Q4 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
[music].
Good afternoon My name is thing.
I'll be your conference operator today.
At this time I would like to welcome everyone to some form its fourth quarter and full year 2019 earnings conference call.
All lines have been placed on mute to prevent any background noise.
The speakers remarks, there will be a question and answer session.
Before we begin I would like to remind you that Columbus management will make statements. During this call that include forward looking statements within the meaning of federal Securities Law, which are made pursuant to the safe Harbor provisions other private Securities Litigation Reform Act of 1995.
Any statements contained in this call that are nice statements of historical facts should be considered to be forward looking statements.
All forward looking statements include without limitation statements about lymphomas strategy.
Your operations future financial position as a result.
Margin product margin operating trends financial guidance marquee girls total revenue and revenue mix I product and geography, the anticipated timing doesn't limited launch of our product offerings the potential impact in advantages of usually <unk> implants.
Business initiatives entranced positions in our commercial operations are based upon current estimates and various assumptions.
These statements involve material risks and uncertainties that could cause actual results or events to materially differ.
Those anticipated or implied by these forward looking statements, including those discussed at the risk factor section of performance.
Public filings with the U.S. Securities and Exchange Commission.
Accordingly, you should not place undue reliance on these forward looking statements.
This may elect to update these forward looking statements at some point in the future I feel a pharmacist disclaims any obligation except as required by law to update or revise any financial projections and forward looking statements, whether because of new information future events or otherwise. This conference call contains time sensitive information.
It is accurate only as of this life block yesterday March 2nd 2000, it's funny.
I will now turn the call over time I suggested a forms president and Chief Executive Officer Mark.
Thank you, Sir and welcome everyone to Conformis is fourth quarter and year ended 2019 earnings conference call.
With me on the call today is our new CFO, Bob Hau, and our former interim CFO Fred Driscoll.
During the call, we will share prepared remarks, a variety of topics, including our fourth quarter financial and operating performance.
Following the prepared remarks as always we look forward to answering your questions.
Just a quick reminder, noted on January 14, 2020, we pre announced our revenue numbers for Q4 in 2019 full year. Those revenue results remain the same an unchanged in our formal announcement today.
From a commercial perspective, we had a challenging fourth quarter in 2019 as anticipated our U.S. business was impacted by it and it covered smells among our surgeon user base and challenges within our product portfolio U.S. headwinds that we've discussed in the past.
However, I'm pleased to report that our international business returned to positive growth in the quarter.
This was due to the continued success we've had an opening new markets. It's hard targeting the higher end private segment in those markets.
Operationally, we had another good quarter of expense management as we bounced overall expenses, while maintaining our commitment to new product development programs indoor gross margin was flat versus prior year, we didn't realize a sequential quarterly improvement a 400 450 basis.
I want to take a moment to highlight a few of the significant events. We had in Q4 before we turn to the more detailed financial review.
First we were pleased to welcome Bob how is our new Chief Financial Officer, Bob comes to US is more than 20 years of progressive experience of public medical device companies that rolls that encompass financial planning and analysis financial reporting and business strategy. Most recently he spent nearly five years. It next stage medical as VP of finance income.
For controller responsible for corporate S.P. in a external financial reporting manufacturing finance shared service functions packs and treasury.
Also at all aspects of financial controls and external audit activity I'm confident the bogs experience, including 17 years of Boston scientific and various finance roles has prepared him well to succeed in his role here can form.
Second we hardly <unk> senior Vice President operations, Gary Mango Gerbrand goes the senior executive is more than 25 years of progressive experience within the medical device industry immediately prior to joining Conformis. Gary served its final elements for three years as executive Vice President operations response, we're manufacturing supply chain.
Distribution and customer service.
Gary also served in various operational roles at Biomet JNJ in Boston scientific.
Lastly, we received FDA clearance of our conformance hip system, which because this is positions us well for full year revenue growth in this large market segment.
As we made and continue to make good progress on our strategic development partnership with Stryker, including achieving the first development milestone that included a 2 million dollar payment.
Let me now turn the call over to Bob for more detailed financial review.
Thanks, Mark and thank everyone for joining us.
