Q2 2021 Eargo Inc Earnings Call
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Thank you for standby and welcome to the year ago second quarter 2021 earnings Conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question at that time. Please press Star then one on you touched on the telephone.
As you'll manage the call the call is being recorded.
I will now turn the call of duty host Mr. Nick <unk>, Vice President Investor Relations. Please go ahead.
Good afternoon, everyone and welcome to the <unk> second quarter 2021 earnings Conference call.
The press release and slides to accompany this call are available on our Investor Relations website at IR Dot year ago Dot Com. Please note. We have also provided supplemental historical financial information at the end of the slide presentation.
As a reminder, both this live call and a digital replay will be available on our IR website.
Joining me on today's call are Christian Gorman, President and Chief Executive Officer, and Adam <unk>, Chief Financial Officer.
Christian and Adam will provide prepared remarks, and then we will open the call to Q&A.
Before we begin I'd like to remind you that some of the matters discussed in the 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 are subject to risks and uncertainties and 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.
These refer to todays press release and slide presentation for a full GAAP to non-GAAP reconciliation.
With that said I will now turn the call over to Christian.
Thank you Nick and good afternoon, everyone. Our business continued to outperform in the second quarter as we again executed on several very significant operational milestones to name a few listed on slide five delivered robust revenue growth of 44% year over year.
We completed the initial launch of vehicle five hour, most revolutionary product ever and we completed the acquisition of a web based hearing screening technology called climate time, which I will discuss more in a moment.
Before turning the call over to Adam for a more detailed review of our financial performance I will first briefly highlight our revenue and volume growth drivers and then elaborate on the strategic benefits of the milestones I just summarized.
Starting with revenue growth, we achieved another quarter of robust growth with revenue up 44% year over year, Despite a particularly challenging comparison to the second quarter of last year. When we benefited from the early 2020 launch of Hi Fi and from a significant acceleration of our insurance business.
This performance was also against the backdrop of our second quarter 2021 cable TV viewership in the 50 plus demographic that was at a five year low.
In the second quarter of 2021, we also delivered cross system shipped growth up 39% and recorded a return accrual rate of approximately $24, 1%, representing an improvement of three points year over year.
Revenue growth in the second quarter was once again supported by continued penetration into the insurance market.
We were also pleased to grow cash paid volumes, both year over year and sequentially, Despite lower media viewership in the quarter.
Turning now to slide six and seven we're incredibly pleased and excited to have launched yoga five on schedule with initial shipments occurring late in the second quarter to select repeat customers and a full commercial launch on July 13th Diego five its a smallest in kenna rechargeable device.
Ever produced the device operates on a completely new platform across sharing instruments charger and mobile app and deliver significant sound quality and feedback cancellation improvement over an already impressive Neil Hi Fi.
Most notably Yoko five introduces a key feature that they're very excited about our all new sound match technology through our proprietary in situ hearing screen and profile adjustment capabilities. Some match provides customers the ability to assess their hearing loss in real.
Time, choosing the hearing aid itself EBIT by themselves a while conducting.
Tulloch hair appointment with one of our licensed hearing professionals. This is accomplished by a test homes that are admitted true device to assist with user and establishing that hearing profile and personalized recommendations based on the results customers. Can then further self calibrate that devices have worked directly with our license.
CRM professionals to remotely make needed adjustments in real time.
As a new level of consumer experience, making an already easy to use product even easier while delivering the highest level of personalization.
Our yoga five awareness generation strategy Leverages media tools across multiple digital and traditional offline channels. We've also initiated robust direct marketing to existing customers. Following two quarters of limited repeat customer marketing.
Offering a unique opportunity for current customers to own our latest generation product all of US who have been strong early commercial traction. After you go five we believe we have created a solution that puts customers first and provides them with the tools that they need to address for hearing loss within minutes.
Without the barriers of clinic visits high cost.
Truth of the sign.
We look forward to furbish shaping the future of hearing.
Hi.
Moving to slide eight.
We're very pleased to have completed the acquisition of assets from climbing time, a developer of web based hearing screening solutions for approximately $2.9 million in the second quarter Clementine offers remote audiologist solutions and self administered hearing screening technology to consumers.
