Neuronetics Inc (STIM) 2019 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Q1 2019 Neuronetics, Inc.

Earnings Call.

(Operator Instructions) As a reminder, this conference call will be recorded.

I would now like to turn the conference over to your host.

Mr. Mark Klausner, please go ahead.

Thank you, operator.

Good morning, and thank you for joining us for Neuronetics First Quarter 2019 Conference Call.

A replay of this call will be available on our Website for 30 days.

Joining me on today's call are Neuronetics' Chief Executive Officer, Chris Thatcher and its Chief Financial Officer, Peter Donato.

Before we begin, I would like to caution listeners that certain information discussed by management during this conference call will include forward-looking statements covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our business strategy, financial and revenue guidance, and other operational items and metrics.

Actual results could differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the Company's business.

For a discussion of risks and uncertainties associated with Neuronetics business, I encourage you to review the Company's filings with the Securities and Exchange Commission including the Company's annual report on Form 10-K filed on March 5, 2019 and the Form 10-Q expected to be filed later today.

The Company disclaims any obligation to update any forward-looking statements made during the course of this call except as required by law.

During the call, we'll also discuss certain financial information on a non-GAAP basis that includes EBITDA.

Management believes that non-GAAP financial information taken in conjunction with U.S. GAAP financial measures provide useful information for both management and investors by excluding certain non-cash and other expenses that are not indicative of our core operating results.

Management uses non-GAAP measures to compare our performance relative to forecasts and strategic plans, to benchmark our performance externally against competitors and for certain compensation decisions.

Reconciliations between U.S. GAAP and non-GAAP results are presented in tables accompanying our press release which can be viewed on our Website.

With that, it's my pleasure to turn the call over to Neuronetics' Chief Executive Officer, Chris Thatcher.

Good morning, everyone, and thank you for joining us on today's call.

I'll start by providing an update on our performance during the first quarter followed by an update in the progress we made towards our key priorities.

I'll then hand the call over to Peter to walk through our financial performance and guidance for Q2 and 2019.

After which, we will provide our closing remarks before opening up the line to take the questions.

The first quarter was a good start to the year as we continue to drive the adoption of NeuroStar Advanced Therapy.

Total revenue was $12.7 million, an increase of 25% over the prior year; primarily driven by 41% growth in the U.S. NeuroStar Advanced Therapy revenue and 21% growth in U.S. treatment session revenue.

Our growth continues to validate our strategy, our ability to execute and NeuroStar Advanced Therapy's proven clinical outcomes for patients, which offers a viable alternative for psychiatrists serving their patients with treatment resistant depression.

On our fourth quarter call, we laid out our focus for the year which was to drive the adoption of NeuroStar Advanced Therapy.

In order to do so, we provided a list of our strategic priorities for 2019.

As a reminder, these priorities are to continue the expansion of our sales force and marketing efforts, focus on driving long-term increases in system utilization, development of our next generation NeuroStar system, begin the clinical work to set the stage for the expansion of new indications and launch NeuroStar Advanced Therapy in Japan and selectively evaluate and treat into other international markets.

Taking each of these in order, as we look to continue the expansion of our sales force and related marketing efforts in 2019, our goal is to add an incremental 15 BDM territories bringing our total to 59 by the end of the year.

In the first quarter, we filled four of those territories, all of which are all fully trained and active.

We continue to be very excited about the quality of the salespeople we're able to attract and we feel very confident that we can continue to drive predictable growth in new system sales and subsequent treatment session pull-through as a result.

In addition to the expansion of our sales force, we continued to utilized DTC marketing campaigns.

In 2018, we launched multiple campaigns at turning a viewer of a television ad into a patient undergoing treatment with NeuroStar Advanced Therapy.

Each of these campaigns provided greater insight into the most effective way to increase patient awareness, generate leads for the practice and ultimately drive system utilization.

In our most recently completed campaign, we gained further insight into campaign frequency, ad duration and the importance of the speed of practice follow-up.

Leveraging those learnings and with a focus on effectively managing the patients-psychiatrist touch point, we launched a nationwide TV ad campaign at the end of the first quarter.

