Q3 2022 Zynex Inc Earnings Call

Good afternoon, ladies and gentlemen, and welcome to design next to third quarter 2022 earnings Conference call.

At this time all participants are in a listen only mode.

A question and answer session will follow the formal presentation.

As a reminder, this conference is being recorded today.

I would now like to turn the conference over to Luisa Smith from the Gilmartin group.

Okay.

Thank you Joe and good afternoon, everyone earlier today <unk> released financial results for the third quarter of 2022, a copy of the press release is available on the company's website. Joining me on today's call are Thomas on Guard, Chairman, President and Chief Executive Officer, Dan Moorhead, Chief Financial Officer.

And I look suck Chief operating officer, and Donald Greg Vice President XI and X monitor installation.

Before we begin I'd like to remind you that during this conference call. The company will make projections and forward looking statements regarding future events.

We encourage you to review the company's past and future filings with the SEC, including without limitation. The company's 2021 Form 10-K, and subsequent form 10, Qs, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward looking.

Yeah.

These factors may include without limitation statements regarding product development product potential regulatory environment sales and marketing strategies capital resources or operating performance.

With that I'll now turn the call over to Thomas.

Yeah. Thank you Luisa and good afternoon, everyone. Thank you for joining us today for our third quarter 2022 earnings call.

As noted in our recent earnings Flash report, we are pleased to report another quarter of record revenue and order numbers.

September saw the highest monthly orders in the company's history.

Following a record breaking in August .

Revenue and profitability remained strong and the productivity of our sales force has allowed for 19% and 13% revenue growth over Q2 and Q.

2021, and sorry, Q3, 2021 and Q2.

2022, respectively.

Total revenue for the quarter was $41 5 million.

Diluted earnings per share of protein.

And adjusted EBITDA of $8 1 million.

We remain confident in our strong performance and expect to achieve both top and bottom line guidance for the full year with current estimates of revenue being between $157 four and $164 million.

And EBITDA of $26 seven.

To $28 7 million.

Our strong cash position and collections allowed us to complete a second start a stock buyback in the open market totaling $20 million. So far this year.

We believe these buybacks a prudent way to apply our positive cash flow at this time and demonstrates our confidence in the performance of the business.

Our ability to capitalize on future growth opportunities and ultimately deliver value to shareholders.

The quarter ended with over 400 sales reps and our ultimate goal is to fill all 800 territories and we are exceptionally pleased with the productivity growth our existing sales force have been realizing recently and so far.

Revenue per Rep is up 30% compared to this time last year and 12% over last quarter.

We'll seek to fill the remaining 350 plus territories over the coming years and eventually make those territories as productive. That's why we now have seasoned reps with consistent high order production.

The development.

Monitoring device vision is progressing as anticipated as our team works to bring the same 600 blood and fluid volume monitor.

Early detection of sepsis device and the laser based pulse oximeter to market.

All told these products individually for game changes.

This quarter, we announced some significant milestones, including the first enrollment in a blood loss detection clinical trial for the same 600.

Pending clearance of this device will announce our commercialization strategy throughout 2023.

The laser based pulse oximeter is still in the development stage following the.

The acquisition of Kestrel Labs in December 2021.

We expect to have prototypes towards the end of this calendar year.

And submission to the FDA for clearance in mid 2023.

Yeah.

I'm very pleased with the company's performance and look forward to witnessing our continued progress in both divisions.

<unk> is unique in that we are executing quarter after quarter and delivering consistent results in terms of revenue growth and profitability.

As opposed to many of our cash restricted small cap peers in the sector, we've been profitable in.

24 of the last 25 quarters.

We're not limited by our high cash burn.

And we don't need to repeatedly turned to the capital markets to pursue growth opportunities.

<unk> has a compelling business model with a fantastic team that is performing efficiently and I'm excited to see what we can do throughout the rest of the year and into the next.

With that I'll now turn the call over to Anna <unk>, Our Chief operating officer for a more detailed business update from the pain management Division.

Thank you as Thomas highlighted the pain management Division has seen consistent order and revenue growth quarter. After quarter sales Rep productivity is at an all time high with revenue per sales rep at 430000 per year.

We've seen steady revenue growth in the business. Despite generally flat number of reps. This efficiency is a result of a competent insurance billing team high quality sales team and new sales management structure that allows our top performing reps to collaborate and learn from each other leading to a better overall result.

We will continue to foster a culture of excellence in our hiring and performance management process to ensure that these productivity levels improve in years to come. Additionally.

Additionally, we are beginning to see a positive cadence and sales hires and are projecting to end of October with over 430 sales reps.

