Q3 2022 Conformis Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Okay.
Good morning, and welcome to the third quarter 2022 earnings Conference call for Conformance, Inc. My name is Shannon and I will be your conference operator today all.
All lines have been placed on listen only mode 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 within the meaning of federal Securities Law, which are made 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 risks 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 factors sections of conformance public filings with the U S Securities and Exchange Commission.
You should not place undue reliance on these forward looking statements conform.
<unk> disclaims any obligation except as required by law to update or revise any financial projections or forward looking statements, whether because of new information future events or otherwise.
This conference call will include time sensitive information and is accurate only as of the live broadcast today November 2nd 2022.
I will now turn the call over to Mark Augusta, President and Chief Executive Officer of Conformance.
Yeah.
Thank you operator with me today is our CFO Bob Hau. We appreciate you taking the time to get our business update.
I will start by reiterating that we remain confident in our long term growth strategy.
We're gaining traction within Britain flattened services, which I will elaborate on in a moment, however, translating our growing surgeon and patient interest in the topline revenue is taking longer than we initially expected.
Just on that we are taking proactive measures with our cost structure to improve our overall cash management.
As a result of deliberate expense control efforts that do not impact our long term opportunity, but can you help us in the short term as we execute on our strategy Bob will share more details on this shortly.
We had a good quarter of awareness with Anr platinum services program for personalized needs.
On top of this we had several positives in the third quarter.
We initiated the full commercial launch of our incorrectly.
We formerly transitioned to our new platinum services model on September one.
Three we received five 10-K clearance of the <unk> hip system and our position to launch the limited market release shortly.
For our international sales grew 5% in constant currency, primarily through our continued progress in Australia.
As we execute on our strategic pivot our near term performance is driven by two initiatives are inherently system continues to receive great reviews from surgeons that use it and print combined several of the best features of our fully personalized solution with aspects of traditional off the shelf system. So it is truly in the category.
So Dr.
Adoption continues to ramp and we now have imprint on contract with approximately 90% of our current customers.
Can you just focus on field training and a focus.
The AFC to increase our overall penetration there.
Interest with our new Platinum services program continues to gain traction as evidenced by the fact that we added to the number of facilities under contract. We increased the number of healthcare facilities to enroll to four nine at the end of the third quarter up from 'twenty, one through the end of second quarter.
Formerly transitioned to the new business model on September one so going forward our fully personalize. These are only available through the bottom services program.
We're pleased with the interest we are seeing.
From surgeons need of conformance.
Not order from us longer than a year for example, platinum services orders were up four exit September over what they were in the five months, leading up to the transition.
In terms of our entire product portfolio, we have not seen much change in the overall macro environment. We are still experiencing higher than normal cases that are being rescheduled or canceled due to labor and supply chain challenges. This continuously to take product deliveries and it's time for me to reschedule surgical cases. In addition, we continue to focus on penetrating.
The AFC segment as reflected by the growth in revenue for this site of care over Q3 2021.
Moving on to an update on our pipeline, we held our own in the quarter correct. There we continue to build inventory to support our limited market release, and we expect the first procedure. If you done shortly we're excited about the product design and scale will position us well to address the growing physician interest and tier hip procedures.
The other major project is our porous coated me on a positive note we have submitted our regulatory package to the FDA. However supply chain challenges remain a headwind we are exploring options to expedite the timeline, but for now we continue to expect a limited market release in early Q2 of next year.
Lastly, as you saw on October 26, our shareholders approved additional ratios on a reverse stock split took us to regain compliance with NASDAQ listing requirements. The company's board of directors has determined to proceed with implementing the reverse stock split using the one for 25 ratio. The company is working with its transfer agent <unk>.
<unk> and other applicable part of these critical meant the reverse stock split with an expected completion date in November 2022.
We will continue to provide updates via press release and a form 8-K as this matter is finalized.
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 afternoon, everyone.
<unk> revenue was in line with our expectations at $13 6 million, which was down 3% on a reported basis and 2% on a constant currency basis versus the third quarter of last year.
Within product revenue our worldwide need business was down 1% on a constant currency basis, and our hip business was down 19%.
As Mark mentioned, our international knee business was up 5% on a constant currency basis due to strong growth in Australia.
