Q1 2020 Earnings Call
Please standby.
Good afternoon, ladies and gentlemen, and welcome to the first quarter of 2020 earnings conference call for Venus concept incorporated.
At this time, all participants had been placed under listen only mode. Please note that this conference call is being recorded and up the recording will be available on the company's website for replay.
Before we begin I would like to remind everyone that our remarks and responses to your questions. Today may contain forward looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from of those indicated including those identified and the risk factor section.
One 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 in accordance with generally accepted accounting principles or gap.
We generally refer to these as non-GAAP financial measures.
Conciliations of these 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. Tom Serafino.
Keith Executive Officer Venus concept. Thank you. Please go ahead Sir.
Thank you operator, and welcome everybody to Venus concepts first quarter 2020 earnings conference call today, I'm joined by our Chief Financial Officer, Dominic Dellapenna, and Chad, Jerry and who we recently appointed as Chief commercial officer of the company.
Let me start with a brief agenda. So what we will cover during our prepared remarks.
Well start with an overview of our revenue performance in the first quarter, including color on how our business trends have been impacted today by the court Rona Ur Cobot 19, pandemic and how we're managing our business to keep us well positioned for growth as the recovery begins after my opening remarks, Dominic will provide you with more in depth.
View of our quarterly financial results as well as a summary of our balance sheet and financial condition.
And then we will open up the call for your questions.
With that in mind, let's get started.
Beginning with a review our first quarter revenue performance, we reported GAAP revenue of 14, and a half million dollars for the first quarter of 2020.
Representing a decrease of 41% year over year, which came in at the low end of our preliminary guidance range.
Obviously these results do not reflect the growth expectations, we had coming into the year and the deltas entirely related to the disruption we experienced as a result of this global can damage caused by corporate 19.
As discussed in our fourth quarter call at March Thirtyth, our revenue results in Q1 were significantly impacted by this global kind data.
We already global business, having established commercial presence in more than 60 countries and over the course or where 10 year history.
Certainly 30% of work 29 team sales came from Asia Pac and the European regions, which were impacted by this pandemic beginning in January and China, and broader Asia Pac region, and then as the disease spread our business in Europe saw disruption beginning in February and worsened in March.
In the U.S., specifically, we had solid growth performance in the first two months of 2020, where sales increased 7% year over year fueled by recent new product introductions, specifically a stronger than expected market response to our bullish initial commercialization, that's corporate 19 pandemic spread through the U.S. in March However, we began to see.
Sales trends slow that's federal and state restrictions were initiated.
The impact varied by customer type site of care geographic region of the country, but by the end of March nearly all of our customers had experienced significant disruption and their activities, including.
Shifting resources to emergent care restricting access to clinicians, reducing elective procedures and we're announcing temporary closer supposing as a result of the cold with 19 pandemic.
Device sales in the U.S. for the month of March declined 80% year over year, driven by device sales falling 95% year over year in the last two weeks of a month, notably we experienced a higher than expected number canceled or delayed orders in the last few days or the first quarter as customers reacted to the very high level of uncertainty.
Related to the mandates for closing of non essential businesses and restrictions on elective procedures.
Given the significant uncertainties associated with call. It 19, we recognized the investment community's desire for increased clarity and if elected to provide color on our third quarter trends.
Somewhere to all med tech businesses with a higher mix of elective procedures are U.S. customer trends deteriorated further in the month of April as evidenced by the fact that night roughly 95% of our customers were closed during the month compared to roughly 80% at the end of March notably our year over year devices.
Sales performance in April was.
Better than expected given so many of our customers were not practicing during the month. It as a direct result of our strong execution by our salesforce during the month, whereby they close some of the orders that were cancelled in the last week of March.
Excluding the contributions related to the timing of orders delivered in April versus March our U.S. device sales declined approximately 55% during the month of April.
Importantly in recent weeks, we've seen an improvement in customer trends.
Some practices have started to reopen.