If an online tool as well as a kiosk to screen hearing physical settings climate Science online hearing screen is currently integrated onto our website and as utilized as part of our free online hearing assessment.
We believe integrating this technology with a year ago as telecom infrastructure will further advance our core mission of making it easier for consumers to assess their hearing consult with hearing professionals and purchase a year ago and the most seamless and convenient way possible as part of its acquisition we're all.
Also adding climate science high quality, R&D and software engineering talent took a year ago.
Our immediate focus is to further optimize the climb in time technology and obtain FDA registration for the kiosk in 'twenty to 'twenty two followed closely by initial commercial testing. Therefore, we expect the acquisition to have no impact on 2020, one revenues and modestly increased.
2021 R&D expenses.
Lastly, and before turning the call over to Adam I want to briefly touch on last month's executive order from the Biogen administration promoting competition and the American economy ASP.
As a reminder, this executive order directs for department of Health and human services to consider issuing proposed rules within 120 days for allowing nearing age to be sold over the counter.
As another reminder, Diego is not an OTC hearing aid as this regulatory category does not yet exist. However, we applaud the executive order and support the Python administration's efforts to increase access to hearing AIDS and lower costs for consumers.
<unk> mission is to increase consumer access to high quality virtually invisible hearing solutions and help more people care better while doing so at approximately half the cost of hearing AIDS purchased through a traditional audiology clinic.
While the specifics of the proposed legislation is still pending Diego has citizen inception been providing the type of consumer friendly hearing care experience. We believe the industry isn't needed for decades as we look at the future. After hearing industry. We believe we're well positioned for the future of how consumers will solve.
They're hearing loss.
Let me now turn it over to Adam for his review of our financial results.
Thanks Christian.
Given Christians discussion of revenue drivers I will start with gross system shift as a reminder, we define a system is to hearing AIDS are charging case and starter accessories shipped as a single unit.
Second quarter 2021 gross systems shipped were 12548 up 39% year over year the year over year change was driven by strong performance of our data driven approach to EMEA.
And generation National advertising and increased penetration of the insurance market.
Second quarter 2021 return accrual rate was 24, 1% compared to 27% in the second quarter of 2020, and 23, 2% in the first quarter of 2021.
Moving to non-GAAP gross margin and non-GAAP operating expenses are.
Our discussion of financial metrics, the gross margin line and 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.
Second quarter non-GAAP gross margin was 72, 3% compared to 67, 3% in the second quarter of 2020.
The year over year gross margin expansion was primarily due to a decrease in sales returns as a percentage of gross system shipped and lower cost of goods sold per unit.
Second quarter, non-GAAP sales and marketing expenses were $20.1 million or <unk> 87, 4% of net revenues compared to $10.7 million or 67, 2% of net revenues in the second quarter of 2020.
The increase was driven by expanded investments in demand generation against the backdrop of a significantly lower media viewership and planned launch costs associated with the year ago five.
Non-GAAP research and development expenses were $4.1 million or 17, 7% of net revenues compared to $2.1 million or 13, 3% of net revenues in the second quarter of 2020.
Non-GAAP general and administrative expenses were $6.3 million or 27, 5% of net revenues compared to $3.1 million or 18, 9% of net revenues in the second quarter of 2020.
On a GAAP basis, we also experienced an increase in G&A due to higher costs associated with operating as a public company.
Non-GAAP net operating losses, the second quarter of 2021 was $13.8 million compared to a non-GAAP net loss of $5.1 million in the second quarter of 2020.
Moving to the balance sheet.
We had cash and cash equivalents of $179.4 million at June 32021.
I'd now like to turn to the audit and processed by our largest third party payer referenced in todays press release.
The payer accounted for approximately 80% of our gross accounts receivable as of June 32021 as.
As a result of the audit claims submitted to the payer since March one 2021 have not been paid increasing our net accounts receivable balance to approximately $15.4 million as of June 32021.
Approximately $10 million roughly half of our total cash burn this quarter is due to the claims that had not yet been processed we are in active discussions with the payer and continuing to work towards a conclusion of the audit but wanted to provide this level of transparency given the increase in accounts receivable.
