Venus Concept Inc (VERO) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 Restoration Robotics Earnings Conference Call.

(Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Mr. Brian Johnston from The Ruth Group.

Please go ahead.

Thanks, operator, and thanks, everybody, 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, November 5, 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.

In the third quarter, we successfully launched our new platform, the ARTAS iX System.

ARTAS iX Systems is the only intelligent solution in the market to offer precise, minimally invasive, repeatable harvesting, simultaneous site-making and implantation functionality in one compact system.

During the quarter, we recognized total revenue of $4.8 million, driven primarily by the sale of 11 ARTAS systems, all of which were ARTAS iX Systems.

These included 8 iX Systems to new U.S. accounts; 1 iX System to an existing U.S. customer; and 2 iX Systems to customers upgrading from a previous iteration, 1 in the U.S. and 1 in the Asia Pacific region.

For perspective, we only announced the new ARTAS iX platform in early July and began shipping the ARTAS iX System in late Q3.

Of the 11 systems sold in the third quarter, 10 were sold in the U.S., demonstrating successful early traction in our pivot to focusing predominantly on growing our domestic business where we are at best position to influence and drive utilization.

By comparison, we sold 5 ARTAS 9x systems in the U.S. in Q2, further signaling early success in our U.S.-focused strategy.

U.S. sales comprised 57% of our consolidated revenue year-to-date compared to 40% in the first 9 months of 2017.

We were also pleased with our ability to sell to hair restoration specialists in the third quarter.

These specialists represent a key customer cohort that has been -- continued to demonstrate interest in the enhanced functionality and capability of our new ARTAS iX platform.

We will continue to focus on hair restoration specialists given their expertise and focus on hair restoration as they typically integrate ARTAS technology into their practices more quickly and at higher annual utilization levels.

Last month, we interacted with a number of existing and potential hair restoration specialist customers at the world congress of the International Society of Hair Restoration Surgery or ISHRS in Hollywood, California.

At this meeting, we had the opportunity to reinforce our presence in the market, educate market-leading KOLs and generate leads which we believe will help us drive broader future adoption.

In addition to our time at ISHRS, we also recently attended the Annual Meeting of the American Society for Dermatologic Surgery in Phoenix, where we announced results from a real-world evaluation study of the ARTAS iX system.

The data which was very well received provided real-world clinical evidence, demonstrating the clinical efficiency of our new ARTAS iX System, further supporting also the use of robotics in overcoming the limitations of manual hair restoration procedures.

In particular, we believe that demonstrating ARTAS iX System's ability to provide clinically efficient surgical workflows while reducing the total case time for these procedures was extremely compelling to potential customers.

By increasing workflow efficiencies and reducing operative times, some physicians may perform 2 procedures per day, doubling current capacity, which makes the economic profile of the system even more attractive.

As discussed on our last update, we had previously implemented a pilot program of tiered flat procedure pricing for our 9x system to further drive physician ROI.

We continue to receive encouraging feedback from our physicians on this approach, specifically with regards to the flexibility of the forward stem to provide additional grafts to their patients at a lower total cost and higher margin.

The implantation of additional grafts may not only lead to improved clinical outcomes but also drives increased procedure revenue for physicians who typically charge per follicle.

Furthermore, we believe that a flat procedure pricing model enhances our ability to forecast future procedure-driven revenue.

Given these clear advantages, we have decided to implement this tiered flat procedure pricing for all ARTAS iX procedures while we continue to offer our legacy per-follicle pricing model for existing 9x customers.

To bolster our U.S.-focused sales strategy, we also announced this morning the appointment of Keith Sullivan, our newest board member, to serve as Interim Chief Commercial Officer.

As a reminder, Keith served as the Chief Commercial Officer at ZELTIQ prior to the recent acquisition by Allergan, where he was responsible for global sales, marketing and training.

I'm confident that Keith will prove particularly adept in providing critical input to refine our strategy, particularly in regards to ramping the utilization of ARTAS systems already present in the market.

As we have discussed previously, we see driving higher-margin procedure revenue as a crucial component to our long-term growth strategy.

Third quarter procedure revenue was negatively impacted by typical seasonal pressure relative to elective aesthetic procedures and inventories of procedure kits already on physicians' shelves.

We continue to see a few key areas with clear opportunities for near-term improvement to drive utilization.

In particular, we remain focused on providing resources to help new users become more efficient and familiar with using the ARTAS Robotic Hair Restoration System.