Reported fourth quarter revenue of 19.9 million, representing a decrease of 10% or 2.2 million year over year on a reported basis.
Excluding the negative impact of foreign currency exchange rate of $86000 revenue decreased 9% on a constant currency basis.
Revenue in the fourth quarter of 2019, and 2018 conclude royalty revenue of 158000, and 145000, respectively related to patent license agreements.
Fourth quarter aquatic revenue was 19.7 million, representing a decrease of 2.2 million or 10% year over year on a reported and constant currency basis.
Sales of I told CR I do and I you any.
Decreased 1.7 million to 11.8 million or 13% year over year on a reported basis and 12% on a constant currency basis.
Sales of I total P.S. decreased.
25 million to 7.3 million or 6% year over year on a reported and constant currency basis.
I total P.S. represented approximately 37% of total product revenue in the fourth quarter of 2019 compared to approximately 36% for the same quarter last year.
Sales of our Conformis hip system were 617000, an increase of 11% year over year on both reported and constant currency basis.
You asked product revenue decreased 2.2 million to 17.2 million or 11% year over year.
U.S. sales of our I told P.S. decreased 8% year over year.
The base business product lines decreased 14% year over year.
These declines were partially offset by an increase in sales the market's system.
Fourth quarter U.S. product revenue represented 87% of total product revenue compared 89% for the same quarter last year.
Rest of World product revenue increased $12000 to 2.5 million were flat year over year on a reported basis.
And up 4% on a constant currency basis.
Arctic sales and 70 countries contributed to the growth and helped offset continued reimbursement challenges in Germany.
I'll now moved to a review of results across the rest of the piano.
Fourth quarter gross margin was 49% of revenue, which was flat to prior year.
This was a sequential improvement from Q3 of 450 basis points.
Total operating expenses decreased 3.8 million to 15.5 million or 20% year over year.
This decrease in expense was driven by reductions in personnel costs and marketing programs as a part of a plan announced at the end of 2018 to reduce cash burn in 2019.
In addition, selling costs were lower due the decrease in revenue.
Net loss was 5.4 million or eight cents per share compared to net loss of 9.9 million or 16 cents per share, but the same period last year.
Net loss per basic share calculations assume weighted average basic shares outstanding I'm 65.5 million for the fourth quarter of 2019 compared to 60.8 million for the same period last year.
Net loss in the fourth quarter included foreign currency exchange income of $876000 compared to foreign currency exchange expense of $630000 in the same period last year.
Full year 2019 for the full year 2019, we reported revenue of 77.4 million, representing a decrease of 14% were 12.4 million year over year on a reported basis and 13% on a constant currency basis.
Total revenue includes royalty revenue of 0.8 million in 2019, and 11.2 million in 2018 of which 10.5 million came from the royalty settlement with Smith <unk> nephew in the third quarter.
Full year 2019, gross margin was 47% of revenue compared to 54% of revenue for 2018, a 700 basis point decrease driven primarily by the nonrecurring 10.5 million royalty settlement in the third quarter of 2018.
Net loss was 28.5 million or 44 cents per share for 2019, compared to 43.4 million or 74 cents per share for 2018.
As of December 30, Onest 2019, we had cash cash equivalents in investments totaling 26.4 million compared to 23.6 million as of December 30, Onest 2018.
Turning to expectations for 2020.
We have previously announced in our January 14, pre release 2020 product revenue growth to be in the range of 3% to 6%.
We anticipate that the Q1 revenue growth rate will approximate that of our fourth quarter.
However, we expect that revenue growth will improve throughout the year as we gain momentum with the full launch of our hip system and the anticipated full launch of our identity knee system and the second half 2020.
Additionally, we expect full year gross margin to improve to bid between 50 and 52%.
With that let me turn call back over to Mark.
Thank you Bob.
Turning towards further comment a meaningful items in the quarter. Let me first start with the knick coverage as disclosed previously although at an updated its coverage policy in December 19 chose not to modify its position with respect to Conformis custom products. We will continue to take steps to convenience to convince that need to change its position with respect to come.