Product gross margin for the third quarter was 34, 6%.
Slight sequential decline of 50 basis points as compared to the second quarter.
While we continue to face headwinds from increased material and labor costs and we worked through some initial transition inefficiencies related to our new business model, we are focused on making the necessary changes to improve operations.
For the fourth quarter, we expect product gross margin to sequentially improve to the upper thirties.
As we head into 2023 this metric should continue to improve it in print and platinum services becomes a larger portion of our product mix and we make efficiency improvements in our business model transformation.
I will now move to Opex, where we continue to manage our cost.
Our total operating expenses for the third quarter were $16 8 million, which was $1 $4 million lower than the second quarter and down 3% versus the third quarter of last year.
As Mark mentioned, we recently implemented a cost reduction plan related to our opex structure.
This plan is anticipated to stay in place until we regain top line momentum.
Currently targeting to reduce annual variable and employee related expenses by $10 million to $12 million, the majority of which will impact 2023.
Several initiatives have already been put in place with others to be implemented this quarter and into early 2023.
These expense reductions will not impact of course need to take care of hip new product development.
Nor will we significantly reduce our investments in sales and marketing programs focused on driving greater imprint in platinum services adoption.
We believe these cash shaving actions will have limited to no impact on our long term opportunity, but they will help us maximize our cash near term.
For the full year of 2022, we now expect our opex to be between <unk> $73 million to $75 million.
Which is lower than the guidance range. We provided back in August where we indicated we would be at the low end of our previous range of <unk> $75 million to $81 million.
Moving to our balance sheet, we have cash and cash equivalents of $59 6 million at the end of the third quarter or.
Our level of cash 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.
This includes the full commercial launch of <unk> and the limited market release of our <unk> hip and porous coated knee.
We expect additional inventory investment to be between $2 million to $4 million over the next few quarters.
In terms of outlook, we expect our fourth quarter product revenue to be between 13% to $14 million.
This puts us at the low end of the 57% to $61 million range for the year, we established back in August .
We believe our revenue performance has been impacted by transitioning our existing customers to our new product offering.
And by continuing supply chain and operational challenges.
At this point, we expect one to two quarters of top line pressure as we complete the transition to a new business model.
While this is disappointing we believe the impact will be relatively short term and after we work through these challenges will return to growth.
With that Mark and I are happy to take your questions.
Yeah.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced please standby, while we compile the Q&A roster.
Thank you. Our first question comes from Eric Anderson from Cowen Eric Your line is open.
Hi, how are you guys doing thanks for taking the question.
Hi, I wanted to just start with the platinum services program. It sounds like feedback from customers adopting the service model has been positive, but not quite translating into revenue growth just curious to hear what the company is trying to do to bridge that gap is this just a surgeon education sort of thing is there anything you could do with the sales force to try and.
Accelerate uptake for that program.
Yes, that's great great questions. So.
There's couple of things we're doing one is we are taking the feedback from some customers there there.
Agree to the program, but then it takes them a little longer to implement a change in their billing and collections. Since this is outside their normal.
Sort of course.
Of course of business, so the actual implementation from them.
Taking longer than we expected from some of the earlier sites that we're able to implement a quicker so.
We're putting some things in place and working with consultants to try to package some stuff up to help that implementation go.
Quicker, Eric So thats one of the things we're doing.
The other thing is we've got in the works.
Some.
Some additional promotional materials as well as direct to consumer advertising and whatnot, which we plan to launch.
First quarter of next year or so so that should help support that effort. We're pleased though with the amount of contract that got done I mean this was.
Big lift as we moved from 21 at the end of Q3.
49, so we added 28, new contracts and importantly, some of those contracts involved multiple facilities.
So we're pleased with that but you're right, it's taking longer to translate into actual growth as they now try to operationalize the platinum services program on their end.
Okay. Thanks for that and then just on the international opportunity. It seems like Youre seeing some nice growth, especially in Australia here.
Are there any other international markets that we could see the conformance portfolio enter in the near to medium term.
I don't think there's anything in the near term that as significant as the Australia and opportunity.
There are some things we're doing to look at improving growth performance in some of our bigger existing markets, but as you know we're also challenged with some of the air currents and things like that so that's really really sort of distracted the ability to.
To focus on those areas I think longer term.