To support this, we continue to offer physician-led training through our Master Class Series.

These classes focus on best practices and the most advanced techniques for male aesthetic patients using our cutting-edge robotic technology.

During the quarter, we held our third Master Class in Atlanta, Georgia, which was well attended and received.

Due to physician demand, we will continue to host additional classes in targeted geographies to help drive utilization.

Another way that we're working closely with our physician customers to drive utilization is by better sourcing customer leads.

In the third quarter, we continued to receive a significant number of potential patient inquiries as a result of our digital marketing activities.

We believe this number can grow significantly given the recent launch of our new website, which is optimized for mobile devices and with the relaunch of Hair for the Holidays.

Hair for the Holidays is specifically designed to drive patient awareness and new patient inquiries via targeted digital advertising campaigns.

We believe that these initiatives, in addition to our continued co-op marketing program, ARTAS Awards, provides partial reimbursement to practices actively utilizing and promoting the ARTAS brand.

We believe this program will help move the needle on utilization in the near term to medium terms.

As we look ahead, we are confident in our ability to deliver increased procedure revenue, particularly through 2019, as our sales force and new users ramp on their productivity curves.

In the more immediate term, we expect full year 2018 procedure revenue to be in line with fiscal year 2017.

In addition to benefiting from increased sales force tenure, we also remain committed to strategically expand our commercial teams in the U.S., where we will continue to execute our razor-razorblade model and focus specifically targeting U.S. hair restoration specialists and aesthetic physicians.

As of the end of third quarter, our direct U.S. team consisted of 9 regional sales managers dedicated to driving new system placements, consistent with 9 as of our last call.

We note our stated goal of 12 to 14 as we head into 2019, additionally 8 practice success managers and 1 practice development leader to drive system utilization at the practice level, especially by working with practices to translate inquiries to procedures as previously discussed and also 7 clinical training members.

We believe a larger and increasingly tenured direct sales force, particularly on the U.S., will provide the structural framework for steady, sustainable growth in the medium to long term.

For the first 3 quarters of 2018, U.S.-based revenue has been approximately 57% of total revenues, an increase from 40% for the same period in 2017, further demonstrating our commitment to grow the U.S. market.

With that said, I'd also like to reiterate our enduring commitment to maintaining our international presence despite our pivot to focus more intently on growing our domestic business.

In the third quarter, we saw increased interest in the ARTAS iX System globally, which gives us confidence in our long-term ability to drive adoption of the new system internationally.

With that said, we believe this enthusiasm is part affected by our ability to sell ARTAS 9x systems OUS in the third quarter where many physicians are awaiting availability of ARTAS iX pending CE Mark approval, which we continue to expect by year-end.

Overall, we remain confident in our commercial strategy and look forward to continuing our work to drive the adoption and utilization of the ARTAS iX System.

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

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

Thank you, Ryan, and good morning, everyone.

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

Total revenue in the third quarter of 2018 was $4.8 million, up 15% compared to third quarter 2017 revenue of $4.2 million.

Approximately 80% of our third quarter 2018 revenue was generated in the U.S. compared to 34% in the U.S. for the same period in 2017.

We note that system ASPs were also higher in the quarter than prior quarters given the premium offering and price of the new ARTAS iX platform.

Gross margin for the third quarter was 45% compared to 41% gross margin in the third quarter of 2017.

The increase in gross margin for the period was primarily related to certain cost efficiencies in 2018, partially offset by higher initial costs related to ARTAS iX sold during the third quarter of 2018.

We note that the launch of the ARTAS iX System will result in lower gross margins in the near-term basis while we focus on cost reductions for this new platform.

In addition, we anticipate lower gross margins on sales for the existing 9x platform, which we continue to offer particularly outside of the U.S. market where the ARTAS iX System is not yet approved.

Operating expenses in the third quarter of 2018 were $8.6 million, a 36% increase from the $6.3 million in the third quarter of 2017.

The increase primarily reflects investments in the company's sales and marketing initiatives, including more headcount, an uptick in research and development spending in connection with the recent launch and campaign of our ARTAS iX System and some bad debt reserves outside of the U.S.

Net loss for the third quarter of 2018 was $7.1 million or a loss of $0.20 per share compared with a net loss of $6.6 million or $4.07 per share for the third quarter of 2017.

Total cash, cash equivalents and restricted cash were $23.6 million as of September 30, 2018, compared to $16.9 million as of June 30, 2018.

This balance includes net -- total net proceeds of $15.6 million from our follow-on common stock offering completed in August.