Foreigners products, but does assume no change in their policy for 2020 plans.
We have the other 90% to 95% of the joint replacement market to go after and we'll be focused on just that.
Guarding our team here Conformis I mentioned earlier, the additions of Bob how and Gary May go to the executive team, we previously announced Eric Rickenbach as our SVP of sales.
Please save the Eric has quickly become a speed and is already relocated his family from Southern California. The Boston area. I'm also pleased to report that we successfully recruited the first three third party distributors, who are there sipri answered the first grants from our shareholder approved 2019 sales incentive plan.
Eric has been laser focused on their commitment of new distribution town as quickly building a pipeline of potential additions. It's early days, but the trend is certainly in the right direction.
Regarding our new product pipeline a couple of comments there there were a few significant milestones to report.
First regarding our hits system as we mentioned we received FDA clearance are now fully launched in the U.S. and actively training new surgeons with this launch Conformis is now fully operating as both the knee and hip company. The entire Conformis team remains excited about participating in the approximate 4 billion U.S. total hip market.
Second we have continued to engage more surgeons with the limited release of our Ayatollah definitely knee system. The early feedback is fantastic. We're on track to achieve full commercial launch of our identity system in the second half, including the POS version of identity. This system represents a significant upgrade on our existing system as it provides new in it.
Proved instrumentation extended previous them options and the more and more probably insert flexibility.
We also continue to make progress on our cementless knee offering with a successful validation labs being conducted over the last few months.
Finally on a product pipeline with the continued move towards outpatient settings, we view our partnership with Stryker is being even more valuable are pleased with our progress today. Indeed as mentioned earlier I'm pleased to report that we successfully achieved their first milestone in that strategic development program. We believe that all these additional product offerings will help.
Well, our revenue growth in 2020 and beyond.
Additionally, I would like to note that we recently announced or 100000 me as well as we achieved and no debt fivei rating in the UK.
We're very proud of both of these accomplishments.
At this time on behalf of our board or shareholders and employees I would like to acknowledge and thank Fred Driscoll for services or interim CFO.
His leadership of our finance I see an HR teams a lot of time to conduct a proper search and to ship successfully at our new CFO Bob out to the team. Thank you Fred Fierro.
With that I'll turn the call back over to fair, operator, and we'll take any questions.
Thank you ask the question you will need to press Star then one or your telephone to withdraw your question. Please press the pound Keith.
Please standby well, we composite culinary roster.
Our first question comes from the line of Robbie Marcus with JP Morgan. Your line is now open.
Hi, This is actually Lilly on a Robbie thanks for taking the question can you talk a little bit Abbas impact you've seen so far from current a virus and to what extent.
Contemplated in your guidance.
Yeah, Great. Great question. Thank you only hi, this is mark and Ah, we anticipated we might get some questions around that so couple of things to point out first off as you know our business is more highly concentrated in the U.S. that most of our competitors. So I don't think.
There is exposed from a revenue standpoint, as far as surgeries and whatnot. So we're not seeing anything at least in our signals at this point.
[laughter] that being said a you know it's too early to say with complete confidence what the impact could be because there could be a turn for the worst for sure, but obviously not having revenue in China. The biggest impact the country at this point, it's not much of an issue for US obviously time will tell as we know how the U.S. will.
I will ask the next piece on this is to think about the supplier piece.
Because you know we all know we have long supply times, we've we've been doing a question Stewart suppliers and doing checks with all of them right now we don't see any risk as far as we can tell to our our raw materials and some of our supplies in house, we little bit.
The longer lead times coming on on consumables like mass and gallons that are part of our clean process, but nothing that she pose a huge risk for our business at this point. So I hope that answers the question, but at this point I'd say the risk is minimal, but we're being highly diligent and continue to monitor the situation.
Great. Thanks, and one more quick one you think this is the second quarter interact we eat a slow down and I total yes cells.
What's the main driver they exhibit at not and some of the other challenges that the whole business has been facing or is there something specific here that I see it yourself.
20 funny, yeah, no. So on that it's it's the headwinds I think I think you're right. We've seen certainly a slowdown in and but it's it's really just those headwinds we talked about in the business. So it's the there's more interesting cementless, we don't have that offering.