Specifically as of this week approximately 20% of our customers are open compared to 5% or so there were open at the end of April.
While we're pleased with the overall position are positive trends in stage lifting restrictions and gradual reopening to talk this is around the U.S., we remain very cautious given the high level of uncertainty with respect to the pace of recovery going forward.
As discussed in our Q4 earnings call. This global pandemic pandemic presented the company with unprecedented challenges and I'm very proud of how our organization has responded we reacted quickly and implemented measures to protect the health and safety of our employees that has given our team the ability to remain focused on supporting our global customers.
To whatever extent possible over the last two months.
There are two areas of strategic focus and activity in recent months that I wanted to highlight is I think they are critically important to understand how we have responded during this period of business disruption and how our continued strong execution of these areas is expected to contribute to our goal of being a well positioned as well positioned as we can when the environment.
Improves.
The first there I want to highlight a recent progress on the commercial strategy from.
We have made considerable efforts as part of our key strategy to maintain strong engagement with our existing customers as they work through the challenges related to this period of business disruption, we have leveraged virtual selling and services.
Strategic strategies and hosted a number of Webinars. During the month of April that included participants numbers that were quite frankly very impressive we hosted six virtual events in the U.S. covering a variety of subjects, including product focused events for the Venus Bliss veeva versa, an artist all of which included external Kale well.
The speakers as well as topical events focus on practice enhancement and support on on subjects, including business recovery now after the call wood prices how to manage your clinic stop customers business through this crisis as well.
We also hosted three webinars for customers and prospects in both Latin America and EMEA in April together. These events and you asked in international markets had more than 1100 participants and we couldn't be happier with our virtual engagement efforts and believe that these activities will result in driving new customer adoption at some point in the.
Near future.
The secondary I wanted to highlight is that we've made significant progress in our efforts to reduce costs.
Building on our plans to reduce the operating expense profile of the combined company with $18 million synergies and cost cuts expected to be realized 2020, we have conducted a full review of our current operating budget for 2020 and identified additional operating expense reduction opportunities of at least $20 million, which we expect.
The realized during 2020 and into 2021.
We expect our restructuring program combined with previously announced synergies and cost reductions to result in a told the total cost savings of approximately $38 million and 2020 continuing into 2021 simply stated we expected. These efforts to result in significant improvement in the Companys financial profile going forward.
Dominic will provide you financial details on this new structuring program and a few moments.
At a high level I wanted to highlight that this restructuring program is an important part of a broader set of strategic initiatives to enhance our competitive positioning and maximize our capital during the period of business disruption.
We expect these strategic initiatives to position us well to return to the market share gains when the market recovers, while driving improving financial results with our leaner operating expense profile.
We will not be detailing each activity for competitive reasons, but they do include the consolidation of our direct selling organize operations in certain international markets and investing that capital into the higher return more attractive U.S. market.
Enhancing our sales leadership team with the appointment of Chad Jerry to the newly created role of Chief Commercial officer, which has allowed us to eliminate multiple layers of sales management and other leadership positions to reinvest that valuable capital into our North American direct sales team overtime, which means these dollars will be focused on driving growth.
And market share gain in the future and doing so at a higher return on investment.
We have also eliminated duplicate of positions throughout the organization as part of our integration and appalled Underperformers and our direct sales team during this period of business disruption.
Finally under charged leadership, we have developed a targeted commercial strategy for the balance of 2020, which builds upon the strong virtual engagement, we have had with existing customers and prospects in recent weeks and months.
We have detailed plans for how we can optimize our pipeline pipeline and sales process as our customers and prospects begin to reopen their offices and begin to schedule and treat patients in the weeks and months ahead.
We have tightened our targeting on specific clinicians and tailored our selling strategies, depending on the geographic region of the country.
We're also arming our direct sales team with programs and messaging that's focused on six key product lines within our portfolio of 12 commercialized products of course, we will continue to leverage our unique pricing and payment options by our industry first subscription model.
