Venus Concept Inc (VERO) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Restoration Robotics, Inc.

Q2 2018 Earnings Conference Call.

(Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Brian Johnston from The Ruth Group.

Sir, you may begin.

Thanks, operator, and thanks, everyone, for participating in today's call.

Joining me from the company are Ryan Rhodes, Chief Executive Officer; and Mark Hair, Chief Financial Officer.

This call is also being broadcast live over the Internet at www.restorationrobotics.com and a replay of the call will be available on the company's website for 90 days.

Before we begin, I would like to caution listeners that comments made by management during this conference call may include forward-looking statements within the meaning of federal securities laws.

These forward-looking statements involve material risks and uncertainties.

Such forward-looking statements are not guarantees of future performance.

And actual results and outcomes could differ materially from our current expectations.

For a discussion of risk factors, I encourage you to review the Restoration Robotics 10-K, subsequent 10-Qs and other reports filed or to be filed with the Securities and 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 30, 2018.

Restoration Robotics undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this call.

With that said, I'd like to turn the call over to Ryan Rhodes.

Thanks, Brian, and good morning, everyone.

Before providing a more detailed update, I'd like to give a high-level overview of our second quarter 2018 performance.

In the second quarter, we prepared for the launch of our next-generation ARTAS iX System.

We sold 11 ARTAS systems and recognized total revenue of $5.5 million.

Of the systems sold in the quarter, 5 were in the U.S. and 6 in international geographies.

Overall, we benefited from positive seasonal trends in the second quarter versus first quarter and from a slightly larger and more tenured sales force, although we continue to see customer hesitancy due to the anticipated availability of the ARTAS iX System with implantation functionality that was recently cleared by the FDA in March.

I will now provide key updates since our last call and insights into our expectations for the remainder of the year.

These include the following: a brief overview of our transformational ARTAS iX System and our expectations for the commercial launch; comments on our strategy to further enhance the efficiency and effectiveness of our commercial infrastructure.

Mark will provide a financial update covering our second quarter operating results; and finally, I will provide an overview of our key initiatives for 2018 and beyond.

Throughout the second quarter, we worked diligently to prepare the launch of ARTAS iX System in early July.

That's accomplishing a transformative milestone for both Restoration Robotics and the hair restoration industry.

The new ARTAS iX System, which is the only robotic system in the world to offer harvesting, site-making and implantation all in one platform, signifies a revolution in hair restoration.

We believe the new system transforms our value proposition to potential customers, positioning us for sustainable long-term growth.

With this next-generation system, we can now offer physicians precision, repeatability and clinical workflow efficiencies with a compact state-of-the-art platform.

ARTAS iX is equipped with a 3-camera stereoscopic vision system with 44-micron resolution and includes a new 7-axis robotic arm.

This platform additionally features a compact, motorized, battery-powered, portable and adjustable procedure chair for increased patient comfort and clinical versatility that can be used ergonomically in multiple aesthetic procedures.

With such a robust feature set, we believe the ARTAS iX System will appeal not only to expert hair restoration specialists but also to a broader base of physicians.

By automating the most significant aspect of the hair transplantation procedure, we feel the new system will attract physicians to hair restoration who are eager to tap into the large and growing male aesthetic market.

The system, which reduces manual variability, provides physicians with an increased level of precision, reproducibility and efficiency.

Due to the unmatched level of automation, we believe the new ARTAS iX system may dramatically shorten overall procedure times by performing the site-making step concurrently with implantation, thus allowing physicians to further leverage technician time to drive practice efficiency.

Given the premium nature of the new ARTAS iX System in terms of novel functionality and features, we expect to receive a higher ASP versus the existing ARTAS 9x platform for system sales over time.

We will also continue to sell the existing ARTAS 9x System at a lower ASP and we'll continue to service existing ARTAS 9x Systems already manufactured, especially those in markets where the ARTAS iX System has not yet received regulatory approval.

We are also exploring options to alter per-procedure pricing to enhance physician ROI while making the physician and procedure more attractive for physicians and their patients.

Specifically, we are conducting a pilot program to restructure our procedure-based fees from a per-follicle charge to a tiered flat per-procedure charge and look forward to providing updates in our pricing strategy in the near term.

To sell the new ARTAS iX System and drive utilization, we will continue to employ a razor-razorblade model in our direct markets, focusing specifically on hair restoration and aesthetic physicians.

