Venus Concept Inc (VERO) 2020 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the First Quarter of 2020 Earnings Conference Call for Venus Concept, Inc. (Operator Instructions) Please note that this conference call is being recorded and that the recording will be available on the company's website for replay.

Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including those identified in the Risk Factors section of our most recent annual report on Form 10-K filed with the Securities and Exchange Commission.

Such factors may be updated from time to time in our filings with the SEC, which are available on our website. We undertake no obligation to publicly update or revise our forward-looking statements as a result of new information, future events or otherwise. This call will also include references to certain financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures.

Reconciliations of these non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in our earnings press release issued today on the Investor Relations portion of our website.

I would now like to turn the call over to Mr. Dom Serafino, Chief Executive Officer of Venus Concept. Thank you. Please go ahead, sir.

Thank you, operator, and welcome, everybody, to Venus Concept's First Quarter 2020 Earnings Conference Call. Today, I'm joined by our Chief Financial Officer, Domenic Della Penna; and Chad Zaring, who we recently appointed as Chief Commercial Officer of the company.

Let me start with a brief agenda of what we will cover during our prepared remarks. I will start with an overview of our revenue performance in the first quarter, including color on how our business trends have been impacted to date by the corona or COVID-19 pandemic, and how we are managing our business to keep us well positioned for growth as the recovery begins.

After my opening remarks, Domenic will provide you with more in-depth review of our quarterly financial results as well as a summary of our balance sheet and financial condition, and then we will open up the call for your questions.

With that in mind, let's get started, beginning with a review of our first quarter revenue performance. We reported GAAP revenue of $14.5 million for the first quarter of 2020, representing a decrease of 41% year-over-year, which came in at the low end of our preliminary guidance range. Obviously, these results do not reflect the growth expectations we had coming into the year, and the delta is entirely related to the disruption we experienced as a result of this global pandemic caused by COVID-19. As discussed on our fourth quarter call on March 30, our revenue results in Q1 were significantly impacted by this global pandemic.

We are a global business, having established commercial presence in more than 60 countries and over the course of our 10 year history. Approximately 30% of our 2019 sales came from APAC and the European regions, which were impacted by this pandemic beginning in January in China and broader APAC region. And then as the disease spread, our business in Europe saw disruption beginning in February and worsened in March.

In the U.S. specifically, we had solid growth performance in the first 2 months of 2020, where sales increased 7% year-over-year fueled by recent new product introductions, specifically a stronger-than-expected market response to our Bliss initial commercialization. As COVID-19 pandemic spread through the U.S. in March, however, we began to see sales trends slow as federal and state restrictions were initiated. The impact varied by customer type, site of care, geographic region of the country. But by the end of March, nearly all of our customers had experienced significant disruption in their activities, including shifting resources to emergent care, restricting access to clinicians, reducing elective procedures and were announcing temporary closings as a result of the COVID-19 pandemic.

Device sales in the U.S. for the month of March declined 80% year-over-year, driven by device sales falling 95% year-over-year in the last 2 weeks of the month. Notably, we experienced a higher-than-expected number of canceled or delayed orders in the last few days of the first quarter as customers reacted to the very high level of uncertainty related to the mandates for closing of nonessential businesses and restrictions on elective procedures.

Given the significant uncertainties associated with COVID-19, we recognize the investment community's desire for increased clarity and have elected to provide color on our current quarter trends. Similar to all med tech businesses, with a high mix of elective procedures, our U.S. customer trends deteriorated further in the month of April, as evidenced by the fact that roughly 95% of our customers were closed during the month compared to roughly 80% at the end of March.

Notably, our year-over-year device sales performance in April was better than expected, given so many of our customers were not practicing during the month. It is a direct result of our strong execution by our sales force during the month, whereby they closed some of the orders that were canceled in the last week of March. Excluding the contributions related to the timing of orders delivered in April versus March, our U.S. device sales declined approximately 55% during the month of April.

Importantly, in recent weeks, we have seen an improvement in customer trends as some practices have started to reopen. Specifically as of this week, approximately 20% of our customers are open compared to 5% or so that were open at the end of April. While we are pleased with the overall position or positive trends in states lifting restrictions and gradual reopening of practices around the U.S., we remain very cautious given the high level of uncertainty with respect to the pace of recovery going forward.

As discussed in our Q4 earnings call, this global pandemic presented the company with unprecedented challenges, and I'm very proud of how our organization has responded. We reacted quickly and implemented measures to protect the health and safety of our employees that has given our team the ability to remain focused on supporting our global customers to whatever extent possible over the last 2 months. There are 2 areas of strategic focus and activity in recent months that I wanted to highlight as I think they are critically important to understand how we have responded during this period of business disruption, and how our continued strong execution in these areas is expected to contribute to our goal of being a well positioned -- as well positioned as we can when the environment improves.

