Zynex Inc (ZYXI) 2018 Q1 法說會逐字稿

Good morning, and welcome to the Zynex First Quarter 2018 Earnings Conference 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.

Factors that could cause actual results to materially differ from forward-looking statements include but are not limited to the need to obtain FDA clearance and CE Marking of new products; the acceptance of new products as well as exist -- excuse me, existing products by doctors and hospitals; larger competitors with greater financial resources; the need to keep pace with technological changes; our dependence on the reimbursement from insurance companies for products sold or rented to our customers; acceptance of our products by health insurance providers; our dependence on third-party manufacturers to produce our goods on time and to our specifications; implementation of our sales strategy, including a strong direct sales force; our ability to up-list to a larger exchange; and other risks 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, 2017, as well as forms 10-K -- excuse me, 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, President and CEO of Zynex. Please go ahead.

Good morning. My name is Thomas Sandgaard, President and CEO of Zynex. Welcome to our First Quarter 2018 Earnings Call.

We had a great first quarter with revenue of $6.9 million and our seventh consecutive quarter with positive earnings. Our revenue doubled compared to the same quarter last year, and we reported positive net income of $1.9 million or $0.06 per fully diluted share. If we compare our revenue in the first quarter with the fourth quarter last year sequentially, it was down slightly due to the seasonality of annual health insurance deductibles not being met in the first few months of the year.

The raging 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. We continue to develop more tools to make physicians aware of our technology that literally has no side effects. Our orders grew 36% year-over-year in the first quarter, while reimbursement per order also grew substantially compared to a year ago and throughout last year.

I'm very pleased to see our gross profit margin increase from 73% in the first quarter last year to 82%, up from 80% at the end of 2017, an indication that the industry for prescription-strength electrotherapy is still a very healthy and viable industry. I should also mention that $1.8 million of our $2 million stock buyback program took place in the first quarter, an effort we may repeat in the future to further strengthen the value of the stock and increase shareholder value.

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 stroke rehabilitation and InWave for incontinence treatment puts us in a very strong product position in rehabilitation markets.

We're also making progress on our new noninvasive blood volume monitor, the first product that can indicate loss of blood during surgery or internal bleeding during recovery and may have additional applications as well. We're hoping we can announce being granted one of several patents, CE Marking for the European market as well as seeing some progress with the FDA here sometime very soon.

We continue to see great potential in both of our product divisions, our existing revenue-generating area for pain management as well as the huge unmet potential for our blood volume monitor.

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

Thanks, Thomas. Here's an overview of our 2018 first quarter. Net revenue increased 100% to $6.9 million from $3.4 million in 2017. Device revenue increased 15% to $1.6 million compared to $1.4 million last year. Supplies revenue increased 158% year-over-year to $5.3 million from $2.1 million.

The growth in revenue drove gross margin to 82% in Q1, up from 73% last year. Fourth quarter net income increased 444% to $1.9 million or $0.06 per diluted share compared to net income of $400,000 or $0.01 per diluted share in the first quarter last year. Adjusted EBITDA, which is a standard EBITDA calculation plus an exclusion of noncash, stock-based compensation and is reconciled in our press release, was $2 million in Q1, up 257% from $600,000 last year. We generated $1 million in cash from operations during the first quarter of 2018, a 4,288% increase from 2017.

On the balance sheet. As of March 31, 2018, our cash balance was $4.4 million compared to $5.6 million at December 31, 2017, as during the first quarter, we spent $1.8 million on repurchasing our common stock. Our working capital grew to $4.6 million compared to $4.4 million as of December 31, 2017.

As of March 31, we owed less than $50,000 on our subordinated notes payable. And they were paid in full on April 1, which was the scheduled payment date, leaving us currently with no debt on the balance sheet outside ordinary operating obligations.

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

Thank you, Dan. We're in a strong growth phase and working to capitalize on the current momentum and demand for our products. We're expanding our product offerings as well as adding sales reps to our existing sales force. We added more than 25 sales reps in the first quarter alone, and obviously, they're not all productive yet, but we'll continue to expand our sales force and our geographic coverage.

We estimate our second quarter revenues to be between $7.5 million and $8 million; EBITDA, between $2.5 million and $3 million; and earnings per share, around $0.08 a share.

Other than the work we are doing, we're getting our blood volume monitor ready for market launch, including government approvals, such as the FDA. We announced earlier in the first quarter that we are reintroducing our NeuroMove device into our sales force. We are deploying a model where clinics get to use a device on their stroke patients, purchasing the supplies or electrodes in that process and allowing for patients that qualify to obtain revenue-generating prescriptions for the home use of the -- so the patients can use it at home. We're also increasing our activity in adding electrodes for sale to clinics with significant volume discounts, a revenue stream that our previous competitor, Empi/DJO, mass up very well.

My long-term goal for our electrotherapy and reactivation 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.