I'd like to reiterate that our use of cash has been driven higher in recent quarters by factors including investments in sales and marketing for 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 as we build the ARTAS iX System to meet market demand; and increase in the inventory while building the new ARTAS iX platform and an increase in accounts receivable as compared to previous quarters as a result of credit extension to customers in 2018.

That said, we are committed to managing our cash resources strategically, and we'll continue to assess our cash burn and cash needs closely in order to ensure our ability to execute on our strategic initiatives going forward.

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

I'd now like to turn the call back to Ryan for closing comments and Q&A.

Thanks, Mark.

Let me now conclude with the summary of our most critical objectives for the remainder of 2018 and as we look ahead to 2019: To execute on our U.S.-focused commercial strategy for the ARTAS iX System.

This includes growing our sales force to increase market penetration and system utilization, particularly in the U.S.; to prepare for the ARTAS iX System launch in other international geographies following expected CE Mark around year-end; to broaden brand awareness through several key marketing initiatives; and to bolster our balance sheet opportunistically in the near term to best position ourselves for growth.

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

Thanks, 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 the call over to the operator to begin Q&A.

Operator?

(Operator Instructions) Our first question is from David Solomon with Roth Capital Partners.

Congrats on the progress in the U.S. First, just housekeeping.

Could you guys give us system sales, procedure revenue and service fees for the quarter?

I don't think I heard it.

Yes.

So as far as system sales go, we had 11 system sales, all of which were iX Systems.

10 of the 11 were in the U.S. and 1 was OUS.

The system revenue for the quarter was approximately $3 million.

And as far as -- give me one second here -- and procedure-based revenue was approximately $1.3 million, and service-related revenue was about $500,000.

So just starting with systems.

It seems like you sold, I mean new systems, the same number in the U.S. This quarter is half as much in the last 2 years combined, in 2016 and 2017.

So obviously, physicians appear to be interested in the iX System.

And I'm curious to hear how the conversation is changing, especially with the more traditional ISHRS surgeons.

When they're talking to you about the iX, are they asking different questions?

Or are they more reassured?

How is it going in the recent months with these doctors?

Yes.

So we've had -- now getting the new system out in the market, I would say a lot of physicians historically who've either followed the company or may have even seen the technology in the past have been notably, I think, impressed with the new platform.

And part of that has to do with the feature set we've incorporated into this new platform.

Obviously, there are a number of things we've built in terms of system capability.

I'd say some of the feedback that they're excited about is the smaller footprint.

The new 7-axis Kuka arm, which is now available on the new system.

The chair, we redesigned our chair and are offering a new option for the chair, so a chair that can be used not only in an ARTAS procedure but is flexible enough to be used in other hair restoration procedures and/or other aesthetic procedures.

So there's a number of benefits in the new system.

So far, the interest has been very positive.

In fact, some of our sales this quarter are to dedicated hair specialists, some as new customers and some are either upgrades or additional system adds to the practice.

So we're very encouraged by the early reception of this -- of the platform, and we will continue to work closely with the hair specialists, as indicated.

Excellent.

And then just regarding graft out-of-body time and graft handling and the implantation feature in and of itself, any specifics in that conversation where you're seeing doctors potentially interested in maybe seeing greater efficacy and follicle yields with the combined recipient site-making/implantation function of the new system?

Yes.

So I think it's certainly early.

We're just getting now the systems up and operating in the installed accounts.

We have heard very favorable feedback at least, provided that the system can now not only do harvesting, it can also make the site and then simultaneously implant the grafts.

So I think it's a little early yet for us to provide any defined data, but I think many will see this capability or new added functionality to may have some additional benefits.

If we can shorten the duration of the procedure time, that may benefit certainly the patient and the physician.

If we can optimize workflow by roboticizing this kind of last feature step of the hair transplant procedure, we may also be able to eliminate additional techs or such that may be participating in the procedure, meaning that we create more efficiency and we better optimize fixed costs in performing the procedure.

But we're one of the only companies actually in the market globally that has any data on clinical outcomes.

We would expect, as we get more data, we'll be able to share that with everyone.

Excellent.

Yes, I understand.

Right now we have a little piece of data on efficiency and throughput, which was recently presented, but we obviously have to wait for efficacy.

But I can only assume, theoretically, it could benefit follicle yield with the way it's working, but it remains to be seen.

I guess my last question, just regarding the CE Mark.

I know we're still expecting it to come in this quarter.

