Q3 2020 Vapotherm Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the people through third quarter 2020, <unk> financial results Conference call.
As a reminder, this call is being webcast live and recorded.
It is now my pleasure to introduce your host Mr. Mark Klausner of Westwicke. Please go ahead Sir.
Good afternoon, and thank you for joining us for that they both are third quarter 2020 financial results conference call joining.
Joining us on todays call are baseball terms, President and Chief Executive Officer, Joe Army, <unk>, Senior Vice President and Chief Financial Officer, John Landry.
We'd like to remind you that this call is being webcast live and recorded a replay of the event will be available following the call on our web site.
To access the webcast. Please visit the events link in the IR section of our web site they put their dotcom.
Before we begin I would like to remind everyone that our remarks and responses to your questions. Today may contain forward looking statements.
These statements are based on the current expectations of management and involve 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 annual report filed on form 10-K for the year ended December 31, 2019, which.
He was filed with the Securities and Exchange Commission, where the FCC on March 4th 2020 indoor.
And our quarterly reports on form 10-Q for the first to second and third quarters of 2020 as filed with the FCC on May 5th 2020 August 4th 2020, and November 4th 2020, respectively.
And in any subsequent filings with the FCC.
Such risk factors may be updated from time to time in our filings with the FCC, which are publicly available on our web site. We undertake no obligation to publicly update or revise our forward looking statements as a result of new information future events or otherwise unless required by law.
This call will also include references to certain financial measures that are not calculated in accordance with generally acceptable accounting principles for gap we.
We generally refer to these as non-GAAP financial measures.
Reconciliations of these non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the Investor Relations portion of our website.
With that it's my pleasure to turn the call over to baseball terms, President and Chief Executive Officer, Joe Army.
Thank you Mark good afternoon, and thank you for joining us today.
I will begin by discussing our third quarter 2020 results.
Then I'll hand, the call over to John Landry, our CFO to provide the financial details of our Threeq results after.
After which I'll update you on our key areas of focus for the remainder of the year before taking questions.
Threeq there was another good quarter for vapor from as we generated 30.6 million in revenue.
A 183% increase over three Q2 thousand 19.
Increased our worldwide installed base by more than 2700 units to approximately 25000 units and opened 43 net new gold and silver accounts in the U.S.
In addition, we printed a 50.8% gross margin for the quarter. Despite continued significant headwinds on.
On our Twoq call I stated my belief that our business had been significantly transformed as a result of two factors one the increased awareness and usage of our high velocity therapy and to our continued progress in developing the oxygen assist module or arm for short.
And our next generation system.
With another quarter under our belt I'm increasingly confident in our ability to sustain this transformative momentum post COVID-19.
Today I'll update you on what I'm seeing in our business that's driving my thinking on this as well as provide an update on the work we've been doing on our product pipeline during Threeq Q.
Two Q was incredibly hectic as we devoted a substantial amount of our energy to rapidly ramp our capacity in an effort to meet all customer needs in the midst of a significant surge in COVID-19 hospitalizations.
Threeq you was primarily about working to settle down and prepare the organization for sustainable long term growth we.
We focused on three things this quarter.
First we ramped production capacity in an effort to meet all future customer demand.
Second we expanded our clinical education efforts to teach new customers how to use our equipment on both type one hypoxic and take to hyper Catholic patients.
Third we continued work on our future growth drivers the oxygen assist module.
And the next generation system.
We expanded our maximum theoretical production capacity by adding new lines, which are fully qualified and ready to go we developed the capability to run three shifts per day in the event, we experienced a significant surge in demand for our capital units.
This reduced our need for overtime and settled our production team down for the long haul we.
We now believe we are in a position to meet all potential future customer demand without burning out our team.
We also expanded our warehouse capacity by 40% and it implemented all applicable safety measures in an effort to keep our people safe.
Importantly, we made all these changes while not adding material to our fixed cost base.
On the clinical education front, our field team is focused on implementing and educating both our new and existing customers on how to use our high velocity therapy or patients suffering from both type one respiratory distress such as those who called in 19 and type two respiratory distress such as those.