The results we have seen so far have been excellent with significant increases in Web traffic, appointment requests and patient conversions which improved the overall cost per patient conversion.

At this stage, we know that we have optimized our marketing spend to get a patient to contact a psychiatrist.

We're optimistic that with each iteration we will continue to create increased demand at the more efficient rate and improve our ability to convert patients who respond to the TV campaign.

Our second strategic priority for the year is to drive long-term utilization increases.

As we have noted previously, we will continue to increase the number of CPC's, or clinical practice consultants, and CTC's, or clinical training consultants in order to maximize the utility of NeuroStar Advanced Therapy for our customers and patients.

Our goal for 2019 is to add an incremental five CPC's and an additional six CTC's to keep up with new system sales and optimize the CPC's territories based on the uneven distribution of system sales in 2018.

During the first quarter, we hired all five of the CPC's and five of the six CTC's slightly ahead of our expectations for the year.

Another one of our strategic priorities is the development and future launch of our next generation NeuroStar system.

We're in the early stages of a multi-year process to create the next iteration of NeuroStar system.

During the first quarter, we continue to drive towards that goal as we look to maintain our industry leadership position by continuingly advancing the capabilities of our system from use in both clinical and research settings.

This initiative starts with our voice of customer and fundamental research and I'm pleased to share that we've completed that and we've begun our product development process.

Our fourth strategic priority for 2019 is to begin the clinical work to set the stage for expansion of indications for use for the NeuroStar Advanced Therapy system.

Our current focus is the build-out of our clinical science team and advance of planned discussions later this year with the FDA on clinical trials on PTSD and bipolar.

This team is building out nicely and I'm pleased with the talent we're brining into this function.

Our final strategic priority for the year is the prudent expansion of our global footprint.

Our near-term focus is on the commercial launch in Japan.

As announced in March, Japan's Central Social Insurance Medial Council has approved the recommendation by Japan's Ministry of Health, Labor and Welfare to provide reimbursement for NeuroStar Advanced Therapy.

The reimbursement is expected to go into effect on or about June 1, 2019.

Obtaining reimbursement approval in Japan, a single-payer health care system, is a critical milestone that facilitates psychiatrists and facilities implementing NeuroStar Advanced Therapy into their treatment continuum to provide a much needed and affordable treatment alternative for MDD patients.

The initial reimbursement approval for NeuroStar Advanced Therapy is expected to cover patients treated at approximately 160 of the largest in-patient and outpatient psychiatric facilities with the most comprehensive mental health services in Japan.

The reimbursement rate at these facilities will be 12,000 Japanese yen per session.

Initially, Teijin Pharmaceuticals, our distribution partner, will have the ability to market to the largest in-patient and out-patient centers in Japan which aligns with our market segmentation and go-to-market strategy.

As of today, approximately 38 doctors from the qualifying facilities have been trained.

As part of the product approval process, a physician needs to be trained by both the [JSPN] and by Teijin.

While the level of reimbursement didn't come in lower than the U.S., we're comfortable that this level supports commercializing the product in Japan.

I would note, that there is a process for us to collect clinical and economic data in a Japanese market subsequent to the launch that we will utilize over the next few years to try to potentially increase both the level of reimbursement as well as increase the number of facilities Teijin can sell to.

While we remain enthusiastic about the Japanese market, we do not anticipate material revenue in 2019 but anticipate that revenue will grow in 2020 and beyond as Teijin sales and marketing efforts mature.

Overall, we're very excited about the progress we made in the first quarter and our ability to continue to drive strong top-line growth in the business and maintain our market leadership position.

I would now like to hand the call over to Peter to discuss our financial performance.

Thanks, Chris.

Total revenue for the quarter was $12.7 million, a 25% increase over the prior year quarter.

U.S. revenue was $12.5 million, an increase of 26% over the first quarter of 2018.

Outside the U.S. revenue was approximately $182,000, an increase of 1% versus the prior year period.

U.S. NeuroStar Advanced Therapy system revenue for the first quarter of 2019 was $3.4 million, an increase of 41% over the first quarter 2018 revenue of $2.4 million.

