Zynex Inc (ZYXI) 2022 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Zynex Third Quarter 2022 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today.

I would now like to turn the conference over to Louisa Smith from the Gilmartin Group.

Thank you, Joe, and good afternoon, everyone. Earlier today, Zynex released financial results for the third quarter of 2022. A copy of the press release is available on the company's website.

Joining me on today's call are Thomas Sandgaard, Chairman, President and Chief Executive Officer; Dan Moorhead, Chief Financial Officer; Anna Lucsok, Chief Operating Officer; and Donald Gregg, Vice President of Zynex Monitoring Solutions.

Before we begin, I'd like to remind you that during this conference call, the company will make projections and forward-looking statements regarding future events. We encourage you to review the company's past and future filings with the SEC, including, without limitation, the company's 2021 Form 10-K and subsequent Form 10-Qs, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements. These factors may include, without limitation, statements regarding product development, product's potential, the regulatory environment, sales and marketing strategies, capital resources or operating performance.

With that, I'll now turn the call over to Thomas.

Yes. Thank you, Louisa. And good afternoon, everyone. Thank you for joining us today for our third quarter 2022 earnings call.

As noted in our recent earnings flat report, we are pleased to report another quarter of record revenue and order numbers. September saw the highest monthly orders in the company's history, following a record break in August.

Revenue and profitability remained strong and the productivity of our sales force has allowed for 19% and 13% revenue growth over Q2 and 2021 and -- sorry, Q3, 2021 and Q2, 2022, respectively. Total revenue for the quarter was $41.5 million, diluted earnings per share of $0.13 and adjusted EBITDA of $8.1 million.

We remain confident in our strong performance and expect to achieve both top and bottom line guidance for the full year, with current estimates of revenue being between $ 157.4 million and $ 160.4 million and EBITDA of $ 26.7 to $28.7 million.

Our strong cash position and collections allowed us to complete a second stock buyback in the open market totaling $ 20 million so far this year. We believe these buybacks are a prudent way to apply our positive cash flow at this time and demonstrates our confidence in the performance of the business, our ability to capitalize on future growth opportunities and ultimately deliver value to shareholders.

The quarter ended with over 400 sales reps and our ultimate goal is to fill all 800 territories, and we are exceptionally pleased with the productivity growth, our existing sales force have been realizing recently and so far.

Revenue per rep is up 30% compared to this time last year and 12% over last quarter. We'll seek to fill the remaining 350-plus territories over the coming years. And eventually make those territories as productive as where we now have seasoned reps with consistent high order production.

The development in our monitoring division is progressing as anticipated as our team works to bring the CM-1600 blood and fluid volume monitor, early detection of sepsis device and the laser-based pulse oximeter to market. I'd all call these products individually for game changers.

This quarter, we announced some significant milestones, including the first enrollment in the blood loss detection clinical trial for the CM-1600. Pending clearance of this device we will announce our commoditization strategy throughout 2023.

The laser-based pulse oximeter is still in the development stage following the acquisition of Kestrel Labs in December of 2021. We expect to have prototypes towards the end of this calendar year and submission to the FDA for clearance in mid-2023.

I'm very pleased with the company's performance and look forward to witnessing our continued progress in both divisions. Zynex is unique in that we are executing quarter after quarter and delivering consistent results in terms of revenue growth and profitability.

As opposed to many of our cash restricted small-cap peers in the sector, we've been profitable in 24 of the last 25 quarters. We're not limited by a high cash burn, and we don't need to repeatedly turn to the capital markets to proceed growth opportunities. Zynex has a compelling business model with a fantastic team that is performing efficiently, and I'm excited to see what we can do throughout the rest of the year and into the next.

With that, I'll now turn the call over to Anna Lucsok, our Chief Operating Officer, for a more detailed business update from the Pain management division.

Thank you. As Thomas highlighted, the Pain management division has seen consistent order and revenue growth quarter after quarter. Sales for our productivity is at all-time high with revenue per sales rep at $430,000 per year. We've seen steady revenue growth in the business despite a generally flat number of reps.

This efficiency is a result of our competent insurance billing team, high-quality sales team and new sales management structure that allows our top-performing reps to collaborate and learn from each other, leading to a better overall result. We'll continue to foster a culture of excellence in our hiring and performance management process to ensure these productivity levels improve in years to come.