Looking back, over the past 3 years, we've not only added a significant amount of new sales reps and grown orders, we've seen reimbursement on our products steadily increase, and we have become more efficient in our operations and have expanded our product line for conservative pain treatment. This has resulted in consistent great financial results that I'm very excited about.

We're currently working on getting the company up-listed to a national stock exchange to ultimately improve liquidity in the stock and getting more people exposed to our stock. It will potentially also improve our ability to use the stock as a currency should we actively engage in acquisitions again in the future.

We will now answer questions from our listeners.

(Operator Instructions) Our first question will come from Howard Halpern of Taglich Brothers.

In terms of you talked about 36% device order growth, how should we look at that? How long does it take to filter into device revenue? And then how long does it -- the usage, I guess, is what really is driving the supply. So how does that 36% portend for going forward into the year?

Well, obviously, it's a very slow-moving train. Revenue generated from an order takes place over the next several years, and the cash that is uncollected as a result of that comes in even later than that. That's a fairly long payment cycle in our industry, where most of it is paid by health insurance companies. So most of the revenue comes from the monthly supplies that are being shipped to the patients as long as they're still treating. And the device revenue is split between when we bill an insurance company for the purchase of the device versus, in many cases, we bill for the monthly use or, in insurance terms, it's called rental. But again, that means, in those cases, the revenue is split or divided many, many months, often well over a year. Sometimes, it's simply lifetime use that insurance approves for patients. So the revenue and especially the cash is spread out over several years from when we get an order. So one, if we have a spike in orders, as an example, you won't see that in -- as a revenue spike immediately. We just know we have consistently increased revenue going forward, if that answers your question.

Yes. And I guess in terms of how the supply revenue growth is occurring, I mean, you're really seeing your installed customer base, the usage, I guess, is going up. Is that the consequence of the supplies revenue growth?

Yes, maybe Dan can pitch in. But in -- just in overall, if you look at the cell phone industry, it's somewhat similar that the more an installed base you have out there, then your revenues simply keeps accumulating as a result of all of that. So you could say as long as our orders stay either stable or grow, the supplies portion of our revenue will, everything else being equal, slightly grow.

And I guess this is more of a general landscape question for the industry with the largest competitor gone a number of years ago. Has the overall landscape changed? And I don't know if you have any internal numbers you would like to share, but what percentage of the overall market have you, I guess, penetrated since they left the market?

Well, in round numbers, a few years back, the total market was about $0.5 billion in annual revenue generated. And obviously, with the disappearance of the biggest competitor and the very limited amount of sales from who used to be #2 in the market, that leaves it up to us to grow our business back into the $0.5 billion in annual revenue. And obviously, with revenue in '16 of $13 million, we were up to $23 million in '17. And we are obviously, as you can see, on a pretty good trajectory to growing revenues this year. There's still a long way up to $0.5 billion a year, and that is -- you can say it's a very positive problem to have. It's a lot of fun to continue to be covering more geographic area and develop new and better sales tools for our sales force, but we have a lot of heavy lifting to grow back into that currently unserved part of the market. But it's not like if you look at products that never had a demand before, but it's being developed. This is well-known territory, physicians that used to prescribe these devices. We just need to get someone in front of them. And we have a fantastic product that is recognized as by far the best in the industry, so it's an easy sell. But getting those new sales reps in front of the physicians is obviously a process that takes a lot of time.

Okay. And just you added 25 sales reps. How many sales reps do you have at -- as we -- in the second quarter as we start the second quarter?

Well, round numbers today here in early May, I think we're approximately 130.

Our next question is from Ajay Tandon with SeeThruEquity.

Just a couple questions on your sales force. If you can give us any color on typically how long is the payback for a new salesperson, that would be helpful.

Oh, it's all over the map because we have some sales reps we get onboard. Sometimes, even when they may not have direct experience in medical sales, that are up to a very significant amount of orders in -- after 2 to 3 months and already there, is positive in terms of the contribution from their orders. It is more common, though, that it takes up to 5 to 6 months for a brand-new rep to be, we could call it, a theoretical breakeven point. But we've had pretty good success with the reps we've hired here in the past 5 months or so and have had a significant amount of them that will definitely be long-term players, better than what we've seen a decade ago when we also grew our sales force. So we've been pretty successful so far with adding sales reps.

Got it. Got it. In terms of going forward on -- given that companies have exited the industry, any color on -- is it still -- are you still able to find good quality people out there as you add headcount?

Yes. We continue to add a mix of reps that, at some point in time, had prior experience in the industry, work -- used to work for a competitor as well as brand-new sales reps. And they obviously get deployed and trained in 2 very different ways. But by far the majority of those we hire right now have somewhat limited experience, but they -- in contrast to the reps we primarily had a year or 2 or 3 or 4 years ago, these new reps, most of them are 100% dedicated to Zynex with a base salary and a commission on top of that. So that's really what's driving most of the growth right now is from that type of sales reps. And that's what we'll be continuing to do for a long time going forward, probably several years with that kind of sales force development.