The increase in U.S. NeuroStar Advanced Therapy system revenue was primarily driven by higher capital in rent-to-own revenue.

Capital units increased by 42% while average selling prices declined by 8% as compared to last year.

On a sequential quarterly basis, average selling prices for capital sales were up approximately one-half of one point.

During the quarter, we saw our active install base increase to 931 units, a net increase of 150 units from the first quarter of 2018; and an increase of 24 units from year-end 2018.

Please note that we had an atypical number of systems go inactive during the first quarter related to a single large customer who had to return a group of their systems and these were pulled out of the active installed base.

U.S. treatment session revenue was $8.8 million for the first quarter of 2019, an increase of 21% over the prior year quarter.

The increase was primarily due to an approximate 18% increase in treatment sessions purchased as well as an increase in other treatment session revenue.

This was partially offset by a 3% decline in treatment session ASP's, due to predetermined volume pricing discounts within our existing customer base.

This is in line with expectations and these discounts are triggered when customers surpass certain predefined high volume thresholds.

U.S. service and other revenue was approximately $418,000, a 16% increase as a result of our expanded install base.

Gross profit for the first quarter of 2019 was $9.9 million, an increase of $2.2 million from $7.7 million during the first quarter of 2018.

Gross margin for the first quarter of 2019 was 77.9%, which was higher than the first quarter of 2018 gross margin of 75.8%.

The majority of the increase in gross margin was the result of increased leverage on our service and operations cost as a result of higher sales compared to the prior year period.

Sales and marketing expenses for the first quarter of 2019 were $9.6 million, an increase of a million and a half dollars over the prior year.

The increase was primarily due to the increased size of our sales force spending on our marketing campaigns in support of a larger install base.

General administrative expenses were $4.6 million, an increase of about $2 million compared to the prior year.

The increase was primarily driven by increased cost related to being a public company as well as legal and tax charges.

Research and development expenses for the first quarter of 2019 were $2.8 million, an increase of approximately $1.2 million from the prior year period.

The increase was primarily due to higher personnel and product development costs related to the commencement of our next generation platform.

Net loss for the first quarter was $7.5 million, compared to a net loss of $5.5 million in the first quarter of 2018.

EBITDA, which is a non-GAAP measure for the first quarter of 2019, was a loss of $6.4 million compared to an EBITDA loss of $4.4 million in the first quarter of 2018.

Moving to the balance sheet.

We ended the quarter with cash and cash equivalence of $96.1 million, compared to $104.6 million at year-end 2018.

Cash usage during the quarter was in line with our expectations.

Turning to guidance, for the full year 2019, we are reiterating our guidance of total worldwide revenue of between $62.5 million and $64.5 million, representing approximately 18% and 22% year-over-year growth respectively.

For the full year 2019, we continue to expect gross margins to be in the mid 70's range, in line with full-year 2018 margins in our previous guidance.

For the full year 2019, we continue to expect operating expenses to be between $71.5 million and $76.5 million primarily due to continued investment in our sales force expansion efforts, marketing, research and development related to the development of our next generation NeuroStar platform and clinical spending as we pursue additional indications; mainly PTSD and bipolar disorders.

For the second quarter of 2019, we expect total worldwide revenue between $15.6 million and $16.2 million representing 18% and 22% year-over-year growth respectively.

I'll now turn the call back over to Chris.

Chris?

Thanks, Peter.

2019 is off to a great start as we continue to drive strong revenue growth and enable a greater number of patients to get treatment using NeuroStar Advanced Therapy.

The sustained growth is a direct reflection of our ability to successfully execute in a long-term commercial strategy that we put in place in combination with the development of our industry-leading NeuroStar Advanced Therapy system for the treatment of drug-resistant depression.

We're very excited about the future at Neuronetics.

With that, I'd like now to open up the line for questions.

(Operator Instructions) Your first question comes from the line of Jason Mills with Canaccord Genuity.

Your next question comes from the line of David Turkaly with JMP Securities.

Hey, I was wondering, just as a -- I had a quick one for you about the upcoming APA meeting.

I was wondering if there was anything there that you're expecting to see.