Additionally, we are beginning to see a positive cadence in sales hires and are projecting to end October with over 430 sales reps. Of the macro challenges facing the sector, we have been impacted primarily by inflation as it relates to corporate employee wages and sales rep compensation. As I've noted, we are committed to maintaining a best-in-class workforce and retaining the talent needed to stay competitive.

Cash collections remain consistent, and we have not seen any material impacts from in or out of network coverage shifts since the beginning of the year. As Thomas noted, collections have been strong enough such that our cash position has allowed us to complete another stock buyback program. We continue to gain traction with new and existing prescribers with our non-opioid pain management products that are used as the first line of defense to eliminate pain.

We have a diverse set of call points that include any physician or providers that see patients in pain, such as orthopedic surgeons, pain doctors, primary care physicians, physical therapists and more. We continue to maintain and grow quality revenue opportunities through a broad range of call points nationwide.

I'll now ask Don Gregg, Vice President of Zynex Monitoring Solutions to speak to the business updates related to that division.

Thank you, Anna. We continue to make excellent strides in building out the patient monitoring division, which is comprised of a multiproduct portfolio and development pipeline. ZMS R&D includes hemodynamic monitoring, sepsis monitoring and laser-based pulse oximetry, with an estimated addressable market of just under $4 billion.

The NiCO co-oximeter and the HemeOX products were added to the pipeline via the acquisition of Kestrel Labs at the end of 2021. We believe that these laser-based products will be used in hospital systems as an alternative to legacy devices and will allow for more accurate readings across diverse populations. It has been noted that the technology and LED systems has an inherent pigmentation bias. But we believe our laser-based solution inherently solves current market problems. We've been building out the team for the co-oximeter products, hiring key engineering personnel and clinical teams in order to position ourselves for FDA submission in mid-2023.

Additionally, our noninvasive CM-1600 wireless blood and fluid monitor has submitted or was submitted to the FDA in late 2021. We are in ongoing conversations with the agency to provide additional information as requested. Clearance for the CM-1600 is anticipated in the coming months.

As a reminder to our audience, the first-generation product, the CM-1500 was previously cleared and the CM-1600 will have wireless monitoring capabilities in addition to that. There are multiple ongoing clinical studies to support the commercialization process with 2 in the enrollment phase and an additional 3 in the design space. We've completed several others.

Last week, our team attended the American Society of Anesthesiologists Conference in New Orleans to showcase the product where we received exceptional feedback and we're able to highlight white papers from our Wake Forest in DaVita studies.

We are excited about the progress we've made in the monitoring division and look forward to presenting and utilizing data in the coming quarters to capitalize on this unique market opportunity and add a diverse revenue division to the company.

I will now turn the call over to Dan Moorhead, Chief Financial Officer, for a more in-depth look at financial performance in Q3.

Thanks, Don. Please refer to our press release issued earlier today for a summary of our financial results for the third quarter. In Q3, orders grew 34% year-over-year and net revenue grew 19% to $41.5 million from $34.8 million in 2021. Device revenue increased 25% to $11.3 million compared to $9.1 million in Q3 of last year. (inaudible) revenue increased 17% year-over-year to $30.2 million from $25.7 million. Gross margin was 80% in the third quarter, similar to what it was a year ago.

Sales and marketing expenses were $17.2 million in the third quarter of 2022 compared to $13.1 million in the same period in 2021. G&A expenses were $9.4 million in Q3, an increase of 37% or $2.5 million year-over-year. $1.3 million or over half of the increase is related to investments in our Monitoring Solutions division and related headcount to launch our new products. The increase in monitoring is in line with our previously stated estimates of increased spend.

Tax expense as a percentage was 23% for the quarter. Net income was $4.9 million and produced $0.13 per diluted share in the third quarter and adjusted EBITDA was $8.1 million. Also of note, cash from operations during Q3 was $7.4 million, which was our second best quarterly results in the company's history.

For the 9 months ended September 30, 2022, orders grew 15% and net revenue grew 22% to $109.4 million from $89.9 million in 2021. Device revenue increased 19% to $27.6 million compared to $23.3 million last year.

Supplies revenue increased 23% year-over-year to $81.8 million from $66.7 million. Year-to-date gross margin was 79% compared to 78% last year. Sales and marketing expenses were $48 million year-to-date compared to $40.7 million in the same period in 2021. G&A expenses were $26 million, an increase of $7.5 million year-over-year and $4 million of the increase is related to the investment in our Monitoring Solutions division.