C O P D.
We believe this continued focus on education will help drive the broader adoption of our technology, especially when customers experienced first hand, how our high velocity therapy is different from traditional high flow therapy.
And how it can be used to help patients be aren't COVID-19.
To give you a sense of the success, we are having I'd like to share with you a story from a gold E.D. hospital in the New York Metro area.
This hospital became a customer during the initial COVID-19 surge.
We believe our team did a great job getting them up to speed quickly on high velocity therapy. So they could treat respiratory distress experienced by the surge of COVID-19 patients most of whom were hypoxic.
As the surge subsided our team was able to educate this customer under full clinical utility of high velocity therapy, including type two patients in respiratory distress. This.
This customer now uses us in adult I see use the general care floor pediatric I see use and the D and recently converted to our new Prosoft nasal Kenya.
An aerosolized disposable patient circuit, which is intended to deliver aerosol medication without disrupting therapy.
In addition, the customer will be trained in the Nic you soon and as just placed an order to expand their fleet of precision power units and Paypal term transfer units further.
[noise] post surge disposable turn rates in this hospital has ramped as we'd expect for a net new account I am really encouraged by the trends I'm seeing in this and other customers, which gives me confidence that we can use the increased access and awareness driven by COVID-19 to support long term growth.
Our third focus was our continuing work on our future growth drivers, primarily the oxygen assist module or all at our next generation system.
We recently updated the own software to operate with both the Medtronic Nellcor and Massimo as PEO two sensors to improve the user experience and the early clinician feedback from the limited market release continues to be positive on both neonatal and adult populations in the United Kingdom Europe.
And the middle East.
Recall that the old device is designed to help caregivers maintain patients within a physician prescribed oxygen saturation range, while requiring significantly fewer manual adjustments to the equipment.
Our pre pandemic strategy was to focus on the neonatal patient population as our clinical data is strong.
However, based on the clinical experience in the UK Europe and the Middle East. We now believe there is a significant unmet clinical need in both neonatal and adult patient populations.
We expect to move into full market release with this product in the UK Europe and the Middle East in one Q2 thousand 21.
And are continuing to work with the FDA on the appropriate regulatory pathway in the U.S.
We believe we've made good progress on our next generation system, especially given the fact that our team was restarting from a hard stop in late first quarter.
While the initial version of this device will be optimized for the hospital setting.
We expect to learn a great deal about clinical utilization and patient needs that will inform our strategy. When we are ready to launch a home specific product.
I also want to throw up in a plug for our new Felix one portable negative pressure mask. This.
This idea came from a respiratory therapy leader in New York City, and can be used with a variety of respiratory support devices, including our high velocity therapy and may mitigate the risk of transmission, a potentially infectious particles to caregivers treating COVID-19 patients.
We are proud to be donating all of the profits from this product to non profit funds set up by the American College of emergency physicians I'm.
American Association of respiratory care and emergency Nursing Association.
Lastly, I want to thank all our teammates and partners around the world for their extraordinary efforts to serve our customers and their patients on the front lines. During this crisis.
This has been remarkable to see what they have accomplished in a very uncertain and stressful period we.
We believe they have repeatedly and successfully navigated the day to day challenges of scaling our capacity significantly while adapting to significant change it working at home made necessary by the COVID-19, pandemic and I've never been prouder of our team.
Now I'll turn it over to John Landry, our CFO to provide a financial review.
Johnny.
Thank you Joe has mentioned revenue in the third quarter of 2020 was $30.6 million, representing a 183% increase over revenue of $10.8 million in the third quarter of 2019 or the prior year US revenue was 25.5 million an increase of $17.5 million or 200.
18% over the prior year, while international revenue was 5 million, an increase of $2.3 million or 81% over the prior year.
Our worldwide installed base has now grown by approximately 8200 Pf units year to date, including third quarter's growth of approximately 2700 P.F. units as at the end of the third quarter. A worldwide installed base consisted of approximately 24800 Pf units, which reflects growth of 50.
<unk> percent since the beginning of the year.
