Zynex Inc (ZYXI) 2021 Q2 法說會逐字稿

Good day, and welcome to the Zynex 2021 Second Quarter Conference call. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Certain statements in this release are forward-looking and, as such, are subject to numerous risks and uncertainties. Actual results may vary significantly from the results expressed or implied in such statements. Risk factors that can cause actual results to materially different from forward-looking statements are described in our filings with the Securities and Exchange Commission, including the Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2020, as well as forms 10-Q, 8-K and 8-K/A, press releases and the company's website. Please note this event is being recorded.

I would now like to turn the conference over to Thomas Sandgaard, Founder, Chairman, and Chief Executive Officer. Please go ahead, sir.

Good afternoon. My name is Thomas Sandgaard, President and CEO of Zynex. Welcome to our 2020 second quarter earnings call. I'm excited to announce yet another quarter of revenue growth and positive net income. Our second quarter revenue of $31 million is the highest quarterly revenue in this company's history and increased 61% compared to the same quarter last year. We continue to see good order flow as the economy returns to normal. And second quarter orders came in 247% higher than Q2 of last year and 11% sequentially compared to the first quarter of this year. The continued strength in orders speaks volumes to the relationships that our sales force has with many prescribers and the need for them to prescribe non-opioid, non-addictive, prescription-strength solutions for the patients in pain. As a reminder, the majority of cash and revenue related to an order comes in over the year and following years following the receipt of the order as the patients use the device and related supplies, which should lead to expanding revenue and profitability further throughout 2021 and beyond.

During the second quarter, we continued to focus on the productivity of our sales reps and trimmed our less productive reps. The trimming of sales reps and the high competitive job market resulted in not hiring as many reps as we said goodbye to and therefore, saw a decrease in active sales reps now here throughout the second quarter to approximately 450 reps at the end of the second quarter. The decrease in sales reps will now slightly decreased the forecasted revenue, but also in turn, which I think is very important, boost profitability here in the near term.

It's obviously very difficult to grow as fast as we've been growing for a while and invest in a sales force with a very high expense and post a significant profit. We now saw the beginning of here in Q2 and expect to see that throughout the rest of the year that we'll be slightly more profitable than we had originally expected. We still expect to have approximately 550 sales reps by year-end. The addition of a net of 50 sales reps compared to the beginning of this year compares to a net of over 300 that we added in 2020, most of those in the second half of 2020. The additional sales force growth is now happening at a much slower pace, which will directly help our bottom line.

I also want to mention that our operations still continue without issues, and our supply chain remains uninterrupted. As we discussed previously, we've taken a very conservative position in response to COVID. And any possible supply chain issues, which resulted in an increase in inventory at the end of Q1 of approximately $3 million in excess of our normal levels. Here in Q2, our inventory level started moving back to more normal levels, which will continue during the second half of 2021.

As announced earlier this year, we moved into a new corporate headquarters during the quarter. The new building has additional square footage and expansion rights to support our continuous roads. The opioid epidemic continues to be a serious issue in this country, and we are increasingly working to get patients off opioids and for physicians to use our prescription strength technology as the first line of defense when treating pain.

Currently, the devastating impact has reached a level where tens of thousands die yearly due to opioid abuse. We continue to develop more tools to make physicians aware of our technology that literally has no side effects. Our products for pain management and rehabilitation still stand out as some of the best in the industry. The NexWave for pain management, our NeuroMove device for stroke rehabilitation and the InWave for incontinence treatments puts us in a very strong product position in the rehabilitation market. We continue to see great potential in both our product divisions, our existing revenue-generating area for pain management as well as a huge unmet potential for our blood volume monitor.