Importantly, the changes to our direct sales infrastructure and more targeted near term commercial strategy have not altered our commitment to our high touch customer focus philosophy, which builds long term relationships with their customers supported by our outstanding marketing team continuous clinical education practice enhancement programs and more.
Now, let me turn the call over to Dolnick Dellapenna, who will provide you a detailed review of our first quarter financial results and discuss our balance sheet and financial condition Dom.
Thanks, Tom.
My prepared remarks. This afternoon will focus on the company's reported results on a GAAP basis, unless otherwise noted.
[music] avoid confusion when evaluating our reported results are when reviewing our historical financial results and not SEC filings. Let me highlight a few items regarding our merger transaction with restoration robotics first reported results prior to the fourth quarter of fiscal year 2019 reflect the business operates.
Since and performance of the legacy Venus concept business.
Referred to as Venus concept Ltd, and our SEC filings.
Second beginning with the fourth quarter and fiscal year 2019 periods. Our reported results include 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 basis, where possible and in certain areas. We will call out areas, where results were materially impacted by this nuance to help the investment community I understand the respective contributions from each business and.
Period.
First quarter total GAAP revenue decreased by 10.1 million or 41% year over year to 14.5 million as reported on our GAAP income statement total products and services revenue decreased by 1.1 million or 13% year over year to seven point.
7 million and total lease revenue decreased 8.9 million or 57% year over year to 6.8 million.
The decrease in lease revenue and in products and services revenue in Q1, 2020 was driven primarily by the business disruption caused by the global pandemic.
Total products and services revenue in the first quarter of 2020 included 1.9 million from the sale of artists an artist I acts systems products and services. Following the closing of our merger on November seven 2019.
Excluding revenue from restoration robotics product and services decreased 35% year over year in Q1.
Turning to a brief review of our revenue performance by geography, and by product line, which incidentally is how we report and discuss revenue results in our 10-K and 10-Q filings.
First quarter total GAAP revenue by geography was driven by a 6.2 million decrease or 41% year over year and international sales.
And at 3.9 million decrease or 41% year over year in U.S. sales compared to the prior year period.
First quarter total GAAP revenue by product category was driven by.
An increase of 1.5 million or 125% year over year in service revenue, including Bureau graph technician services at agency services and extended T extended warranty sales.
An increase of approximately $200000 or 14% year over year in sales of products, including skincare here and other consumable products.
The growth in these two product categories was partially offset by a decrease of 8.9 million or 57% year over year and leases revenue, which is where our subscription program is reported and represents all sale off system sales with typical lease terms of 36 months and a decrease of coupon.
8 million or 45% year over year and system sales, which are cash sales of our sales of systems with payments expected in less than 12 months.
Turning to a review of our first quarter performance across the rest of the piano.
Total GAAP gross profit decreased 8.8 million or 49% year over year to 9.3 million, representing a gross margin of 64% compared to a gross margin of 73.5% in Q1 2019.
Gross profit in the first quarter of 2020 includes the impact of restoration robotics post close including purchase accounting impacts, which represented approximately 250 basis points to the year over year change and gross margin.
The primary drivers of the year over year change in gross margin where.
Lower revenue as a result of coated related business disruption and excess manufacturing costs related to the artist system as a result of lower than expected production and sales.
Total GAAP operating expenses increased 32.9 million were 165% year over year to 52.9 million.
The increase in total operating expenses was driven primarily by.
A noncash pretax goodwill impairment charge of 27.5 million.
The adverse change in marketing and market conditions from the Cobot 19 pandemic prompted management to conduct an impairment evaluation, which resulted in the impairment charge recorded the company does not expect this noncash impairment charge to have an impact on future operations or effects liquidity cash flow.
It's from operating activities or compliance with financial covenant covenants and its borrowing agreements.
Excluding the impairment charge operating expenses for the first quarter 2020 increased 5.5 million or 27% driven by.