We're looking at some of the.
Some of the Asian markets as you might expect.
Japan, and China, but as you know the regulatory pathway is convoluted, there, especially for a custom product.
I wouldn't factor that in anything in the near term.
Okay understood. Thanks for taking my questions.
Thank you.
Yes.
Sure.
Our next question comes from Caitlin Cronin from Canaccord Genuity Caitlin Your line is open.
Hi, This is Caitlin <unk> on for Paul Ross, Thanks for taking the questions.
Hi, Jason Lin. Thank you, yes, so just to.
Jump off on platinum as well.
How much time do you guys really need to tell how platinum services is taking hold and any metrics from platinum, but you can disclose such as conversion rate mix percent et cetera.
Okay.
Yes.
Only metric I would say I'll answer Riversleigh win.
Our facility.
Offers the program, it's clearly clearly successful.
And the numbers are bearing out that.
Anywhere from 20% to 30% of the patients upgrade.
So the opportunity is real.
The challenge is like anything else is a smaller market share player getting that message and reach out we have a challenge with our distribution and field sales force about going after that I think.
<unk> got to continue to educate.
Make them feel confident or help them excuse me help them feel confident but when it's offered it's clearly successful we've seen that every time, a new a new facility.
Launches the program.
As I said earlier with Eric's question.
Was.
It's been a surprise to us or in the sense that for some of the bigger places that are interested which we're pleased because we've executed these contracts with some pretty big places, but their ability to quickly operationalize it because they have to get.
IP and revenue cycle management, and they have to think through their policies.
Taking them longer and so they are actually asking us for help.
To do some things in the short term, so where we're doing a quick adjustment to that and respond to those things and hopefully that'll.
Kick in but it is taking longer.
From that standpoint, but I am very pleased with the number of facilities that increased and then we continue to have interesting discussions and we have a lot of people that are in the queue. So I expect the I fully expect the number of facilities that are offering platinum services to grow and as long as we do that it should trans.
<unk> into <unk>.
Topline growth its just got more of a lag from when they execute the agreement to win they operationalize. It then we would have anticipated.
Got you.
And then just two more questions.
The impact of the business model transition are you, losing customers and also with the changes to the reduction.
Of spending what's the updated timing of all the products that you currently have under development.
Thank you.
No. Thanks, Kevin So I think it's a really insightful question. The first one which I think you asked did a really good way there is no doubt that.
So first off as we said in the prepared remarks. The good news is we have about 90% of our existing business contracted within print so.
The imprint access to implement by existing customers is pretty significant.
There is no doubt there is.
Impact on some customers.
That.
Didn't want they're they're they're world change they wanted to continue to do what they were doing and as a result.
The reason they may have decided well if I can't do a fully custom.
The product then I'll do something else.
It's hard to estimate exactly what that is we have gone through detail by detail.
We think.
That.
Probably it's like sort of 5% to 10% range, but a lot of it is short term.
Stuff that could that we think will come back after we get some exposure where we're at.
So there is clearly some disruption and we're seeing that in the top line now I would just like to remind everybody that we also still suffer from.
Sure.
Not a non optimized portfolio, we don't have a robotic solution. We don't have inter operative guidance, we don't have.
Cement list. So those are all things you don't have but we're working on as we know porous coated and things like that so they'll come back, but we do have a very unique program in platinum service that we have to continue to market.
And we're also very pleased with our <unk> clinical performance.
Body, who has used it now and it's and we've had more surgeons use it for the first time.
And the last quarter.
Clinical performance is good I would say the other thing it's implicit in your question that has caused us potentially to see a pullback from a small number of surgeons. Some of the operational challenge, we've had which we mentioned in the prepared remarks and <unk>.
<unk> seen from the other companies reporting.
Top line growth, which is great. The reality is there's a lot of pressure.
Throughout the supply chain and for a company like conformance that has aggressive just in time delivery model.
That is continued continue to be a headwind for us and that's a challenge and so.
Our field has had to deal with rescheduling of cases, and moving things around in and I think that's a headwind to top line growth.
Okay.
Awesome, Yes, nothing else for me thanks.
Thank you Kevin.
Thank you one moment.
Our next question comes from Steven Lichtman from Oppenheimer <unk> Company, Steve Your line is open.