Our U.S. disposable utilization rate in the third quarter of 2020 was 1.92 as compared to 1.66 in the prior year. This is the third quarter in a row, where our U.S. disposable utilization rate exceeded our historical experience by approximately <unk> 0.25 turns we.
We believe this increase in U.S. disposable utilization rates in the quarter was largely due to the increased usage of our technology for the treatment of respiratory distress experienced by many cove in 19 patients.
Given the significant increase in the installed base. We continue to believe that turn rates are likely to return to more normalized level. Once co that 19 cases begin to moderate any may even be slightly lower than historical averages as the newly installed pf units become productive use.
U.S. disposable average selling prices increased in the third quarter due to the continued uptake of the Prosoft needle candela and Aerosolized disposable patient circuit, both of which were launched in the first quarter. This year.
The international disposable utilization rate in the third quarter of 2020 was 1.63 as compared to 1.80 in the prior year Rick.
Recall that we use a distributor network internationally, which results in less slightly lumpier disposable utilization rates, especially in the third quarter of each year due to seasonality.
Gross profit in the third quarter of 2020 was $15.5 million, an increase of 10.7 million over gross profit of $4.8 million in the prior year.
Gross margin was 50.8% in the third quarter of 2020 compared to 44.5% in the prior year.
We improved gross margin faster than anticipated due to improved overhead absorption.
Recall, we significantly scale production beginning late in the first quarter. This year in order to meet increased customer demand for our products, especially capital equipment.
This provided us with a significant tailwind through the third quarter, which we expect to normalize given our current inventory position. These.
These tailwinds continue to be partially offset by headwinds in the form of higher labor cost increase supplier freight and expediting fees incurred to meet the rapid increase in production capacity they much higher mix of capital equipment revenue than we recorded in the third quarter of 2019.
Operating expenses were $26.7 million in the third quarter of 2020, an increase of $10.2 million or $16.5 million in the prior year. The increase in operating expenses was primarily due to commissions earned on increased revenue and increased headcount in the worldwide sales and marketing organization general and administrative expenses.
And new product development cost associated with our next generation system Harsha.
Partially offset by reduced worldwide TV due to COVID-19.
Net loss in the third quarter of 2020 was $12.4 million or 49 cents per share compared to $12.8 million or 65 cents per share in the prior year.
Adjusted EBITDA for the third quarter of 2020 was negative 8.2 million compared to a negative $10.6 million in the prior year.
Adjusted EBITDA adjusted for foreign currency gains or losses net interest expense.
Depreciation and amortization expense and stock based compensation.
The $2.4 million decrease in adjusted EBITDA loss in the third quarter of 2020 as compared to the prior year was primarily due to higher revenue and gross profit, partially offset by higher operating expenses.
As of September Thirtyth, 2020, cash and cash equivalents were $139 million compared to 148.3 million as of June Thirtyth, 2020, and $71.7 million as of December 30, Onest 2019.
In the third quarter of 2020, our cash burn was $9.3 million.
In October we refinanced our debt facilities and entered into a 52 million dollar facility with sea ice BC innovation banking, consisting of a term loan of $40 million and $12 million revolving line of credit.
At closing we paid off in full the outstanding balances on our previous term loan and revolving line of credit. This new term debt facility reduces our interest rate by over 500 basis points and our interest expense by approximately $2 million per year.
Before we provide our guidance for the fourth quarter and full year 2020, I would like to discuss our perspective on the current operating environment and trends we are seeing in the business.
A couple of weeks ago, our expectation for Q4 disposable utilization was based on a light flu and RSV season.
And modest cobot impact on our business.
Our hypothesis was that better hygiene practices, social distancing, an increase rates of flu vaccination would likely lead to a light flu season. This year in the us and Europe similar to what was experienced in the southern hemisphere.
In addition, we were expecting the RSV season to be soft given that kids are not spending as much time in person at school in the U.S.
We still believe our hypotheses regarding flu and RSV a correct. However, we have recently seen an increase in kobin related hospitalizations across the us and Europe.
