Q4 2019 Earnings Call
Please standby.
Good afternoon, ladies and gentlemen, and welcome to the fourth quarter fiscal year 2019 earnings conference call for Venus concept incorporated.
At this time of participants have been placed in listen only mode.
Please note that this conference call is being recorded and that the recording will be available on the company's website for replay.
Before we begin I would like pincher to remind everyone data remarks and responses to your questions. Today may contain forward looking statements that are based on the current expectations of management and involved inherent risks and uncertainties that could cause actual results to differ materially from those indicated.
Including those identified in the risk factor section of our most recent annual report on form 10-K filed with the Securities and Exchange Commission.
Such factors may be updated from time to time in our filings with the FCC, which are available on our website.
We undertake no obligation to publicly update or revise our forward looking statements as a result of new information future events or otherwise.
This call will also include references to certain financial measures that are not calculated in accordance with generally accepted accounting principles or gap.
We generally refer to these as non-GAAP financial measures.
Reconciliations of those non-GAAP financial measures.
To the most comparable measures calculated and presented in accordance with gap are available in our earnings press release issued today on the Investor Relations portion of our website.
I would now like turn the call over to Mr. dumps are female chief Executive officer of Venus concept.
Please go ahead Sir.
Thank you operator, and welcome everyone to Venus concepts fourth quarter 2019 earnings Conference call, which also marks our first quarterly earnings calls since closing up our merger.
I'm joined today on the call with our Chief Financial Officer, Dominic Dellapenna.
Let me first start with a brief agenda of what we will be covering during our prepared remarks I.
I will start with a brief description of Venus concept, then I'll provide a high level overview of our operating and financial performance during 2019, including a review of our fourth quarter revenue results, which came in at the high end of our previously announced guidance range.
After my opening remarks, Dominic will provide you with a more in depth review of our quarterly and fiscal year financial results as well as an overview of our preliminary revenue results for the first quarter 2020.
What do we provided in our earnings press release earlier this afternoon.
Following dominic's discussions of our financial results in Corp, first quarter <unk> outlook.
Then share some closing thoughts on the expected business and procedure related disruption as a result of the crisis caused.
By the global spread of the Corona virus covert 19, and then we will open up the call for some questions.
With that overview in mind, let's get started.
As this is Venus concepts first quarterly earnings call as a new public company. Following the close of a merger we thought it would be helpful to spend a few minutes describing the company.
Venus constant limited was originally founded in 2018, or sorry, 2010 with and over the five year period since the company's inception, we have grown the business to more than 107 million of revenue size of the until 2019.
We closed an important merger transaction on November seven 2019, where we merge.
With restoration robotics, and the combined Tenthree became Venus concept and.
I mean, this concept peg generated GAAP revenue.
110.4 million in 2000 lighting and on a pro forma basis, the combined entity generated 123.4 million in 2019.
We have developed and commercialized 12 technology platforms, including the artist and the overall systems [noise].
Venus concept is truly a global company.
It's roughly 50% 57% of our total company sales in 2019 coming from customers outside of the U.S., we sell in more than 60 countries, including 29 direct markets and another 36, well we operate through traditional distributor relationships.
We have a significant direct sales and marketing infrastructure with 206 people as of the end of 2019.
We shipped more than 2400 systems in 2019, and our customers are administering millions of treatments per year with our devices globally.
Our vision is to develop provide world class technologies to deliver clinical results in a safe effective and easy way and dedicate our company to the best in class post sale support philosophy that can help enhance the profitability and financial success of our customers.
We sell our full suite of medical aesthetic and hear restoration systems to customers and the traditional market, which includes dermatology and plastic surgery and increasingly the much larger non traditional market first static services such as family practice General practice.
Medical spas, which now represent approximately two thirds of our customer base globally.
The non traditional market represents a compelling global opportunity for Venus concept as the traditional industry business models have not sufficiently address the needs of these customers.
We have changed the paradigm with a unique pricing and payment option via our industry first the subscription model, which we use in certain product categories in certain geographical markets.
Our subscription model is very similar to a cellphone plan, where you pay for technology over time and can upgrade to the newest technology mid contract if desired and extending the new contract.
Our subscription model typically our three your religion.
We capture approximately 40% of the contract economics in the first year.
Our customers enjoy seamlessly cost effective upgrade opportunities and our program is protected by a monthly activation called.
We have a high touch customer philosophy focused on long term relationships supported by our outstanding marketing support continuous clinical education practice enhancement programs and much more.