Tends to be more of a CR offering so some of our PS surgeons would move to that there's obviously you know the robotic trialing that's going on its not having the stem extensions identity not having the P.S. that'd be so unfortunately, yes will be a little delayed as we come out with the done any like we said in the second half, but we expect a.
To get growth back in yes, but there's nothing.
You know kind of performance related it's just really about the market in the portfolio, which are headwinds I've discussed in the past.
Great. Thank you.
[noise]. Thank you. My next question comes from the line of Kyle Rose with Canaccord. Your line is now open.
Great. Thank you for taking the questions I just wondered if we could talk a little bit more about guidance and just maybe you know what it assumes with respect to the performance in the in the underlying business units.
I know you talked about in the first quarter should look similar with the growth rate we saw in the fourth quarter, but maybe just help us understand how you're thinking and contemplating the hip.
<unk> launch yeah or full commercialization in 2020, and then you know how we should think about or the the other two new business units trending from a revenue growth for or market share loss perspective.
Sure Hey, Kyle this is mark. So this is the mathematically how I think about it and as you know there's you know there's gonna be a.
A little bit of arrange here, but I think you know right right now like we said, we're we're looking to make a slow marched improvement I think the Q1, we feel you know, we're looking and we feel good about sort of.
Yeah, well, maybe slightly improved growth and form is you know Q1's going to be like it is but.
As we get more identity sets out there in the knee business as we get a limited launch of Cementless cover coming in we're gonna see an improvement of our knee business and you know it's tough to say exactly what the the ranges, but the way I'm thinking about it is we'll see a sequential growth improvement.
Quarter to quarter with obviously, a back half improvement and then it. So they'll were start you know some sense that we started to gain a little slow. We're gonna finished strong so I'm feeling kind of on balance kind of maybe full year sort of flattish on the mi the wheel wildcard is the hip you never just an 11%.
Rent growth on the hip granted it's on small numbers, but we're training surgeons significantly as we said in the commentary it start we're putting a new years is you know onto the hip we're fully launched so yes, we have some more instruments raising stuff to get out there, but it's fully launched in available for sale and the.
The hits the wildcard if they hit by is higher than and better than expected that puts us over the top to the higher into that range, Kyle and if we have sort of a more modest sort of growth, but certainly growth on a full year basis for hit that puts us shades us towards the lower into that range. That's our best thinking but that hopefully helps you would.
The phasing.
Very helpful and then.
My question just for Bob on on the piano I mean, how do you think about.
Operating guidance, you know under understand gross margins, but when we think about no cash burn and just operating spend for the year.
What are your expectations there.
Yes and whatnot.
Basically guiding on operating expenses a line item, but maybe I can help on a cash burn basis.
So from a quarterly cash burn obviously that will vary based on activity and events, but on average were anticipating a range of about five to 7 million quarter fourth first quarter is expected to be a little bit higher oh that range.
Mainly due to support a full launch of our hip system. Some trade show timing had some capital expenditures the sport kind of the high total identity full market release.
And then we'd expect it to kind of come come back down from the first quarter again, there's a timing element in there, but that kind of directionally, what we're thinking from a cash Bernstein.
Okay, great. Thank you for taking the questions yeah. Thanks Scott.
Thank you. My next question comes from the line of Ryan Zimmerman with <unk>. Your line is now open.
Great. Thank you. Thanks for taking my questions. So just a housekeeping question.
Is there a press release socio the quarter I didn't see it on the website or and like Factset or any of those third party aggregators as their financial covenants. There absolutely is I'm looking out in front of me and ER and Bob is going to walk out of the room right now and glass our friend is going to have people, where it actually the shouldn't went out.
I'm not crazy I ask a few people okay, no that's cline, Okay Oh no.
Unfortunately, Bob they'd go up his first do they ask all of us and the press releases about [laughter], sorry about that right now we have what absolutely right and.
We're waiting for waiting with Bated breath guys.
A few dozen then no alright, perfect. So let me let me ask the real question now.
Maybe just talk a little bit about the milestones associated with the Stryker transaction, you've gone through the first one and.
