are an important element of the Company's compensation structure and generally accepted accounting principles indicate that all forms of share-based payments should be valued and included as appropriate in results of operations.
– The manner in which management compensates for these limitations when using non-GAAP financial measures:
Management takes into consideration the limitations in using non-GAAP financial measures by evaluating the dilutive effect of the Company's share-based compensation arrangements on the Company's basic and diluted earnings per share calculations and by reviewing other quantitative and qualitative information regarding the Company's share-based compensation arrangements. Management also uses these non-GAAP measures in conjunction with GAAP measures to assess the impact of share-based compensation.
About the Company
Aspect Medical Systems, Inc. is a global market leader in brain monitoring technology. To date, the Company's Bispectral Index (BIS) technology has been used to assess approximately 32 million patients and has been the subject of more than 3,100 published articles and abstracts. BIS technology is installed in approximately 80 percent of hospitals listed in the July 2008 U.S. News and World Report ranking of America's Best Hospitals and in approximately 73 percent of all U.S. operating rooms. In the last twelve months BIS technology was used in approximately 19 percent of all U.S. surgical procedures requiring general anesthesia or deep sedation. Aspect Medical Systems has OEM agreements with eight leading manufacturers of patient monitoring systems