Tax expense year-to-date is 23%. Net income increased 17% to $9.6 million and produced $0.24 per diluted share year-to-date in 2022, and we had adjusted EBITDA of $16.7 million.

Finally, we ended the quarter with $23.5 million in cash. Cash from operations increased $9.6 million year-to-date, which allowed us to complete our second buyback, pay a cash dividend and pay down our debt related to the Kestrel acquisition by $4 million.

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

Thank you, Dan. As I stated previously, we expect our fourth quarter revenue to come in between $48 million and $51 million, with adjusted EBITDA between $10 million and $12 million. This puts us in a position with our full year 2022 estimate for revenue in the range of $ 157.4 million to $ 160.4 million, representing growth of approximately 22% over the year of 2021. Adjusted EBITDA for 2022 is estimated to be between $26.7 million and $28.7 million.

With that, operator, please open the call up for questions.

We will now begin the question-and-answer session. (Operator Instructions) And our first question will come from Adam Maeder with Piper Sandler.

This is Simran on for Adam. Congratulations on the quarter. Maybe starting with a little bit more detail on the procedure environment and just kind of the progression that you saw over the course of Q3. It does sound like you've had record order volumes in September. So maybe just describe a little bit about how things have kind of played out during the quarter. Was there any sort of seasonality that impacted the business that could have led you to even executing even higher on the quarter or just any higher-level thoughts there?

So overall, we've seen a significant increase in productivity of our sales reps and the growth in this quarter was driven directly from that. We have been putting a lot of effort and initiatives into attracting higher-quality sales reps, and we've been successful at that. We also put a new sales management structure in place, as mentioned earlier, and that has proven to be very successful at bringing our new reps up to speed, but also existing reps that -- helping them with their performance overall. So I don't think this is necessarily related to any seasonality, it is directly related to increased performance or more efficient performance from our sales force.

Okay. And just with the sales rep adds, I think you said that you expect to end October with 430 reps. Could you maybe talk about what the sales force will look like exiting 2022 and just over the longer term? What does a fully complete, efficient sales rep structure look like for commercial organization.

Maybe I'll just start -- so the structure is already in place. And the 800 territories will probably be in the ballpark of 450 sales reps by the end of the year. And over the next few years, populate the remaining part. About half of our sales force, current sales force are what you would call fully or near fully productive, and the other half are still in the ramping-up phase.

So we'll obviously see a significant ramp-up as we grow in terms of revenue per rep. So we get closer to the million dollars per year in average revenue per rep. And obviously, as we saturate all the open territories more then we'll naturally, just looking at the math that goes into it, we'll start seeing the increased revenue productivity per rep in the coming years. But it's all about populating all 800 territories. The management structure is in place and is working well.

And if I could squeeze one last one in here. Just on the blood monitoring side. There's a lot of commentary on the product in the script today. And just overall, we've been kind of hearing about this aspect of the business kind of coming into play. So I'm just curious as far as what kind of impact you anticipate that category will have on the business as we head into 2023. And then as I look at numbers for next year, it's still a pretty healthy increase even though it does seem like the sales rep kind of productivity is coming into the mix. I mean are you comfortable with where the (inaudible) are as far as 2023 goes?

So this is Don Gregg. We have a product that's submitted to the FDA, our blood monitoring volume device. And we have a commercial strategy that we've aligned on for the organization for both sales and marketing. We're expecting clearance here fairly soon. And as we continue to deliver on the product milestones, we'll begin estimating in Q1 or so, to following clearance to start commercializing that product. The important thing is that we're playing in almost a $4 billion market across our pulse oximetry, sepsis and blood volume markets. And we're expecting to compete with different technology in that category and win our fair share of business across that.

And I would just add in, so 2023, we are pretty comfortable with what's out there. We'll continue, obviously, as we go through the budget cycle to kind of fine-tune those numbers. But we feel pretty good about 2023.

Our next question will come from Jeffrey Cohen with Ladenburg Thalmann.

So I guess, firstly, a question for Anna, when you talk about the sales productivity being up 30% year-over-year, could you talk a little bit about kind of the learning curve that you're finding and maybe some of those aggregate numbers that you spoke about as far as annualized revenue on a mean or a median basis or a territorial basis?

Yes, I can talk about this. We, I would say the learning curve so far has been more about more attention to our new sales reps that we're bringing on board from the leadership. So we increased the number of people in sales management overall, and they have less direct reports that they can give more attention to. And that's proven to be successful. We are also monitoring the activity of our reps, making sure that they're set up for success, and they're seeing more clinics in capturing more business that way.