Our key differentiator is that we understand that in order to succeed in the aesthetic market, we need to address the very real challenges doctors face every day, which include.
The high cost of technology ownership.
Technology obsolescence issues.
And typically every two years or so in certain instead of product categories.
The need to provide real marketing solutions to drive patient traction in acquisition.
In an audience, who traditionally have not be did marketers and of course, ensuring that qualified well trained staff would be available to our customers.
We believe Venus concept is well positioned there is a leading player in both the global minimally invasive and noninvasive medical aesthetics market and the minimally minimally invasive surgical hair restoration market.
Now turning to our review of our 2019 financials and operating results.
2019 was certainly a year of accomplishments and change for Venus concept.
We delivered solid commercial execution developed clear developed cleared and launch new products in both the U.S. in international markets markets. We closed a merger transaction with restoration robotics on the seventh of November.
We made significant progress enhancing our financial condition with multiple financing transactions.
In terms of our commercial progress in 2019.
We reported total GAAP revenue of 110.4 million up 8% year over year.
At the high end of our preliminary guidance range. This growth performance was driven by a 5% increase in the legacy Venus concept business and the balance coming from revenue from the sale of artists an artist <unk> systems and products services and were included in our GAAP results. Following the closing of the merger on the seventh of November.
On a pro forma basis.
Which shows ourselves performance of the combined companies as if the merger had occurred on January 1st 2018 total revenue for the full year of 2019 period was 123.3 million compared to 124.6 million in 2018, you slight decrease of 1% year over year.
The change in total revenue year over year was driven by 5% growth in the <unk> Venus legacy business.
Offset by a 29% decline in the restoration robotics for the sales in the same period.
[noise] total GAAP revenue for the fourth quarter of 2019 increased 11% year over year, driven by 2% growth for the Venus legacy business and the contributions from restoration robotics following the closure of the merger.
On a pro forma basis sales declined 6% year over year in Q4, 2019, driven by a 40% decline in the sales of restoration robotics compared to the fourth quarter of 2018.
Our sales results on a pro forma basis were modestly better than we expected. It came in at the high end of our previously announced guidance range. That's to say, we fully expected sales transfer restoration in robotics to be challenged in the fourth quarter as we work through the initial stages of our integration and began implementing our commercial.
Strategy for the combined here restoration business going forward.
We were pleased with our sales and operating performance in the fourth quarter relative to our plan and believe we ended 2019 on a positive no.
Overall, our sales performance in 2019 reflects strong execution of certain strategic objectives and candidly someone anticipated headwinds that resulted in a total growth was less than we targeted coming into the year.
On the positive side, our new product introductions, we're one of the largest drivers of growth in 2019, which helped us offset some of the on anticipated business related disruption, we highlighted in the third quarter early results.
Driven by proactive protracted excuse me period between the announcement in closing of our merger with restoration robotics.
Our continued focus on product innovation led by a strong year of development regulatory clearance and launches of new products in 2019.
We launched two new products in the U.S., the Venus he'll endovenous plus the ladder of which we announced by a press release in August the Venus blesses our solution to fat reduction for the abdominal area and the flanks. The Bliss is very comfortable for patients provides excellent results and has little to no downtime.
We believe that the Bliss will be a preferred solution for providers as there was no disposable cost per treatment, which makes the profitability per procedure extremely compelling for physicians.
The early feedback from our initial launch during two or Q4 2019 was very positive and we're excited by the prospects of this new product introduction as the fat reduction category is one of the fastest growing nonsurgical non injectable procedure categories in the medical aesthetic industry today.
Outside of the U.S., we lost a total of four new platforms in 2019.
You know seal Minas Bliss.
Venus I believe for permanent hair reduction and the Neal dropped 2.0 system for hair restoration.
With respect to our merger with restoration robotics as we discussed over the second half of 2019, the merger took significantly longer to close than we anticipated and we experienced disruption in both businesses as a result.
We're pleased to announce that off as of the closing on November 7th we are quickly moving towards the execution of our integration of the two companies.
The inter integration is progressing well and we've identified $18 million of synergies and cost savings that we expect to realize during fiscal year 2020.
We developed a new commercial strategy for artists an artist I ask systems products and services, which had struggled to drive broad based adoption and utilization in recent years.
There are three key tenants to this new commercial strategy.