Any sort of data releases or anything else like that that we can look forward to out in San Fran in a couple of weeks?

Yes.

So we view this as our largest sales call of the year.

We have tens of customers that were planning to meet and greet at the booth and introduce our NeuroStar Advanced Therapy system to.

There's a great opportunity for us to crease increased awareness around the difference in our product as well as convert our leads into sales.

So we view this as our biggest sales call.

There's -- we will have at the booth, we will have a series of psychiatrists talking about their experience with NeuroStar throughout the conference.

Got it.

And I apologize, I was hopping back and forth between a few today, but I noticed in your remarks you talked about higher capital and then also rent to own revenue.

I was wondering is there any color in terms of the split where that stands today.

Yes.

Yes.

Thanks, David.

This is where we thought we'd be in total NeuroStar Advanced Therapy system revenue.

It is a little bit higher in rental and a little bit lower in capital but our ultimate goal is to expand our install base and we're able to do that in the first quarter and the mix is just slightly higher and slightly different than we had anticipated.

There's no underlying trend in the business, we just had a slightly different mix than we expected.

Do you want to talk a little bit about the accounting, Peter?

Yes, sure.

In addition, Dave, this quarter, some of the leases were accounted for that's sales-type leases.

That's opposed to operating leases.

I'm sure you're seeing that elsewhere as well.

The impact of this is all the revenue from the lease is recognized upfront as opposed to being recognized over the term of the lease and that's an assessment, Dave, that will have to be done each quarter.

Customer by customer, lease by lease, and that could cause some volatility in the NeuroStar Therapy revenue line and at least between the categories of capital sales and rental.

Got it.

One last one.

You mentioned the active install base, 931.

Any color there?

I'm just curious how many of the centers are using more than one system.

And just remind us, the 931 is out of how many that you think you can actually get penetrate over time?

So David, we don't have the -- that number at our fingertips here as it relates to the number of centers that have multiple systems but it's more than a hundred, for sure, that have more than one system.

And as you know, our whole goal is to increase system utilization and if you look at our system utilization we're quite proud of what we accomplished in the first quarter.

System utilization is actually up and when you think about the number of system installs in Q1 versus prior year, we're up almost right around 19% in system installs with some pricing decline in NeuroStar treatment session pricing.

When you think about those two numbers combined, those are really diluted to utilization and what you see is in our -- in this first quarter is utilization is actually up.

So we're quite enthusiastic about our ability to ramp up our current systems with -- in the face of that dilution.

Your next question comes from the line of Margaret Kaczor with William Blair.

The first one for me is maybe just a little bit more color on the one customer that you guys spoke about in the morning comments that maybe pulled (inaudible) from the field.

Can you give us any more clarity around whether that's competitive, operational or something else?

And then did that also impact [competitive] sales for this quarter?

Yes.

Thanks for the question.

So yes, this was primarily driven by one large customer and the business venture did not work out for them and the systems were pulled out of the active install base.

They had a very aggressive plan to grow their business and they were not able to get the business capitalized.

So these systems were low-performing systems so we don't expect any sort of material impact on loss revenues from NeuroStar treatment session going forward.

It wasn't -- to finish the question, Margaret, not competitive and no impact on the quarter.

Keep in mind that you know, we use a rolling year so a lot of these fell out a while back, so it's incorporated into our guidance now it backed on the quarter, not the result of a competitive situation.

Okay.

Perfect.

And then in terms of the year-over-year utilization growth that you guys referred to on the call, can you give us a number around that and then whether or not the -- that utilization growth, how should we think about that throughout the year especially as you guys have started investing, it sounds like, in the national DTC advertising campaign?

Yes, so the utilization is mid to low single digits in the face of a 20% dilution and when we talk about dilution in this case it's a positive event, as you well know, when we're adding 18% new systems.

Those systems are typically dilutive to the utilization number coupled with a several point decline in pricing.

So we're quite pleased with 20% dilution that our system utilization is actually up low to mid-single digits.

So, that's a good thing.

You know, we're not going to forecast the next couple of quarters on utilization but we've been able to maintain this trend now for several quarters and we're quite excited about our ability to ramp our existing customers and the fact that that number is even positive is, I think, a wonderful thing based on all of the systems that we sold in the last couple of quarters.