Okay.
Now turning to guidance.
Due to the continued momentum in our business and confidence in the year ago, five driving consumer demand. We are raising full year 2021, net revenue guidance to 93 million to $96 million.
From the 89 million to $93 million.
We expect revenue growth in the second half of the year to be primarily volume driven looking.
Looking at revenue cadence for the remainder of the year, we expected modest sequential growth in Q3 with the majority of our sequential growth in Q4.
Moving to gross margin guidance, where you're reiterating GAAP gross margin guidance between 68 and 71%. We are also reiterating non-GAAP gross margin guidance of between 70 and 72%.
I would now like to turn it back to Christian for summary closing remarks.
Thanks, Adam.
Reiterate we're pleased with our performance in the second quarter, particularly against the backdrop of a very challenging media viewership environment and feel confident in the momentum of our business into the second half of the year key revenue growth drivers in the back half of the year include the full commercial launch of vehicles.
The continued scale up of TD in all of our national advertising and the potential for continued growth of insurance customers. When you take a step back and look at what's going on in the hearing industry. We feels of winds of change up blowing in our direction as a company that is revolutionizing and industry Yugo.
As the only sizable DTC hearing a company with two national visibility.
So we have a unique opportunity to educate the payor.
<unk> and regulatory communities about how the hearing aid industry actually works, including the challenges consumers face in accessing and paying for quality hearing AIDS. We believe the pending OTC draft language as well as the state of the size of the current administration.
And with U S legislature to broaden Medicare coverage of hearing AIDS could not have come at a better time.
Additionally, <unk> has permanently become a fixture in the way health care is delivered giving us another competitive advantage.
<unk> is using the barriers for consumers to access FDA registered class, one and two hearing AIDS and a regulatory compliant way and we feel better than ever about our competitive position to help more people hear better.
That concludes my prepared remarks, and I would like to turn the call back to the operator for Q&A.
Thank you ladies.
Ladies and gentlemen, as a reminder to ask a question you May Press Star then one on your telephone.
Your question about the penalty.
That's all I wanted to ask a question.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Bob Hopkins with Bank of America. Your line is open.
Thank you and good afternoon.
I appreciate all the all the detail there I guess two questions one is.
About this this quarter since it was kind of the quarter before the launch the big launch of the <unk> five.
Did you guys sort of tone down promotion this quarter.
Could you just talk about you know the promotion you had this quarter versus last and the reason I ask the question is that just the magnitude of the beat you guys had this quarter was a little less than you've had in previous quarters I just want to understand the dynamic from you guys that you know given the launch timing.
Thank you.
It's Christian here so.
We did not toned down our media right.
We saw as we also mentioned right.
Change in media behavior.
We knew that we were going into an important launch ever vehicle five and we also know that we're sort of trailblazing in terms of creating a real position in the market. So we kept our media and that's also reflected in our investment in sales and marketing throughout the quarter and it is true.
The promotions we were running.
Heading into the summer.
Rob I'll say the father's day promotions as we also that last year. So we were running sort of a similar promotional schedule along with our continued investment into the media.
To continue to drive the business.
As we stated we're pretty proud to deliver 44% growth on a pretty tough comparison portal.
And the final point is we didn't have the benefit in this quarter either of any kind of repeat orders right. So it was on that backdrop.
As part of the logic.
Okay. Okay got it and then the follow up I did want to ask maybe a little bit more about the.
Accounts receivable was just to understand how much.
When does that resolved with what.
What needs to happen.
And do you feel comfortable on.
The amount of cash you have coming in as a result, just wanted a little more color on that thank you.
No no absolutely I'll hand, this one offices, so add on but I think one thing thats really carriers.
Where we are in the process of really changing how you deliver hearing AIDS.
So we see that the audit and Metlife and actually also applaud the efforts here.
To really understand how we can continue to deliver a better experience ultimately for members, but at a more specific with Europe and Bob These kind of auditor.
Claims are pretty common, particularly given the growth in our business we.