An increase of 5.8 million worth 70% in general and administrative expenses and an increase of 0.6 million or 27% in research and development expenses.
These increases compared to the prior year were offset partially by a decrease of 0.9 million or 10% and sales and marketing expenses.
Total GAAP operating loss in the first quarter of 2020 was 43.6 million compared to an operating loss of 1.9 million in the prior year period, excluding the impacts of goodwill impairment charge, our first quarter operating loss was 16.1 million.
Net loss attributable to Venus concept Inc. for the first quarter of 2020 was 50.2 million were $1.68 per share compared to 5.3 million or $1.10 per share for the first quarter of 2019 weighted average shares used to compute net loss attributable to Venus concept.
Inc. holders per share were 29.8 million and 4.8 million for the first quarters of 2020 and 29 team respectively.
In addition to the after mentioned goodwill impairment charge of 27.5 million pre tax our net loss results also included foreign exchange losses of 4.3 million compared to 0.7 million in the prior year period changes in foreign exchange, our driven mainly by foreign exchange effect on accounts receivable back.
This is denominated in currencies other than the U.S. dollar with the larger impact for Mexico, Canada, and Australia, which currencies declined as a result of the collapse in world oil prices in March 2020.
We do not currently hedge against foreign currency risk.
Adjusted EBITDA for the.
First quarter 2020, with 13.7 million compared to adjusted EBITDA loss of 1.2 million for the first quarter of 2019, we have provided a full reconciliation of our GAAP net loss to adjusted EBITDA in our press release this afternoon.
Turning to the balance sheet.
The company had 20.6 million and 15.7 million of cash and cash equivalents as of March 30, Onest 2020, and Decemberthirty, one 2019, respectively and total debt obligations of approximately 71.9 71.5 million and 69 million as of March 31st 20.
20, and December 30, Onest 2019, respectively.
The year over year change in cash was driven by an increase of 20.4 million in cash from financing activities, partially offset by a use of cash from operating activities of 15.4 million and 0.1 million use of cash from investing activities.
The year over year change in cash from financing activities was primarily driven by the net proceeds from 2020 private placement of 20.3 million.
Subsequent to quarter end the company received funding and the total amount of 4.1 million in connection with two small business loans under the federal pay cheque protection program provided by the cares Act. The funds will help mitigate the financial impact of covert 19 pandemic and will be used for the.
Payment of payroll costs interest on mortgage applications rentals applications and utility expenses.
On April 29th the company entered into an amended agreement with matter in which calls for interest payments for the period, beginning January Onest, 2020, and ending on and including April 29, 2020 to be paid in kind. The amended agreement also calls for the interest rate per annum during the period to increase.
9% to 12%.
Turning to a review of our guidance, which we reiterated in our press release this afternoon.
Due to the rapidly evolving environment and continued uncertainties from the impact of covert 19 on March Thirtyth 2020. The company withdrew its previously announced fiscal year 2020 revenue guidance, which was issued on January 13th 2020.
At this date the company cannot predict the specific extend or duration of the impact of the covert 19 outbreak on its financial and operating results for the fiscal year 2020.
We expect cobot 19 will continue to significantly negatively affect customer demand in the second quarter fiscal 2020 and into the second half of the year as previewed in our press release and earnings call for Q4 2019 on March Thirtyth and reiterated in our earnings press release this afternoon.
We expect to realize a significant reduction in operating expenses this year.
After the merger we focused on improving the profitability of the combined business and had identified approximately 18 million of synergies and cost reductions related to the merger that we expect to realize over the course of fiscal 2020.
In response to the challenging business environment in recent months related to the Coven 19. We also conducted a full review of our 2020 operating budget and the first quarter. Osisko 2020, we began implementing a new restructuring program, which is expected to contribute to our overall strategy of financial improvement through the elimination.
Of overhead and streamlining of certain enterprise functions.
