Zynex Inc (ZYXI) 2020 Q4 法說會逐字稿

Good afternoon, and welcome to the Zynex Fourth Quarter and Full Year 2020 Earnings Call. (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 could cause actual results to materially differ 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.

Good afternoon. My name is Thomas Sandgaard, President and CEO of Zynex. Welcome to our 2020 fourth quarter and full year earnings call.

I'm excited to announce yet another quarter of revenue growth and positive net income. Our fourth quarter revenue of $25.6 million increased 81% compared to the same quarter last year. It was also the highest quarterly revenue in the history of the company. It was our 18th straight quarter with positive net income, and fully diluted earnings per share was $0.05.

Adjusted EBITDA for the fourth quarter was $3.4 million, as we continue to invest in growing our sales force. We continue to see good order flow as we push through obstacles related to COVID-19 pandemic. Fourth quarter orders came in 117% higher than the fourth quarter of last year and 45% sequentially compared to Q3. For the full year, orders grew 96% compared to 2019, a solid result in the middle of the pandemic.

The continued strength in orders and growth of those orders speaks volumes to the relationships that our sales force has with many prescribers and the need for them to prescribe non-opioid, nonaddictive prescriptions strength solutions for the patients in pain.

As selling gets back to normal later in 2021, we see an upside in sales order growth as the over 300 sales reps we added net during 2020, they haven't been able to get access to many of the clinics in the territories due to COVID restrictions. As a reminder, the majority of cash and revenue related to an order comes in over the year following the receipt of the order as the patient uses the device and related supplies, which should lead to expanding revenue and profitability in the second half of 2021 and beyond.

In Q4, we continued to aggressively add sales reps and exceeded 500 total reps by the end of the fourth quarter. Our recruiting efforts continue to be supported by a surge in candidates due to increased unemployment-related rates related to COVID-19. We expect these new hires to provide significant productivity increases in 2021 and beyond. We expect to have over 600 sales reps by year-end.

I should also mention that our operations continue without any issues, and our supply chain remains uninterrupted. It's our practice to keep several months of finished products on the shelf, have 4 months of components on hand for internal assembly and 12 to 18 months of orders placed with our vendors on top of the in-house materials.

During 2020, we took an even more conservative approach in response to COVID and any possible supply chain issues, which resulted in an increased inventory of approximately $3 million higher than our normal levels. We should be back to a more normal inventory level when we get through Q2 and Q3.

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 products in the industry. The NexWave for pain management, our NeuroMove device for store rehabilitation and InWave for incontinence treatment, puts us in a very strong product position in the rehabilitation markets.

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 the FDA clearance for our CM-1500 blood and fluid monitor nearly a year ago. The CM-1500 is a noninvasive monitor intended to monitor patient's fluid balance in 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 where internal bleedings today are common and difficult to detect until the point where serious complications recur. We believe this product will lead to safer surgeries, fewer complications and less mortality, one of the biggest unmet needs in hospitals today.

We're still recruiting to add more personnel to this division. We're seeing good solid preliminary results from a clinical study at Wake Forest, and we're preparing to commence more studies on the device shortly. We are seeing interest in purchasing the device from hospitals that have -- now have the device and demo. And our engineering team are well underway with building prototypes of our next-generation CM-1600 device that will be easier to use in certain settings.

Recently, we filed a patent application for a technology that is somewhat similar in nature, but will be used for noninvasively early detecting sepsis, another huge unmet problem in hospitals today.

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

Thanks, Thomas. First, I'll review our 2020 fourth quarter results. Orders grew 117% year-over-year, and net revenue grew 81% to $25.6 million from $14.2 million in 2019. Device revenue increased 118% to $8.2 million compared to $3.8 million last year. Supplies revenue increased 67% year-over-year to $17.4 million from $10.4 million. Gross margins were 78% in the fourth quarter.

Sales and marketing expenses increased 156% year-over-year, as we continue to aggressively grow our sales force, and G&A expense grew 91% year-over-year. Much of the increase was related to increased headcount in our reimbursement and patient support functions related to our order growth.

Fourth quarter net income was $1.8 million or $0.05 per diluted share. Adjusted EBITDA, which is a standard EBITDA calculation plus an exclusion of noncash stock-based compensation and other income expense and is reconciled in our press release, was $3.4 million in the fourth quarter of 2020.

