Q1 2021 Eargo Inc Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by and welcome to the end of first quarter 2021 earnings conference call. At this time, all participants on a listen only mode. After.
After the Speakers' presentation there'll be a question and answer session to ask a question at that time. Please press Star then one when you touched on the telephone.
Today's conference call is being recorded.
I will now turn the conference or the health net.
But <unk> Vice President Investor Relations.
Sir you may be.
Good afternoon, everyone and welcome to the era Golf first quarter 2021 earnings Conference call.
The press release and slides to accompany this call are available on our Investor Relations website IR Dot dot.
Dot com.
Note. We have also provided supplemental historical financial information at the end of the slide presentation.
As a reminder, both the slides Paul and a digital replay will be available on our IR website.
Joining me on today's call are Christian Gonzalez, President and Chief Executive Officer, and animal opponents, Chief Financial Officer, Chris.
Question on Adam will provide prepared remarks, and then we will open the call to Q&A.
Before we begin I would like to remind you that some of the matters discussed on this conference call will contain forward looking statements regarding future events as outlined in our slides.
We wish to caution you that such statements are based on management's current expectations and beliefs are forward looking in nature or sub.
Direct to risk and uncertainties.
Actual events or results may differ materially.
Factors that could cause actual results or events to differ materially include but are not limited to factors referenced in our press release today as well as our filings with the SEC.
We will also be discussing non-GAAP financial results on today's call.
Please refer to today's press release and slide presentation for a full GAAP to non-GAAP reconciliation.
I will now turn the call over to Christian.
Thank you, Mike and good afternoon, everyone. Following a record fourth quarter.
Pleased to report that we again delivered outstanding performance on the first quarter of 2021 first on increasing our confidence in our 'twenty to 'twenty, one guidance and longer term financial objectives before turning the call over to Adam for a more detailed review of our first quarter financial performance in 2020 one.
On guidance I will briefly highlight some of our key revenue and volume growth drivers and provide an update on the upcoming launch on yogurt five almost revolutionary product copper.
Starting on slide five.
We delivered strong first quarter on net revenue growth of approximately 74% our first quarter growth force, particularly impressive given that we did not have the benefit of a new product launch or growth from repeat customers compared to the first quarter of 2020.
We also did it but cross system shipped growth of over 66% and a return accrual rate of approximately 23% an improvement of eight points year over year.
Both revenue and volume growth in the first quarter were supported by several drivers.
First is the further penetration into the insurance market.
Our insurance opportunity remains large and underpenetrated as we are still only serving less than 2% of what we consider to be our immediately addressable insurance market.
Please.
Growth was also driven by the continued scale up of both digital marketing and on National media presence driving consumer awareness of both our innovative products and yoga O'brien.
These investments once again delivered volume growth across both cash pay and insurance customers as we leverage our media dollars to attract multiple customer types and Anna.
Cheapskate liability on operating expenses.
We know national advertising is a successful tool in attracting these diverse customer types and building consumer awareness of EBITDA goes innovative products, our distribution model and total care approach to audiology, what we continue to be impressed by the ways in which our team.
On your asleep Leverages data analytics to methodically balance the mix of digital T D and traditional offline media.
During the second quarter, we are investing in creative website support and training ahead of the late second quarter launch of vehicle five preparing to introduce this game changing products to both new and existing customers.
Supporting all of this growth is what we believe is the most established and integrated teller care model into hearing industry. It's an important part of our competitive moat on.
Our platform is simple.
Convenient personalized scalable and completely transforms the consumer journey consumers can schedule pelikan appointments with our licensed hearing professionals before purchase offering convenient clinical support and hearing screening and become part of their own home.
This has proven to be a powerful conversion tool that we plan to further leverage with the launch of vehicles.
But it doesn't stop with product purchase this.
Innovative infrastructure on highly trained team of Paula cafes true professionals worked just as hard post purchase to engage customers just your insurer and outstanding customer experience and build long term Yoko brand loyalty.
It is becoming more evident that pelikan is here to stay not just been hearing about a cross healthcare as a pioneer in bringing a vertically integrated <unk> experience to hearing care. We believe we are all well positioned to lead the disruption of this march on Underpenetrated market.
As more consumers realize it's simply a better more efficient ways to solve for hearing loss. We will continue to invest in tele care to extend our competitive advantage and support our long term revenue growth expectations.