The first area I want to highlight are our recent progress on the commercial strategy front. We have made considerable efforts as part of our key strategy to maintain strong engagement with our existing customers as they work through the challenges related to this period of business disruption. We have leveraged virtual selling and services strategies and have hosted a number of webinars during the month of April that included participant numbers that were, quite frankly, very impressive. We hosted 6 virtual events in the U.S., covering a variety of subjects, including product-focused events for the Venus Bliss, Viva, Versa and ARTAS, all of which included external KOL speakers as well as topical events focused on practice enhancement and support on subjects including business recovery now and after the COVID crisis, how to manage your clinic staff, customers' business through this crisis as well.

We also hosted 3 webinars for customers and prospects in both Latin America and EMEA in April. Together, these events in U.S. and international markets had more than 1,100 participants, and we couldn't be happier with our virtual engagement efforts and believe that these activities will result in driving new customer adoption at some point in the near future.

The second area I wanted to highlight is that we've made significant progress in our efforts to reduce costs. Building on our plans to reduce the operating expense profile of the combined company with $18 million of synergies and cost cuts expected to be realized in 2020, we have conducted a full review of our current operating budget for 2020 and have identified additional operating expense reduction opportunities of at least $20 million, which we expect to realize during 2020 and into 2021.

We expect our restructuring program, combined with previously announced synergies and cost reductions, to result in a total cost savings of approximately $38 million in 2020, continuing into 2021.

Simply stated, we expected these efforts to result in significant improvement in the company's financial profile going forward. Domenic will provide you financial details on this new structuring program in a few moments. But at a high level, I wanted to highlight that this restructuring program is an important part of a broader set of strategic initiatives to enhance our competitive positioning and maximize our capital during the period of business disruption.

We expect these strategic initiatives to position us well to return to the market share gains when the market recovers, while driving improving financial results with our leaner operating expense profile. We will not be detailing each activity for competitive reasons, but they do include the consolidation of our direct selling operations in certain international markets and investing that capital into the higher return, more attractive U.S. market; enhancing our sales leadership team with the appointment of Chad Zaring to the newly created role of Chief Commercial Officer, which has allowed us to eliminate multiple layers of sales management and other leadership positions to reinvest that valuable capital into our North American direct sales team over time, which means these dollars will be focused on driving growth and market share gain in the future and doing so at a higher return on investment.

We have also eliminated duplicative positions throughout the organization as part of our integration and have culled underperformers in our direct sales team during this period of business disruption.

Finally, under Chad's leadership, we have developed a targeted commercial strategy for the balance of 2020, which builds upon the strong virtual engagement we have had with existing customers and prospects in recent weeks and months.

We have detailed plans for how we can optimize our pipeline and sales process as our customers and prospects begin to reopen their offices and begin to schedule and treat patients in the weeks and months ahead.

We have tightened our targeting on specific clinicians and tailored our selling strategies depending on the geographic region of the country. We are also arming our direct sales team with programs and messaging that's focused on 6 key product lines within our portfolio of 12 commercialized products. Of course, we will continue to leverage our unique pricing and payment options via our industry-first subscription model. Importantly, the changes to our direct sales infrastructure and more targeted near-term commercial strategy have not altered our commitment to our high-touch customer focused philosophy, which builds long-term relationships with our customers supported by our outstanding marketing team, continuous clinical education, practice enhancement programs and more.

Now let me turn the call over to Domenic Della Penna, who will provide you a detailed review of our first quarter financial results and discuss our balance sheet and financial condition. Dom?

Thanks, Dom. My prepared remarks this afternoon will focus on the company's reported results on a GAAP basis, unless otherwise noted. To avoid confusion when evaluating our reported results or when reviewing our historical financial results and SEC filings, let me highlight a few items regarding our merger transaction with Restoration Robotics.

First, reported results prior to the fourth quarter of fiscal year 2019 reflect the business operations and performance of the legacy Venus Concept business, referred to as Venus Concept Ltd. in our SEC filings.

Second, beginning with the fourth quarter and fiscal year 2019 periods, our reported results include the contributions from Restoration Robotics from November 7, 2019, to December 31, 2019. This makes the evaluation of financial results, compared to 2018, a bit challenging, given it's not an apples-to-apples basis. Where possible and in certain areas, we will call out areas where results were materially impacted by this nuance to help the investment community understand the respective contributions from each business in the period.

