LIPPERT HEILSHORN & ASSOCIATES
 Moderator: Jody Cain
July 24, 2008
4:00 pm CT
 Operator:
    
    Welcome to the Endologix second-quarter 2008 conference
call. At this time, all participants are in a listen-only
mode. Following managements prepared remarks, we will hold
a Q&A session. To ask a question, please press star followed
by 1 on your touchtone phone. If anyone has difficulty
hearing the conference, please star-0 for operator
assistance.As a reminder, this conference is being recorded July 24,
2008. I would now like to turn the conference over to Ms.
Jody Cain. Please go ahead, maam.Jody Cain:
    
    This is Jody Cain with Lippert Heilshorn & Associates. Thank
you for participating in todays call. Joining me from
Endologix are John McDermott, president and chief executive
officer, and Bob Krist, chief financial officer.Earlier this afternoon, Endologix issued a press release
announcing financial results for the 2008-second quarter. If
you have not received this news release or if you had like
to be added to the companys distribution list, please call
Lippert Heilshorn in Los Angeles at 310-691-7100 and speak
with Amy Higgins.




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This call is also being broadcast live over the internet at
www.endologix.com and a replay of the call will be available
on the companys Web site for the next 14 days. Before we
begin, I would like to caution listeners to comments made by
management during this conference call will include
forward-looking statements within the meaning of Federal
Securities laws.These forward-looking statements involve materials risks and
uncertainties. For a discussion of risk factors, I encourage
you to review the Endologix annual report on form 10K and
subsequent reports as filed with the Securities & Exchange
Commission. Furthermore, the content of this conference call
contains time sensitive information that is accurate only as
of the date of the live broadcast, July 24, 2008.Endologix undertakes no obligation to revise or update any
statements to reflect events or circumstances after the date
of this call. With that said, I would like to turn the call
over to John McDermott. John?John McDermott:
    
    Thank you Jody. I would like to extend my thanks to each of
you for joining us this afternoon. I am pleased to be
speaking with you on my first conference call as president
and chief executive officer of Endologix. I have been
familiar with the company for many years and in fact, it was
my division at Bard that launched the original Powerlink
System in Europe back in 1999, and formerly supplied
Endologix with ePTFE graft material.I have been in the peripheral vascular market for about 20
years and I have always been impressed by the Powerlink
platform and its commercial potential. I accepted the chief
executive position at Endologix because its a significant
opportunity based on the Powerlink Systems strong,
long-term clinical results in our current low market share.




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I believe we have significant growth potential and I am
committing to building a high-growth, profitable business.
During the past two months, I have met with our customers,
our sales force and our employees in Irvine, CA. Today I
will be sharing my thoughts on several key initiatives to
improve our performance and capture a larger share of the
endovascular AAA market.First, I am pleased to report our continued revenue growth.
Global sales for the 2008 second quarter were $9.3 million,
up 48% from the 2007 second quarter and up 11% sequentially.
Our domestic revenue of $7.9 million was up 47% over the
2007 second quarter and 15% sequentially.Although we are reporting strong growth for the quarter
given our year-to-date total product revenue of $17.6
million, I believe it is prudent to adjust our 2008 full
year-revenue guidance. We now expect that our total revenue
for the year will range from $37 million to $40 million,
which compares with our previous revenue guidance of $39
million to $43 million. Our adjusted guidance reflects
significant growth to 38% to 47% compared with 2007 and
represents continued growth in the second half of 2008.In reviewing the other metrics in our 2008 full-year
guidance, we continue to expect our 2008 gross margin will
be in the 71% to 75% range, an increase of 900 to1,300 basis
points over 2007. We are increasing our expense-guidance
range to $39 million to $41 million compared with our
previous guidance of $35 million to $39 million.This decision is based on a detailed expense forecast for
the second half of 2008 that factors in higher-than-expected
legal fees, some personnel-transition costs related to
executive hires, and launch expenses associated with our two
upcoming product introductions. The good news is that most
of these




