DYNT

Dynatronics Corporation (DYNT)

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Dynatronics Corporation. (DYNT)

F3Q 2011 Earnings Conference Call

May 16, 2011 13:00 ET

Executives

Kelvyn Cullimore – President and Chief Executive Officer

Analysts

John Henderson

Joe Levy

Presentation

Kelvyn Cullimore – President and Chief Executive Officer

This is Kelvyn Cullimore, President and CEO of Dynatronics. We would like to welcome everybody to our conference call reporting the results of the third fiscal quarter ending March 31, 2011.

The purpose of today’s call is to discuss the financial results for that quarter. And before we begin, as a reminder, during the course of the call we may make forward-looking statements regarding future events or the future financial performance of the company. Those statements involve risks and uncertainties that could cause actual results to differ, perhaps materially from the results projected in such forward-looking statements. We caution you that any such statements should be considered in conjunction with the disclosures including specific risk factors and financial data contained in the company’s most recent filings with the SEC, including its most recent annual report on Form 10-K.

So today, I am going to update you on our results for our third fiscal quarter ended March 31, 2011. And following the presentation, I’ll open it up for any questions that you may have and we will do our best to give you the most information that we can.

As you’ve probably seen from the press release that went out this morning, we reported an improvement over the quarter for same quarter last year. Our sales were up about 2% to $8,383,000. We are somewhat pleased with that increase because the markets – the general economy continues to show weakness in especially capital equipment areas. Our manufacturing modalities are lingering behind other sales, because of that. But what we did see in this particular quarter that was encouraging was that we saw for the first time an uptick in new clinic openings and clinic expansions.

Since late 2007 and 2008 when the economy took a downturn, new clinic openings and expansions almost ground to a halt. And that is the source of most of the sales of capital equipment, is when new clinics open and expand. So that engine seems to be starting up again and that did benefit us somewhat in the current quarter. Most of you are aware also that we announced that we have signed contracts with some GPOs, and I will talk about that a little more in detail after I go over the financial results, but the GPOs are group purchasing organizations, large organizations that represent thousands of clinics and facilities.

And even though we signed some of those on March 1, there was virtually no contribution to sales in the current quarter from those contracts, because we are just starting to get them going. We did show for the nine months that sales were lagging a little behind the same period down about 2.1% compared to the nine-month period last year, but the improvement this quarter helped to diminish that difference and showing a positive trend towards an increase even without the GPO business that we are anticipating.

We were fortunate in showing a slightly improved gross margin from 37.8% to 38.5% in comparing the current quarter to the same one last year. That’s attributable to two main things. One of them is the slight improvement in capital equipment sales during the quarter, which have higher margins than the supply products that we sell, but also our new product that we introduced about six months ago called Stream. It is a software service that we provide and that product, the margin that we generate from that was accounted for a good part of the improvement in margin for the quarter. We saw about $10,000 a month in margin from that product, and are seeing that start to ramp up as well. I will talk a little more about Stream at the end of the discussion of the financial numbers.

Our SG&A expense stayed pretty constant with last year. For the quarter, we are actually a little bit better than we were for the nine months and so that’s helping to contribute to the bottom line. Probably the largest factor in our profitability for the quarter and for the nine-month period has been our commitment to R&D expenditures this fiscal year. The R&D cycle for Dynatronics is just that it’s a cycle and it goes through peaks and valleys depending on where we are at and new product development.

And right now we are moving towards the peak of that cycle. As a result, we are showing about $400,000 more in R&D expense for the nine months and $120,000 more of this quarter, which is about 50% increase over the last year and that’s reflective of the fact that we are moving towards the final phase of new product introductions that we are anticipating later this year and early next calendar year and as that cycle continues we expect to see the R&D expenditures stay a little bit higher over the next six months. After which we expect them to brought back more to historical levels, which will be lower during a period of time until we start to do another new product, which will then bring the cycle up again as some point in the next couple of years.

But that R&D expenditure, which we feel is a necessary investment to keeping our product lines vibrant and attractive to the market. Certainly diminished our profitability for the nine-month and for the quarter, even though we are up 21% in pre-tax income for this quarter over last year at the same time that is after reflecting the $117,000 in additional R&D expense.

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