We expect to realize cost savings from this new restructuring program of approximately $20 million in 2020 and continuing into 2021. The restructuring program is mainly focused on a combination of permanent head count reductions hiring freezes temporary unpaid leave and a reduced work week.
Lloyds and reduction of discretionary spending across all departments.
In terms of operating expenses and cash burn in 2020, while we're not in a position to offer formal financial guidance. At this time, we would like to offer the following considerations for the second quarter up 2020 for modeling purposes.
The combined companies had a total operating expense.
32.3 million in Q2 of 2019 or roughly a third of which have which a third came from restoration robotics. The combined Opex. In Q2 2019 included approximately 33.7 million of merger related cost.
So the normalized Opex was 28.6 million in Q2 of 2019.
We expect to realize the larger benefit from synergies and expense savings in the second quarter 2020, as compared to the contribution realize and the first quarter 2020. We also expect to realize cost savings related to the new restructuring program, which we begin we began implementing in April in total we expect.
To realize the 10 million dollar reduction year over year and combined.
Company normalized Opex and 2020 in the second quarter of 2020.
We also continue to identify additional cost reduction measures that will be implemented if we experienced a prolonged recovery.
From this pandemic.
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 on the dramatic change in our business during the first quarter.
In closing the business disruption from quoted was significant in Q1 and into Q2, but we are encouraged by the slight improvement in trends over the last few weeks, we had been very focused on maximizing our available capital resources and ensuring that we are best positioned to return to above market growth and significant market share gains as soon as.
Is this recovery begins we continue to believe the long term opportunity for Venus concept remains extremely compelling for us as a leading player in both the global minimally invasive and noninvasive medical aesthetic market and the minimally invasive surgical hair restoration market I want to thank all of our employees and our customers for their resilience in their flood.
Its ability during these challenging times and our shareholders for their continued support of Venus concept with that operator, I would like to now open the call to your questions operator.
Thank you.
If you would 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 phone your mute function is turned off to allow your signal to reach our equipment. We do ask that you limit yourself to one question and one follow up.
If you would like to ask additional questions. We invite you to add yourself CQ again by pressing star one.
Please standby.
Our first question comes from Mike with Oppenheimer. Please state your question.
Good afternoon, and thanks for taking my question help everyone is safe and healthy just curious if outside the U.S. recovery is further along than the U.S. and if you can call attention to any companies or countries or regions that are experiencing greater strength.
Yeah. Thanks for the question you know, we obviously have noticed that that markets went into locked down at different stages through the course of Q1.
We have opened up in certain markets to a greater extent that obviously in North America, China, Japan, South Korea, and Australia are improving Europe has recently made very good progress in Germany for example.
The UK, France, and Spain, and Italy are on their way to reopening having said that you know there a little slower given the magnitude of the impact of this particular virus in those countries, but we do we are seeing a pretty positive trend when it comes to.
Generating lead activity et cetera from various regions across the the the full scope of our business unit.
And if I could squeeze in one more in the U.S.
Certain markets I, leading the way in reopening of we'd be said, 20% of sites are now back operational.
Yeah, we what we've done in the U.S. in particular is what we we did a few things number one we really tightened the sales organization to feed on the street and we really aligned it with the markets that we're demonstrating early returned to as best we can call normality markets like Florida, Texas and so on we've had.
You are our various webinars and so on the U.S. market has demonstrated that we do have pockets of I'll call. It positive return to is the normality as best we can all having said that we want to make sure that we keep our finger on the Paul's here and we do monitor this on a weekly basis with our organization in our sales leader.
Yep.
And I think that ultimately we do count obviously on the U.S. that represents a significant portion of our our annual business. So we do want to make sure that we can capitalize wherever possible with specific markets that are opening you know obviously there are still challenges in New York State and California, but we do anticipate that at least California and the.
Coming weeks, we'll begin to reopen we already do have some business happening there, albeit in a modest way, but but the signs are pretty positive based on the response, we've had from our current customer base, which is what we've also been very focused on people, who already know us and welcome and welcome us into their dialogue, if you will for others.