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incremental costs are non-operating so our profitability
profile for next year looks very promising.However, as a result of the sales and expense adjustments,
we are moving our expectation of generating positive cash
flow from operations to the first half of 2009. To provide
sufficient liquidity as we move toward profitability, we
have increased our available bank financing from $5 million
up to $8 million. Although we believe our current cash to be
sufficient to avoid borrowing, the additional available
credit provides ample cushion to avoid a dilutive equity
financing.We are committed to grow and reaching profitability at
Endologix and Id like to share with you a numbers sales
initiatives being implemented in the second half of this
year that I believe will better position us to reach these
objectives. First, I am pleased to announce that Joe DeJohn
has recently joined Endologix as vice president of sales.
Joe has a strong track record for driving sales growth in
the peripheral vascular market. I have worked with Joe in
the past and believe he has the ideal skills and experience
to lead our talented sales team. We are also in the process
of evaluating our current sales-territory alignments. We
recently acquired current AAA procedural data and are
building an optimal territory map.When completed, we will compare the optimal map to our
current sales-territory map and make adjustments over time,
while minimizing customer and sales-representative
disruption. This alignment initiative will also give us a
road map for the location of new reps as we expand our sales
force in the future.Additionally, effective July 1st,
we implemented a new sales
force-compensation plan that puts greater emphasis on
per-territory sales increases




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and better supports our strategy to grow and take market share. We are also
dedicating additional focus and resources on sales training. Our past sales rep
turnover has been higher than Id like, and I believe we can lower turnover by
better preparing our sales reps to be successful early in their tenures.To assist in this initiative, we have hired a dedicated sales-training manager
with significant AAA experience. In addition to implementing these sales
initiatives, we expect to launch two new important products over the next nine
months. First, in this years fourth quarter, we plan to introduce our 34-mm
aortic cuffs. These devices have some unique competitive advantages and will
allow us to compete in a new market segment, which represents about 10% to 15%
percent of the AAA procedures.We already have a good reputation for being able to treat tough anatomies and
these cuffs will further strengthen our position. In the first half of 2009, we
expect to introduce the new delivery system designed to make Power Link Device
Deployment very simple and intuitive. We have received very encouraging feedback
from physicians and believe the new system will drive some incremental growth
for us in 2009.With those comments, I would like to turn the call over to Bob Krist to review
our financial performance. Bob?Bob Krist:
    
    Thanks, John and good afternoon to all. Well, as John just
mentioned, the Powerlink System product revenue for the second
quarter was $9.3 million, which represented a 48% increase from
$6.3 million in the second quarter of 2007, and an 11%
sequential increase over the first quarter of 2008.Domestic product sales increased by 47% to $7.9 million from
$5.4 million last year and by 15% sequentially from $6.8
million in this years first quarter.




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The 47% year-over-year domestic-sales increase was driven by a 26% increase in
the number of covered sales territories and by a 15% increase in average sales
per territory.The 15% sequential-quarter increase in domestic sales was the product of an 8%
increase in the number of covered territories and a 7% increase in sales per
territory. International sales for the quarter were $1.4 million, up by 54% from
$895,000 in the prior-year second quarter and down by 6% from $1.5 million in
the first quarter of 2008.However, international sales in the first quarter included an initial stocking
order of some $278,000 to Cosmotec, our distributor in Japan following receipt
of Shonin approval for the Powerlink System this past February. Gross profit
increased by 83% to $6.7 million compared to $3.7 million in the second quarter
of 2007. This was driven by both strong sales-growth and strong gross-margin
improvement.More specifically, gross margin was 72% of total revenue in the second quarter
and that was up from 58% in the prior-year quarter and up from 70% in the first
quarter of this year. We have now realized about a 15% margin-point improvement
relative to the second quarter of 2007 from the in-house production of our ePTFE
graft material, and we have now reached the lower end of our margin-guidance
range of 71% to 75% for the full year.And while we have achieved most of the impact expected from producing graft
material in-house, we do anticipate additional, gradual margin improvement over
the balance of 2008.




