Handpiece

The launch of the new handpiece by its major customer will be this fall. This is the reason for the recent spike in revenue. The customer is probably stockpiling this new version.

It isn’t a new product, it’s just an iteration of the previous version.

Pro-Dex had previously had trouble sourcing an electronic component so it had to pay more for getting it from other suppliers. This has led to lower gross margins. The regular supplier should get back to normal later in the year.

Thoracic Driver

This has a lot of potential. It’s the highest margin product. Second major customer (and first major customer for the driver) still has inventory. When that is sold, they will re-order.

There’s a third customer that wants the driver with an add-on attachment developed by Pro-Dex. After the development process is done, they’ll order both the driver and the attachment. This customer will probably be about the same size as the second major customer.

There are 2 other customers trying out demo units. One of them bought some drivers, but very few.

Sales cycle is long. Anywhere between 12 to 18 months.

CE Mark

Pro-Dex is working with 2 notified bodies, the first one was really bad and the company is looking to stop dealing with them. Rick is hopeful that he’ll be selling drivers in Europe early next year.

Extremities

There’s not much progress there. Pro-Dex management team met with its second largest customer last week in a trade show. They were introduced to the people in charge of extremities. The thoracic driver can easily be adapted to extremities, but it will take time until there are firm orders.

New Building

It’s built. They must go through several validations (FDA, largest customer, etc). Mostly paperwork. In January it should be fully operational. Currently, the company has barely enough capacity for the current backlog and there are plans to increase the backlog with new products.

New Products

The company is developing an attachment for the thoracic driver, an arthroscopic shaver, an hip impactor (for the largest customer), and another attachment for the CMF driver.

Conclusion

Rick mentions that he has aggressive growth plans – they just bought a building that will double their size. They have 4 projects in development. He just signed 2 other proposals for developing new products, but the sales cycle is very long.

They are looking to do more contract manufacturing (just manufacturing instruments designed by others).

Rick would like to see the company doing $75 million in revenue 5 years from now. If they get a 15% margin, and at a Price/Earnings of 15x, that would mean a share price of around $46, which is almost 3 times the current share price.

The feeling I got coming out from this call was that this will be a slow and steady ramp up in new products, not explosive growth.

Either way, I’m happy holding on to my Pro-Dex shares. Pro-Dex will remain in the Portfolio as long-term position.