No.
Certainly I think around 10 or $15 million, maybe a little more associated with the deals. So one of the milestones you need to achieve to get the rest of that capital.
Collars.
And she was kinda talk to that for a second follow up.
Yeah. Unfortunately, we're not going to really be in the business of predicting that because we've got you know we've got a very important partner that we kind of stay aligned with I think from.
As we hit stuff it becomes material to us. So there's a you know we and we want to disclose it. So so we do but I'm not going to get into unfortunately at this point. There's some things you know maybe as I said as we go.
Down a down the road as we we might be able to give you some more color, but we've we've done pretty much in disclosing stuff in the.
In the you know in the AK than the filings and you're right. It is it is significant source of financing for us meaningful I think the main thing I can leave you with his we feel really good about the status of the partnership and we feel really good about the you know the status of the program the trajectory of the program the things away.
Uh huh so.
So you know if I didnt feel that way, obviously I'd be talking differently about it. So I can't really give you a lot more color at least at this time in the year that okay right.
So let me ask about Oh, U.S., it was a little bit better than.
As seen in a long time right starting to turn the corner. You said you had some new countries. So just help us understand kind of in your guidance for the here what's contemplated internationally.
It sounds like you're moving in a few new countries you know how much should we think about you know international revenue for the for the rest of the here or or maybe what the right run rate is as me thinking about international Thanks for taking my question.
Yeah. So fairpoint I mean, it's been a long slog right since I've been here with some of that stuff and and its taking some time, but we finally, you know turned the corner as you said slightly.
And Oh, you know that's good for us I think.
You know in our plan for the year, we expect to continue to build on that momentum through the quarters coming I don't think we're ready to sort of provide you know a lot of guidance around that but you can expect that you know if I was thinking around it probably getting back to kind of mid to high.
Single digit sort of growth or you know through through the quarters as we go we think about phasing.
Okay, and then just last one for me and I'll hop back in queue you know.
Talked about the Salesforce, a little bit you have some new leadership in place.
What's the status of your sales force today are the distribution partners, they're using I mean.
They have now a full recon product line to go for maybe just kind of help us understand kind of where you're at and what do you feel you need to contain a build on from a distribution standpoint. Thank you.
Yeah, I'll comment on that I think that's a great question I mean for the first time now we've got all the levers to pull I've got you know and the team here, we've got a a hip offering fully launched.
Two you know and granted the again set expectations of cry types that we don't have revision all this stuff it's very good.
You know primary hip offering and we're very pleased with.
The way, we're offering that and what you know what we have to offer and we just we just haven't had that so so it's nice to finally be a hip and knee company you combine that with the shareholder plan that was approved by shareholders. The sales equity incentive plan and then you combine that with a great leader like Eric I'm now.
We've got the pieces of the puzzle set to frankly go after the you know a different level of talent and fill out some areas, where frankly, we haven't been doing and it doesn't happen overnight as you might imagine, but I'm I'm pleased because as I said, we're not disclosing how many but but we did more than one of our first.
You know sales grants and you know and competitive teams that have come over Oh, where people with experience that maybe had been on the sideline for awhile and we've got a number of others in the pipeline I'm in and I'm really pleased to see the energy around that so you know sales talent additions sales distress.
We've seen growth is a key lever for us, but most importantly, we think it said it's about the quality of those people now and the excitement around that so so more to come and we'll continue to talk through that but that clearly is is a big part of our of our commercial strategy that complements our product portfolio strategy. Okay.
Okay. Thanks.
Thank you My next question from the line as Steven Steven Lichtman with Oppenheimer and company. Your line is now open.
Thanks, Hi, guys.
Mark is what did you can put any numbers around the training program for surgeons Don caps.
How many would you hope to train this year and so far about what percent of the surgeons trained our new to Conformis.
That's a that's a really insightful question and it's something that I expected that I would get asked and it pains me [laughter] emerged to answer it at this point, but but and I not being serious we we have I think I gave a number.
In the past, where I said roughly in the limited release about 20% of the surgeons were non new user.