We believe all the claims we submit our valid reimbursable and we have had a very productive call. Even this week with the with the with the payer and we're confident we're able to provide them all the requested documentation.
Of course.
Can't speculate until where where the claims will whether they will actually be processed or not but ultimately our expectation and guidance is based on a positive outcome and we will keep everybody posted as we learn more.
Okay. Thank you.
Operator.
Do we have any further questions.
I'm happy to keep going.
I know Europe.
I guess again Canadian and number one is you have one.
Yeah no absolutely.
In terms of the the launch can you just talk about the the guidance increase and was that based on just base business trends or early signs from the launch.
Just what drove you to raise the guidance there and just maybe if you could quantify any of the initial reception to the launch that'd be helpful. Thank you.
Thank you balanced the question, we were where we were hoping for.
We've always been really excited about year ago, five because we do think it's a transformational opportunity not just from a product point of view, but also how we deliver our tele care I think with what we've seen.
Post launch has been.
And remember this was sort of in the middle of July but we came out we are seeing as expected an increase in repeat customers and where we're at and I think more excitingly. This feedback we're getting from repeat customers.
<unk> positive around the sound quality of experience. The fact that we've removed some of the challenges with prior products.
So that feels great. The other piece of feedback that we're getting is really around now it's not just an ego product anymore. It's actually a system. The fact that we have now much more mobile app integrations, and basically providing more user controls which was the whole plan.
But obviously if that also gives us the confidence to go out and increase our guidance for the full year again, we have not rolled out a year ago five to all segments of our business, it's focused on repeat and cash pay.
And that's where we're sort of focusing the attention. This is a platform that we want to continue to rollout and thats why I receive a real acceleration as we've also seen in prior years in Q4.
Where we have the opportunity of the holiday buying and so on and by then we want to be fully rolled out but.
It's a very strong beginning and that's of course also giving us the confidence to increase our guidance.
Yeah.
Yeah.
Thank you.
Thank you Paul Thank you.
Our next question comes from the line of Robbie Marcus with Jpmorgan. Your line is open.
Oh, great. Thanks for taking the questions.
So it's been about.
With a little sequential growth in third quarter will be about four quarters in the $22 million to $23 million range. So maybe just walk through some of the drivers that start accelerating sales, whether it's more repeat customers or how to think about the impact of a year ago five on sales or pickup.
And in insurance sales, how do we think about.
Some of the drivers moving forward and is this really the pattern. We should think about in future years or is this a little different because of the significant.
<unk> five launch thanks.
No no no well said I think.
We saw a step change in our business.
Happened already in Q2 of last year right Q3, and then a very strong Q4 of 2020 and then in Europe. Since that now also have Q1 and Q2 more in line with Q4, which is probably the <unk>.
Seasonality that we've seen.
And the business also historically catered to drivers that are sort of taking another sequential step up from where we were in Q2.
A year ago, five launched really focus on the key customers right and that's what we're leaning into and in Q3.
And the insurance on the general cash pay.
We're sort of keeping our media investments roughly in line with wherever it has been and then with Q4, where we're having the promotional activities also please note that business.
Something we're really proud of first of all we launched a year ago five at the same price as prior generation, we're not running an introduction Harry offers or anything to sort of.
Just to artificially push demand.
So where we were running a lot of promotions in Q2 Q3 Q4 last year Q1, Q2, we're running no promotions right now because we believe that's where we want to take the company. That's of course also building up more powder, we've seen historically Q4 come in very strong from a consumer.
Behavior point of view that benefits our business model.
So those are really the drivers and that's how we're sort of looking at I think you should also be looking at it. So we feel really good leaning into that especially given where we are running the business right now in Q3.
Great I appreciate that question and.
Yeah, maybe another.
Financial question another great quarter.
Low to improving return rates, how do we think about what year ago five can do bolt on on the return rate and also on the cost of goods is it.
It should help.
We use some parts and I believe has a lower bill of goods Tonight.
I appreciate that thanks a lot.
I would say and.
I'll, let Adam run through the details here, but this has clearly been part of the whole design process. This is a product that's designed to be easier to use for the customer and benefit more people right. We have not factored any of those things and to return rates just to be clear and into our guidance either right.