As most of you probably already know, we managed to get FDA clearance for our CM-1500 blood volume monitor a year ago. We recently also filed a patent on top of the 3 patents that are -- that have now been issued for the blood volume monitor, but also for a non-invasive method to detect or early detection of sepsis. The CM-1500 is a non-invasive monitor intended to monitor patient's fluid balance in the hospitals and surgical centers. We expect to initially target ORs and surgeries that typically display substantial blood loss as well as recovery rooms and ICUs for internal bleedings today are common and difficult to detect until serious complications occur. We believe this product will lead to safer surgeries, fewer complications, and less mortality; one of the biggest unmet needs in hospitals today.

We continue to see solid preliminary results from a clinical study of Wake Forest. We've now had the device amounted to more than -- more than 120 patients. And the device so far has been solid in terms of either not providing a false positive or when there has been bleeding and/or other fluid loss shown a significant change. So this is obviously very encouraging. And we are -- we're gearing up to commence more studies on the device shortly. Our engineering team is also expanding pretty significantly and well underway. We're building prototypes of the next generation, the CM-1600 that will be easy to use in surgical settings compared to the CM-1500. And we are also adding personnel and other resources to conduct more clinical research.

I will now turn the call over to Dan Moorhead, our CFO.

Thanks, Thomas. First, I'll review our 2021 second quarter results. Orders grew 247% year-over-year and net revenue grew 61% to $31 million from $19.3 million in 2020. It's also worth noting that Q2 revenue increased 29% sequentially compared to Q1. Device revenue increased 83% to $7.8 million compared to $4.3 million last year. Supplies revenue increased 55% year-over-year to $23.2 million from $15 million. Gross margins were 77% in the quarter. As we've mentioned previously, we transitioned our production and warehouse to a new facility during Q1. This has greatly enhanced our efficiency, but in the short term, it has put some pressure on gross margins. Sales and marketing expenses increased 102% year-over-year due to our sales force growth. G&A expense grew 43% year-over-year. Much of the increase was related to increased headcount in our reimbursement and patient support functions related to our order growth.

Second quarter net income was $2.8 million or $0.08 per diluted share. Adjusted EBITDA, which is a standard EBITDA calculation plus an exclusion of non-cash, stock-based compensation, severance, non-cash lease expense, and other income expense and is reconciled in our press release, was $4.8 million in the second quarter of 2021. I'll now review our 2021 6 months’ results. Orders grew 186% year-over-year, which increased net revenue 60% to $55.1 million from $34.5 million in 2020. Device revenue increased 84% to $14.2 million compared to $7.7 million last year. Supplies revenue increased 53% year-over-year to $41 million from $26.8 million. Gross margins were 76% in the first half of 2021. Sales and marketing expenses increased 123% year-over-year, and G&A expense grew 44% year-over-year.

2021 6 months’ net income was $2.1 million or $0.06 per diluted share compared to net income of $6 million or $0.17 per diluted share last year. Adjusted EBITDA was $4.4 million in the first half of 2021. On the balance sheet, as of June 30, cash was $32.3 million, which is down slightly from Q1, but mainly related to the $2 million in purchases in our stock buyback program. Our working capital was $52.9 million at June 30.

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

Sorry. I am sorry, I'll be right back. And I'm pleased with the second quarter order growth of 247% and our revenue growth of 61%. It clearly justifies the investments in our sales personnel, sales management, and inside support functions. Our focus for 2021 is increasing sales rep productivity as selling resumes to normal course, continuing to leverage the investments we have made within sales and G&A to improve profitability, and, most importantly, helping our patients in pain. We will continue our sales force growth in the second half of 2021, but at a slower pace than in 2020. We have made the investment in growing our sales force primarily in the second half of 2020. This investment is showing all the right signs that as the first quarter orders grew 140% year-over-year and again, in the second quarter, 247% year-over-year. These orders convert into revenue over the next several quarters, I should say, several years and further out, and therefore, we continue to build profitability in the second half of 2021 and 2022.