Technologies.
Very helpful. Thanks, let them.
Yep. Thank you.
Thank you just a reminder, if you'd like to ask a question. Please single by pressing star one on your telephone keypad.
You May proceed to stocky followed by the number two key on your telephone keypad sort of move your question from the Q.
Our next question comes from Murray to both with BTG. Please state your question.
Hi, Thank you so much for taking the questions and thanks for the color I Hope you all are doing well during the fourth quarter, Hi, Murray Hope you guys are doing well too.
Hey, Thank you for that Hey, we were encouraged to hear a that your sales team was able to close some of the orders from March into Q, you and I know that often some of these capital equipment purchases and subscription decision, making small toward the end of quarter. So I'm just curious whether you expect that plan.
To continue in Q2.
I'm, just trying to think about where customer is kind of.
Perception, our thinking will be toward the end of Q2, it possibly more regions will be out a lock down at that point.
Right. That's a great question look you're absolutely right that traditionally in our business.
About 50% of the business comes in the last month of any given quarter, having said that I think that you know as as the locked down started to occur in the U.S. in particular in March there was a lot of fear factor unknown and so on and that really did impact us in the last few weeks of the of the quarter, which are critical in any given quarter for us and.
Other companies as well, having said that I think our team has done a very good job of engaging with the customers who had activity in the queue that we expected in Q1 and were able to convert and as the waters sorta calm that the world wasn't necessarily ending in the first part of April and more importantly into May we still can stick, we still see that.
Trend developing and we think that.
This will probably be a quarter, we will try to flatten out as best we can the activity in Q2, which typically represents the second busiest quarter of the year for most companies in our space. We think we're also well position to engage in a more aggressive manner, our subscription model, especially with our shift to a more I'll call. It.
Core market.
Focus.
These customers the dermatology and plastic surgery community typically have access to capital.
For any purchases that they make and in our case, having the ability to go to them as we continue to come out of this with a an offering that nobody else can we feel that this gives us some flexibility in a bit of a competitive advantage.
Over our peers and we think that that will continue through Q2.
Ultimately still in closing on this you know June will still be the busiest month, regardless for the business because obviously as we look at sort of the transition in markets opening we're cautious about how they opened but we want to see a continued momentum of a less fear and more.
Eager participation in commercial activity and so we're monitoring it on a weekly basis and enacting accordingly.
Makes a lot of sense. Thank you for that insight I guess my follow up question would be just to clarify on some of the cost reduction measures. We've already taken another plant and thanks for that detail on Q2 that we think about models.
[laughter], that's 38 million how much of that hits and 2020 and I know you mentioned it would continue into 2020 ones I wanted to clarify whether some of that 38 million happens and 2021 as well or whether that's just the lower sustained expense level and 2021 that youre right yes.
I'll give it to bomb dellapenna for that one yes, no. The full 38 million is what we expect to realized in 2020.
And obviously that will continue on into.
2021, so they you know it's a combination of the 18 million that we announced.
As part of our year end results.
Combined with the 20 million that we are have targeted as a result, this covert 19.
Pandemic. So in response to that we're looking at a total combined $38 million.
And the are you know the 10 million essentially into two if you take the 38 and divided by four quarters, you're at 9.5 million, we're expecting a little more in Q2, because that's the peak of the pandemic.
In terms of the impact on on a on the company. We expect some recovery in Q3 and later in the year such that some of the cost reductions that we've taken and the immediate term will will not necessarily.
Results in the second half of the year as it recovers right because some people will return back to work.
Absolutely. Thank you so much.
Thank you Mary.
We are currently showing no additional participants in the <unk> in the queue that does conclude our conference for today. Thank you all for your participation.
Thank you everybody. We appreciate the continued support and we look forward to improving economic times and performance of the company.
Through this there's very challenging and unique situation I have a good evening.
Thank you all parties may disconnect.