As a result, we now believe the impact of cobot hospitalizations during the quarter, we will offset reduced flu and RSV activity and the net result in disposable utilization will be similar to what we've seen in a normal flu season.
Should cobot hospitalizations rise sharply the net result may be similar to what we have seen a severe flu season.
On the capital equipment front sales have been dynamic on a month to month basis and difficult to predict going back to March generally we've seen significant increases in capital equipment sales in geographic areas, where cove. It has seen its first wave of outbreaks, we have not typically seen meaningful increases in capital equipment sales and geographic areas when cobot outbreaks of Curtis second.
Time.
As it is difficult to predict what geographic areas will be impacted by cobot outbreaks. It remains difficult to predict our capital equipment sales.
In addition, we believe some of our capital equipment sales that typically would have occurred in the fourth quarter. This year.
Were moved into the third quarter as hospitals prepared for the fall and winter.
As a result, while capital equipment sales in Q4, we'll grow over Q4 2019, we have not factored in any significant impact from Covance.
In the event that we see a stronger than anticipated flu or RSV season, where new geographic areas are impacted by coded for first time in Q4.
Capital equipment sales will likely be above our current expectations.
Overall, we expect revenue in the range of 18 million to $20 million in the fourth quarter of 2020, and the anticipated year over year increase of 38% to 54% over the prior year.
For the full year 2020, we expect revenue of between 102.8 million to $104.8 million, an increase of 114% to 118% over 2019.
With that I'd like to turn the call back to Joe to discuss our key areas of focus for the remainder of the year.
Thanks, John before opening the line for questions I'd like to review, how we intend to focus our efforts for the remainder of 2020.
Play is very simple and it's more of the same from the third quarter first we plan to continue educating our net new gold hospitals on how to use our high velocity therapy on patients experiencing type two respiratory distress give.
Given what we've seen to date. We believe these efforts are paying off we will set the stage for long run future growth across our business. So.
Secondly, we plan to focus on new product development and for Q, We plan to expand the Nic you an adult on limited market release in the UK Europe and the middle East with respect to the U.S., we hope to have finalized our own neonate I'd. He study design and regulatory pathway with the FDA by the end of the.
Year.
We also plan to submit the next generation system for regulatory clearance for both the hospital and home settings and spend more time thinking about the elements, we will need in place to serve respiratory distress patients in the home.
Lastly, we plan to continue to run our three pronged gross margin improvement plan.
Leverage our operating expenses and drive working capital efficiencies over time.
To provide a little more insight into how impactful our high velocity therapy is a treating the respiratory distress experienced by many COVID-19 patients I want to share one of the many patient stories with you from last quarter that comes from a VA hospital as related to me by one of our sales professionals.
This week, we visited a VA hospital for military week hearing the success stories from the Rts and the doctors on how they have successfully used high velocity therapy to treat respiratory distress from all covers including coated patients was incredible.
One of the head pulmonary doctors told me a story about a COO PV exacerbation patient, whose respiratory distress he had successfully treated using vapor.
He stated this was a very sick patient, who not only had a vapor thurman the room, but also had a vent and bypass.
At first she told me they intubated the patient and peak pressures were very high no matter the motive ventilation.
Told me. They then estimated the patient to bypass because as CEO to level of 112 made them uncomfortable.
But the patient continue to decline and his COO to continued to rise. The Doctor told me that he then put the patient on vapor serve device and within 45 minutes to Seo to was in the eighties.
Continuing the therapy or 40 leaders. He told me that after six hours the patient had completely turned around this was a true aha moment for the Doctor and a few others into building.
It also gave us an opportunity to educate on different leader flows and now Bayport term is different from common high flow nasal canyon.
In conclusion I'm feeling good about how we perform in three Q and I were set up for the remainder of 2020 and beyond.
Our installed base continued to grow materially faster than anticipated and we are beginning to see these net new gold accounts use our high velocity therapy are type two patients expand usage throughout the hospital we.
We believe there is significantly more awareness of the benefit of our technology than there was at the beginning of the year revenue has significantly exceeded our expectations for this point in the year and our gross margin improvement plan is ahead of schedule despite strong headwinds.