Got it.

Great.

And then maybe the last one for me.

You referenced a little bit more mix on the rental side, I think on the last question.

But in terms of other clarity on the system sales that you saw this quarter, are you continuing to see strong repeat purchases from those existing accounts, you know, those high volume focus accounts?

And again, how should we think about this relative to your expectations both this quarter and throughout the rest of the year?

Yes.

So we are seeing a slight increase over the last 4 quarters in second, third, fourth and 14th system purchased within our install base and we're seeing a slight increase.

We're not reporting out on how we're breaking it out but most of our systems are first-time purchases in Q1.

Your next question comes from the line of Jason Mills with Canaccord Genuity.

Chris, can you hear me this time?

Yes.

Good -- I [forgot] the mute button, sorry.

So just start a couple of good questions already from my colleagues.

So let's start in Japan.

You -- you've commented about the reimbursement level.

I just would like a bit more color on your strategy there.

Let's say 2020 through 2022.

I understand you're probably not willing to give us quantitative metrics but wanted your strategy nonetheless just as it relates to attempting to renegotiate reimbursement rates higher, what you think that will take and ultimately within those 160 centers you're allowed to start in, what can be the -- the treatment system utilization.

What can be the market opportunity, I guess, from an [TAM] perspective within that cohort of centers?

Yes.

So let's talk about our market segmentation strategy.

No matter how many sites we were approved to go in to sell to, we were going to go into the highest -- the most respected psychiatric institutes in Japan and these are well-known institutes.

All of these are on the list and we were planning on going into the places that have the highest in-patient and out-patient volume.

So the 160 facilities are aligned with what I would call, you know, our inner bulls eye core, first mover commercial strategy and it will take us a couple of years to penetrate these facilities.

We expect these facilities to be able to handle multiple NeuroStar's and they currently have tens of thousands of patients in-patient in these facilities.

We haven't -- because of the new news around these 160 facilities, at this stage we don't have the total number of in-patient and out-patient but you should consider these opportunities as some of the largest psychiatric opportunities for us in the U.S. and in Japan and should model those accordingly.

Now remember, we're just starting here in June and Japan is already -- Teijin has already bought a handful of more systems so they have an inventory in place and they're going to start selling aggressively come June 1. It's uncertain if they're going to order again in the back half of this year and as you know, it takes a little bit of time to get these things up and running so we won't see much NeuroStar treatment sessions probably into 2020 and beyond.

So let me stop there, Jason.

Okay.

No.

That's helpful.

Second question.

Just circling back to the install base.

That having been said, the average install base for active units was a little lower than what we were modeling.

So we just wanted to maybe have a new conversation here about what you see as the market opportunity.

In our model, we're expecting you to exit the year sort of in and around a couple of hundred install, active install, higher than you are currently.

So that would imply good growth of say somewhere in the range of 50 to 60 average ads per quarter.

Is that the right way to think about the progress of your business through this year?

Yes.

Jason, so our guidance to the market has always been take a look at the number of business development managers we have selling systems.

Those have been pretty consistent for this quarter as well as for last year.

And as we add more business development, as we sell more systems, and that's really how the capital equipment revenue was built, that in conjunction with rental revenue gives you all NeuroStar revenue and we're excited where we came in for the quarter at 41% growth.

That's impressive NeuroStar revenue growth for us, right at where we expected.

Okay, helpful.

And then lastly, Peter, maybe bringing you into the conversation about the ASP's going forward, first on the (inaudible) sessions, the 3% decline was at the lower end of the 3% to 5% expectation and had been trending, I think, a little higher than that the pasts couple of quarters.

What are the implications as we think about that juxtaposed to the HVT, the high value target initiative?

And is the deceleration in decline due to coming up against tougher comps there?

Or are you, indeed, seeing a stabilization around this level going forward do you think?

That's a good question, Jason.

This is Peter.

Yes.

