Q2 2022 Conformis Inc Earnings Call
and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After management's remarks, there will be a question-and-answer session. I would like to remind you that this call will include forward-looking statements with the meaning of the federal securities law, which are pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements made during this call that are not statements of historical facts should be considered forward-looking.
These statements involve material risk and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements, including those discussed in the risk factor section of conformance public filings with the U.S. Securities and Exchange Commissions.
You should not place undue reliance on forward-looking statements. Conformist claims any obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether of new information, future events, or otherwise. This conference call will include time-sensitive information and is accurate only as of the live broadcast as of today, August 9, 2022..
I will now turn the call over to Mark Agusti, President and Chief Executive Officer of Conformis.
Thank you and welcome to our second quarter earnings call. We appreciate you taking the time to hear our business update. Your CFO is Bob Howe.
Let's begin with several positives from the quarter. First, our residents came in at the midpoint of our expectations. The second is that our residents came in at the midpoint of our expectations.
Second, our international sales grew 6% in constant currency with our continued progress in several key geographies, including Australia.
Third, our imprint need continues to receive positive search and feedback, and revenue from ASC customers continues to grow.
And then lastly, we recently executed our first major national agreement for our Platinum Services Program. fail and a victory at Type green.
Now, next, I would like to offer additional perspective on our updated outlook. As you will have noted in our release, we adjusted our full year product revenue outlook to a range of $57 to $61 million.
The main driver for adjusted outlook is that we did not exit the second quarter with the accelerated business momentum we thought we'd have back in May. There are several reasons for this.
First, the environment is still challenging. Despite the general recovery and elective procedures, staffing shortages remain at medical facilities and elevated levels of case rescheduling continue.
Second, our portfolio transition to imprint continues to ramp as we shift our focus to the AFC.
However, the commencement of the full commercial release of our imprint and e-system has been impacted due to availability of several key components from our supply chain partners.
To address this challenge, we have pivoted our launch approach to a rolling release schedule, but the goal will be fully launched by late Q3.
And then third, supply chain and internal staffing challenges have impacted our just-in-time model. This has led to an increased number of cases with type product deliveries, as well as additional cases being rescheduled.
Moving to an update on our pipeline, we did have some changes this quarter due mainly to delays from various testing firms we use as well as supply chain partners.
For Arctera, while I'm pleased to report that we received our 510K clearance this week, we nevertheless are now planning for a limited market release early in the fourth quarter, about a 90-day delay due to late shipments of instruments from a supplier. We remain encouraged about the commercial opportunity for Arctera given the positive surge in feedback from our validation labs.
Also, due to supplier delays beyond our control, we now anticipate an early April 2023 launch for our porous coated knee.
This is particularly frustrating since the segment is one of the faster growing segments in the order of space and it's creating more and more interest from our search and customers.
We are exploring every option possible to expedite the timeline.
As I've said on past calls, those two products are critical for us to address gaps within our existing product portfolio.
Our long-term growth depends on providing a more robust product offering so we can capture greater procedural share from our existing surgeon users and attract new surgeons.
In closing, as I mentioned at the beginning of my comments, we announced last week that we had signed a contract with Visian.
which will allow us to begin contracting at the local level with its members for our Platinum Services program.
We believe this is further validation of the benefits that this program can provide for patients and healthcare facilities alike.
We continue to add to the number of facilities under contract for Platinum Service Program. We've enrolled 21 healthcare facilities through the end of the second quarter. We anticipate that new facility enrollment in our Platinum Service Program will continue to remain choppy, but we are encouraged by the general interest from the Marketplace.
I will now turn the call over to Bob for some more details about our financial performance for the quarter and our outlook.
Thank you, Mark, and good morning, everyone.
Product revenue was in line with our expectations at $15.1 million which was essentially flat compared to last year and showed slight sequential growth from the first quarter.
Within product revenue, our worldwide meat products grew 1% on a reported basis.
Our hit product revenue was approximately $744,000, which was down 18% compared to last year's second quarter.
As I mentioned last quarter, we had a significant amount of rescheduled activity occur in the second quarter last year, which made for a challenging conference quarter.
We expect hip to return to gross in fourth quarter following the launch of our Aptera hip stem.
Product gross margin for the second quarter was 35.1%.
a sequential improvement of 100 basis points as compared to the first quarter.
While we continue to face headwinds from increased material and labor costs, as well as inefficiencies as we transition to our new business model, we are focused on making the necessary changes to improve our operations.