I'll now review the 2020 full year results. Orders grew 96% year-over-year, which increased net revenue 76% to $80.1 million from $45.5 million in 2019. Device revenue increased 99% to $21.3 million compared to $10.7 million last year. Supplies revenue increased 69% year-over-year to $58.9 million from $34.8 million. Gross margins were 78%.

Sales and marketing expenses increased 130% year-over-year, and G&A expense grew 71% year-over-year. 2020 net income was $9.1 million or $0.26 per diluted share compared to net income of $9.5 million or $0.28 per diluted share in 2019. Adjusted EBITDA increased 13% to $13.7 million in 2020.

On the balance sheet, as of December 31, 2020, our cash balance was $39.2 million, up from $14 million at year-end. As many of you know, we completed an equity transaction during July, which added $25 million to the balance sheet. Cash was down slightly from Q3 as we increased our inventory to protect against any supply chain issues. Our working capital grew 205% to $52.9 million at December 31 compared to $17.4 million as of December 31, 2019.

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

Thank you, Dan. I'm pleased with our full year growth -- full year-over-year growth in orders of 96%, and our revenue growth of 76% in the midst of a COVID-19 pandemic. It's a huge testament to our efforts to grow our sales force and clearly justifies the investments in our sales personnel, sales management and inside support functions.

Our focus for 2021 is on increasing sales productivity as selling resumes to its normal course, continuing to leverage the investments we have made within sales and also G&A to improve profitability and most importantly, help our patients in pain. We will continue to grow our sales force during 2021, except it will be at a much slower pace than last year.

We have made the investments in growing our sales force primarily in the second half of last year. This investment is showing all the right signs as Q4 orders grew an impressive 117% year-over-year. January of this year grew 98% over last January, and February is currently trending above 120%, while March looks like growth over -- well over 150% at this point. Eventually, over the next year or 2, these orders will turn into revenue, and therefore, we expect to return to a healthier relationship between top line revenue and sales expenses, as we get into the third and fourth quarters of 2021.

As always, with the beginning of the year, we see insurance deductibles impacting revenues. So this seasonality that we see every year means a flat or slightly lower revenue in the first quarter compared to the fourth quarter of the previous year. That's been the case for many years.

We estimate our first quarter revenue to come in between $23 million and $24.5 million with an adjusted EBITDA loss between $0.5 million and $1.5 million. As a reminder, first quarter revenue is historically affected by health insurance deductibles not being met in the beginning of the year. This revenue seasonality, along with the sales force investments we made in the second half of 2020, is causing a small loss in Q1.

With our current order growth, we expect revenue and profitability to ramp up significantly throughout the year. The Q1 revenue range is 51% to 61% higher than in 2020, and full year 2021 revenue is estimated to come in between $135 million and $150 million with adjusted EBITDA between $15 million and $25 million. The full year revenue estimate is approximately 68% to 87% above 2020 revenue of $80.1 million.

My goal for our electrotherapy and rehab division is to continue to grow our share of the 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.

The very large expense line in our financials is therefore a part of a very deliberate effort to grow our top-line revenue long-term and therefore leverage the healthy margins in our industry to maximize long-term profitability and earnings per share. We will see the effects of that in the third quarter of this year and going forward. In the meantime, our revenue is still impacted by the slowdown in orders in Q2 last year due to COVID and our bottom line impacted by adding a net of 300 sales reps during last year, primarily during the second half.

Our long-term goal is still to fill all 800 territories in the U.S. and get sales reps fully productive. We see that it takes up to about 2 years to make a sales rep fully productive. In summary, we announced yet another great quarter with strong growth in orders, growth in revenue and profit.

We will now answer questions from our listeners.

(Operator Instructions) We'll take our first question today from Yi Chen with H.C. Wainwright.

My first question is, how much impact from COVID-19 have you incorporated into the 2021 revenue guidance?

Relatively little. The biggest impact was a -- came from a significant dip in orders in April and May, to some degree, the first half of June of last year. So we saw a significant dip in orders in that second quarter, that impacted revenue in the third and fourth quarter of last year. So we came out a little less than what else we could have.