The 3% to 5% remains intact, and I think we've been pretty consistent that when the growth rate tends to be in the low 20's, which it was this quarter, 21%, and keep in mind Q1 is historically a low utilization month due to starts, right, people aren't starting after Thanksgiving so you see a slowdown in Q4 and then it's the big (inaudible) assistants that are just getting up to speed.

So the 21% is in line with expectations and with that, Jason, that puts us towards the lower end of the range which is 3% and, as we've said before, when that numbers ticks up into the mid 20's or closer to 30%, then you could see -- pricing breaks that would take you above or at -- at or above the 5% range.

And we've seen that in the past, so I would characterize this quarter consistent with what we were expecting and obviously right on the low end of the range.

Your next question comes from the line of Matthew O'Brien with Piper Jaffray.

Hopefully, you can hear me okay.

Just wanted to follow up on the one larger customer that returned their systems to you.

Is this something that you've seen historically with some customers doing something along this line?

Maybe more of a single customer or two doing something like that?

Just given that this was multiple systems.

I'm sure that's going to draw a lot of attention among investors and they want to make sure there's nothing that's really systematically wrong with the ability to build models for a lot of these centers going forward.

So this is just one customer, all right, and we've done this now -- we have over 500 customers out there.

This is one customer and this is a business that had a very aggressive plan to grow their business and they didn't get capitalized to grow their business.

So this is what I would say is an isolated issue.

You can see what our inactive turnover rate has been historically, and historically, it's been very low.

And this is just a one-off and -- but we wanted to call it out because it was a group within one customer.

Got it.

And then another thing that comes up quite a bit is the competitive environment and with 41% system growth in the quarter, clearly you're not seeing much of an impact at this point.

I would just love if you could comment a little bit more about the landscape that you're seeing out there as far as accounts go and time that it takes to attract and close accounts.

Is that growing, is it taking longer just given some more of the maybe the competitive commentary coming out.

Anything along those lines that you're seeing, you know, head-to-head wins, any other commentary that you can provide there?

Yes.

Sure, thanks.

Thanks, Matt.

So as we all know, this is a very large market opportunity.

Overall, the category is well underpenetrated and we've been competing against the current market entrees anywhere from 5 to 3 years.

And nothing has really changed.

You know, we have a sales and marketing organization that we estimate to be four to five times the total size of all the competitors combined and we're executing as planned.

We think this is a really terrific first quarter, 25% top-line growth.

This is the highest revenue growth of the -- in the companies history for Q1 and 41% NeuroStar system growth.

So, we feel like we're executing as planned against the competitors out there.

That's fair.

The last one for me, and there's 2 parts to it but -- so I'll just ask them both here.

Maybe for Peter, I think you have the tough -- you just came out of the toughest comp of the year.

You've put a very good performance in Q1.

Didn't change guidance at all, and so I just want to make sure that's not signaling anything that you're worried about something in the last 3 quarters of the year.

Maybe you could say something along the lines of feel more comfortable with the mid-point of the range or even a little bit higher end of the range.

And then the other question would be, you know, given your commentary about the new system that you're investing in right now and some thoughts among investors that it's really just a pricing game kind of environment, you know, what can you add to the feature set equation that makes this bigger investment that you're making in next generation system worth it to really continue to differentiate yourself and win in this market?

Peter, why don't you take the first one?

Yes.

I was going to take the first part, and then I'll pass to Chris for the second part.

So to answer your question, no Matt, we feel really comfortable where we're at.

We're right in line.

We've got -- we give a range.

We're in the midpoint of the range which is implicitly we feel really good about the [62.5 to 64.5] for the full year, and we're just executing to that plan.

And then as it relates to the new system, we think that as good as our system is today, it could be better.

And we're focused on feature sets to make this more efficient, more precise and more reproducible and we are looking forward to delighting customers in the future when they see this next generation system.

And this system will also be compatible and able to deliver our new indications as well.

That concludes our question and answer for today.

I will now turn the call back to Chris Thatcher for closing remarks.

Thanks for joining us on today's call, and we look forward to updating you on our next quarterly conference call.

Have a good week.

Ladies and gentlemen, this conclude today's conference.

Thank you for your participation.

You have a wonderful day, and you may disconnect.