We want to see it work out needless to say, we feel good about the beginning typically what we've seen in the past is when we launch a new product, we always had a lot of.
We typically see a small spike in returns repairs because of how to work in support of new product, we're definitely seeing that better than we have historically I think we're also are more mature organization driving better support but please remember I don't know Adam's going to mentioned is now.
One of the things effects, we will see short term is.
Given that we don't have our refurbishment program up and running we don't have inventory of returned product.
Thats going to artificially if that's going to drive more cost right and again. We are also working through sort of initial buys of components and so on that were bought at a higher price. So.
The total Bom cost is going to come down over time, but of course, we will be seeing a short term negative impact sorry, Adam for taking all your Thunder here I know you have a little bit more to add.
We will say Christian Ravi I'd, just add more color to that.
We are very proud of the mid twenties on RFC rates in the 24% in Q2, we haven't modeled in our guidance that improving in the back half of the year. Obviously, we are.
Encouraged by the early signs of a year ago five launch, but we won't have a strong signal that probably in the return even as we close Q3, but we'll keep you guys posted as we learn more I think through the Cogs side of things we.
We definitely see a path to Cogs improvement as well as.
And gross margin improvement, obviously with that but it's going to take a bit of time in terms of Q3 will be Chris you mentioned the prototypes are flushed through and we won't really see the benefit from refurbishment until we get into Q4 and fully into Q1 of next year, but we're on track or maybe even running slightly ahead of where I was thinking would be in terms of the refurbishment capability.
So feeling really good about it it just takes a couple of quarters that COVID-19.
Great I appreciate it thanks a lot.
Thank you Robin Farley.
Thank you.
Our next question comes from the line of Larry <unk> with Wells Fargo. Your line is open.
Hey, guys. Thanks for taking the question can you hear me okay.
Larry.
But Christian maybe just one follow up on the the audit.
The insurance channel is obviously important for you.
Are you willing to disclose who the insurance company is as soon as the government.
Can you disclose anymore.
And why theyre not paying or.
We're in this negotiation and do you think you can resolve this in 2021 and I had a follow up.
No no.
Thank you Ron My one Larry.
Obviously, we have we're in discussions went out of negotiation. So this is more as I see it and education of our business model and how our business model works differently from the classic way of distributing hearing AIDS.
Given that we are in an active discussion.
It's a very constructive discussion went up as close in demand, but it is a large payor that.
Basically administrating on behalf of the federal government. So I think you probably know what I'm talking about on that front. So it's really right now its a discussion around and of course, what we're seeing is remember although people basically claiming benefits are typically independent providers. So it's.
A lot of very small.
And a low number of volume.
We're providing all over America, alright, so were one single provider with a high volume and hence.
Lot of dollars flowing through so we see this more as well.
We're actually doing their diligence by auditing everything we do it because we do it in a different way and it's been we don't do it through a clinic right. We do it through <unk> online experiences and phone experiences. So it's really this process of seeing how that fits into this out of the traditional way of providing.
<unk> and <unk>.
So on a full benefits.
No.
That's the discussion.
Asked about 'twenty one.
And again, we can't speculate on what the timing is going to be but.
Clearly, what we see an opportunity for and we see that as more of an educational process that gives us opportunities to further broaden our insurance coverage.
Got it and for my follow up Christian I know you have a lot going on with the launch of Ergo side, but I'd love to hear about how you're thinking about opportunities outside of the DTC model such as the omni channel opportunity that you've talked about.
If we could see anything this year and next year. Thanks for taking the question.
Yes, no this is something where we.
We've been laser focused on and we continue to push and it's also a big part of the rationale for the acquisition of the hearing screening capability and more importantly, acquiring.
Engineers, who are specialized in this field through climate science. So that's something we're excited about that we will exit is core to our ability to work with partners. Because again hearing is not just a product. It's also understanding what is my hearing and we're gaining a whole new capability to do that so we are.
Running a lot of tests and experiments on this sort of physical retail side. So that's something we're looking into.