We estimate our third quarter revenue to come in between 34.5 and $36 million, with an adjusted EBITDA between 5 and $6 million. The third quarter revenue range is now 72% to 80% higher than 2020's third quarter revenue. We have narrowed our full year 2021 revenue estimate to now be between 130 and $137.5 million, with adjusted EBITDA expected to come in between 16.5 and $21.5 million. The full year 2021 revenue estimate is in the lower end of previously provided guidance due to the fewer than expected sales reps, which is partly due to the -- how hard it is to hire sales reps are. But the good part about it is that it's having a positive effect on our near-term profitability. The full year revenue estimate is approximately 62% to 72% of 2020 revenue of $80.1 million.

My long-term goal for our electrotherapy and rehab division is to continue to grow our share of a huge market for prescription pain management and to take advantage of the huge void in the market after the disappearance of our main competitors. This includes growing our domestic sales force as well as potential acquisitions of complementary technologies. Our long-term goal is to fill all 800 territories in the U.S. and eventually have our sales reps all become fully productive. We see that it takes up to 2 years to make a sales rep fully productive.

In summary, we have announced strong growth in orders, and we see those will drive revenue growth and profitability growth in the second half of 2021. We will now answer questions from our listeners.

We will now begin the question-and-answer session. (Operator Instructions) And the first question will come from Matthew O'Brien with Piper Sandler.

This is Simran on for Matt. So I wanted to speak on the sales force. As you guys are looking to onboard more reps, I think you mentioned 550 was the target by year-end. What does that mean for the spend here in the back half of the year in order to hit that target? And then can you also speak on the attrition you're seeing in the sales force, which seemed to impact this quarter's total rep number more so than in previous quarters?

Yes. I would say it impacts the bottom line more than anything. The relatively new reps that got added maybe at the very end of last year would not have provided a whole lot of orders that have contributed to revenue yet. So the fact that we, in the first quarter, we're very conservative about adding a whole lot of reps and we're more focused on trimming those that were not so productive and continue that trend here through the second quarter has more contributed to a better bottom line than we originally estimated. Not really contributing so much to the -- to any change in revenue. And we see as we ramp up the sales force again, although it will be at a much slower pace. We'll see that the rest of the year looks pretty solid in terms of the bottom line, and we would be coming in at approximately the same revenue that we were expecting going into the year.

Okay. Sorry, I think what I meant was, would you have to spend more in order to hit that target in order to onboard those reps, the 550 that you're trying to hit by year-end? Or you're commenting...

There's not a whole lot of additional expense. I think the fact that we will end up at 550, we were a while back 6 months ago, we were thinking, 7 months ago, we were thinking more like 600 reps at the end of the year. So we will -- as a result of that, we'll end up spending less, and therefore, we're very optimistic about the EBITDA and the EBITDA margin.

And then if you look at it as a percent of -- just real quick, if you look at it as a percent of revenue, Q2 sales expenses were about 44%. It should be similar to that in Q3 as a percentage as the revenue goes up. And then we'll continue to gain more leverage on it. So it should be approaching 40%, 41% of revenue by Q4.

And then just a follow-up. Could you maybe provide some color on kind of what that means for the outlook in 2022?

Yes, since we have seen several quarters with order growth well over 100%, which is a doubling of revenue. Of course, it's yet to be seen how well our sales force, first sales force will continue to ramp up and how well the new reps we're adding will be ramping up in the early days to see if we can get the same kind of order growth in the next quarter or 2. Obviously, as our numbers, the top line continue to go up, and we fill more and more territories and they become more mature. The percentage growth will eventually start dropping. But revenue for next year compared to revenue for this year could well be approaching 100%. But again, that will be a pretty significant -- this early, there's a significant tailwinds on that. It's always easier to predict when the company grows 5% or 6% a year. And when we're talking about this kind of growth, there's a pretty big tolerance and the revenue growth will -- and order growth we'll see next year.

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

This is actually Destiny on for Jeff. I was just wondering if you could first maybe talk about some of the progress you've made around securing an additional supplier or additional supply sources. I know that you mentioned that you're taking precautions and being conservative. So I'm wondering if there's any additional information you could give us around that?