Do you -- is it possible for there to be orders still?

Or would that -- or is it hard to book orders until after you get approval?

And then lastly, any changes that we can expect with the commercial strategy with Keith joining as Chief Commercial Officer?

Or should we expect it to be kind of be how it is right now?

Yes.

So through the CE Mark process, we have been working with the notified body, and we have a road map to getting our audit done and the other pieces that are going to be in line with getting this new certification So we are expecting that near year-end, as indicated.

So that is on its plan as noted.

Regarding Keith joining the company, yes, so Keith has been added to our board back in July.

And we're very excited to have him involved deeper in the company now.

So I think it may be a little early to say.

He will have a defined focus in the commercial strategy in the U.S. predominantly.

So sales, marketing, training.

But we're excited to have him onboard.

And again, it's still early.

He's just kind of getting into the role, but we would expect great things out of his input and his leadership within the company.

Our next question is from Matt Hewitt with Craig-Hallum.

I guess first up, once -- what does the pipeline look like, and I don't know how deep it is, but the pipeline for Europe once you receive CE Mark?

I mean, do you have a number of customers over there that have indicated a pretty strong interest where you could start to see those orders starting to flow maybe in the first half of next year?

Yes.

We had a number of folks that we saw at the International Society of Hair Restoration Surgery.

So that is a global meeting of hair specialists.

So a number of folks had come by to see the system.

We have not been at any trade shows or scientific meetings showing the system in OUS markets yet.

That will now happen going forward.

But I will say that, so far, early on, there's been a lot of interest.

We are still actively also selling our legacy 9x system.

And I remind everyone, the 9x is the world's most successful robotic platform in providing harvesting of hair follicles.

So we've got that as an offering as well.

So we are encouraged by some of the comments we saw from some people coming by.

We are engaged with some customers already in the sales pipeline.

I don't have a hard number I could share with you today.

But so far, I think many are very interested.

They like what we've done, bringing the new system to market and all the other potential advantages that may play out with use of this system in their practices, if they acquire one.

So I think that's what I can tell you as of now.

Okay, that's great.

And then regarding gross margins, obviously, a nice improvement versus the year ago period, and that was despite having some incremental costs related to the iX launch.

How should we be thinking about that here in the fourth quarter and maybe as we get into 2019 as some of those initial launch costs and related initial expenses kind of fall off?

Yes.

So it's -- good questions.

It's going to somewhat depend upon our mix.

As we saw in the third quarter, notwithstanding the fact that there are additional costs, we had a strong ASP in the quarter in which we launched the new platform.

We've talked a little bit about 9x, and as we continue to sell 9x, that's going to be at a lower margin.

So it's going to be somewhat dependent upon our mix.

So that's a little bit of an unknown, meaning as far as if the interest remains high in the iX platform.

But with that said, we fully plan to sell some 9x.

So what we've been looking at is margins kind of similar to what we've been experiencing the last couple of quarters.

We know, in Q2, it spiked a little bit, but what we've seen in Q3 is going to be a little bit more consistent with what we're expecting going forward.

Our next question is from Anthony Vendetti with Maxim Group.

I was just curious.

So it looks like the ARTAS 9x is off to a good start.

Can you talk a little bit about procedure volume?

Was it a little bit more of the third quarter being seasonally weak?

It seems like you're expecting procedure volume to be a little bit down.

Or did you sell the first -- when you sell them, do they get a certain number of procedures in that first -- within that initial purchase, so they're not going to be purchasing new procedures probably until 1Q '19?

Yes.

So a couple of things.

We do see the normal Q3 seasonality.

So that is something we've discussed prior, and that is a reality, so a little softer on procedures in Q3.

We also mentioned having -- some customers having some inventory available, so that doesn't impact procedure-based revenue as they continue to work through that inventory.

And then the third thing that I mentioned is relevant to your question.

When we do sell systems, we do, in some cases, commonly give them some utilization upfront.

And the reason we do that obviously is that they're going to be going through their quick-start training program.

They're going to be onboarding with some initial cases.

And to get them up and running, we just include it into the actual deal.

So that is correct, we do, do that, and that is common.

Okay.

And -- but you -- would you expect that to pick up then to normal levels once we get into '19 or it's hard to say?

Yes, I think we would.

We see -- again, we -- customers, typically, we see a lot more activity in the fourth quarter.

It tends to be a busier time for hair restoration as well as other aesthetic procedures.

So we would expect to see that and then also transitioning into 2019.