I would also add, Jeff, that we are -- Thomas talks a lot about the $1 million productivity mark. We're over 40% of the way there. We've talked about the average for a rep to get to that 1 million is somewhere close to 3 years, an average 10-year of a rep right now is just over a year. So we're really on track or ahead of track as far as projections, we've given per rep and based on the tenure of the reps we have on board.

Can Anna or Thomas, could you talk about the EBITDA margins, it looks like you're -- the middle of the range is coming at around 17.4% on an annual basis for 2023. Just curious how does that feel to you? It seems like the past couple of years have been from high teens to mid-20s from '18, '19 and 2020. Does it feel like that should stabilize? And I guess, will that be affected on in your case by some of these product introductions coming to market in '23, we hope.

Yes, that's the biggest piece. We did 20% last year. This year, we're kind of high teens, like you said, somewhere in that 17% range. And the biggest difference is the investment we made in monitoring solutions. Without that, we'd be in the low 20s. So yes, we would expect it to kind of stabilize. And I think we're looking to, again, hop back into the 20s. We're going to be at 20%, obviously, in Q3 and in Q4, and I think we would expect to be there in '23 as well.

And then final for us, maybe Thomas, can you talk a little bit about Q4 in the general sense of the business or you've got a pretty strong range out there for Q4 and a pretty strong year from a pull-through in the fourth quarter. How does that feel? And how does that feel carrying through? Or is that going to be continued acceleration with the potential for the 3 platforms to hold on to what we've seen over the past few years on the 1,600 and sepsis and its point (inaudible)

Yes. You've followed us for a while now, Jeff. So I assume you're familiar with the seasonality that we have. And I would assume other companies have in medical devices that bill insurance companies, in that the fourth quarter is always the strongest. We see here in October that's nearly complete that, the order growth versus last year continued what we saw in August and September. So that's very encouraging.

So the fourth quarter is traditionally always very strong in terms of orders, but it's also strong in terms of cash collections as well as revenue recognition simply because more and more patients have met their deductibles. So they are typically more procedures, et cetera, being carried out, and we benefit from doctors being at work more than they are maybe in the earlier parts of the year.

So in terms of orders, in terms of revenue, in terms of cash collections, that's always the strongest quarter in the year. And then we dropped back down and kind of start from scratch again in the first quarter, et cetera. And as we continue to grow, the numbers are just better. So you're right, it's sequentially a big leap, but it's in line with what we normally see percentage wise at the fourth quarter as compared to the first 3 quarters of the year. So I'm very comfortable with that.

And one more quick one, if I could. As far as the inventory, it looks like it remains strong at 43%. I know it ticked up earlier in the year. Anything to read in there on supply chain or inventory for the quarter or going forward?

We have had and have no supply chain issues whatsoever. So that is -- I mean, that's obviously Anna, driving that part of the business and has done it exceptionally well the past couple of years.

Our next question will come from Yi Chen with H.C. Wainright.

Could you give us a more granular estimate as to how many reps will be available at the end of 2023?

That's a tough one,. That's way out. So I think a lot of it just depends on the labor market, and it's been so up and down. I think we've seen a good trend recently, like Anna said and Thomas mentioned, that we expect to be in the 450 range by the end of the year, but I think it would be premature for us to put something out on 2023.

And during the remainder of 2022, shall we expect to see results coming out of the clinical trials of CM-1600?

Yes. We actually have results from several of the trials that we've actually completed. We have several other trials that are actually in phase. Some of those are longer duration than others. And just as a quick recap, we have a whole blood study. That is a multi-site study. It's about 500 subjects or so. And initial analysis of this data is collected, providing a better understanding of parameter accuracy, our relative index behavior and low-volume blood loss studies. And this is across a diverse subject population.

Other studies that we have going on is our dialysis study, monitoring study at DaVita. And that specifically is monitoring patients across 3 different dialysis sessions. And there's a -- these are volunteers that have multiple compounding medical conditions relevant to normal hemodynamic and fluid dynamic control. This has shown a lot of promise because our device has had no intra-subject variability, supporting our relative patient approach. And we have apheresis donation study that has been continuing is currently enrolling.

This is designed to test and understand how the physiological parameters and relative index change in blood component fluid protocols. This is, as I said, continuing at this point, but there is a blood shortage crisis in the U.S. and physicians are using more blood components and non-blood fluids for patient resuscitation at this point. So it's a very relevant area for us to study and understand particularly for our products. It's providing some insights into the parameters accuracy and relative index, sensitivity and specificity. And so this is showing some very good promise.