We definitely still see the impact of that dip in orders here in this first quarter. There will be a little bit in the second. I think once we get to the third quarter of this year, the impact from that dip is very little. All of our reps are obviously not having full access or the same type of access that they used to have before COVID. But just the fact that we have added so many sales reps has more than mitigated those marginal difficulties we see for the individual rep. So therefore, we still see order growth in the range of, at least, double over last year, except for that second quarter of last year. And eventually, we'll see revenue growth catching up to that kind of order growth.

And second question, does the -- does your revenue projection include any potential revenue from the Blood Volume Monitor? And if not, can we still expect the device to be commercialized sometime later this year?

Well, it's definitely commercialized. It's already sitting in a few hospitals where people are looking at and testing it and have indicated that they're certainly interested in acquiring it. We have not put any of those numbers in the forecast for this year. We have so much growth in the pain management division alone that it wasn't necessary to put that in. So that buys us a little or puts some of the pressure -- take some of the pressure off in terms of certainly the public markets and the perception of how much revenue should come this year, but there might be a little that will trickle in before the end of the year. Most of the activity is obviously on getting more clinical data, but we do have some sales efforts.

So currently, you do not have a dedicated sales team for the Blood Volume Monitor yet, is that correct?

We do have one person titled business development -- Director of Business Development. But we might expand with more people to basically undertake a sales rep of 10 and just 1 person.

Okay. And finally, can you provide an update on the development of the sepsis monitor?

Yes. We are still in the very early stages of figuring out the prototyping of that device. So there's not a whole lot yet other than the concept is there, the patent has been filed. And -- well the patent application has been filed, and we will be looking at how we can develop a prototype for it. We just added 1 more engineer to the engineering team. So we should have the resources to take that on as soon as he starts.

We'll take our next question from Jeffrey Cohen with Ladenburg Thalmann.

A few questions. So firstly, can you remind us on the sepsis monitor, what you anticipate the input is?

Well, it's -- the principle is the same, which is multiple parameters that have a correlation with the onset of sepsis. Individually, they don't mean much. But when you put them together in an index then it becomes a very strong indication, just like the Blood Volume Monitor.

In this case, we're looking at heart rate, temperature, respiratory rate and 1 or 2 more parameters to eventually add into that index that could give us an alarm. So the end result of that is alert a medical professional that you should probably take a blood sample so that you can analyze to see if you actually have sepsis coming on. And that would be earlier than when it gets into a very serious situation, where it's more obvious that sepsis sunset.

So if we can take -- have medical professionals take that sample early on and with a decent degree of probability will then be able to say, yes, we can start treatment now rather than later. We will be able to save some lives and obviously reduce a lot of complications.

And similar to the Blood Volume Monitor, you would be applying this to the forearm or the hand as far as a click?

That would be -- this product here will have the ability to have the sensors applied -- the more flexibility as to where that can be applied than the Blood Volume Monitor. But that is definitely an option to place it there, and the sensors could -- would, for the most, be somewhat similar.

Got it. And then on -- it's the first time I've heard you really talk about or mention acquisitions or complementary products. Are you thinking about that in the pain/opioid arena or are you thinking about that as far as analysis in the hospital patient population or all in any?

Yes. We're looking at both. We have come somewhat close or very close, in some cases, actually for both divisions. As of now -- what's on the table right now, those things that are more imminent potential acquisitions, they would be in the pain management space.

I mean we already distributed products from other companies. If we add more products in that space, it would have an immediate sales channel, and we're only looking at products that would be able to leverage that we have -- that they would have the same call point. So that's what we're looking at, but it's going to be the right opportunity for us to pull the trigger.

Okay. And then lastly, as far as the guidance on both sides with the range as well as the EBITDA numbers, it looked like 2020 was a fairly methodical and orderly ramp-up of revenues. It sounds like you're saying is a little bit of a reset in Q1 similar to Q4 with probably another equal and orderly ramp up throughout the year to get to that midpoint. And with the midpoint in the, call it, 76% or 77% range, are we okay in thinking about, generally speaking, the sales and marketing line being driven by the, say, 80% to 85%, and then the G&A line increasing in the 60% to 65%?

I would say for the full year, the sales side -- this year, sales comes in at a little over 40%, and that's going to be similar next year, but it's going to decrease significantly over the course of the year. With the guidance we gave in Q1, the sales and marketing line is over 50% because of the flatness in revenue in Q1 that we see every year. And then you should see a decrease down towards 40% by the end of the year.