As of this call, our direct U.S. team consists of 9 regional sales managers dedicated to driving new system placements, up from 7 as of our last call, following hiring in anticipation of the ARTAS iX System launch and as part of our pivot to focus more specifically in the U.S. market.

Also 8 practice managers and 1 practice development leader to drive system utilization at the practice level and 7 clinical trainers.

As we stated previously, we plan to leverage our new technology to drive top line growth.

To support this strategy, we plan to continue to expand both our capital and consumable-focused direct sales teams in the U.S. through 2018 with a goal to reach 12 to 15 regional sales managers by year-end.

We also plan to drive utilization by continuing to dedicate additional marketing resources while continuing our work to partner with physicians to activate new potential patients.

As we've stated before, despite our increased focus on the U.S. market, we remain committed to maintaining an international commercial presence, mainly through distributors with some direct reps in select geographies.

Specifically, we intend to enhance our efforts outside the U.S. through an ongoing evaluation of our current distributor partners and by recruiting a new Head of International Sales, who will be responsible for managing our direct sales reps in international geographies and relationships with our distributor partners.

I'd like to remind everyone that because we have not yet received CE Mark for the ARTAS iX System in Europe, we have constrained opportunities in certain international markets and expect some European customers to delay their purchases until the ARTAS iX System receives CE Mark and becomes available around the end of the year.

That being said, we look forward to shipping our first ARTAS iX systems in the U.S. market in the third quarter.

In all, we are confident in our medium- and long-term growth prospects and look forward to continuing our work to market the revolutionary ARTAS iX System and drive value for our customers and our shareholders.

I believe that we have a skilled team that is prepared to accomplish our near-term objectives, bolstered further by the addition of Keith Sullivan, who recently joined our Board of Directors in July.

I look forward to providing updates on our progress in the quarters to come.

I will now turn the call over to Mark for a review of our second quarter financial performance.

Thank you, Ryan, and good morning, everyone.

I'd like to now provide an overview of our second quarter 2018 financial results.

Total revenues in the second quarter of 2018 were $5.5 million, up from our first quarter revenue of $5.0 million.

As compared to second quarter 2017 revenue, revenues were down 5% due to a decrease in system revenue.

48% of second quarter 2018 revenue was generated in the U.S., compared to 39% in the U.S. the same period in 2017.

Gross margin for the second quarter was 54% compared to 40% gross margin in the second quarter 2017.

The increase in gross margin for the period was primarily related to cost efficiencies and the mix of higher procedure-based revenue, which as we've stated before, yields a higher gross margin.

We initially anticipate higher manufacturing, warranty and service costs associated with the launch of the ARTAS iX System, which will result in lower gross margins moving forward.

In addition, we anticipate lower gross margins at sales for the existing -- on the sales for the existing ARTAS 9x platform.

Operating expenses in the second quarter of 2018 were $8.1 million, a 21% increase from the $6.7 million in the second quarter of 2017.

The increase primarily reflects investments in the company's sales and marketing initiatives, along with higher headcount, as well as an uptick in research and development spending in connection with the recent development and launch of our ARTAS iX System.

Net loss for the second quarter of 2018 was $6.2 million or $0.21 per share compared with a net loss of $5.0 million or $3.09 per share for the second quarter 2017.

Total cash, cash equivalents and restricted cash were $17.0 million as of June 30, 2018, compared to $16.6 million as of March 31, 2018.

This June 30 figure includes net proceeds of approximately $9.3 million following the finalization of a loan and security agreement for a $20 million debt facility in May.

The remaining balance of gross proceeds, or approximately $10.7 million, was used to repay outstanding amounts of our previous loan facility and paid costs related to the new debt facility.

The new agreement provides for interest-only payments for the first 18 months, resulting in approximately $2 million per quarter in deferral of the principal payments compared to our prior facility.

I'd like to note that our cash or our use of cash for the quarter was driven higher by a few factors including: investments in sales and marketing ahead of the launch of the ARTAS iX System, including headcount additions as well as marketing initiatives; expenditures and other ARTAS iX System launch costs, including inventory and regulatory-related expenses, which we anticipate continuing through the remainder of 2018 as we build iX Systems to meet market demand; and an increase in accounts receivable as compared to previous quarters as a result of credit extension to customers in 2018.

As I stated last quarter, we will not be providing specific revenue guidance until we have additional operational and sales experience with our new management team and greater visibility into our future performance, especially given the launch of the ARTAS iX System in the U.S. and other international markets.