First and improved pricing model, where we lowered the list price of the artists from 229000 compared to 325 to 325000 previously still improving the gross profit margin profile as a result, a significant reduction in the cost of goods that we identified.
Second a targeted planned to engage with clinicians to reinvigorate underutilized artist systems, including practice enhance the managers and customer focused hair technicians like our Bureau grafts team and importantly, the 30 Ci tenant to the new commercial strategy, which we believe will improve the growth trends for artist is the.
Talk that we're now able to offer the most comprehensive hair restoration solutions offering available today.
At this point can't really be overstated with artists. The neo graph. We now have an end to end portfolio, a minimally invasive solutions unique from any competitor in the $4.1 billion global here a restoration market.
Well the new commercial strategy represents a compelling near term driver for improving performance of Venus concept.
The R&D opportunity, we see from this combined R&D teams, we believe represents a significant potential driver of growth over the long term.
Longer term R&D strategy is focused on leveraging the potentially powerful combination of Venus expertise and non invasive energy based technologies for a static applications and restoration robotics expertise and robotic technology three d. pre operative planning and software specifically, we believe that.
As a compelling opportunity to introduce new.
Minimally invasive robotic solutions for medical aesthetic procedures that are only treated with invasive surgical interventions today.
We will have much more to share regarding long term opportunity from the combined R&D teams as we progress through 2020 for now we just know that the integration plan for the R&D team is progressing is progressing and going well and we continue to be excited about the long term prospects.
For our technology.
At this point I'd like to turn the call over the Dominic Dellapenna.
Provided detailed review of our fourth quarter and fiscal year 2019 financial results and discuss the balance sheet and financial conditions Dominic.
Thanks, Don.
My prepared remarks. This afternoon will focus on the company's reported results on a GAAP basis, unless otherwise noted.
To avoid confusion when evaluating our reported results or when reviewing our historic financial results and that SEC filings.
Let me highlight a few items regarding our merger transaction with restoration robotics.
First reported results prior to the fourth quarter fiscal year 2019 reflect the business operations and performance of the legacy Venus concept business.
Referred to as Venus concept limited and our FCC filings.
Second starting with the fourth quarter and fiscal year 2019 periods. Our reported results include the contributions from restoration robotics from November 7th 2019 to December 31st 2019.
This makes the evaluation of financial results compared to 2018, a bit challenging given its not an apples to apples comparison, where possible and only in certain areas. We will call out areas, where results were materially impacted by this nuance to help the investment community understand their respective an.
Since from each business in the period.
Fourth quarter total GAAP revenue increased 3.2 million or 11% year over year to 31.9 million as reported on our GAAP income statement total products and services revenue increased 5.5 million or 55% year over year to 15.5 million.
Okay, and total lease revenue decreased 2.3 million or 12% year over year to 16.4 million.
Total products and services revenue in the fourth quarter of 2019 included 2.8 million from the sale of artists and artist I ex systems products and services. Following the closing of our merger on November seven 2019.
Excluding revenue from restoration robotics post closing products and services increased 27% year over year in Q4. The decrease in lease revenue in Q4, 2019 was driven primarily by our strategy of shifting the mix from subscription to cast sales in the period.
Turning to a brief review of our revenue performance by geography, and product line, which incidentally is how we report and discuss revenue results in our 10-K and 10-Q filings.
Fourth quarter total GAAP revenue by geography was driven by a 3.5 million increase or 29% year over year, and international sales and which offset a 300000 dollar decrease or 2% year over year and U.S. sales compared to the prior year period.
The increase in sales to international customers benefited from strong sales in Europe as a result of certain strategic changes we made in the region in the fourth quarter of 2018.
Fourth quarter total GAAP revenue by product category was driven by.
An increase of 3.1 million or 42% year over year and system sales, which are casket sales or sales of systems with payments expected in less than 12 months.
An increase of 1.7 million or 129% year over year in service revenue, including Bureau, graft or technician services AD agency services and extended warranty sales and an increase of approximately 700000 or 57%.
Year over year in sales of products, including skincare hair and other consumable.
The growth in these three product categories was partially offset by a decrease of 2.3 million or 12% year over year and leases revenue, which is where our subscription program is reported numbers that represents all sales with typical lease terms of 2036 months.
Turning to a review of our fourth quarter performance across the rest of the piano.
Total GAAP gross profit decreased 2.3 million or 10% year over year to 19.7 million, representing a gross margin of 62% compared to a gross margin of 77% in Q4 2018.