As far as -- its margin. And on the growth side then, the sales and marketing could be 70%, 75% range for the year?

I don't have that calculation in front of me. I typically look at it as a percent of revenue, and you'll definitely -- I'd have to go back and look at it that way. But again, if you're trending down towards about 40% as a percent of revenue by the end of the year, that's about right.

Were you talking about gross profit margin or were you talking about our sales expense line?

Yes. I was thinking of just trying to get a better handle on the expense lines. So with that midpoint in guidance, I think, we're at, call it, 60% and 30%, first being sales and marketing for the year in that general range.

Yes. Yes, that's pretty close.

Okay. And I think I got it. And lastly, on the sales front. So you increased dramatically last year by 300-plus reps, getting over 500. It sounds like this year, perhaps another 100-ish get added. Any commentary on retention or selection or qualification or training of note, and how that's been going?

It's about the same as we've seen before. We continue to get better and better at training new reps. It's going to be a little easier this year because training about 500 new reps last year -- maybe not that much, 400 or something like that. And then 300 of them are still with us, was obviously a big task on top of the reps that were already on board. So this year, by only adding 100 net, is going to enable us to make sure we pay more attention, not only during training, but in the first few days when our regional sales managers hold their hands out in the field after they get their initial training. It will be a much easier task, and we could probably achieve even better results in terms of early on productivity and retention rate.

(Operator Instructions) We'll take our next question from Marc Wiesenberger with B. Riley Securities.

This is actually Aman jumping in for Marc. So I wanted to ask, can you talk about the demand and prescriptions associated with rehabbing from surgical procedures? And where are you relative to normalized levels? And how has that trended over the last couple of quarters?

Well, the demand is -- some people describe the demand for professional or medical pain management to be in the $500 billion range, well wide and half of it being here in the U.S. And what we see -- so that's a pretty good way of illustrating that any rep we have in the 800 territories that already mapped out barely scratch the surface of the demand that exists in their territories. Whether it's the amount of patients that there are or it's the amount of clinics that they can even possibly get to during a day or during the time that they're at the workforce.

So we see the long-term revenue potential be an average of $1 million per sale rep for long term. Obviously, it takes a couple of years for most reps to get to that kind of productivity. That's order productivity then the revenue comes even lighter than that because of our business model. But right now, because of how many new reps there are and they're just beginning to send in the first few orders, that obviously means that our average is way lower than that something we've covered many times previously.

But obviously, if you say that the average revenue program long-term is $1 million a year, and we'll eventually have filled up 800 territories, that should be equating to a revenue of $800 million in theory. We currently see that we have a few reps that are producing over $2 million a year in annual revenue, and our top 20 reps produce an average of -- or you got to be below the top 20 to be producing in the neighborhood of maybe $1 million in annual revenue. So it's absolutely attainable, but we have so many reps that are just slowly working up to that.

So it a very slow-moving machine that we have built here. But there's also a lot of sustainability to it because the revenue is generated for a couple of years after we get those orders. So it's slowly getting on the books. And eventually, in the future quarters, we'll see the accumulated effect of those orders turning into revenue.

Okay. And then I wanted to ask about your supply chain. Are you seeing any input inflation there? And do you have any ability to pass that on to your customers?

We're fortunate enough to be growing so fast and also now having pretty much second sources on everything we do, and that puts us in a very strong negotiating position. So if the worldwide trend to see increased prices, we still see decreasing prices on our raw material and components, simply because our volumes are increasing so much, and we've been good at creating second sources. So we have competition and pricing as a result of that. So we see the opposite trend, but that's not obviously a macro trend. That's something that's self-inflicted, just the fact that we're doing better.

Got it. Good to know. And then last question for me, and I'll jump back in the queue. Can you talk about any traction you're getting with other products like NeuroMove and InWave? And do you have any plans to make more aggressive efforts to monetize these products besides the NexWave?

Right now, our focus is to primarily increase revenue of the NexWave. That is where the most obvious demand is. And you can say, where you get the most bang-for-the-buck buy, adding more sales reps, providing them with better training, better promotional and material and better support. So our investments have been more in the sales force. Also, we added from going -- last year, we added 10 more regional sales managers. We went from 5 to 15 regional sales managers, that's also an investment in a way that primarily fits that space.