(Operator Instructions) Our next question is from Marc Wiesenberger with B. Riley FBR.

What percentage of the TENS devices are rented versus purchased?

I wouldn't classify it as a rent versus purchased. When you bill the insurance companies, sometimes, they want the patient to use it on a monthly basis, and there's no term on it, so it's not really a rental from an accounting perspective. But when they are using it on a monthly basis, it's all over the place because we've run some averages, but it can go out to 15 months, so anywhere from 3 months to 15 months. But I think the majority we'd see is probably at the higher end of that.

Great. For a few of the products, you have consumables that are definitely showing great growth. For those products, do they need to be exclusively purchased from you? Or is there a risk that potentially those can be got from some other source?

They are available. They're probably lower-quality supplies that can be acquired on places like Amazon and other web interfaces. But it's not really something that you can just walk into a store and buy. So we haven't really seen with the population we're dealing with that people are shopping around for electrodes. So we believe that the trend will continue. It is also -- we utilize the best quality that is made worldwide in terms of electrodes, and having the best quality device goes well together. If we were to maybe open up for -- or if people got more creative in terms of finding a lesser-quality electrode elsewhere, it could potentially deteriorate on the quality of the treatment. So we don't really see any trends in that direction.

When customers are looking for additional supplies, is that something that's billed automatically? Or do they have to actively reach out and reorder?

It's really -- it really depends on the insurance company. Some insurance companies requires us to check in with the patient every month, some every 3 months. In some cases, we need to get the okay from the insurance company to continue to supply. And in some cases, there's more than automatic element where, then after the fact, the insurance would say, "Hey, this patient's been treating for 2 years now. That should be enough." There are all kinds of scenarios, and it's obviously something that takes a lot of manpower to manage internally.

I was just going to say, is that something that potentially could be optimized and kind of more streamlined to -- down the road?

Well, of course, there's always opportunities for automating this process better, but there's the whole concept of making sure that we help the patient as best as possible in terms of what they need for the treatment as well as looking at what the doctor prescribed. And what the insurance company that has -- or obviously, the most weight in terms of decision making, what they want for the treatment for the patient. Sometimes, they adjust the quantity of supplies that is sent to the patient based on what they feel is medically necessary. And so that's a lot of work that goes into that.

Understood. And just one more from me. You've noted a number of times that -- the disappearance of your 2 main competitors. Have you seen anyone attempting to come into the market now that there is such a void left by their exit?

Other than the few small players that's been there for a long time already, no, we have not seen anyone attempt to get back into the industry. So yes, so far, it's really us to carry the load and help educating the public, physicians, et cetera, about the benefits of using electrotherapy without any side effects versus something like opioids that we obviously believe is prescribed way too often.

And our next question is from Alex Hamilton with CGR.

Sorry, that was actually my question was in terms of the opioid epidemic. China gained acceptance of it. What is the hurdle? I mean, you've made a lot of progress. Is it just an education process and it's just going to take a while? Can you sort of talk about how that's been going?

Yes. We actually have some, we believe, will be pretty unique tools that would be deployed here soon for our sales force to educate physicians. We do find that there's quite a few physicians that are still prescribing opioids that are not as aware of our technology as they potentially could be. So we have some great tools coming up. That's, at least in the short term, our primary focus. We tend to try to educate insurance companies whenever we possibly can. And obviously, we also try to reach the public in general. We've been more active in social media. We try to be active in also recommending people where to look to get off of opioids. It could be groups that were -- where we offer ways of rehabilitation, et cetera. So we try to be active in all kinds of angles. But I think our primary focus short term will -- or our increased activity will be on trying to demonstrate to physicians that here's a really safe alternative to opioids. And that hopefully will make a change in reduction in opioids prescribed and an increase in our devices being prescribed.

And our next question is from Don McDonald with Consilium Global Research.

A quick question. On the -- on your blood volume monitor business. Going forward, do you think that -- how will it accelerate your top line? And how will it affect your gross profit margin going forward?

Let's see. The -- in terms of how it will accelerate, it's something we expect will be very much a hockey stick. It's an on-off. It's like flipping in a switch because those are very expensive devices. And there's, as far as we can tell, a huge demand for better fluid management in the hospital sector and surgical centers. So if and when we get the approvals, whether we get it in Europe before in the U.S., we don't know yet, I believe that it'll have a significant impact on our revenue. In terms of the profitability or the profit margins, I should probably first mention that the SG&A associated with launching this product will probably be significant. But other than that, we again expect to have a very large portion of the revenue from the consumables. And the gross profit margins, I would expect overall to be even better than what we see in the pain management market with our electrotherapy products. So with significant amount of SG&A that it'll take, especially on the sales and marketing and developing strategic partnerships, et cetera, that we would obviously need a very high profit margin to pay for all that. But I'm very optimistic also from a financial perspective that, that could be a very healthy proposition. It looks like that was the last question.

Yes, sir, and this will conclude our question-and-answer session. I would like to turn the conference back over to 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.