Turning now to slide six and a key growth driver for the second half of the year.
Five we are incredibly excited as we approach the initial launch of our most revolutionary product ever.
Late in the second quarter as we have discussed yoga five will be operating on a completely new platform across hearing instruments charger and mobile App, we have tested the product with a range of experienced users and the response has been nothing short of outstanding.
Starting with the fundamentals of helping people here are better our users have told us that yoga five deliver significant sound quality and feedback cancellation improvements on already impressive Neil Hi Fi Yoko.
Yoko five will also deliver more archaeological game, allowing the device to fit more people with hearing loss at the more severe end of the moderate hearing loss category.
Moving beyond the fundamentals vehicle five will also feature a small on physical design, allowing us to fit more people, who previously may not have been good candidates for in the canal to sign.
And or improve fit for existing users such as me.
But the feature we are most excited about is yoga fives in situ hearing screen and profile adjustment capabilities customers will be able to measure from hearing loss in real time and real situations.
Inside on audio group.
Using the hearing itself you go buy themselves a while conducting a tele care appointment.
One of our licensed hearing professionals. They can then calibrate med devices all work with our licensed hearing professionals to adjust the profiles and sound settings, which are pushed to the hearing aid in real time, while the device in the ear canal.
As a new level of consumer experience, making an already easy to use product even easier while delivering the highest level of personalization.
Other features include accustomed to sign lithium ion battery co develop what's the world beat on micro batteries boarder out of Germany, inductive charging with no metal contacts and waterproof functionality all of which we believe will further improve the day to day functionality.
If a device that sits on the harsh environment inside the ear canal.
In parallel with the launch vehicle five we are also launching a totally redesigned mobile companion app that will take user experience junior levels. This app will enable many of the functions I just described such as in situ peering assessment and profile adjustments as well as embedded.
L a care scheduling and video call functions deepening the connection between the consumer and our licensed hearing professionals.
We believe the launch related investments, we are making from the second quarter will support Unexciting you know go five introduction should come tumors.
And we continue to expect a late second quarter launch with material revenue contribution beginning in the third quarter before.
Before turning the call over to Adam.
Wants to deliver a special thank you so on.
Our R&D and software teams, who have worked tirelessly to make this product everything we hoped it would be we are incredibly fortunate to have such an impressive and dedicated professionals driving the future of hyogo and helping more people hear about it.
Now I'll turn it over to Adam for his review of our financial results.
Thanks Christian.
On Christian's thorough discussion of revenue drivers I will start with growth systems shipped.
As a reminder, we define the system has to hearing AIDS are charging case and start your accessories.
As a single unit.
First quarter 2021 growth system shipped were 11704.
66, 5% year over year.
The year over year change was driven by strong performance of our data driven approach to demand generation Nash.
National advertising and increased penetration of the insurance market.
As expected growth system shipped were slightly down sequentially due to strong holiday promotion volumes in the fourth quarter and a product launch in the second quarter of this year as compared to first quarter launches in previous years.
First quarter 2021 return accrual rate was 23, 2%.
Compared to 28, 2% from the first quarter of 2020.
And 24, 2% in the fourth quarter of 2020.
The reduction in our return rate was driven primarily by a higher mix of insurance customers.
Moving to non-GAAP gross margin.
And non-GAAP operating expenses.
Our discussion of financial metrics at the gross margin line on below will be on a non-GAAP basis.
Which excludes stock based compensation expense.
Please refer to our GAAP to non-GAAP reconciliation included in today's earnings release.
First quarter non-GAAP gross margin was 72, 2% compared to 63, 2% in the first quarter of 2020.
And 78% in the fourth quarter of 2020.
The year over year gross margin expansion was primarily due to a decrease in sales returns.
As a percentage of growth systems shipped.
Higher average selling prices and lower cost of goods sold.
First quarter, non-GAAP sales and marketing expenses were $15 1 million or 68% on net revenues.
<unk> to $10 $7 million were 84, 7% of net revenues in the first quarter of 2020.
The increase was driven by expanded investments in demand generation, including national advertising as well as year ago five launch preparations.
Non-GAAP research and development expenses were $3 7 million.
Or 16, 8% of net revenues.
<unk> $2.6 million or 29% of net revenues from the first quarter of 2020.
Non-GAAP general and administrative expenses.
$5 million.
Or 24, 8% on net revenues.