The primary driver year over year change and gross margin was revenue mix, including the mix of revenue by geography and by product category compared to the prior year.
GAAP gross profit in the fourth quarter of 2019 includes the impact of restoration robotics post close including purchase accounting impacts, which represented approximately 160 basis points to the year over year change in gross margin.
Total GAAP operating expense increased 6.4 million or 21% year over year to 37.6 million. The increase in total operating expenses was driven primarily by an increase of 7 million, where 79% year over year in general and administrative expenses.
An increase of 1.4 million or 13% year over year, and selling and marketing expenses.
Offset partially by a decrease of 2.1 million or 23% year over year in provision for bad debt expense.
The change in total GAAP operating expense in Q4 was driven by a 3% increase in Opex from the legacy Venus business and the contributions from restoration robotics post close.
Total GAAP operating expenses, specifically general and administrative expenses for the fourth quarter of 2019 include approximately 5 million of costs related to the merger, which did not impact results in the prior year period.
Excluding the costs related to the merger in the period. The total general and administrative expenses increased approximately 2 million or 23% to 10.8 million compared to 8.8 million for the fourth quarter of 2018.
Total GAAP operating loss in the fourth quarter of 2019 was 17.9 million compared to an operating loss of 9.2 million and the prior year period.
Excluding the impacts of restoration robotics post close.
And the 5 million a merger costs, our fourth quarter operating loss was roughly flat year over year.
Net loss attributable to Venus concept inc. for the fourth quarter of 2019 was 20.8 million or one dollar and seven cents per share compared to 13.2 million or $2.70.
77 cents per share for the fourth quarter of 2018.
Weighted average shares used to compute net loss attributable to Venus concept inc. shareholders for share were 19.5 million and 4.8 million for the fourth quarters of 2019 and 2018, respectively.
Adjusted EBITDA loss for the fourth quarter of 2019 was 11.5 million compared to adjusted EBITDA income of 2.4 million for for the fourth quarter of 2018.
We have provided a full reconciliation of our GAAP net loss to adjusted EBITDA in our press released this afternoon.
Turning to a brief review of our fiscal year 2019 results.
Total GAAP revenue increased 7.8 million or 8% year over year 210.4 million. The increase in total revenue by geography was driven by an increase of 6.4 million or 11% in international sales and an increase of 1.4 million or 3% in U.S. sales.
Total products and services revenue for the fiscal year, 2019 increased 14.2 million or 46% to 45.4 million compared to 31.1 million for the fiscal year 2018.
Total leases revenue for the fiscal year, 2019 declined 6.4 million or 9% to 65.2 million compared to 71.5 million for the fiscal year 2018.
Total GAAP revenue for the fiscal year 2019 included revenue of 2.8 million from Venus concept Inc., formerly restoration robotic think from November seven 2019 to December 30, Onest 2019.
Net loss attributable to Venus concept inc. holders for the fiscal year, 2019 was 40.6 million or $4.77 per share compared to 15 million or $3 in 16 cents per share for the fiscal year 2018.
Recall that 2018 results were for legacy Venus concept only the largest driver of the year over year change in net loss was the increase in GAAP operating expenses of approximately 24 million specifically, an increase of 20.1 million year over year in general and administrative expenses.
Adjusted EBITDA loss for the fiscal year 2019 was 12.5 million compared to adjusted EBITDA income of 9.8 million for the fiscal year 2018.
As detailed in the reconciliation table in our press released this afternoon, we had approximately 13.6 million of nonrecurring expenses in 2019.
The majority of which were additional professional fees for our merger and thus are not expected to be part of our go forward operating expense profile.
The company had 15.7 million and 6.8 million of cash and cash equivalents as of December 30, Onest 2019, and December 30, Onest 2018, respectively, and total debt obligations of approximately 69 million and 56.5 million as of December 30 Onest.
2019 at December 30, Onest 2018, respectively.
The year over year change in cash was driven by an increase of 42.2 million in cash from investing activities and an increase of 6.4 million in cash from investing activities sorry.
An increase of 42.2 million in cash from financing activities and an increase of 6.4 million in cash from investing activities.
Partially offset by a use of cash from operating activities of 39.6 million.
The year over year change in cash from financing activities consisted primarily of.
Net proceeds from the draw down of the Madron credit agreement of 9.7 million.
Net proceeds from issuance of unsecured senior subordinated convertible promissory notes of 29.1 million.