With that said, I'd like to turn the time -- the call back to Ryan for closing comments and Q&A.

Thanks, Mark.

Let me now conclude with the company's key areas of focus as we continue to drive progress through 2018 and beyond.

Key focus areas are: execute on our commercial strategy for the ARTAS iX System, which includes growing our sales force to increase market penetration and system utilization; prepare for the ARTAS iX System launch in other international geographies following the expected CE Mark around year-end; and last, broaden overall ARTAS brand awareness through several key marketing initiatives.

With that said, I'd like to turn the call now over to Brian to open our Q&A session.

Thank you, Ryan.

Please note that if after the call, any analysts or investors have additional questions, management will be available in the coming days.

If you'd like to arrange a call, please reach out to The Ruth Group.

I'll now turn over the call to the operator to begin Q&A.

Operator?

(Operator Instructions) And our first question comes from the line of David Solomon with Roth Capital Partners.

Just want to focus on the ARTAS iX.

What kind of feedback are you getting, now that you've launched it, from the current users or potential users on the new system?

Just any color on the response that you're getting from the community would be helpful.

Yes.

Thanks, David.

I think clearly, we've had it out into the market just for a few weeks now, at least showing it and discussing it.

Overall, the feedback has been very, very positive.

I think people are excited for the fact that it now offers implantation.

So they're very eager to understand more about that.

Additionally, I think some of the benefits of the system, the fact that it is in the form of a new platform.

We have a smaller footprint in the size of the system, the robotic system.

But we've also redesigned and offer a new chair to go along with it.

But there's been other ergonomic improvements, aesthetic improvements to the system as a whole.

And we're very excited to get it out in the market and hear from physicians directly on their initial experience using it.

Great.

And just on the procedure pilot pricing plan going on, just want to -- any color we can get on maybe the tiers of pricing and maybe the breakpoints for size of case that would satisfy a certain price per procedure?

Yes.

So we've been running a pilot just to look at the different pricing options out there.

Really again, it is a pilot looking at different potential models that we have.

The goal here is that physicians, in many cases, are looking to provide hair restoration in larger procedures.

And we want to be able to accommodate them in some type of pricing model that works in parallel with their goals and the goals of that individual patient.

We don't really disclose exactly how that model is in terms of the different tiers.

But we would say that we're looking at a model, or in this pilot, that can -- look at the number of hairs that are actually transplanted and how that model may play out to benefit both the physician and the patient.

And so David, so right now, we do have 2 different tiers of pricing for some of our customers.

And right now, that's for kind of what we're calling a normal-sized case and a smaller-sized case.

I think your question was around what is the cutoff on the size of the case?

And so there's one price for procedures that are around 800 follicles or below, smaller cases, and then a different price for procedures above that.

And so that's what we have right now.

And so we're looking to see how that fulfills the needs of our customers.

Great.

That's really helpful.

And just my last question, just broadly, what kind of doctors are you now interacting with, with this ARTAS iX?

Has it changed?

Are you seeing maybe more plastic surgeons or non-hair experts that are becoming more interested in the ARTAS?

Yes.

We have been determined and certainly focused in the area of hair specialists.

We -- there's a large audience of those type of physicians out in the market.

And clearly, we've had a lot of discussion with them because they use a technology today, whether it's our technology or a different type of technology.

And they're the ones that treat a number of patients, a large number of patients who suffer from hair loss.

So we are focused in that market.

Additionally, we have been focused in the aesthetic market space with dermatologists, plastic surgeons, cosmetic surgeons and ENT, facial plastic physicians.

So those are kind of the key areas of focus or call points for the company.

And our next question comes from the line of Matt Hewitt from Craig-Hallum Capital.

First off, was there any discounting provided in the second quarter?

The system sales actually came in a little bit better than I had anticipated and gross margins were noticeably ahead.

So I'm just curious, does that discounting start here in Q3?

Or was there maybe a little bit in Q2?

Yes.

So there was a little bit in Q2.

While we knew that the iX System was going to be launched in Q3, so we experienced some price discounting beginning in Q2.

Okay.

Well, that's still a great gross margin performance despite that.

As we think about gross margins, you mentioned there will be some discounting here in Q3 and going forward for the old system.

Plus you've got the new iX ramping.

How should we be thinking about gross margin in the third quarter or the second half of the year, however you want to break it out?

Is that -- is it going to be 40%?

Or any color you could provide there would be helpful.

Yes, a really good question.

So we're not giving specific guidance on that.