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Total operating expenses were $10.5 million in the second quarter compared with
$7.6 million in the prior-year quarter. That represents a 39% year-over-year
increase.Sales and marketing expense increased by 31% and that was due to the number of
covered sales territories increasing by 26% in the period, and by the impact of
higher, variable sales commissions on the 47% domestic-sales increase.Research, development and clinical expenses for the second quarter of 2008 were
$1.8 million versus $1.5 million last year. This increase was primarily due to
late-stage product-development expense related to new products, which involved
considerable destructive product-testing to verify product design.General and administrative expenses were $2.6 million versus $1.4 million last
year. The increase was almost entirely attributable to two areas - about
one-third of it, $370,000 reflects increased legal fees, and about one-half of
the increase was in costs associated with the CEO succession which occurred
during the second quarter of 2008. Also, total stock-option expense was $718,000
compared with $624,000 in the 2007 second quarter.Overall, the net loss in the second quarter of 2008 was $3.8 million or 9 cents
per share, which compares with a net loss of $3.7 million, also 9 cents per
share, for the second quarter of 2007. Stock-option expense was 2 cents per
share in both periods.For the six months of 2008, total product revenue was $17.6 million, up by 41%
from $12.5 million for the first six months of 2007.




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Domestic revenue also increased by 41% to $14.7 million and international
revenue increased by 40% to $2.9 million. The 41% year-over-year domestic-sales
increase was driven by an 18% increase in the number of covered sales
territories and by a 19% increase in average sales per territory.Gross-profit dollars increased by 69% to $12.5 million, compared to $7.4 million
in the first six months of 2007, driven by the 41% product-sales increase and by
more than 1,200 basis points of margin improvement. Gross margin was 71% in the
first half of 2008, compared to 59% in the same period last year.Total operating expenses for the six months of 2008 were $20.1 million versus
$16 million in comparable period in 2007. Overall, that represents a 26%
increase.Marketing and sales expenses increased by 21% to $11.9 million in first half of
2008 from $9.9 million last year. This increase was due to the number of covered
sales territories increasing by 18% and the impact of higher variable-sales
commissions on the 41% domestic-sales increase.Research, development and clinical expenses for the first half of 2008 were $3.3
million versus $3.1 million in the first half of last year, and all of that
increase occurred during the second quarter and was discussed earlier.General and administrative expenses were $4.9 million in the first half of 2008
versus $3.1 million in the comparable period last year. Again, the increases
were almost entirely in the same two areas as in the second-quarter comparison.
About half of the increase, $815,000 was in legal fees and about 30% or $550,000
of the increase was related to the CEO succession.




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These latter costs are non-recurring in nature and the impact is essentially
complete now with the June numbers. So, the net loss for the first six months of
2008 narrowed to $7.5 million, or 17 cents per share, from a net loss of $8.2
million, or 19 cents per share, for the first six months of 2007. Stock-option
expense for the first six months of 2008 was $1.3 million, or 3 cents per share,
versus $1.1 million, also 3 cents per share in the first six months of last
year.During the second quarter, we continued to improve our control over working
capital. Accounts receivable days sales outstanding average 51 including both
domestic and international accounts, and stood at 51 days at quarter end.
Inventory turnover improved by 27% to 1.4 times at the end of the quarter,
compared to 1.1 times at this point last year.Total cash and marketable securities at June 30th, was $6.1 million compared to
$9.2 million as of December 31st of last year, and $7.1 million as of this past
March 31st. Consequently, the burn in the second quarter was a net of $1.7
million and cash used has averaged about $500,000 per month through the first
half of this year.Given the leverage we enjoy in converting each new dollar of revenue into about
75 cents of cash, we remain confident that our currently available cash
position, together with now $8 million of available bank financing, will provide
ample working-capital flexibility for Endologix to execute its business plan,
and achieve sustainable positive cash-flow from operations without requiring an
equity financing.With that, I will turn the call back to John.