Net proceeds from the equity financing, we completed concurrently with the merger closing of 26.5 million proceeds from the exercise of options a zero point Fourmillion and proceeds from the drawdown on the CNB credit facility of 2.1 million.
Partially offset by the repayment of the solar loan and security agreement of $20 million.
The issuance of the loan to restoration robotics, the 4.5 million prior to the merger and to a lesser extent payment of the neo graft earn out liability of 0.8 million.
On March 18th 2020, we raised 22.3 million through a sale of shares of common stock.
Series, a convertible preferred stock and warrants to purchase common stock in a private placement.
A group of investors, including E W Healthcare partners.
Health Quest capital and said co capital.
The transaction was completed on March 19th 2020.
Turning to a review of our guidance, which we updated in our press release this afternoon.
Due to the rapidly evolving environment and continued uncertainties from the impact of Covidien 19. The company is withdrawing its previously announced fiscal year 2020 revenue guidance, which was issued on January 13th 2020.
At this stage the company cannot predict the specific extent or duration of the impact of the covert 19 outbreak on its financial and operating results for the fiscal year 2020.
The company plans to provide additional information to the extent practicable during its first quarter of 2020 earnings call in May.
We have also provided preliminary revenue expectations for the first quarter of 2020, and this afternoon's press release, which reflect the significant impact of the covert 19 outbreak on our global business.
Specifically, we expect preliminary total GAAP revenue for the first quarter of 2020 to be in the range of 14 to 18 million compared to total GAAP revenue of 24.6 million for the first quarter of 2019, representing a decrease of 27% to 43% year over year.
[noise]. Additionally, in terms of operating expenses and cash burn while we are not in a position to offer a specific financial guidance. At this time, we would like to offer the following considerations for modeling purposes.
The combined companies had total opex of 29.5 million in Q1, 2019, roughly a third of which came from restoration robotics.
Coming into 2020, we had identified 18 million of synergies and expense savings and had started the process of implementing these cost cuts as part of our integration plan that said the 18 million was our target for the full year 2020 period and only a portion of the 18 million were expected to be realize.
In Q1.
Our first quarter burn will also be impacted by additional professional fees and costs related to the pipe financing transaction and year end close.
Further asked with other medical device companies, we see opex represent a higher percentage of sales in the first quarter each year than we do in the other three fiscal quarters as we have incremental spending for our trade shows and insurance premiums among others would skew Q1, a bit higher on a relative basis.
Finally, I would like to remind everyone that we've provided preliminary revenue expectations for the first quarter and the interests of full transparency. During this unprecedented time of uncertainty and crisis in our global addressable markets.
We intend to give additional color on topline and expense lines going forward as part of our Q1 called in May.
And we are unable to give incremental detailed and these areas at this time.
So with that I'll turn the call back to Dom.
Thanks, Dominic before we open up the call for your questions I wanted to share a few thoughts with you on the diet the dramatic change in our business during the first quarter.
The global pandemic caused by the novel Krona virus has significantly impacted our growth trends during the first three months of 2020.
Which while difficult to predict we expect will contain impact our results in the second quarter 2020, and possibly beyond.
We are however, a global business, having established commercial presence as I said earlier and 60 countries are over 60 countries and of course.
Over in the course for 10 year history, approximately 30% of our 2019 sales came from the APAC and European regions, which were impacted by the pandemic beginning in January in China, and the broader APEC region, and then as disease spread our business in Europe saw disruption beginning in February and worsening in March.
We had experienced a pronounced decline in both procedure and system adoption and these global markets during Q1.
In terms of our U.S. business, we got off to a very strong start.
To the quarter, which was fueled by our recent new product introductions, specifically the strong market response to our Bliss commercialization, which was stronger than expected and how does preparing for a backlog situation as a result of the impressive demand.
Beginning in March however, along with most medical device companies with businesses. They rely on elective procedures the trends in both procedures and system adopt adoption deteriorated meaningful meaningfully.
We like everyone else are dealing with unprecedented disruption in our addressable markets. As a result, the result of this pandemic both in terms of the magnitude the pace and the pace of declines.
We are focused on supporting our global customers in whatever way and extent possible, while protecting the health and safety of our employees.
As a result of this rapidly changing market dynamics in each of our primary markets around the world and the high level of uncertainty with respect to the duration of this period of disruption.
And the pace of the recoveries and APAC Europe and the U.S. This year, we as we said earlier have withdrawn our 2020 revenue guidance range that we had announced in January.