Our key product development initiatives, including own and the next generation system are progressing nicely lastly, I want to reiterate are very proud of our team for working to meet the needs of our customers I am. Thank you for trusting us with your capital. It means a lot to us now I'd like to open it up for questions.
Ladies and gentlemen in order to ask a question you do need to press Star and then one on your telephone keypad.
Please standby will be compiled given the roster.
Our first question comes from the line of Margaret is ordered with William Blair. Your line is open.
Hey, good afternoon, guys. Thanks for taking the questions.
First off for me is just a follow up on the quarter you guys saw strong capital sales this quarter, but you also referenced that geography second way its aren't driving significant capital demand. So I know this is really hard to parse out, but how much of that Q3 demand one cold related versus expanding within accounts and ultimately when do we get.
Good quarterly run rate range, as we think about kind of the post cobot Naples them.
Hey, Margaret it's Joe I'll take a shot at that will let John follow up.
He's got so within the third quarter, an awful lot of the capital equipment sales did in fact come from coal bid in the southern tier and Texas.
Texas, Florida, Arizona, and so forth in the Sunbelt, So you know that.
That July Spike, we were busier than all help getting product out the door.
The disposables themselves I mean, we're feeling pretty good about our ability to predict at least within a relevant range how those disposables are performing.
But you know.
Capital equipment sales with that one was if we hadn't had the inventory on the shelf that we put on at the end of the second quarter. We had been in the world to hurt we wouldn't have been able to take care of the customers because our ability to predict. This is very very limited you just don't know where it's going to show up.
And then I think the one piece in which you said is we did see what we believe to be a fair amount of capital equipment that we booked in the third quarter actually was would it typically would have been in the fourth quarter, but we're hearing from the accounts as they were all get nervous and getting ready to see if they were.
Are going to get whacked here in the fall.
Hi, Margaret and John I would agree with that I think what we saw was obviously a lot of good demand.
And in regards to second waves and where we've seen it typically we see the capital equipment sales in areas the.
The world or do you asked where cobot strikes for the first time, we havent seen it to a great extent, where we've seen second waves in different geographic regions of the world not say that will take place, but it's been more typically aligned with first waves. This.
At this point in time.
Okay, and so that gets me to the last part of that question, which was you know at what point do we get to kind of a good quarterly run rate post code that is Q4, then that number where you guys aren't assuming that much from a capital perspective.
Related to common.
Yes, that's right Margaret So as we took a look at the capital.
Thought about our guidance for the fourth quarter in particular as Joe mentioned, we feel pretty good about where were thinking disposables and that business will be.
Given our experience and hypotheses around flu RSV season coded hospitalizations on the capital side. It is a bit more of a wildcard.
Predict it we did have in developing our guidance once more.
Thought process around the modest impact from COVID-19 in the fourth quarter, we expect to see growth over the fourth quarter of 19, but obviously a sequential decline from what we saw here in the third quarter, which we expected course suspect most of that was front loaded here in the back for the back half of the year into Q3.
Okay.
And then as I can as we look for you guys did give that example of that New York Hospital God can you give us more color that once it sounds like maybe a non customer pre coal bed and then you were able to convert them really cross the hospital within months that or at least a fairly rapid time period. So is this a typical experience amongst the accounts.
Yes, what convince them to be able to do so other than kind of that that quote unquote Aha moment.
And.
Are these things were next gen updates or kind of what gets you to there or the clinical and economic data and so on.
Thanks, guys. So just to kind of to to make sure I'm getting that right. Margaret the question would be that that New York Hospital that I shared with you is that a kind of a one off or are we starting to see more and more of that that correctly. Your question.
So if I wouldn't I wouldn't know told you. The story if it was a one off I wouldn't call. It a we see these everyday but we're seeing more and more of this.
A field team has done an absolutely phenomenal job this summer out in the field teaching all of these net new customers how to use this technology, particularly on tied to hyper cat integration. So thats really the play that we've been running over and over and over again, because this was a tremendous opportunity for us to expand.