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John McDermott:
    
    Thanks Bob. I am excited about the future of Endologix and our ability to capture additional shares of the AAA
endovascular market. With the recent addition of Joe DeJohn and our second-half sales initiatives, we are
well-positioned to become a meaningful player in this market. We have a great technology platform with
excellent clinical results and a new-product pipeline expected to strengthen our competitive position.We believe the future will be exciting for both the employees and the shareholders of Endologix. With that
said, I would like to open the call for your questions. Operator?Operator:
    
    Thank you. Ladies and gentlemen, if you wish to register for a question for todays question and answer session
you will need to press star then the number 1 on your telephone. You will hear a prompt to acknowledge your
request. If you question has been answered and you wish to withdraw your polling request, you may do so by
pressing the pound key.If you are using a speakerphone, please pick up your handset before entering your request. Again, we request
that if you have pressed star-1 to ask a question before this time, please press it once more to ensure you are
entered into the queue.One moment please for the first question.John McDermott:
    
    While we are waiting for the first question, I would like to give a quick update on our patent litigation with
Dr. Lazarus. We met last week in a mediation session and I am pleased to report that we have settled the case
by acquiring a license to the patent. We think this is a good resolution and nice addition to our IP portfolio.




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So with that, Operator, we are ready for the first question.Operator:
    
    Your first question comes from the line of John Putnam of Dawson James.John Putnam:
    
    Thanks very much. I wondered if you might elaborate on your reason, really, for lowering the revenue
expectation for the second half, John, and also, I guess, a little bit of guidance, if you will, on legal
expenses going forward.John McDermott:
    
    Yeah, let me start with the revenue guidance. The decision to revise the guidance was really based on the
year-to-date actual sales and our forecast certainly for the six months. We also factored in our plan to
maintain the current size of the sales force, around 50 reps, through the end of this year, and that decision
is based upon several factors.First, as discussed earlier, we are strengthening our sales-force training program and it does not make sense
to add new people right now until that is done. So, our short-term focus will be on our new hires, our recent
hires and making sure we are giving them all the tools and training they need to be successful.Second, as we also discussed, we are using procedure data to develop an optimal sales-territory map to make
sure that we have all the right people in the places. This will give us a road map for where we want to add new
reps as well. Third, we believe that we have the capacity, weve got additional capacity, within our current
sales force to increase sales.On average, we do about four cases per month, per territory and we know a well-trained experienced rep can do
up to three times that number. So, we see a lot productivity opportunities with the current team, and this
includes additional accounts we currently serve as well as opening new accounts. And




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lastly, we announced that we are introducing some important new products
including the 34-mm cuffs in the fourth quarter and the new delivery system in
the first half of next year.Obviously, we will be doing a lot of sales-force training for these new
products, especially the new delivery system. It doesnt make sense right now to
bring new people in and train on one system only to retrain in six months on a
completely new system. So, its better for us to wait until we get the
alignments done, get the new training program in place. So, thats why were
holding the line on our 50 reps.And as discussed on the call, all of our focus is on growing the Powerlink sales
and these initiatives support that goal. As it relates to the second half, weve
really got all of those initiatives factored into our revised guidance. But,
those are the highlights of the reason for the change.John Putnam:
    
    John, did you experience any higher turnover in the second quarter?John McDermott:
    
    I wouldnt say higher than what weve experienced historically. Its been higher, as I mentioned, than Id like
it to be, and I think some of these initiatives will help address that, but nothing unique to Q2.John Putnam:
    
    And the new legal expenses going forward, what do you see happening there?John McDermott:
    
    Well again, weve got a good forecast of the legal fees moving forward. The Lazarus situation is settled, so
that comes out of the move forward. We just got out the remaining (Cook) issues, and then we hope to return,
after that ultimately gets addressed, back to a more normal run rate with legal.John Putnam:
    
    Okay, thanks a lot.