We intend however to provide you an updated updated thoughts as part of our Q1 earnings call in May and your interim while we are unable to answer questions about our 2020 growth profile with specificity. We are now we are not standing still in fact in response to this challenging sales trend in recent months.
Related to covert 19, we conducted a full review of our 2020 operating budget and this review we identified additional operating expense reduction opportunities of at least 20 million.
We will begin implementing this new expense reduction program as of the start of the second quarter of 2020.
We plan to provide additional detail on the composition and cadence of these incremental cost savings as part of our Q1 call as well. We also continue to identify additional expense cuts there will be made if we experienced a prolonged recovery from this pandemic.
We will get through this challenging time, and we are focused on maximizing our available capital resources and on ensuring that we are best positioned to return to above market growth and significant market share gains as soon as possible.
Lastly, I do want to thank all of our employees and customers for the resilience and flexibility. During this challenging time and of course, our shareholders for their continued support of Venus concept.
With that operator, I'd like to open it up to call <unk> questions to color.
Thank you operator [noise].
If you'd like to ask a question. Please signaled by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to a lighter signal to reach our equipment.
And our first question comes from Suresh Calia with Oppenheimer and company. Please state your question.
Good afternoon, gentlemen, can you have youre right, we can thrive.
Oh, I hope you guys, a safe and healthy Crazy times.
Yep.
So.
Dominic Dominic bunch of questions. Let me see if I can just kind of parse through them quickly.
China, obviously your comments, so well noted about impact from covert 19 in January but the U.S. was strong I I in Jan and fed so the numbers.
For Q1 would indicate that March had seen a precipitous drop I guess, where I'm headed as a fight extrapolate that trend to Q2.
Not that you'll have provided guidance it almost gives us a sense that.
Q1 might be a relatively high watermark am I too far off and my thought process just given the uncertainty here.
Yes, Raj I think that you know as we look at our business two things I mean Q1 is typically the slowest in our in our aesthetic business.
And when we looked at January you're absolutely right. We did have a very strong start in the U.S.. Although you know the majority of the business in our space typically comes in the last three weeks or so of the final month of the quarter, but as we saw the spread from China into other markets. We recognize that it did create somewhat of a challenge to get even coming.
Hone in parts out of China, as they shut down to be able to build their platforms in a timely manner to take advantage of I'll call. The delay in the reaction in North America. Unfortunately, we found ourselves right in the middle of March facing the realities of the U.S. shutdown and as I said earlier, the U.S. does represent about 46% of our.
Of our global business. So having said that you know if there is any good news into Q2 typically you know the trend does continue in terms of the first month of of each new quarter is relatively quiet in our space. So you know none of US no. When this will end, but if there is any constellation here at least for.
For the month of April we have a little bit of room in terms of how we deal with things.
Does that help you yep fair enough and I just between products and lease revenues.
I would I be too far off.
For flight 20 in terms of you know in the current environment. One would think that a subscription model would pick up right because of the capital outlay that burden has been removed in the current environment any qualitative assessment you can provide us of how you guys are thinking even though the guide.
This is removed how should we think of because earlier. It was like you all wanted to be at the 50, 60% range for subscription should we think it should tick up a little more deliberately as the year progresses any color would be great. Yeah. No surprise, it's a great question and I think that you know that is one of the things that I built.
Separates Venus concept from all of our competitors anecdotally, we heard a lot of examples of end of quarter challenges with leasing companies financing various deals from a variety of different companies and so this having the ability to use our subscription model to sort of hedge against that I will definitely help us. If this thing gets extended beyond.
And you know any reasonable amount of time, we think that ultimately.
What the subscription model will allow us to do is to pay close attention to where the opportunities are because ironically enough to demand was still there and this is not a 2008 sort of financial crisis situation. This is obviously a health situation. So I think that as we come out of this the beautiful thing about what we have available to us as the ability to sort of.
I, just where we would go with our subscription model and we feel that.
The subscription model that will give us a competitive advantage, especially as we come out of you know sort of this I'll call. It distraction for lack of a better word that's had everybody shut down their doors for a long period of time.
Got it and final question for Dominic Oh wait at least two part question, so dominant the 18 million and synergies.
How should we think about what is comprised with an across the cross margin line item and partly the reason I ask as you know the cross margin in Q4.
The composite gross margin is roughly around 62% we were expecting it.