In addition to education of our current payer we are actively working across the insurance segment to understand how we can build it out and nothing has really fundamentally changed in terms of timing and insurance side, Larry because again.
Our certain windows in 'twenty two is essentially very much locked in in terms of health plan designs right, but we are seeing we are continuing to see a lot of long term opportunity on that front on the retail.
Changing essentially on a day by day basis in terms of opening and so on.
What's going to be happening here so.
So when is something going to happen. We don't think anything major is going to be changing in terms of actual distribution in 'twenty, one but OTC.
It's being discussed right. So this is clear there's a lot of people working.
I think that will be experiments happening I'm pretty certain there will be a lot of experiments through there through 'twenty, one, but I think anything of material value and growth will not be until the new year and that's also pretty much in sync with the OTC proposed language and so on.
Thanks, guys.
Thank you Laura.
Thank you.
Our next question comes from the line of Margaret Kaczor with William Blair. Your line is open.
Hey, guys. This is Matt on for Margaret today.
No.
To ask a question on the launch of <unk>.
Christian you just start to running the price of the product without a promotion. So I wanted to see if you could provide some color as to what the ASP for.
For your guidance looks like now and then are you seeing more consumer demand for year ago, five which could also drive your ASP for the back half of the year.
And good.
Good to have you here.
That's a really good question.
Again, it's really early days here.
In terms of where we are the list price is the same you can argue we're not putting into the same level of promotion.
Again. This is this is how we're running the business right now so it's early days, but we definitely feel confident and again our guidance is build essentially flat ASP.
We feel very confident around what that implies for our guidance.
So I think that that's really the first point and I just lost your second point, while I was answering the question here apologies banking.
Yeah.
Yeah, No I was just asking I guess, Mark Cameron demand for you here.
It also contributed to driving.
Yeah, No no I don't think its going to drive the ASP per se, but we are definitely seeing a lot of interests again, our communication is obviously focused on repeat customers because that's something that we have been.
Holding off for a while and we're seeing record levels of interest right.
Within the actual cash paid.
Part of it.
We are seeing in terms of traffic and of course, we leaned into the launch and hopefully you've had a chance to see some of that we had a great partner and NASDAQ who were also.
We were on time, we run times square, we run all of the Billboards. So yes, we've seen at.
Growth in traffic online traffic lights that visits we've seen a growth in phone calls right.
As expected to be fair around the launch and that's all factored into our guidance.
Okay.
Great. Thank you and while I know.
Guys just one.
Arago five Malawi.
So I'm wondering about the PK.
You guys have talked about launching a next generation device each year. So.
What can we expect in 2022 can it be.
Something like a software update to Q&A.
Q&A devised there given the software and hardware <unk>, five and how impactful cannot nexgen product beat Greg in 2022.
Oh no no.
I kind of look at 'twenty, one as a sort of as a reset year based on a very tumultuous 2020 right.
And that also impacted our launch timing as we indicated as part of our IPO.
We will definitely have a 'twenty two launch also in the first half.
So.
We have built the ability to continue to deliver product innovation, which is core to our strategy and one of the things that gets me really excited is exactly what youre choosing to remember that a core feature set of vehicles five is that where we're bringing much more of the algorithms firmware capabilities in.
House, that's driving the strong performance of the current year ago five product in terms of.
Feedback cancellation, we have a lot of opportunities to continue to make real meaningful audio ability improvements.
Improvements and that's clearly the area that we'll see where we are.
Sure.
And I think our sort of roadmap strategy, you're always looking at what can we do from a design point of view hardware, but what can we do from an audio processing point of view E algorithm and also what can we do sort of a mobile app interaction and with yoga five we're already seeing much more mobile app engagement.
And we've seen with the prior families. So.
We feel confident that what we can bring out.
2022 is going to be a meaningful.
And valuable upgrades to the product experience and Thats why we constantly are striving to do.
Great. Thanks, so much.
Thank you.
Thank you.
I'm showing no further questions in the queue I will now turn the call back over to Nick for closing remarks.
Thanks, operator, and thanks, everyone for joining us today that concludes the second quarter conference call.
Thanks, Hi, gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful evening.
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