And then install base, but we were really really focused on making sure that they are using it on both types of patients and that's what we're beginning to see where we were pretty.
We like what we're seeing with respect to that particular account and others like it.
Okay, great. Thanks very much.
The next question is from Doe pullback with Canaccord. Your line is open.
Great. Thanks, Good evening and thanks for taking my call.
[music].
Hi, good a couple of questions here.
And I think most of these questions runner on Champagne problems right. When you have a lot of systems in the field and you drive utilization and how much longer where the extra capital sales continue but.
To hone in on some of the questions. One capital sales what was the mix of new like totally new accounts versus units going into existing and then how many gold accounts did you sign up in the quarter and then I have a couple of follow up questions.
Sure Bill this is John good to speak with you in terms of the mix of new accounts versus existing accounts is followed roughly the same model that our business is historically seen roughly two thirds of those capital equipment.
Sales went into it.
Existing customers as we continue go deeper and wider into the into the book.
And then I guess in regard to the number of the gold and silver as we added another 43 this quarter, bringing us to almost 150 for the first three quarters of the year.
Excellent and so just two thirds went into existing accounts and one third wouldn't into new accounts.
Correct for the Keppel, Okay, I just wanted to be clear, that's that's a pretty big number.
And then you know that our.
R&D went up sequentially and I'm is that programs to support the people 2.0 or is that queuing up for the OEM trials or what specifically because it was a pretty good jump sequentially.
Sure Bill in regard to that level investment in R&D in the sequential increase that's tied to our HBT 2.0, our next generation system.
Which we are targeting to.
Which has the ability to break away from the need to have a.
B connected to wall gas will have an internal blower capability, which will allow us to access areas. The hospital that don't have piped in there will.
We will be also allow us to potentially tackle patients in respiratory distress outside the hospital, whether they may be in a home setting or in transport to hospital facility.
And then.
Lastly is just.
Regulatory wise.
What do you think the pathway on the OEM is going to be in the U.S. I know you're in discussions is this going to be a big trial or is it a small trial and what type of follow up do you think it could be at this point and then really the same question on the 2.0 'cause. It my understanding that 2.0 will also integrate the OEM.
So and I don't know if it's it'll be one trial, where it would be the 2.0 with the OEM, but any any color would be helpful. Thank you.
All right well, let's unpack that first of all and talk about the clinical trial that we did at Oxford and say Peter So that was roughly 30 patients right.
And they were each on the technology.
Either on our technology, rather control for 24 hours Bill So terms of any kind of follow up there is really not a lot of follow up in that study that study was very very conclusive around the clinical efficacy of the technology even at that size.
So you know as you know the FDA has designated this breakthrough technology, we continue to dialogue extensively with them. We are liking the direction that those conversations are taking our focus here in the fourth quarter.
He is on finalizing the Nic you I'd, each study and getting it cleared from the FDA and that'll inform us a lot more in terms of the overall regulatory pathway, but we like where we're at with these guys. So far outside the United States you make a good point about the own technology being.
Integrated into the next generation.
You know, it's our intention here later this quarter during the fourth quarter to be able to file that.
For regulatory clearance in Europe and outside of the U.S., so that entire own platform will already be integrated into the nexgen outside the U.S.
Great. Thank you.
And again, ladies and gentlemen, thank you for your question. It is star and then one on your telephone keypad for.
Our next question is from Murray cycle with BTG. Your line is open.
Hi, Joe Hi, John Thank you for putting the question loans.
So my first question on the training and education angle really encouraging that you told us about Joe currently something that's key to buy a thesis on they put them on slide.
Keith again sort of a progress update on how.
Many of the new look how youre field team has been able to touch at the point in terms of training and education and how.
How long you think that process might take and we eat out of the the covance.
Thank you.
Well.
Weve touched them all Marina so first of all it's good talking to you. Thank you for asking the question.
Weve touched them all in terms of spending them up and teaching them how to use it on type one patients are people were all over those accounts when the initial surge as took place our people in there you know building gear teaching them training them getting them set up and for the ones, where we couldn't physically get in the hospital, we used our people Therm Academy that this.