<unk> to $5 8 million or 46, 1% and net revenues in the first quarter of 2020.
On a non-GAAP basis, we experienced an increase in G&A due to higher costs associated with being a public company.
These increases however were offset by IPO cancellation expenses incurred back in Q1 of 2020.
Non-GAAP net operating loss for the first quarter of 2021 was negative $8 2 million compared.
Compared to a non-GAAP net loss of negative $11 2 million in the first quarter of 2020.
Finally.
We had cash and cash equivalents of $201 6 million at March 31, 2021.
Now turning to guidance.
Due to our high degree of confidence in our ability to drive growth and capitalize on the momentum in our business. We are raising full year 2021, net revenue guidance to 89 million to $93 million.
Up from 87 million to $93 million.
We expect revenue growth to be driven by robust volume growth with stable customer asp's and stable return accrual rates as compared to how we exited 2020.
Looking at revenue cadence for the remainder of the year, we expect the second half of 2021.
Generate approximately 52% on a full year revenue.
Moving to gross margin guidance, we are reiterating GAAP gross margin guidance of between 68% to 71%.
We are also reiterating non-GAAP gross margin guidance of between 70 and 72%.
This guidance reflects our confidence in continued consumer adoption.
<unk> 2021, particularly with the launch initial launch appears low fives in late Q2.
I would now like to turn it back to Christian for summary closing remarks.
Thanks, Adam.
We're very pleased with our results from the first quarter of 2020, one and how this momentum positions us for strong 2020. One we remain focused on executing our strategic initiatives this year, including driving volume growth through customer mix.
Gail off of both digital and offline demand generation and of course, the launch of <unk>.
Our initial progress on these initiatives gives us increased confidence in achieving our full year revenue on gross margin guidance. We remain focused on our mission of helping more people here better and couldnt be more excited for what the future holds for a year ago.
That concludes my prepared remarks, and I would like to turn the call back to the operator for Q&A.
Thank you.
Ladies and gentlemen, if you'd like to ask a question. Please press Star then one when you touch tone telephone again to ask a question. Please press Star then one.
One on that for our first question.
Our first question comes from Robbie Marcus of Jpmorgan. Your line is open.
Oh, great. Thanks for the question and congrats on a nice quarter.
Thanks, Rob maybe this.
Maybe to start a couple of things.
The first was how did the mix of patients look in the quarter you you exceeded expectations.
I was just hoping to get a better sense of what does it repeat customers was it new direct to consumer customers and how much was due to the insurance channel.
Great.
Good to talk Ravi Christian here.
Yes.
We saw growth in both cash pay and insurance.
No we did not see a lot of repeat so that was significantly lower than we'd seen in prior quarters as expected.
So the balance of all of the developments over again, where we're pleased is the fact that we were able to grow both cash pay on insurance on specifically on the mix Adam Yes.
And it goes back to Robbie we were pretty close to where we were staying about Q3 of last year and the highest 14th on insurance.
And so the mix came in pretty much in line with expectations and we talked about it I believe in prior conversations we expect the full year 2021 insurance mix to be roughly where it was in the back half of that.
2020 on the mid Forty's.
Got it okay. So it implies pretty nice direct to consumer growth.
<unk> growth as well on the quarter.
So maybe a second from me.
The return rate I think it was a record low for you at 23% maybe.
Maybe you could just touch on what drove that and.
I think in the past we had been thinking maybe something like 25% was the low but how how low do you think this can trend down now as youre breaking barriers towards the bottom end here.
And I know you put it right.
We're ahead of our own expectations on I think business really due to the diligence.
Our support team on how do we read to keep optimizing user experience, we're not changing our overall assumptions on what we can do with a return rate that will be fluctuations from from time to time here.
We definitely got a little bit of benefit by the slightly better mix that Adam just talked about on the insurance side.
Again, it's early to say.
We will keep hunting, that's one but we're not changing our assumptions on where we can take the.
Turn rates going forward.
Got it and if I could squeeze one more in here on guidance you beat by $2 million versus the street in first quarter you raised the low end of guidance by $2 million as well I know you typically have a very conservative approach towards setting expectations, but just want to make sure.
Anything to read into that it was just the low end and not the midpoint that went up or is it just really early in the year still.
I don't know again, we've been getting started on some great support and guidance here and we feel great and where you're going on given the strength of Q1, we feel it.