And then just lastly, as you're transitioning more to U.S. sales, are you going to be selling the older system to some countries outside the U.S. still?

Yes.

So we do sell our legacy 9x system, so that is available globally.

We will continue to offer that in the U.S. and in OUS markets.

Some markets -- pending CE Mark, CE Mark will allow them to have the opportunity to have iX sold in their country.

The other is -- some of the other regions, depending on what market may not get the iX approval or clearance until later.

So 9x is still an active system.

We still have -- thousands of thousands of procedures out there have been performed on this platform and as well as millions of harvests.

So we do have that as an offering.

It's kind of a segmented strategy.

We have 9x and then, of course, we have the new system, the iX.

So both are available, and we sell both in all markets.

Our next question is from Margaret Kaczor with William Blair.

So the first one is just on the U.S. sales of ARTAS iX.

The 10 were maybe a little bit above our estimate.

Most of them sounded like they were shipped late in the quarter.

So as we look at the backlog at least going forward to this point, particularly as we go into a stronger Q4 and a more ramped sales force, what do those leads look like?

And has that changed at all with kind of a very active Q3 conference schedule?

Yes.

So we came off of Q3 -- again, finished the quarter with quite a bit of interest.

We -- as I mentioned, we were at 2 very notable meetings, ISHRS, the hair specialists' meeting in Los Angeles; and then ASDS, American Society of Dermatologic Surgery, down in, I believe, Texas -- or Arizona.

So we do have now some people that are active in our pipeline.

If I was looking at kind of the numbers, I think we would like -- we probably like to see something similar to what we did in Q3.

We are continuing to ramp, and we would expect more and more interest as we get the system exposed to more physicians around the country.

So see similar kind of numbers in terms of performance in the U.S. team, similar to Q3.

Okay.

And part of the question is kind of just not even the fourth quarter but as you look into 2019, are you guys satisfied with the leads that you guys got out of those conferences and seeing maybe year-over-year growth in the number of leads that are being generated?

Maybe any kind of qualitative data that you could give on the quality of leads that you're getting?

And kind of the last question, I guess.

It sounded a lot -- do you think the iX at this point has passed the trialing phase of the system?

Or are physicians waiting to see results?

Or is it going to still take a few more quarters and maybe kind of keep the U.S. system sales somewhat more range-bound?

Yes.

I would say we're happy with the leads we've got so far.

We're -- I don't think we're satisfied yet, but we are actively out there.

Our sales teams are fully engaged.

And we attend a number of notable meetings, scientific meetings, and we'll be going through that schedule here end of year but obviously kicking off 2019.

So again, we will continue to promote the system as noted.

Additionally, I think -- what was the second part of the question?

Discussing...

Just because the trialing of the system and the stages it works at.

Yes, yes.

So we are just kind of early on in our experience.

We've had cases performed to date, and we'll continue to ramp through the rest of the systems that were installed end of Q3.

I think there are doctors that are very eager to hear from others on how it's going, both on the harvesting side and then also on the implantation side.

I think many are looking to their peers, if they have bought the system already.

What has been their feedback?

How is it performing?

And what is it you like about the new system over the legacy system?

So we'll continue to monitor that.

And of course, I think, as we get favorable feedback, that should help us further broaden the pipeline and ultimately increase sales.

Okay.

And then last one for me.

In terms of the tiered flat pricing system just on the utilization that you referenced, how broadly did you guys utilize them in the past quarter?

And have you seen any changes to the sales process to the upside or downside from making that move?

Yes.

So we started that process in advance of launching iX.

We have had the 2 models -- pricing models available: the pricing -- our legacy pricing model, which was per graft; and then the flat tiered pricing that we offered with ARTAS 9x for select customers who wanted to participate.

With iX, now we have gone to the flat tiered pricing model as our kind of standard approach to be able to -- as stated in the script I read, looking at incorporating a notable cost upfront so the physicians can plan more effectively.

And then also, as they give more hair follicles to patients, they don't have to pay an additional charge for that.

So I can't comment on anything in terms of the fact that -- if people wanted to see this pricing model.

It was something our customers have asked for, and then we responded appropriately and now offered the option -- both options on 9x and then the flat tiered pricing on our new iX system.

And that does conclude our Q&A session for today.

I'd like to turn the call back over to Mr. Ryan Rhodes for any further remarks.

Thank you, Christie.

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

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

This does conclude today's program, and you may all disconnect.

Everyone, have a great day.