First quarter total GAAP revenue decreased by $10.1 million or 41% year-over-year to $14.5 million. As reported on our GAAP income statement, total products and services revenue decreased by $1.1 million or 13% year-over-year to $7.7 million. And total lease revenue decreased $8.9 million or 57% year-over-year to $6.8 million.

The decrease in lease revenue and in products and services revenue in Q1 2020 was driven primarily by the business disruption caused by the global pandemic. Total products and services revenue in the first quarter of 2020 included $1.9 million from the sale of ARTAS and ARTAS iX systems, products and services following the closing of our merger on November 7, 2019. Excluding revenue from Restoration Robotics, products and services decreased 35% year-over-year in Q1.

Turning to a brief review of our revenue performance by geography and by product line, which incidentally is how we report and discuss revenue results in our 10-K and 10-Q filings.

First quarter total GAAP revenue by geography was driven by a $6.2 million decrease or 41% year-over-year in international sales and a $3.9 million decrease or 41% year-over-year in U.S. sales compared to the prior year period.

First quarter total GAAP revenue by product category was driven by an increase of $1.5 million or 125% year-over-year in service revenue including VeroGraft technician services, ad agency services and extended warranty sales; an increase of approximately $200,000 or 14% year-over-year in sales of products, including skin care, hair and other consumable products. The growth in these 2 product categories was partially offset by a decrease of $8.9 million or 57% year-over-year in leases revenue, which is where our subscription program is reported and represents all system sales with typical lease terms of 36 months; and a decrease of $2.8 million or 45% year-over-year in system sales, which are cash sales or sales of systems with payments expected in less than 12 months.

Turning to a review of our first quarter performance across the rest of the P&L. Total GAAP gross profit decreased $8.8 million or 49% year-over-year to $9.3 million representing a gross margin of 64% compared to a gross margin of 73.5% in Q1 2019.

GAAP gross profit in the first quarter of 2020 includes the impact of Restoration Robotics post-close including purchase accounting impacts, which represented approximately 250 basis points to the year-over-year change in gross margin. The primary drivers of the year-over-year change in gross margin were lower revenue as a result of COVID-related business disruption and excess manufacturing costs related to the ARTAS system as a result of lower-than-expected production and sales.

Total GAAP operating expenses increased $32.9 million or 165% year-over-year to $52.9 million. The increase in total operating expenses was driven primarily by a noncash pretax goodwill impairment charge of $27.5 million. The adverse change in market conditions from the COVID-19 pandemic prompted management to conduct an impairment evaluation, which resulted in the impairment charge recorded. The company does not expect this noncash impairment charge to have an impact on future operations or affect its liquidity, cash flows from operating activities or compliance with financial covenants in its borrowing agreements.

Excluding the impairment charge, operating expenses for the first quarter of 2020 increased $5.5 million or 27%, driven by an increase of $5.8 million or 70% in general and administrative expenses and an increase of $0.6 million or 27% in research and development expenses. These increases compared to the prior year were offset partially by a decrease of $0.9 million or 10% in sales and marketing expenses.

Total GAAP operating loss in the first quarter of 2020 was $43.6 million compared to an operating loss of $1.9 million in the prior year period. Excluding the impacts of goodwill impairment charge, our first quarter operating loss was $16.1 million. Net loss attributable to Venus Concept, Inc. for the first quarter of 2020 was $50.2 million or $1.68 per share compared to $5.3 million or $1.10 per share for the first quarter of 2019. Weighted average shares used to compute net loss attributable to Venus Concept Inc. holders per share were 29.8 million and 4.8 million for the first quarters of 2020 and 2019, respectively.

Note, in addition to the aforementioned goodwill impairment charge of $27.5 million pretax, our net loss results also included foreign exchange losses of $4.3 million compared to $0.7 million in the prior year period. Changes in foreign exchange are driven mainly by foreign exchange effect on accounts receivable balances denominated in currencies other than the U.S. dollar with the larger impact for Mexico, Canada and Australia, which currencies declined as a result of the collapse in world oil prices in March 2020. We do not currently hedge against foreign currency risk.

Adjusted EBITDA for the first quarter of 2020 was $13.7 million compared to adjusted EBITDA loss of $1.2 million for the first quarter of 2019. We have provided a full reconciliation of our GAAP net loss to adjusted EBITDA in our press release this afternoon.

Turning to the balance sheet. The company had $20.6 million and $15.7 million of cash and cash equivalents as of March 31, 2020, and December 31, 2019, respectively, and total debt obligations of approximately $71.5 million and $69 million as of March 31, 2020, and December 31, 2019, respectively.