They came in from Us and and it's all early to report on that because we're literally what its March were only two months in and don't forget we have a lead time. So I've got have some time to analyze and see how things are going to shake out on that feed.
But I I wouldn't see any reason why we couldn't do that or better omni certainly you know have are good surgeon relationships will go after but there's no doubt that we're getting new surgeons as well and and I see that all day long. So that's a that's why the hit is a very.
Three important growth opportunity for us and and that's why I talk about this range of expectations is as what we see we've had a number of classes in the first quarter, which is one of the reasons why we'll see a little bit of an expense bubble in the first quarter and it's not huge but it's important we talk about it and we wanted to do that want to front load some of that training.
We could have the you know the log istent largest impact for the full year, but again, we've never reported on number of trained surgeons. When we're in the me and I I think it's it's little early for us to think about doing that on behalf okay.
Okay Fair enough and then shifting a day international obviously as you mentioned, Germany still remains a challenge offset by some of the new countries, but within Germany can you characterize where we're at with risk with respect to the state of your business to be sequentially is it is it's stable or is it still going down <unk> any color on that front.
Yeah.
I'm just trying to see let me just let me.
We think through here because they.
[noise], maybe you don't give Germany.
Directly, but I, but I I would characterize more is sort of stable. You know then they're not I mean, it's tough to say you know, we bottomed out and again I want to.
The spares probably worth repeating there's no like anniversarying out of this because this is not like a onetime change the way it was.
With a onetime reimbursement cut if you will that happened in our unique this continues to be continued pressure on medical necessity and as it rolls out is different states interpreted differently and whatnot, it's its bit of a challenge there for so I think.
More or less stable, but its really about the new countries that we added a new distribution that we put in so I'm not you know in our plan to be clear our plan sort of has Germany being sort of stable ish and the growth is coming from other countries and adding.
Adding new revenue streams.
Okay, Great and then lastly, just on the on the knee business Youre, obviously presby, there's been a missing piece for for you guys. So far.
You talk a little bit more about what identity is going to do for you on the call on the core knee business and how it it can potentially you know we re accelerate that business in the interim as you await a press fit.
Yeah, So I I guess I'm very excited about it definitely I mean, the the the first number users is the feedback been fantastic. We've got you know our core positions, calling us and wanting it because.
It's it's it's it's a couple of little things first off its new instruments that are upgraded and nicer than the additional I mean, I'm talking on really reusable instruments, but on top of that our patient specific cutting guides. The jigs have the of metal block that snap since the now the tax how feel for pending the guides.
True through metal instead of plastic for the solidly go incremental set of plastic is a big deal I'm.
There is the TV extension. So we can do high DMD patients also on for CR or.
Surgeons now they cannot everything requesting get a one piece poly versus two piece and for some surgeons.
Like that and so we can do that they also in rolling this out we rolled out flexibility. We're surgeons can now custom tailor their poly ordering so based on their own preferences. They can decide what polys will come shipped to them on a customized basis, which they really like and it.
Sets us up for Cementless, because the Cementless platform will be the identity platform and I'm pleased to say again as I said in my prepared comments. We've had a couple of Validations lab is most recently within the last two weeks. If this had happened to me sorta ever I. Just you know two of the surgeons that were involved in line.
There were only four in the lab that did that could ever worked texted me right away you know home run. This thing is gonna be awesome type thing, they're very excited about our cementless offering. So yeah. We still have work to do we start to do the manufacturing work and do some of the Validations and.
Readiness to get that thing to launch, but my best information right. Now says you know, it's it's mid year, maybe a little bit you know kind of to mid third quarter, but but that that's going to add it'd be an important part to our product portfolio obviously.
Great. Thanks, Mark.
Hey, Steve.
[noise]. Thank you. This concludes today's question and answer session I would now like to Kinda call back Tomorrow is asking for closing remarks, alright. So thank you for those are still on we track down the press release, apparently the press release service was having a format in Europe or operational issue. Our people are on it there.
Trying to get it to go out and I can expect it'll go out in short order.
And then we'll go from there, but we definitely have one.
And it should get posted shortly thank you.
Thank you. Thank you operator.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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