We expect to sequentially improve this metric again in the third quarter and be back to the low 40% margins in the fourth quarter.
As you've heard me say before, longer term we believe that as we ramp, imprint, and the Platinum Services Program, both of which produce higher gross margins than our legacy business.
we have a meaningful opportunity to further expand our gross margins.
I'll now move to optics.
Our total operating expenses for the second quarter were $18.2 million, which was $2.3 million lower than the first quarter.
Relative to the first quarter, sales and marketing was down slightly, R&D was down 500,000, partly due to adjustments to the timing of our new product launches, and G&A was down 1.6 million, primarily due to reductions in legal fees incurred to protect our IP and lower product delivery expenses as we continue to improve our delivery performance.
For the year, we now expect to be at the lower end of the 75 to 81 million dollar range we previously communicated.
Moving to our balance sheet, it remains strong with cash and cash equivalents of $72.6 million at the end of the second quarter.
As expected, our use of cash was down in the second quarter as compared to the first quarter.
Second core cash use was $10.2 million, which was $7.6 million lower than the first quarter.
Our cast use will continue to fluctuate quarter to quarter near term and as highlighted last quarter we expect to increase inventory over the next few quarters to support our product launch cadence which includes a full commercial launch of imprint and the limited market releases of our ACTARA hip and porous coated knee.
I will close with some additional details on our outlook.
We expect our third quarter product revenue to be between $13 to $14 million.
As Mark mentioned, we did not enter the third quarter with the level of momentum we expected to have back in May.
We continue to deal with supply chain issues and the impact from our previous product delivery challenges.
In addition, our recent strategy pivot has come as medical facilities are still dealing with staffing issues.
This has resulted in more volatility than expected in our near-term order points.
Based on these factors, we now expect to see the sequential decline in product revenue from the second quarter to the third quarter that we historically experience.
since the third quarter is typically the slowest quarter of the year for us.
Based on our updated expectations for the third quarter, factoring in our new timeline for the full market release of Imprint and the limited market release of Actera Hip.
and the ongoing portfolio transition, we expect our full year product revenue to be between $57 and $61 million.
With that, Mark and I are happy to take your questions.
And thank you.
And as a reminder, to ask a question, you will need to press star 1 1 on your telephone. One more moment for questions.
And our first question comes from Josh Jennings from Cowan. Your line is now open.
This is Eric calling for Josh. Thanks for taking the question.
Was hoping to just hear a little bit more on recent procedure volume trends that you've been experiencing. Are you able to share with us the month over month trends that you've experienced through 2Q and now into early 3Q?
Yeah, hi Eric, this is Mark. Thanks for joining us this morning. Yeah, thanks for that question. It's good too because I think we experienced what other companies have discussed and that was early 2Q was strong and relatively strong. And then June there was definitely a market slowdown that continued into July a little bit. We'll be sure to see that continuing in July , but we are expecting a little bit.
more strength in, you know, later in the quarter in Q3. But having said that, looking at, you know, taking everything in context, as Bob pointed out, we are going to see sort of the historic cyclical down for us, I think for the industry for Q3. Not horrible, but you know, just sort of that cyclical kind of summer off vacations and that type of stuff. And
And again, as we mentioned, the staffing challenges. So that's sort of the trends we saw month to month there. Okay, great, thank you. And then just on the Vizient deal, could you talk a little bit more about how Vizient is gonna be offering Conformis products to their hospital customers? And then just to double check, there's no contributions from that deal factored into guidance for this year, correct? Yeah, no, not at this point. And yeah, we're very excited about it because they reviewed our program, obviously, we're very excited about it.
and they worked out the contracting with us, which we're excited about. So it provides access, and it gives us sort of the opportunity to discuss and approach the busy customers, but there's no sort of obligated purchases or anything like that in there. You understand how these GPOs work. But for us, it was pretty exciting because it sort of clears the deck and sort of establishes sort of how the program's rolling out and how it can work. So I think, with the folks our founders introduced, others Rich finger with, there's a flying customer who loves to spend leave safety,
that participate in the Vizient Network, that will be a big deal for us to be able to get in there and present the program to them.
Great, thank you for taking the questions.
Thanks, sir.
Thank you.
And one moment for questions.
And our next question comes from Steve Litchman from Oppenheimer. Your line is now open. Okay, thanks approximately everybody. Great!