We've also completed a couple of lower body negative pressure studies that simulate hemorrhagic shock, and there's significant promise in this category of our device. So this is showing how a system and algorithms work in what we would call a high-volume blood loss, where it's normal to see various stages on hypovolemic shock. So it's exciting that our primers are responding to the changes despite anticipated compensatory mechanisms. This is an important study for us and the refinement of our algorithm to perform optimally in complex cases. Hopefully, that gives you a pretty good insight into that, Yi.

Yes. So you still expect to secure the marketing clearance before the end of this year, correct?

It's hard to anticipate what the FDA -- the agency is going to do, but we've been in rounds of questions with them. And we're continuing through that. And so it's hard to speculate when we'll actually get through all of that, but I'm expecting that we're going as fast as we can at this point with the agency.

And could you comment on the plan for NiCo oximeter and HemeOX oximeter in 2023?

Yes, I think we've been consistent that we plan to have that submission to the FDA in mid-2023. And we are on track for our milestones and in some -- many of those in our program, we are actually ahead of schedule. So I think that from a risk standpoint in all programs that we're doing fairly well.

Our next question will come from Marc Wiesenberger with B. Riley Securities.

Can you talk about the introduction of new products beyond the next wave over the last few quarters? And how do we think about them as a percentage of the total orders kind of growth rates relative to the next wave and their respective margin profiles?

Yes. The most significant introduction we have done has been -- obviously, let me take one step back. Outside of the next (inaudible) 00:32:14 promote cervical traction devices, low back support or LSO devices, ice, our cold and hot therapy machines. And now we have -- and of course, we have the Neuromove device for stroke rehab and the incontinent device that we're not promoting much right now.

But we have recently introduced knee braces and that has gone really well. We -- that the 2 different kinds. They are osteoporosis arthritis or OA, braces and they are post-operational knee braces. And all these devices go really well with the next wave for pain management and rehabilitation, many of them being used right after the surgery. So of course, we see a lot of prescriptions from orthopedic surgeons. And I'd say the knee braces are doing really well.

So if we go back a few earnings calls and we were talking about how much of the orders were coming from other products than the next wave. We were talking about 15%, 16%, 17%. And we are now looking at just over 20% coming from other products. So it's cold and hot therapy machines that are increasing Cervical traction is increasing, low-back support and then with the extra little notch coming from the knee braces.

So it's good to, of course, we have the monitoring division that's going to long term help us with a significant amount of diversification. But it's good to see that we are spreading out how the orders are coming in on other products in the pain management division.

Dan, anything to call out in terms of the strong cash from operations this quarter? It looks like the adjusted EBITDA conversion to cash from operations was about 91%. And given the fourth quarter guide for adjusted EBITDA between 10 to 12, is there any reason to believe that we won't see record cash from operations in the fourth quarter and have kind of a similar conversion rate?

I think -- it's 1 quarter. So I'm more on the conservative side, but I would say, yes, we expect to have good cash flow. We typically have good cash flow in the fourth quarter. So we would expect there to be a pretty high conversion rate there. Obviously, there's some timing things that can get you -- if it comes in a week early week late. But generally, I would say, yes, we expect to have a pretty high conversion rate during Q4.

And then just the last one. Consensus is kind of looking at 23 revenue up around kind of 22% and OpEx up kind of around 20%, and that's maybe stripping out maybe one of the outliers in there. But given the investments that are needed for the monitoring segment, is that a reasonable expectation to still think that revenue, for sure, will outstrip OpEx growth and maybe frame it another way, how much investment is still needed really -- are going to be needed to achieve the objectives of the monitoring division next year?

Well, some of it's run rate, right? So the spend has increased every quarter this year. So you're talking what our exit rate is versus the entrance rate. So we said we were spending an extra $5 million, and that gets us to about $8 million this year. But based on that exit rate, obviously, it's still going to be up. But I think -- again, I think the percentages in the 2023, as we see it right now, we haven't put out guidance yet. But as we see it right now, we think it's in the ballpark.

This will conclude our question-and-answer session. I'd like to turn the conference back over to Thomas Sandgaard for any closing remarks.

Yes. Thank you for joining us today. We look forward to maintaining our profitability and leveraging growth opportunities in the quarters and years to come. We appreciate your interest in Zynex and enjoy your evening. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.