The year-over-year change in cash was driven by an increase of $20.4 million in cash from financing activities, partially offset by a use of cash from operating activities of $15.4 million and $0.1 million use of cash from investing activities. The year-over-year change in cash from financing activities was primarily driven by the net proceeds from 2020 private placement of $20.3 million.

Subsequent to quarter end, the company received funding in the total amount of $4.1 million in connection with 2 small business loans under the Federal Paycheck Protection Program provided by the CARES Act. The funds will help mitigate the financial impact of COVID-19 pandemic and will be used for the payment of payroll costs, interest on mortgage applications, rent applications and utility expenses. On April 29, the company entered into an amended agreement with Madryn, which calls for interest payments for the period beginning January 1, 2020, and ending on and including April 29, 2020, to be paid in kind. The amended agreement also calls for the interest rate per annum during the PIK period to increase from 9% to 12%.

Turning to a review of our guidance, which we reiterated in our press release this afternoon. Due to the rapidly evolving environment and continued uncertainties from the impact of COVID-19, on March 30, 2020, the company withdrew its previously announced fiscal year 2020 revenue guidance, which was issued on January 13, 2020. At this date, the company cannot predict the specific extent or duration of the impact of the COVID-19 outbreak on its financial and operating results for the fiscal year 2020. We expect COVID-19 will continue to significantly negatively affect customer demand in the second quarter of fiscal 2020 and into the second half of the year.

As previewed in our press release and earnings call for Q4 2019 on March 30 and reiterated in our earnings press release this afternoon, we expect to realize a significant reduction in operating expenses this year. After the merger, we focused on improving the profitability of the combined business and had identified approximately $18 million of synergies and cost reductions related to the merger that we expect to realize over the course of fiscal 2020. In response to the challenging business environment in recent months related to the COVID-19, we also conducted a full review of our 2020 operating budget.

In the first quarter of fiscal 2020, we began implementing a new restructuring program, which is expected to contribute to our overall strategy of financial improvement through the elimination of overhead and streamlining of certain enterprise functions. We expect to realize cost savings from this new restructuring program of approximately $20 million in 2020 and continuing into 2021. The restructuring program is mainly focused on a combination of permanent headcount reductions, hiring freezes, temporary unpaid leave and a reduced work week for certain employees and reduction of discretionary spending across all departments.

In terms of operating expenses and cash burn in 2020, while we are not in a position to offer formal financial guidance at this time, we would like to offer the following considerations for the second quarter of 2020 for modeling purposes.

The combined companies had a total operating expense of $32.3 million in Q2 of 2019 or roughly 1/3 of which -- of which 1/3 came from Restoration Robotics. The combined OpEx in Q2 of 2019 included approximately $3.7 million of merger-related costs. So the normalized OpEx was $28.6 million in Q2 of 2019. We expect to realize a larger benefit from synergies and expense savings in the second quarter of 2020 as compared to the contribution realized in the first quarter of 2020.

We also expect to realize cost savings related to the new restructuring program, which we began implementing in April. In total, we expect to realize a $10 million reduction year-over-year in combined company normalized OpEx in 2020 -- in the second quarter of 2020. We also continue to identify additional cost reduction measures that will be implemented if we experience a prolonged recovery from this pandemic.

With that, I'll turn the call back to Dom.

Thanks, Domenic. Before we open up the call for your questions, I wanted to share a few thoughts on the dramatic change in our business during the first quarter. In closing, the business disruption from COVID was significant in Q1 and into Q2. But we are encouraged by the slight improvement in trends over the last few weeks. We have been very focused on maximizing our available capital resources and ensuring that we are best positioned to return to above-market growth and significant market share gains as soon as this recovery begins.

We continue to believe the long-term opportunity for Venus Concept remains extremely compelling for us as a leading player in both the global minimally invasive and noninvasive medical esthetic market and the minimally invasive surgical hair restoration market.

I want to thank all of our employees and our customers for their resilience and their flexibility during these challenging times and our shareholders for their continued support of Venus Concept. With that, operator, I would like to now open the call to your questions. Operator?

(Operator Instructions) Our first question comes from Mike Ott with Oppenheimer.

Just curious if the outside U.S. recovery is further along than the U.S., and if you can call attention to any companies or countries or regions that are experiencing greater strength.

Yes. Thanks for the question. We obviously have noticed that markets went into lockdown at different stages through the course of Q1. We have opened up in certain markets to a greater extent than, obviously, in North America. China, Japan, South Korea and Australia are improving. Europe has recently made very good progress in Germany, for example, the U.K., France and Spain and Italy are on their way to reopening. Having said that, they're a little slower, given the magnitude of the impact of this particular virus in those countries. But we do -- we are seeing a pretty positive trend when it comes to generating lead activity, et cetera, from various regions across the full scope of our business unit.