And the other products that we distribute from other companies and potentially will acquire that fit into that sales force is where our focus is. Long term, you're right. We've got some great products. Our InWave for incontinence treatment is a great product, and there's really good reimbursement for it as well. So as we penetrate those markets better, that's certainly something we could take up and do more of. That's probably an item we can -- that -- where we can utilize at least parts of our sales force.

The NeuroMove will probably, the way things are reimbursement-wise right now, require more effort, more of an investment long-term and potentially securing better reimbursement and/or educating the end users more than necessarily the physicians to drive more revenue on that. So that is more longer term.

We also need to consider expansion internationally in terms of diversifying and expanding our revenue base that way. So that will be part of the mix as well. But again, we're probably a couple of years out before we look at be looking at expanding into those areas. The demand is so big and any effort we put in, in pain management, in that area right now, pays off so quickly that it's an obvious one to put most of our entity on short-term intent.

Next question comes from Matt O'Brien with Piper Sandler.

This is Korinne on for Matt. So first, could you talk a little bit about the revenue mix shift we're seeing with supplies decreasing a bit? And what are the drivers of that? And also, where do you see mix going over the coming years?

I would say, overall, that is pretty meaningless, how that flows because it's very constant. It just -- well, maybe Dan can give the more technical explanation of it. Every patient has a total revenue stream that comes from device and supplies.

The only thing is that when we have a huge uptick in orders, obviously, initially, there would be an uptick in the device revenue versus the supplies, but long term, then the supplies revenue catch up to it. But overall, it's flat. It's technicalities, and that makes it looks like there are fluctuations. But maybe you can...

Yes. Typically -- and like you said, it's typically pretty flat. We're usually around 75% supplies. Q4 is always a little bit of an anomaly because we see a -- at the end of the year, we always see a bump in device. We had the same thing last year. It didn't quantify quite as much as it did this year, but the customer base is a lot bigger this year.

So again, I agree with Thomas, I think it's going to be pretty flat, and you're typically in that 25-75 device-supplies as a percentage of revenue.

Great. That's super helpful. And second, can you just provide a little more color on the gross margin pressures we're seeing and where you see that going throughout '21 and into 2022?

We've been pretty constant. We've been in that 78% range for the last several quarters. In prior years, we might have been a little higher than that. But coming out of '15, '16, '17, when the company really didn't have a huge staff, we were lacking in a lot of areas. And so to get staffing where it needed, we had to make those investments and sacrifice the margin a little bit.

Going into '21, as many people know, we did open up a new facility that is our production facility standalone. Prior, it was on the first floor of our corporate headquarters. So that investment, obviously, we took a space that we needed to grow into a little bit. So I think that will put a little margin pressure in '21. And so instead of maybe that 78% to 82%, maybe we're 75% to 80% going into next year, but the product margins themselves have been pretty constant.

Awesome. And last one for me. I know you touched on this earlier, but could you just expand a little bit more on the retention and turnover you're seeing of your reps? And since you've onboarded a bunch of new folks so quickly, we'd be interested in hearing how those metrics have been trending versus historical levels?

Yes. We -- those that we hired during last year, we -- most of them came on board in the second half, and therefore, a lot of them have still been with us less than a quarter. We typically give them 90 days, sometimes a little extra to prove that they can actually sell more than just the initial interviewing. And here, right at year-end, we had a little bit of cleanup. So we are probably still in the 10% -- a little lower 10%, maybe 10%, 15% attrition rate.

So it's probably -- if you look at other medical device companies, probably a little better than you see in other medical device companies. And I expect we will be doing even better here this year because we're only going to be hiring at a rate that is less than 1/3 of what we did last year. And much less, probably 1/4, of what we did in the second half of last year. And that gives us the ability to be even pickier when we recruit, we can pay more attention to the individuals during training. And our regional sales managers will be able to follow-up and hold the hands of the new sales reps better than they were able to last year. So I expect to see a significant improvement in the retention -- in sales force going forward.

And this concludes our question-and-answer session. I'd like to turn the conference back over to Thomas Sandgaard for any closing remarks.

Yes. Thank you. First of all, I just wanted to apologize for the technical difficulties in dialing in today. But other than that, I hope that today's earnings call has been informative for everyone, and I appreciate the interest in Zynex and listening into this call. Thank you, and a great day to all.

The conference has now concluded. We thank you again for attending today's presentation. You may now disconnect, and have a great day.