Since learning tool, we've traded over 17000 clinicians with that thinks its the beginning of the year. So we're touching them in multiple ways right.
Really the play here since the last time, we all spoke was the expansion of the field clinical organization and then full court press driving them into all of those net new accounts teaching them about how to use our technology on type two and you know we're feeling very good about that right now we like the progress that we're making.
Yeah. There is always going to be some accounts is going to take us longer to get to than others, either because they are in the midst of another surge or because you know that it's just that they are entrenched in there or the previous technology.
But as far we're pretty happy with the way that it's going and are confident we're just going to keep running that play over and over and over again, we'd like to slot.
All right. That's very helpful. Thank you wanted to use my follow up on profitable.
John You gave us some good commentary on how you think about Q4 disposable turn rates being similar to a flu season, given some of the offsets a comprehensive order.
But could you walk us through kind of a Q3 cadence and as I think of it yes sequentially.
Sequentially between Q3, and Q4 do you envision higher hospitalisation from what you've seen so far into Q4. Thank you.
Sure.
Henry It's nice to speak with you again in terms of the seasonality as you point out.
Typically Q3 is our seasonally lowest quarter of the year from both a capital and disposable perspective here.
Here.
This year is up.
Really different for US we had quite strong demand here in the third quarter and as we look at our disposables as we think about the fourth quarter, we see them kind of roughly roughly in line with where we saw them in third quarter as we think about in.
In terms of.
Volumes going into the fourth quarter as compared to third quarter sequentially.
Factors and those items, we talk we spoke about on the call regarding our expectations around like flu RSV season.
Being offset by the cobot hospitalizations.
That we're seeing now.
Should coded hospitalizations spike or dramatically increase from these levels.
We would expect to see revenues above where where we guided to our baseline assumption assume.
And covered hospitalizations.
Ongoing at sort of the rate that where we're seeing now.
Okay helpful. That's it for me thank you.
Thanks.
Our next question is from Bob Hopkins with Bank of America Merrill Lynch. Your line is open.
Hi, there you actually have Brad Bowers on for Bob Today, just a quick question I was just wondering if you could give any color on some of the trends you've seen so far into Q4 and also if you could explain a little bit more why you think that second wave wouldnt see as many capital units being sold that you could give a little bit of color on why.
That might be a why it would continue into Q4 of them are seeing cobot spiking up again. Thank you.
Sure this.
This is Joe I'll take a stab at that and we won't have Johnny answer some of that so.
Excuse me I asked us for our guidance you know three weeks ago four weeks ago.
There was not a whole lot of talk about cobot that just wasn't and.
And we really weren't seeing a lot of it in the business that this business is really if you think about our business really two different things right. The disposable component to this is.
Is increasingly I mean, it's always been very predictable, but even in the midst of coping we've done a pretty good job of being able to predict. This that's not that's not really hard to stay ahead of it whether it be from a production inventory point of view or whatnot.
You know, we know that as Kogan hospitalizations increase we're treating those patients we've been doing a heck of a job treatment ticking comparable.
The real wildcard here the thing that's really really unpredictable is the capital equipment sales right because it can come on very very quickly and you just don't see it just it just comes it comes out very very quickly and there's no way for us to forecast where the coal good census.
It is going to hit you think about it the first way that really hit in New York City hit parts of Pennsylvania, North Jersey, New Orleans that kind of thing second wave, which really the sunbelt right. There in that July timeframe. We just have no idea, where it's going to hit next.
That said you know in the last week or so we've seen an increase in activity in our international business, particularly in the European and middle Eastern sectors.
You know, we're going to begin with.
You can feel it coming in the U.S., where there's going to be more covert patients in that hospital. The question really is which geography, if they go into New York City, given how much gear, we put into New York City those hospitals are already.
Hey man they are ready obviously, our disposables go up lot right, but we're not going to see more capital if they've already got what they need goes into a different part of the country that hasn't experienced wage yet well you know I said that on the last call you see hospitalizations rise in a new part of the house in a new part of the country that you haven't seen it before you can pretty much better at our disposal RK.