Thank you. Good morning guys. I wanted to touch base on this, the supply challenges that you noted Mark.
Specifically on imprint and on hip, it sounds like the impact in terms of launches on those two are relatively small. Can you give us a sense of what you are doing to get better visibility on that supply and what gives you the confidence that for those two products that the impact on launches is not going to be longer than anticipated? Let's do it.
Yeah, I can, it's a lot of stuff, Steve, but I'm happy. I appreciate the question. Good morning, by the way, and I'm happy to do that. So first off, at Imprint, I just want to point out, we are in limited release. We continue to grow volume and roll that out, and we are still planning to transition over our business on September 1st. In advance of that, when we say full launch, what we're really trying to do is be able to make sure we can deliver to patient specific.
an interoperative solution and plan that goes with Imprint within three to four weeks of customer ordering versus the six weeks that it takes us to do a fully custom thing. So in limited release, as we've been building up inventories, we've kept Imprint at sort of a six-week lead time, which is too long for that product. We know that customers want it sooner, and that's why we've talked about full market release, getting it down to that three to four weeks. So that's what we've been doing.
We were hoping to do that sooner Steve as I said my prepared comments, but now it's looking like it's going to be Late q3 and what we're doing actually is we're doing a rolling sort of reduction in The lead time so the surgeons and their offices when they go to order from us We'll see each week as the lead time gets pulled in because we it's sort of like a reservation, right? They go on to our website and they actually order I order the product and they can see the surgery date when it's available
And the issue for us there, from a supplier standpoint, a little bit of it has been our own sort of internal challenges dealing with staffing and some of the changes that happened towards the end of last year and beginning of this year with the workforce. Bye.
You're finding that things for imprint forests that affect the inventory build is little stuff like packaging. Right? I mean, literally packaging suppliers, relating their deliveries. For us, the big thing, which you've probably heard about, Steve, is Tyvek and some of the films that we need to make the pouches that stuff gets sterilized in. Those products, the lead times have gone out. So things that were...
two to three, maybe four week lead times are now six, eight, 12 week lead times. And so that's very challenging to deal with when the product you're expecting to have that goes into your manufacturing process isn't available. Simple one, the reason why, so I feel comfortable, because we're very close at imprint, so I feel very comfortable on the rolling dates there, high, high confidence. And then on the hip.
really pleased with the 510K approval, really pleased with the search and feedback from the validation labs. We have all of the instruments in hand now except for one part from one supplier. And so we're highly confident based on discussions with that supplier, though it's late that they'll make the new communicated date and that gives us confidence that we'll be able to get into limited release on this product sort of late Q3. And from our standpoint, have most of the fourth quarter.
of course coding is important. Again, we've had validation labs.
been able to continue all the testing and work we need to do for our 5-10K submittal, so that's not really a concern to us right now. The real issue is just supplier lead times, frankly, on some of the casting components we need for both the femoral and tibia trays, some of the components there to be able to build up inventory stock of the cementless components. And that's important because you need to have all the sizes and all the inventory available.
Again, it's just one or two suppliers. We've got detailed plans with them. As I mentioned, we're looking at every opportunity. We see some potential to pull things up, but we just want to be balanced in the approach. Right now, it's looking like it's going to be late Q1, early Q2, which is certainly disappointing because things that we expected to get in hand, just all of a sudden, they're not available for another 60 years.
changes, but is it the shift from fully custom to platinum services? What was that? What does that comment mean relative to the impact on guidance?
Well, anytime you make a change, right, and you worry just, you know, the rhythm and how customers react, we've done a lot of market research, we've had tons of calls and preparations with our customers, but, you know, at the end of the day, the ordering site and the web page and all the other stuff is going to change on September 1st. And so, you know, and I'm not suggesting it's not going to be live or active because all that stuff is and we're ordering and printing, as you know, today.
But the real question is when we basically flip people over and they're going to get imprint versus the fully custom product, how will customers behave on balance? I mean, I have every reason to believe it's fine, because we still have a lot of value and actually are giving more flexibility with imprint. But it is a change, Steve. So that's really the question. We're managing through that.
We feel like all the signs are positive and everything's fine, but it's like anything else, until you take that first step, you're never sure. So we're just trying to be balanced in the approach given what we're seeing in the market, both from a scans and surgical trend, and I talked a little about that in the first question with what we saw in the month to month, but then also this is all going on while we're doing this business challenge.