Even better about our full year guidance, but it is like you said this is a we're one quarter into a year and it's definitely a tumultuous year, but we're looking into.
So we don't want to get ahead of ourselves, but we do feel.
Very good about where we are right now so that's the logic.
<unk>.
Okay great.
Thanks again.
Thank you.
Thank you. Our next question comes from target CAGR of William Blair. Your line is open.
Hey, good afternoon, everyone. Thanks for taking on the question I was hoping to start a little bit on the April trends or even at the beginning of the mall.
Are you guys seeing any pull back potentially on demand as audiologist kind of open up or patients begin to return there.
Are you actually saying you know maybe more on demand.
Patients start to go to restaurants and be mobile and try to be more on groups.
Those are those are all valid questions again, we don't give specific quarterly guidance.
And in terms of what we're doing here, we're definitely seeing that there's always moving pieces in the sort of demand landscape I would say, we're really benefiting here from having multiple ways of driving our on demand fever true digital beef out through Chile, each be that through more direct mail activities.
As well so we're not seeing any major changes that are changing any of our outlooks in terms of the business here I think we on what we really have built Margaret is a model that is really resilient.
To sort of large from macro changes and I think we also have the ability to adapt our media mix and how we focus our business.
Based on what it's telling us. So this is something we track real time, and we're making adjustments real time, but we're not giving sort of specific guidance to the quarter here.
Fair enough I had to try.
So as it is.
So we think as you go five add on.
One more too, but as I think if you go five on that launch I know you guys talked about it being a more material on the back half of this year and what have you guys traditionally seen when you've launched a new product does that give you a short term bullishness on our long term bullish you know does it help you on close rates what are the metrics, we should be looking at for success with that launch.
Yeah. So.
Really what we've seen on I think the Best example, we have whats the launches Yeah, Hi Fi last year and Q1 is it's really a long term impact so for us what's going to be key but if you go five its a brand new platform everything is new around was on we do believe it has a lot of potential but he is not to drive a short.
Term impact or a spike in Q3, but it's really this is a platform bad debt, we will be driving.
Forward. So that's really our emphasis I think that's also the case, yeah I would say what is the day user reception, we delighting that on and where we really see those as we see it on conversion rate. The other piece, we see is really on returning customers.
I think this is why we do have expectations that we can drive a higher level of returning customers. When we launched <unk> five and then the rest is more how do we really continue to build the long term growth of year ago and this is an important platform in terms of improving also our telecom approach given all of this.
The higher degree of personalization and integration so that we can do.
Okay and then just one last one from me I was hoping to touch on competition, a little bad debt just because we started getting more questions around that have you seen on any changes to the competitive the competitive environment, either today or in the future and that could be you know some of the online services companies like <unk> dot com or some of the other manufacturers maybe outside of the big five that.
You'd be looking at you on saying well I can just go ahead and copy that thanks.
Okay.
Expenses here.
Yeah exactly no.
Was there a lot of things happening into hearing with industry and I think it's proving the potential of this industry in general across your Dot com.
Across lively Boes with average Billy's Synovus recent acquisition of Centaur is there.
Consumer so there's definitely a lot of activity in this space.
Back to my earlier comment.
Year ago, I think we're not seeing that impact our business to be fat and none of us.
Outside Bose announcement is new Comping around live has been around for a long time. So this is not anything that's not a new dynamic and Ministry I think it's just more visibility.
And so the industry, which is something we will always applaud.
So we haven't seen anything that is sort of making us think extra hard about what we're doing I think if anything we're feeling more confident that what we're building being fully vertically integrated is still a very differentiated and unique value proposition that will.
Hopefully continue to push our leadership in terms of driving penetration into this industry.
Great. Thanks, guys.
Thank you.
Thank you again, if you'd like to ask a question. Please press Star then one on your Touchtone telephone our net.
Question comes from Larry <unk> Wells Fargo. Your line is open.
Good afternoon, guys. Thanks for taking the question a couple to start on <unk> five.
So Christian what still needs to be done before you launch and.
Have you decided if theres going to be a price premium.
Good questions as always.
Alright.
Where we are with yoga five as you know.
Planning.
Back end of the day ramp. So this is more of a logistics supply chain piece of it we have.