No, not really any material significant information. It just shows quarter after quarter that the strategy we applied or started applying about 2 years ago, is working really well, having so many second sources in place and also being very conservative about placing orders filed in the future has put us in a strong position. And we're just obviously trimming the inventory levels a little bit just so that as we see that long term, the supply chains will be more stable that we don't carry too much inventory. But -- so it turned our cash position a little bit. On the other hand, as we were able to afford it, I think that money was well spent.

Understood. Perhaps I'll transition over to some sales force questions. Could you remind me how many sales reps on call center or back-end individual support can typically manage in terms of patient volume?

Yes. It changes all the time because we -- in terms of the infrastructure, the back office supporting our sales reps. We have here in the last couple of years, we probably restructured that over 2 years, probably 4 or 5x as we continue to grow as the issues we are dealing with the sales force keep changing. But probably more importantly, as we -- in the middle of last year, the second half of last year, expanded our regional sales managers from 5 up to 15 to manage how many sales reps we have now.

So as a result of that, we've actually been able to make it a little lighter on the inside and move people over to more processing orders, making sure that the prescriptions we get and the background information, the demographics, et cetera, are -- that's all more complete. So it can change. But typically, we've had one sales support person, if you want to put it that way, per region and a couple of support people per region as well that helps the reps with getting the paperwork in complete, et cetera. So depending on how you create the structure, but it takes about 3, maybe 4 people per region to support them, and you multiply that by 15. So that tells you about the support organization.

Got it. All right. And you know I have to ask your progress around the blood volume monitor. How -- what kind of feedback are you getting internally from your VP of sales and ops as well as some of the initial customers and placements? And then you mentioned some clinical work, and I was wondering if you could provide a little more detail on that as well.

Yes. I don't have the list with me, but that's more than half a dozen clinical sites, research hospitals, et cetera, that we're working on. I don't remember the names right here. And there are more that are kind of in the hopper that we're talking to. Obviously, he's very excited. I think we're all very excited about the kind of data we are getting from Wake Forest. I believe it's better than we would expect. But we're also trying to -- especially with new studies, we'll be starting up, try to stress test it, so that's the more extreme situations we put the device in and therefore, potentially learn more about how to trim and optimize some of the parameters we used to add into the index. But so far, it looks like a very solid product.

The next question will come from Yi Chen with H.C. Wainwright.

I think your original goal for the sales rep number by the end of this year was 600 million. Now that's a bit lower. So would you say the overall time frame for -- to reach your ultimate goal for the number of sales reps have shifted a little bit later due to the difficulty of finding experienced and productive sales reps?

Yes. I would say I'm not sure we have been specific about an endpoint for that, but we should be able to add a net from here on out of up to 200 reps a year. And we could probably push it because we saw what we could do last year. We could probably push it to get to 600 by year-end. But at this point, because it's not as easy as it was a year ago. I think it's better that we're also picky about who we hire. So we have a higher success rate with the

(technical difficulty)

to our sales force. I think that's important, too. And a nice side effect, obviously, is that it's going to -- as we continue to grow over the next several years, it's going to give us a slightly better EBITDA margin or profitability by not growing as fast. So -- but technically, you're right, yes.

Okay. Got it. At this point, would you be able to provide -- provide some clarification regarding the potential launch of the blood volume monitor potentially in 2022 and whether that's going to be the original model or the newest model?

Yes, that's a good question. Personally, I think the features, including being wireless instead of having a cable over to the patient is one of those things that's going to make it a much easier sell. And there's a few things on the user frankly there's the concept, the algorithms and all that is still the same. So that's something we're definitely looking at. I think it's probably more about having a little more substance in terms of the clinical support, so that when we do approach at a broader scale, hospitals in general, surgical centers, et cetera, that we make it an easy sell for the sales force and/or the medical device companies we might be working with here in the future to get it out. But it's -- yes, we definitely building the clinical evidence and we're also debating internally where we should put the biggest push, whether it should be the existing model or 1 of the 2 next models that we have in the pipeline and are literally prototyping now.