Fundamentally we're doing it because it's going to be more growth opportunities and I want to reiterate that we are seeing really good competitive uptake in our imprint. We're seeing really good growth in the ASC segment, which is really the fundamental rationale for the strategy. There's a lot of value there with being able to provide the imprint system with the business efficient model, with the patient specific surgical plan, the flexible polys, which we don't have on our inter-operative poly flexibility.
So, lastly, international, it's good to see that that is in the positive zone after, you know, obviously having some reimbursement challenges there historically. What's your outlook for international over the next couple of years? What are some specific targets and what's the opportunity for you?
Yeah, thanks, Stephen, and it has been a, um...
a really tough ride over there and you know, and I don't want to get over our ski tips because Jeremy's still still a challenge for us because of the Really really just sort of harsh.
reimbursement environment and whatnot and then you've got NDR stuff you're dealing with but um
But, what we've seen is, the gentleman that's leading our business there has made some really good moves with some of the other countries with our agents and we've seen growth in some of the other countries, small growth but now growth, that wasn't there before. Obviously, as I mentioned in the remarks, Australia, which is a really good market for our model. It just took longer to get there through a regulatory process than we would have liked.
but it was worth the pain and toil because now it's delivering really good for us. And I think Australia has a chance to be our second largest market after Germany. So really what you see happening is Germany sort of flattened out. There's still demand for our products because if you really dig into it, we've got great clinical results and a lot of work that's been done in Germany. And so people really like the product and they want the product. It's just a reimbursement challenge. And what's happened is that growth is sort of...
or decline if you will, right, has bottomed out, Steve. All the other countries have come back into slight growth for the most part, maybe not every single one, and that's delivered finally for us in the quarter of a nice growth. And I think we have a chance to continue sort of on that track here with reasonable expectations internationally.
Thanks Mark.
Thank you.
And thank you. And one moment for our next question.
And our next question comes from Caitlin Croan from Canaccord. Your line is now open.
Hi, this is Caitlin on for Kyle Rose.
Just on Platinum Services, how's it going?
Just on Platinum Services, how is the rollout going? And have you had any challenges similar to the challenges you've noted for your other products? And how many more facilities do you expect to add this year on contract? And then just on Vizient, how do you expect the Vizient partnership to really drive uptake of Platinum Services as well as Identity and Cordura this year into next year in the future?
Thank you.
Yeah, so well, they're related. Good question, Kaitlin. So, the discussions on Platinum Service are going really, really well. I've mentioned that it's sort of like a capital sale, so it's a bit choppy, and it's sort of early days. So, I would liken it back to, you know, I know we probably can't all remember that far away, but the early days of Robot were sort of very slow initially, and then, you know, obviously there was general acceptance as the market starts to integrate it, bring it online, and I think that'll be the case.
with Platinum Services and obviously as a smaller market share player, we don't quite have the reach the big guys have, so our adoption curve is probably going to be even flatter than Robot. But the business model is just too compelling and we're sort of very much skating to where the puck's going in the industry as far as patients wanting personalization, as far as premium services being offered to patients, patients willing to pay for cash paid services. Visit www.potterybarn.com for more information
So all of that's in line with where the market's going. We added more facilities under contract in Q2. Kaylin, we have a number of discussions. We're very excited about the number of discussions we have, so we're not going to give a specific number, but we absolutely expect to add more facilities in the second half. And Vizient is going to be a really nice kind of tail end in that as well because...
It really gives us something to go and talk to and market and chat about. And I see that tail end sort of keeping us going into 2023 as we looked at more Platinum Services accounts. So this is early days, it's very exciting. Surgeons are interested, very much interested in talking about it. You can see a lot of surgeon peer-to-peer discussion about.
patient education and the model and how to implement it. And as I said, it's just very compelling and it fits with where the market's going. So we're excited about it, but it's gonna be sort of a flat but upward adoption curve, certainly over the next two to four quarters.
Okay.
Thank you.
And I am showing no further questions. I would now like to turn the call back over to Mark Agusti for closing remarks.
Thank you, Justin. Once again, everyone, thanks for joining us this morning. Thank you again for your interest in investment and performance. The team's working hard to realize the growth opportunity we have. The strategy is strong and remains intact. We're extremely confident that we have a great implant portfolio that delivers great clinical results and the most unique service program in the industry with our new Platinum Services Program. They'll gain traction over the coming quarters that they talked about. We look forward to providing further updates.
later in November . With that, we'll end the call and wish you all a great rest of the day. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect.
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