And if I can squeeze in one more, in the U.S., are certain markets leading the way in reopening. I believe you said 20% of sites are now back operational.

Yes. We -- what we've done in the U.S., in particular, is we did a few things. Number one, we really tightened the sales organization, the feet on the street, and we really aligned it with the markets that were demonstrating early return to, as best we can call, normality, markets like Florida, Texas and so on. We've had, through our various webinars and so on, the U.S. market has demonstrated that we do have pockets of, I'll call it, positive return to the normality as best as we can.

Having said that, we want to make sure that we keep our finger on the pulse here, and we do monitor this on a weekly basis with our organization and our sales leadership. And I think that ultimately, we do count, obviously, on the U.S., that represents a significant portion of our annual business. So we do want to make sure that we can capitalize, wherever possible, with specific markets that are opening. Obviously, there are still challenges in New York State and California. But we do anticipate that at least California in the coming weeks will begin to reopen. We already do have some business happening there, albeit in a modest way, but the signs are pretty positive based on the response we've had from our current customer base, which is what we've also been very focused on, people who already know us, and welcome us into their dialogue, if you will, for other technologies.

(Operator Instructions) Our next question comes from Marie Thibault with BTIG.

Thanks for the color. We were encouraged to hear that your sales team was able to close some of the orders from March into Q2. And I know that often some of these capital equipment purchases and subscription decision-making fall toward the end of the quarter. So I'm just curious whether you expect that to continue in Q2. I'm just trying to think about where a customer's, kind of, perception or thinking will be toward the end of Q2 as possibly more regions will be out of lockdown at that point.

Right, Marie, and that's a great question. Look, you're absolutely right that traditionally in our business about 50% of the business comes in the last month of any given quarter. Having said that, I think that as the lockdown started to occur in the U.S., in particular, in March, there was a lot of fear factor unknown and so on, and that really did impact us in the last few weeks of the quarter, which are critical in any given quarter for us and other companies as well.

Having said that, I think our team has done a very good job of engaging with the customers who had activity in the queue that we expected in Q1, and were able to convert and, as the waters sort of calmed, the world wasn't necessarily ending in the first part of April and more importantly into May. We still see that trend developing, and we think that this will probably be a quarter we will try to flatten out as best we can the activity in Q2, which typically represents the second busiest quarter of the year for most companies in our space.

We think we're also well positioned to engage in a more aggressive manner our subscription model, especially with our shift to a more, I'll call it, core market focus. These customers, the dermatology and plastic surgery community, typically have access to capital for any purchases that they make. And in our case, having the ability to go to them as we continue to come out of this with an offering that nobody else can, we feel that this gives us some flexibility and a bit of a competitive advantage over our peers. And we think that that will continue through Q2.

Ultimately, still, in closing on this, June will still be the busiest month regardless for the business because, obviously, as we look at sort of the transition in markets opening, we're cautious about how they open, but we want to see a continued momentum of less fear and more eager participation in commercial activity. And so we're monitoring it on a weekly basis and acting accordingly.

Okay. Makes a lot of sense. I guess my follow-up question would be just to clarify on some of the cost reduction measures you've already taken and those that are planned. And thanks for that detail on Q2 as we think about models.

The $38 million, how much of that hits in 2020? I know you mentioned it would continue into 2021. So I wanted to clarify whether some of that $38 million happens in 2021 as well, or whether that's just a lower sustained expense level in 2021 that you were referring to.

Yes. I'll give it to Dom Della Penna for that one.

Yes. No. The full $38 million is what we expect to realize in 2020 and, obviously, that will continue on into 2021. So the -- it's a combination of the $18 million that we announced as part of our year-end results combined with the $20 million that we are -- have targeted as a result of this COVID-19 pandemic. So in response to that, we're looking at a total combined $38 million. And the $10 million essentially in Q2, if you take the $38 million and divide it by 4 quarters, you're at $9.5 million.

We're expecting a little more in Q2 because that's the peak of the pandemic in terms of the impact on the company. We expect some recovery in Q3 and later in the year, such that some of the cost reductions that we've taken in the immediate term will not necessarily result in the second half of the year as it recovers, right? Because some people will return back to work.

We are currently showing no additional participants in the queue. That does conclude our conference for today. Thank you all for your participation.

Thank you, everybody, and we appreciate the continued support, and we look forward to improving economic times and performance of the company through this very challenging and unique situation. Have a good evening.

Thank you. All participants, you may disconnect.