To be closer to 69, if you can give us some some idea as to how youre thinking and what the different components across merchant I'm going to move and the sub part to my question is for the recent financing can you give us on an as converted basis, how much of the holdings for insiders. Thank you very much for taking.
My questions.
Thanks, Sara so in terms of the the gross margins. So first off the 18 million and synergies relate to operating expense synergies and not necessarily gross margin related.
Those are strictly on the Opex side.
In terms of the.
Reduction in gross margin part of it is a function of some purchase accounting, resulting ought to be a restoration robotics merger, which impacted us to the tune of about 160 basis points.
In addition, the the decision to rebalance cash versus subscription also led to a slight deterioration in a in a sps in the fourth quarter as we tried to consciously rebalance the split from on a Venus standalone from approximately 70% subscription to closer to.
60% to 65% so that accounts for part of the deterioration in margin. In addition, the success of our two to five services ended up driving the services line revenue, but it impacted our margins to some extent we.
We have since revisited the nature of the services provided to try to change the mix within that going forward such as such that it's not a impacting us as much. So we should start to see a difference and ER and the go forward margin profile of the two to five services that we offer.
In addition.
The there was a large chain order and China, which impacted our our margins overall, so we had.
Lower proportion of subscription deals, which impacted Sps our us business as I noted in my comments was down we had a good result, with international and particular in Europe, but the U.S. business also suffered from integration efforts that were.
Protracted because of the delay in the merger. So we had various vacancies that we were.
Territories are left relatively on attended as we tried to close this deal and leverage the combined salesforce. So that unfortunately impacted our U.S. results, where we also have higher margins. So a combination of territory and product mix affected our margins in Q4, and there wasn't an element of I would call it clean.
In Q4 in terms of the combined company and revisiting inventory reserves bad debt provisions purchase price accounting and making sure that we basically.
Have everything cleaned up as part of our go forward balance sheet as a a as a fully integrated company.
Thank you now that the second part of your question I'll have to get back to surcharge on not because I don't have those are those details in front of me in terms of B the cap structure.
On a go forward basis.
So we'll follow up on that with you.
No worries.
Thank you just a reminder to ask a question press star one on your telephone keypad. Once again to ask a question press star one on your telephone keypad.
Our next question comes from Anthony Vendetti with Maxim Group. Please state your question.
Sure. Thanks.
I saw on being a split.
It sounds like you've got off to a strong start.
In the beginning year and.
Thank you said.
March last couple of weeks a March is when you get most of your sales.
Can you can you give a little more color on on.
What should directory you were on.
Prior to.
Let's say March 1st what what we've seen this list looking like.
How did your schedule.
Just a little more color on that and then I just had a follow up question.
Sure I mean, I think that obviously, we can't give product level disclosures at this point, what I will say is as Youll recall, we did launch the Venus listen Q4.
Soft launch mode, and we continued to be in soft launch in Q1, because already before the Corona virus that we had a a long lead time item per component parts coming from China that was also sort of challenging our our sell through having said that you know the bliss is becoming a.
Product that will be probably our leading category overall and I think that what we will do let's take a look at.
Supply chain now that China has opened its supply chain for the most part for the component parts that we need for the Bliss and we do anticipate that it will be the largest growth driver for us in 2019.
You know obviously getting into the back end of the of the first quarter and having the markets are essentially shut down I mean, our salespeople, we're getting very creative and doing you know sort of in house, a are doing a teleconferencing demos et cetera, et cetera, as where some of the customers that were still open using them.
Yes, we think that there's a.
A fair assumption here that this product will ultimately become our our primary focus point for the balance of this year.
Okay, and then on me expense reduction side so.
Dominic spoke about the 18 million operating cost synergies.
But Tom you mentioned.
Based on.
You know the current situation, there's about 20 million and ride ons reduction is that.
Is that in addition to what you're looking at in terms of cost synergies or is that roughly 20 million. Just an incremental addition of 2 million from but they don't know so 18 million was identified as part of the the transaction with the restoration.
You know thing that we closed on November on November 7th the deal. This is above and beyond that given the current circumstances. So we feel pretty confident that you know that the two of them combined will be.
Integrated into our 2020 opex.
Okay, Great. That's helpful. Thanks, I'll jump back up here.
Thanks Anthony.
Thank you.
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This does conclude our conference for today. Thank you all for your.
Thanks, everybody for your time today, we appreciate it in these difficult times.
Thank you.