Hi, everyone. This is <unk> on for Steve.
Hi, Amir.
Okay.
Just had a quick question around.
Apply chain headwind.
Is there any commentary around what you what youre seeing on the ground.
As it relates to your previously indicated like supply chain headwinds.
So what we're seeing on the ground that what you said a mirror.
Yes, Mark correct, yes.
Yeah well.
Bob is very close to it too, but again my impression that from my perspective is there's two things going on one is we're building out a.
New business model, which requires build the stock capabilities running a warehouse as well as the just in time capabilities, but even in our build to stock an imprint we've got our.
Patient specific instrumentation, and we deliver that to a specific patient and about a three week to four week timeframe and so.
No.
So there is transition involved in our.
And our manufacturing facilities at the same time.
Two things are really challenged US one is is suppliers as I've said in the past not meeting their delivery commitments because everything from packaging to femoral components to metals I mean, it's been raw materials.
It's been frankly.
Never ending game of whack a mole as soon as you think you've got one problem solved another one rears its head and then you combine that with the labor market that we have a lot of transition and a lot of turnover and so the level of institutional knowledge continues to to change and that would be a struggle for any organization I think smaller.
Organizations.
Get hurt worse than that because we don't have.
We don't have large purchasing departments are large manufacturing engineering department. So.
When you when you have departments that consist of just one person or three people.
And you lose a person you could lose the bandwidth through that department anywhere from a third 100%. So other people have to pick up the slack.
And that affects us in other areas. So the labor challenges that that are macroeconomic issues.
Particular hit small companies in particular have hit us pretty hard. So those are my observations around sort of three things, but I don't know if you would add the only thing I would add I think market debate going from here are we sporadically deal with some unpredictable shipping rates. So we're shipping as Mark mentioned just in time.
When the shipment that mature.
We thought it was going to show up it causes.
For the standard off the shelf products, so that has ebbed and flowed but that certainly has added to some of the complexities.
Great. Thank you and just another question on my side.
Is there anything you can provide on working through the backlog of these.
These prior rescheduled cases, and then just a quick follow up to that do you see elevated levels of reschedule cases.
A potential tailwind in 'twenty three.
Thank you.
Yes, I mean look at the backlog I don't think there's necessarily a big backlog as you know we have.
Scans and Thats, how we do our projections and.
Those are scheduled and Thats, how we plan and forecast there are times when we have cases that get back on the schedule and those and that.
That factors into it but I don't think from our standpoint backlogs a big a big driver.
As far as Youre seeing the elevated levels of canceled cases in 'twenty three being a headwind did I hear you right.
Correct, yes.
Yes.
Look at that that's been something again that has ebbed and flowed it hasnt been consistent in recent quarters.
It's it's elevated I think part of that is due to some of the dynamics with staffing of the.
Please go ahead.
Part of that is.
Is some of the challenges with us having to reschedule and move because of the because of the stuff. We just talked about.
I don't think I don't expect.
It's going to be more space.
To predict this is been honest the last several quarters have been challenging for us. So I don't I don't expect at.
At this point that it should get worse than what we're seeing.
Great Great. Thank you just one just one last question on my side.
And is there any updates on the <unk> contract.
As mentioned in prior calls Hasnt hasn't been hasn't been helping you guys increased attract more customers for the platinum services program.
Thank you.
Yes, I don't have a specific number to provide but it definitely has helped.
And it's definitely.
Helped in a couple of situations.
And as I said, when we announced that its.
It's more of a quote license tightened so again it takes our sales force time to go and qualify and find that it's been it's been real helpful not only.
In the visiting customers, but it's also been helpful with some of the other corporate partners that we're talking to about platinum services.
Really good about that moving forward. So so that part has been good.
Okay. Thanks, so much.
Thank you Amir I appreciate it.
Thank you just as a reminder, if anyone else would like to ask a question you need to press star one one on your telephone.
At the moment.
Okay. At this time I would like to now turn it back to Mark for any closing remarks.
Thank you appreciate it operator and thank you for everybody who attended the call today appreciate.
If you're listening in thanks to the questions that we have.
Appreciate it we look forward to providing further update.
At the start of the new year on fourth quarter. Thank you.
Okay.
Yeah.
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