We've gone through our registrations on all of US right and we are constantly monitoring all of the feedback we're getting from test users in terms of sort of the software experience, but from a hardware point of view, we're fully locked in and it's more ramp right. So now it's weighted chewning on the software and how do we.
<unk> positioned the right way it is.
Hi, a question.
Margaret I'll focus here is really how do we how do we bring this new platform out in a way that allows us to continue to delight our customers. So that's really been timeline piece of it are the remaining.
<unk> blocks in front of us on the on the price point.
We what we've debated this a lot.
We believe it's very very important to drive more access into this category. So we're not going to be introducing <unk> five at a premium and this is not out of lack of confidence on the products on the contrary, we do believe by bringing out a revolutionary product at a similar price point to what we're seeing today.
We can drive hopefully even stronger conversions and motivate more people to get into the industry. So it's something that really from a strategic point of view are very proud of being able to do and again very consistent with what we've baked into our guidance you just true to preempt that question.
Christian just to follow up.
How derisked do you think the late Q2 launch is based on what you said that there is some software tweaks.
How de risked is the late Q2 launch.
Yeah.
I feel very comfortable or else, we wouldn't be talking about those opening on this call right I'm wearing hearing AIDS as we speak right I think for US it's more how do we how do we scale the launch.
And that's why we're also saying we won't see material revenue impact in Q3, but from a product readiness point of view.
From a hardware point of view from an acoustic point of view.
I've never felt that are on where we are right.
Obviously, there's a lot of things that you need to tie together at the end of the day, but sort of core hardware plus core audio logical.
Business business.
The best I've felt with any product launch.
Christian.
And maybe Adam I'm trying to understand kind of the guidance.
And in the year ago, five impact because you know.
The benefits seems so clear.
And you said kind of this is the biggest product launch in the company's history. So why wouldn't there be an inflection in the business given these large number for improvement.
And it seems to imply a modest sequential increase in dollar sales if I looked at that 52%.
For this year that you've talked about add on that's lower than what we saw in 2019 and 2020. So help me reconcile.
It seems like a pretty important and should be successful launch for you guys with the guidance you gave.
Maybe I start on I'll definitely let Adam give you a bit nuance here.
I think what's been so important on everything that we've done from a guidance point of view since we started exploring the public markets with you has really been we want to base. It on what <unk> seen historically, if we don't want to make assumptions to pushing things too to a new level that does not mean, we're not trying to lean into.
Opportunities, we will always do that on I hope I also believe that we have proven that we will do that but in terms of basing our guidance on higher conversion rates or higher adoption.
I think we would be putting a lot of risk into our guidance on best not what we've set out to do but you can probably provide more on what Christian said, it well I think Larry my approach and the team's approach has always been let's put in the guidance things. We know we can chi and we feel very confident and so we are you can share from.
Her from the pound is I'll say it directly we feel very good about having opportunity to meet and exceed our guidance for 2021, I think from me that based on getting the things on thinking about as we built this are really around let's not get ahead of ourselves on the pricing looks like on ahead of ourselves on the RFP right with like ahead of ourselves on the volume but.
We see opportunity across the board to outperform in every area.
Basis.
Got it and just last from me Christian how are you thinking about.
The timelines for opportunities outside of the DTC models, such as the omni channel opportunity International.
And other insured market thanks for taking the questions.
Yeah.
This is another part, but we've really been.
Doubling down on our investments and through Q1 on into Q2 so.
First of all I believe in all of these opportunities.
We've spoken about before specifically given the the construction and planned to signs within men's Sharon's markets, we're not expecting any meaningful insurance to happen into inside this year.
But there are a lot of moving you know element in the marketplace right now given that obviously the world is opening up more and more people can get out on about more of a just also opening some additional omni channel opportunities when and to what scale, that's going to happen is hard to predict but it is something.
That we're very focused on where we're building our teams to be able to execute on it.
But I can't give any guidance on on specific timing here.
When something happens.
We definitely believe that we are into ready spots to participate.
When opportunities come up I hope, that's a fair way of putting it.
Got it thanks for taking the west questions guys.
Thank you.
Thank you.
I'm showing no further questions at this time I'd like to turn the call back over to Mr. <unk> for any closing remarks.
Thanks, operator, and thank you everyone for joining us on the call. Today. This concludes that year ago first quarter of 2021 earnings conference call.
Thank you, ladies and gentlemen goodbye.
Thank you for participating you may all disconnect have a great.
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