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John McDermott:
    
    Youre welcome.Operator:
    
    Once again, ladies and gentlemen, as a reminder to register for a question, please press star then the number 1
on your telephone.Your next question comes from the line of Shawn Fitz of Stephens Inc.Shawn Fitz:
    
    Yes, good afternoon, John thanks for taking my question.John McDermott:
    
    Sure, Shawn.Shawn Fitz:
    
    When we think about the sales initiatives and some of the plans you guys have to improve the productivity of
the sales force, if you think about kind of the three or four main items, which of those can drive the most
significant delta in the shortest amount of time?John McDermott:
    
    Well, its difficult to pick one of those out honestly. As I mentioned, one of the things that we can do a
better job with is our sales-force turnover. This is one of those very - as you heard from following the
company- its a very relationship-oriented business and to the extent that you have high sales-force
turnover, that just disrupts those relationships and makes it difficult to get meaningful long-term trash in an
account.So, I think going after the turnover is important and I believe that one of the reasons that weve had higher
turnover than wed like is the sale- training program. We have a program obviously, but I dont think weve
done as good a job as we can do getting our people ready early in their tenure. And, so I think those two
things will make a contribution.




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Certainly the new comp plan, you know, rolling out this new commission plan, its much more of a
growth-oriented plan so for those reps who sell more, theyre going to make more. And obviously were getting
good feedback from the field on their earning potential of the reps and thats encouraging to us.So, I think all of the sales initiatives, including the sales leadership will combine, give us good overall
results. But, its difficult to single one of those out; I think theyre all going to contribute.Shawn Fitz:
    
    You know, and again, I think in the first quarter, you know, turnover had been something that we had focused in
on, when we think about the turnover that youre experiencing now, are you seeing more turnover in the most
recent hires or is it really kind of across the spectrum of your experience on the rep side?John McDermott:
    
    It tends to be more the newer reps, which is why it leads me to believe that, you know, it could be a couple
things, maybe we havent done as good a job profiling, you know, what are the ideal characteristics of a rep
moving forward. I have a very clear picture of that moving forward.But, in addition to that, I think theres training, you know, the new reps may have struggled some more than
they needed to had we done a better job really preparing them to be successful. So, thats why we think putting
some more resource effort into getting them ready fast is going to matter.And to that end, you know, if you looked at our whole sales force right now, what were doing in the - very
tactically in short term is were going to focus the majority of our training resource in Q3 on what Id call
the rookie class or




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those sales representatives that have been with the company less than 12 months.Because those are the ones that clearly are still coming up the learning curve,
those would typically be the ones we would think of that would have the highest
degree of turnover risk if theyre not given the tools and training to be
successful. So, thats how thats going to play out.Shawn Fitz:
    
    And I guess just real experience, is that an easier
problem to grapple with, with turnover with your
least-experienced reps than it would be essentially to
have kind of turnover across the spectrum of experience
levels?John McDermott:
    
    I would be, honestly, Id be troubled if we had high
turnover in our seasoned reps. I dont see that at all.
In fact I get a lot of enthusiasm with our senior people.
They as individuals and we as a company are very
committed to this platform and weve seen how successful
it is and how effective it is to treating aneurisms.So, I think if you talk to our senior people, you would
find them extremely committed, not to just the AAA, but
to this device in particular, in this company. So, where
we see the turnover is in the newer reps and I think
thats fixable. It doesnt happen overnight, but were
laying down the right building blocks to get stronger as
we move forward.Shawn Fitz:
    
    Okay, and then last question, along that line of
thinking, theres a lot of initiatives, new management,
new leadership, new training. Should we expect to see
continued sequential improvement in rep productivity in
the face of all that, John, or should we maybe be a
little more modest in terms of our expectations on
productivity-per-rep?