So by the end of this year, we would have better clarity as to the launch plan?

Yes, yes, probably. I think there's so much happening in that division now that there'll be a lot more to talk about in the next -- in a couple of quarters, definitely, yes.

The next question will come from Marc Wiesenberger with B. Riley.

Does the updated guide contemplate any potential disruptions from the Delta variant in the second half of the year? Or is it based essentially on an unchanged environment from the second quarter?

I would say no. And to be more specific, unchanged environment, yes. That what we estimate, yes.

And then a little more commentary on the calling of the sales force. Was there a change in any quota levels? Or what kind of went into the decision to trim now? Was it that you just kind of your tolerance for some wider performance was no longer acceptable? Or kind of maybe just help us understand your thought process on trimming now?

It -- I think it's a combination of things, but one of the primary driving factors was obviously considering the 300 net additions last year where the majority was towards the end of the year. We did have quite a few people that were not performing to you used the term quota to sort of the minimum requirements that tell us that we'll have a solid performer long term. So there's been quite a bit of turnover in that. And deliberately, early in the year, we were hiring at a much lower rate, probably about 1/5 of what we did in the second half of last year.

And that obviously netted out to be a deduction in the sales force. It's not something that I would look at it as a negative, of course, I'll take the increased bottom-line any day while we are still growing the order significantly. But as we're looking at it, it's now becoming easier to manage the sales force for our regional sales managers because they have fewer and more -- or I should say, less dysfunctional reps that you need to attend to. So there's a lot of benefits as we didn't add that many into the sales force during that period. We have now double, triple that effort, so that we will be adding probably be a net of -- probably net of 20 every month throughout the rest of the year.

Got it. Can you talk about the top 10 reps and what percentage of sales they represent as well as the top 50 sales reps? And how have those percentages changed since the end of the -- end of last year?

I don't have the numbers in front of me. So I'd have to guess a little bit, but our top 10 reps would probably be producing something like 4% or 5% of all orders. And there's also -- let me think. And there's not necessarily a correlation between who are the top 10 order producers and who are the better revenue producers. But we still have some reps that are, a few reps that produce maybe $2 million or close to $2 million a year. And quite -- quite a few more than a dozen that produce well over $1 million a year and a lot of reps that are slowly creeping up there. But they obviously need to have been employed here for quite a while before the accumulated revenue as it comes in month after month after the order comes in before the revenue slowly starts moving the average revenue for sales rep number. To your question is top 50, that's about 10% of our sales force, we probably get something like 15% of all orders from those. It's very widespread, as you can hear. The orders, fortunately, are not just concentrated to a few reps, but definitely spread out through the entire country.

Just 2 final questions for me. With regards to the -- NexWave, do you have any plans to kind of update it at all, maybe make it wireless, or add additional functionality? And if not, how do you -- how long do you think the current iteration can sustain its reception in the market as we do see some early entrants, having maybe more kind of updated pain management devices?

Currently, we don't have any plans. We've got really great engineers so that we relatively quickly can bring new versions of that technology or other products to the market if it needs to be. And as we see new technologies come to the market all the time we did that -- we saw that 30 years ago, we saw that 20 years ago, 10 years ago, et cetera. It's still a very strong in terms of market adaptability, holds a very strong position. And what we see is most -- what's more important is obviously that pretty much all insurance is covered. We also see that, obviously, prescribers are familiar with it and becoming more and more familiar with it.

And one of the most important things that drives when prescriptions are in is to a large extent, the relationship between the sales rep and the prescriber as well as how well we, as an organization, not just the device but how well we take care of the patients. We help them with insurance questions, we help them with technical questions, and we literally follow up with the patient same day or the day after what case we get the prescription. We follow up with the patient, same day or the day after they received the device, and we have a very extensive customer service department that we try to keep as well-staffed, I should say, in some cases, overstaffed so that we can answer all calls that come in at well over 90% at a time. So no one gets to leave voice mails or anything. It's part of the overall experience and also makes the prescriber want to continue to prescribe the device because we take good care of the patients.