But as we stated that we do initially anticipate higher manufacturing cost on our new system, initially at least higher warranty and service-related costs for the new iX System.

And so we believe that our margins will come down in the near term.

And in addition, as we have a different price point for the existing 9x platform, we believe all these factors will continue to bring down the margin from what we've seen in Q2, at least in the short term.

Okay.

And then -- but longer term, 2, 3 years down the road, do you expect to get back up to mid- to upper 50%s, maybe even hit 60% gross margin?

Or how should I think about that?

So I think where we are right now is where we would like to be with a potential of even improvement from where we are now in the long term as we get economies of scale and we start manufacturing and selling more of the iX systems into the marketplace.

I think primarily what we're talking about now is, in the short term, is we're transitioning.

We have 2 systems, one with a lower margin and we're just getting ramped up on the first.

So it's this introductory phase that we're talking about, the lower margin, but we definitely hope to get back up to where we are now with potentially even some improvements on that over the long term.

Okay, great.

And then maybe one last one for me.

As far as the CE Mark is concerned, is that something you expect here in the second half of the year?

Or what's the timing expectations on that?

Yes.

So we're working on CE Mark.

That is on our roadmap.

We would expect it toward the end of the year.

That's our goal, the very end of the year, probably later in Q4.

(Operator Instructions) Our next question comes from the line of Anthony Vendetti of the Maxim Group.

I was just wondering on shipping the new system, I know you mentioned 3Q here.

Could we expect some of those systems to actually start shipping here in the next couple weeks, where are we with the manufacturing process?

Or is it more of a September shipping date?

Yes, Anthony, good question.

We are working diligently to have systems ready to ship in September.

So that's really right now, our roadmap is to have systems shipping out in September.

Okay.

And then utilization obviously had a nice pickup here in the quarter.

What would you attribute that to?

Is that due to some of the new practice managers you hired or a new strategy in terms of increasing the utilization?

Yes.

So Anthony, specifically the utilization are metrics that we don't specifically report, but we do report the revenue associated with purchases of procedures that sometimes take place prior to those procedures happening.

So we do sell procedures along with our systems.

And it's just been one of our focuses to ensure that we have procedures available to all of our customers going forward.

So we don't yet provide metrics specifically to utilization.

But we are pleased with the efforts and the buildup of our PSM team to help practices succeed.

Okay.

And what is the goal for the practice managers?

I know you said regional sales managers, 12 to 15 by the end of the year.

You have 8 practice managers and 1 PDM.

What's the ramp-up expected for them by the end of the year?

So currently, we add practice managers based on the geography of where our systems are placed.

So in typical fashion, as we place and sell more systems, we'll be ramping and adding practice managers.

We don't have necessarily a determined forecast.

They coincide with the markets and the geographies that they cover.

Our practice managers cover our existing accounts, so the existing customer base.

And as we place more systems, then we make a conscious decision to add them where needed in order to make sure we have the right touch to the customer and the right attention, especially during the onboarding process of the new customer.

So I would expect looking outward that we may be adding a few toward the end of the year.

But I don't have a specific number that I can offer you.

Okay.

And then lastly, on the upgrade path for existing customers, it seems like this product -- this new system is revolutionary in a lot of ways.

It's a significant upgrade, not just the fact that it has implantation.

So for your current user base, there could be a lot of demand to upgrade.

And have you finalized that pathway for the existing customers?

Yes.

What we've stated openly is we would provide an upgrade pathway for our existing customers.

So essentially, we will work with our customers and look at the history of when they bought their existing system and how we would propose an upgrade pathway for them.

Right now, a lot of our focus is with new potential customers.

But we're also talking to some of our existing customers, who have shown interest early now that the product is now entering into the market.

So we'll have more color and visibility on that, I think, as we get further down the road.

But we will provide an upgrade pathway, nothing that I can talk in hard numbers at this time.

But it is something we have and will extend to our customers.

And Anthony, part of that is going to be based on when the system was purchased, at what price, how long ago.

And it's going to be a little bit of a case-by-case basis.

But we're happy to engage in those conversations as they come up.

And we've had some express some interest already.

So we'll work on those.

And I'm not showing any further questions at this time.

I would now like to turn the call back to Ryan Rhodes for closing remarks.

Well, thank you again.

And I'd like to thank everyone for participating today and for your support and interest in Restoration Robotics.

Everyone, have a great day.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program.

And you may all disconnect.

Everyone, have a great day.