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John McDermott:
    
    Well certainly, thats the goal moving forward. I guess
your question is timing, when do you start to see those
incremental gains? Within our guidance, weve put, you
know, weve considered relatively modest productivity
gains, weve got some, but we havent pushed into too
hard, you know.Again, I think its based into the guidance right now, we
look at it on an individual basis and, as I said, on
average, if you looked at the whole sales force, we do
about four cases a month. And, we know that a fully
loaded rep can do three times that number. So, weve got
a lot of capacity there. And the lower volume, of course,
is happening in the rookie class, which is where a lot of
attention is going to be applied over Q3.We certainly want to get those folks trained up and
strong as we then come out to roll, you know, we roll out
our new products. When we hit the cuffs in Q4 and then
the new-delivery set-up in the first half of next year,
the goal would be to have that rookie class no longer be
rookies at all, but very strong, capable, talented
people.And in fact, some of the people that fall under the
rookie class are actually very experienced AAA reps. So,
you cant necessarily put them all into one bucket. Weve
got some extremely talented rookies that are already
starting to put up some good numbers.Shawn Fitz:
    
    Okay. John, thanks, Bob, thanks for your time.John McDermott:
    
    You bet.Bob Krist:
    
    Sure.




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Operator:
    
    Your next question comes from the line of Robert Cvengros
of Next Generation Equity.Robert Cvengros:
    
    Hey, guys.John McDermott:
    
    Hey, Bob.Bob Krist:
    
    Hey, Bob.Robert Cvengros:
    
    Just interested in getting some color on Japan. I noticed
that your revenues, sequentially, are down a bit and I
saw that you had a restocking order or a stocking order
in Japan in the first quarter. Just interested in finding
out about, do you have subsequent restocking or do you
have any visibility about procedures in Japan?John McDermott:
    
    Yeah, we do, things are going well in Japan, actually. We
just completed our third physician-training course and
since kicking off in the April timeframe, weve trained
about 64 Japanese doctors on the system. And our case
volume continues to improve every month. Theyve got 13
reps dedicated to the Powerlink System in Japan.And we have just recently received a replenishment order
from Cosmotec, so theyre already starting to work off
their stocking order, now theyre in replenishment mode,
so you know, were starting to see some good activity
there.Robert Cvengros:
    
    Are orders, I mean every time theres an order, is it,
like, a bulk order or is it just the order  how do the
orders work?




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John McDermott:
    
    Its lumpy, yeah they tend to order in blocks, its not
small amounts  we get some smaller orders each month,
but more recently, weve got another good-size order.Robert Cvengros:
    
    Got it. So, it sounds like this procedure scheduled
opportunities in Japan, how about with LeMaitre how are
things tracking with them?John McDermott:
    
    Theyre doing well. They have exceeded their minimums
through Q2 and theyre tracking to have a very good year
for us.Robert Cvengros:
    
    Got it.Bob Krist:
    
    Hey, Bob, this is Bob Krist. Just to add to what John
said and to confirm your observation, if you were to take
out those Cosmotec shipments and look at the sequential
performance internationally without those numbers in it,
you would be up about 15% to16% sequentially, which is
very consistent with the domestic-sales increase.Now, we usually see a little more seasonality in the
summer months out of Europe, so we may not have that kind
of sequential activity in this upcoming quarter, but its
been quite strong growth inside and outside the U.S.
business.Robert Cvengros:
    
    And just on another note, ASP for the Powerlink is
domestically, relatively firm compared to other quarters?Bob Krist:
    
    Yes, it is holding very nicely.Robert Cvengros:
    
    That will do it for right now, thank you.




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Operator:
    
    That is all the time we have today. Please proceed with
your presentation or any closing remarks.John McDermott:
    
    Okay, once again I would like to thank everyone for
joining us today for your questions and for your support.
We are committed to continued sales growth in
market-share gains with the Powerlink System. If you have
any additional questions, please call either Bob or me.
We look forward to keeping you apprised of our progress
and thanks again for your interest in Endologix.Operator:
    
    Ladies and gentlemen, that concludes your conference call
for today. We thank you for your participation and ask
that you please disconnect your line.