So it's not just having a great device. It's the entire experience and having a strong sales force with strong relationships. That's important for generating the prescriptions and the future of revenue as you're alluding to. So there's less pressure on just having a fancy new technology. It's really the whole package. And being able to -- with prescription strengths, electrotherapy be able to help patients with the pain. So I don't see a competitor from a product point of view, competitive pressure at all.

Understood. And then just a final one for me. Have you added any sales reps in the Monitoring division at all?

We're about to add a few people we call business development people that you can call them glorified sales reps. We've been spending a lot of the time on developing key opinion leaders more than just knocking on doors and try to move some bucks. So that's literally the strategy here early on. It's about getting more clinical research, also building key opinion leaders, and just part of the stair steps that you have to take in this type of medical device sales.

The next question will come from James Terwilliger of Northland Capital Markets.

Thomas, can you hear me?

Yes, I can hear you.

Excellent. And a nice job on the quarter. Very quickly and I apologize, Thomas, I've been kind of flipping between different earnings calls, unfortunately. On the pain management side, and I've heard this from some other companies, are you getting hit by any type of wage pressure. It's hard to find employees out there, let alone good employees. Are you seeing any type of increase in wage pressure of what you have to pay these particular sales reps that you're trying to hire?

I don't know if we lost Thomas there or not. But we are seeing -- it's just general hiring pressure, one, finding them, and then it becomes wage pressure because they may have offers from a lot of different places to work, and it's just very competitive in this industry period, sales, med device or medtech. I would say, generally, it's really competitive. So yes, that ends up putting some pressure on wages and how that wage package is structured for sure.

Yes. No, I'm hearing that from other companies as well. And again, I apologize, I've been jumping around on a couple of calls. How many people -- I'm moving on to the Monitor division, how many people are in that? I know we talked about business development and working with KOLs. How many -- is it a 5 to 10 person team in there? I know it's pretty lean and mean, but I mean is that still kind of -- or how many people are in that Monitoring division at this time?

Yes. No, I think it's been a handful in that kind of 5 to 10 range, but we've definitely seen some new hires here. So we've bumped over 10 and then the hiring plan for the rest of the year. Thomas, you can comment more, but I think it's going to push us close to 15 to 20 by the end of the year.

Yes, absolutely. We are now investing heavily in it and we have a great guy Don Gregg, that's running that division. And it's very encouraging to see how we now see a lot of activity in that division.

So I got 2 more questions there on the monitor. I thought I heard Wake Forest earlier in the call. And again, I apologize again, how many clinical test sites or how many beta sites are you in right now? I know it's early, but -- and I know it's going to be a tough sell a piece of capital equipment going into a hospital after the hospital shut down with COVID. But how many different hospital clients are you kind of working through with this monitor at this time?

We're talking to a lot and has a lot, but hopefully, we'll get started very soon. But technically, we're just in that one right now.

Okay. And then lastly, Thomas, this is for you. If you look into 2022 and how you would launch this monitor, and I don't want to get into the numbers because it's too early. Would your preference be to go with an internal sales force or a strategic partner or maybe monitor with your business development people, so maybe some independent distributors that could call on those hospitals? Is there any -- what is your thought on ideally, I know you may not have the answer yet, what you would want to do in terms of distribution for this monitor?

I think as a small medical device company, and this is a fairly new area for us, relatively speaking. I think the best thing we can do is explore all options. And fortunately, we do have the financial ability to take the time to do it right and also to develop on all fronts, whether it's private labeling, whether it's strategic partnerships, whether it's licensing, whether it's a direct sales force. And it could also from a geographic perspective, be different, applying different distribution strategies depending on the part of the globe that we are addressing.

And this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Thomas Sandgaard for any closing remarks.

Thank you. I hope today's earnings call has been informative for everyone, and I appreciate the interest in Zynex and listening in on this call. Thank you, and a great day to all.

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