Capital revenue is going to be impacted by that but you know I hate to say this I don't mean to be Cavalier, but your guess is as good as mine, where the how cold it is going to show up because I have no idea.
The way we've approached this problem, though is you try to deal with the unknowable. So we said Okay. Then we only have really three things, we could do right optionality flexibility and speed. So if we can't forecast that then we're going to build up some inventory we're going to add production lines. So that if we get slammed we're going to be able to go.
With their need every customer needs, we've learned how to run third shifts we've learned how to do weekend work all of that has created that optionality to make sure that we take care of those customers and get them whatever they indeed whenever they need it and do it in a really short timeframe.
That's that's the best I can do on our.
Got you. So I mean, I guess, you kind of alluded to this earlier I noticed in your response also appreciate all that color there. It's super helpful. But what it would have been just clarifying it to say that if we did see continued increased coal being I guess nationally that it would make your Q4 guidance look a little bit conservative. Thank you and I understand why not.
No listen nationally if at all if it shows up in New York City, They've got all the boxes, they're going to need to take care of these people are in good shape right showing up in Texas, Texas, Scott a lot of gear now they're ready to go to those hospitals are ready.
If it shows up in a different part of the country you seeing nationally right, but we don't look at it that way we have to look at like what city is that you're going in and how many of our systems to the ever in that city. That's the key variable in forecasting that capital revenue and that's what I'm, telling you is so unpredictable.
Got you appreciate all that thank you very much.
The next question is from Bill Plovanic with Canaccord. Your line is open.
Yeah, great. Thanks for taking my follow up.
I'm, just trying to kind of triangulate.
Something on the capital sales.
The commentary of two thirds of the sales are to existing accounts is that because cove. It is rolling into those accounts and they already have some systems. So they expand significantly.
Or I or you're getting deeper into those accounts and then all the new ones are essentially the cove and I'm trying to make is if he did 2100 systems in the U.S. it'd be 1400 to exist existing which would be a bigger forward number and I'm just trying to understand that and then my second question is.
I think you called it the Felix one negative pressure masks, where does that tend to hit into the revenue segment reporting segments should we make sure we tease it out and in any.
Qualification of the size of that I think would be helpful. So that we make sure that we don't put that on this ongoing basis pass the covert issue.
So let's deal with the second one let's deal with the second one first because that's the easiest one by far don't bother model in it it's got to be a very very low priced product. It's designed to help them deal with a problem right now I would be surprised if we sold this year. After we're done with cold, there's really not going to be a need for this and it's.
It's not going to you're not gonna and even notice it in my revenue lines. So I wouldn't worry about it right. The second one I just wanted to make sure I just wanted to make sure it wasn't a million or 2 million Bucks in like all the so you know next year.
That's that was that was the reason for the question on that Yep understood understood. Good question.
The other one is so our split between existing customers and new customers sounds like we put an awful lot of geared to existing customers and then really getting into the Y. So I want to back up or remind you of our strategy here is to go into the largest emergency departments in the country right. So that's what our installed bases.
And when we think about where these koby patients show up Bill They show up in the biggest Cds in the cities right. So.
So it only makes sense and historically by the way just as a matter of historical fact, two thirds of our just our capital revenue in any given quarter goes to existing customers expanding their fleet. So this is actually in line with what we've always seen it's just much much bigger numbers and you know candidly, we're pretty excited about it we love that.
Current customers are buying this year, because it's just accelerating the path of them sending it throughout their hospitals so Bob.
Bottom line is we're in the right place at the right time, we're calling on the right customers. Our focus on these large gold emergency departments. We just we were very fortunate that we were already there before this cobot things truck, which is why they would be buying so many.
That's very helpful. Thank you.
Ladies and gentlemen, this concludes speak in any period I will turn the call back over to Mr., Joe Army for any closing remarks.
Well I want to thank you all for your interest in April and we really appreciate it and we look forward to updating you on our progress again next quarter have a great night.
This concludes today's conference call. Thank you for your participation and you may now disconnect.
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