At the macro challenges facing the sector, we have been impacted primarily by inflation as it relates to corporate employee wages and sales rep compensation as I've noted, we're committed to maintaining our best in class workforce and retaining the talent needed to stay competitive.

Cash collections remain consistent and we have not seen any material impacts from in or out of network coverage shifts since the beginning of the year.

As Thomas noted collections have been strong strong enough such that our cash position has allowed us to complete another stock buyback program.

We continue to gain traction with new and existing prescribers with our non opioid pain management products that are used as the first line of defense to eliminate pain.

We have a diverse set of call points that include any physician or providers. The six patients in pain, such as orthopedic surgeons paying doctors primary care physician physical therapists and more.

We continue to maintain and grow quality revenue opportunities through a broad range of cocoa inflation right.

I'll now ask Don Grad, Vice President of <unk> solutions to speak to the business updates related to that division. Thank you. Anna we continue to make excellent strides in building Alpha patient monitoring division, which is comprised of a multi product portfolio and development pipeline Z.

Z M. S. R&D includes hemodynamic monitoring subsurface monitoring and laser based pulse oximetry with an estimated addressable market of just under $4 billion.

The Nico co oximeter and the <unk> products were added to the pipeline via the acquisition of Kestrel labs at the end of 2021, we believe that these laser based products will be used in hospital systems as an alternative to legacy devices and will allow for more accurate readings across diverse populations. It has been noted that the <unk>.

Technology and <unk> systems has an inherent pigmentation bias, but we believe our laser based solution inherently solve current market problems. We've been building up the team for the co oximeter products hiring key engineering personnel and clinical teams in order to position ourselves for FDA submission in mid 'twenty.

'twenty three additionally, our noninvasive seem 1600 wireless blood and fluid monitor has submitted was submitted to the FDA in late 2021, we are in ongoing conversations with the agency to provide additional information as requested clearance for the <unk> hundred is anticipated.

In the coming months as a reminder to our audience. The first generation product to see them 1500 was previously cleared and the Siem 1600 will have wireless monitoring capabilities.

In addition to that there are multiple ongoing clinical studies to support the commercialization process with two in the enrollment phase and an additional three in the design space. We've completed several others last week. Our team attended the American Society of Anesthesiologists Conference in New Orleans.

To showcase the product, where we received exceptional feedback and we're able to highlight white papers from our wake Forest and Davita studies. We are excited about the progress we've made and the monitoring division and look forward to presenting and utilizing data in the coming quarters to capitalize on this unique market opportunity and add a diverse raw.

Revenue division to the company.

I will now turn the call over to Dan Moorhead, Chief Financial Officer for a more in depth look at financial performance in Q3.

Yeah.

Thanks, Don.

Please refer to our press release issued earlier today for a summary of our financial results for the third quarter.

In Q3 orders grew 34% year over year, and net revenue grew 19% to $41 $5 million from $34 8 million in 2021.

Device revenue increased 25% to $11 3 million compared to $9 1 million in Q3 of last year.

Supplies revenue increased 17% year over year to $30 2 million from $25 7 million.

Gross margin was 80% in the third quarter.

Similar to what it was a year ago.

Sales and marketing expenses were $17 $2 million in the third quarter of 2022 compared to $13 1 million in the same period in 2021.

G&A expenses were $9 4 million in Q3, an increase of 37% or $2 5 million year over year.

$1 3 million or over half of the increase is related to investments in our monitoring solutions division and related head count to launch our new products.

The increase in monitoring is in line with our previously stated estimates of increased spend.

Tax expense as a percentage was 23% for the quarter net income was $4 9 million and produced <unk> 13 per diluted share in the third quarter and adjusted EBITDA was $8 $1 million.

Also of note cash from operations. During Q3 was $7 4 million, which was our second best quarterly quarterly result in the company's history.

For the nine months ended September 30 of 2022 orders grew 15% and net revenue grew 22% to $109 4 million from $89 9 million in 2021.

Device revenue increased 19% to $27 6 million compared to $23 3 million last year.

Supplies revenue increased 23% year over year to $81 8 million from $66 7 million.

Year to date gross margin was 79% compared to 78% last year.

Sales and marketing expenses were $48 million year to date compared to $40 7 million in the same period in 2021.

G&A expenses were $26 million, an increase of $7 5 million year over year, and four 4 million of the increase is related to the investment in our monitoring solutions divisions.

Tax expense year to date is 23% net income increased 17% to $9 $6 million and produce 24 cents per diluted share year to date in 2022, and we had adjusted EBITDA of $16 7 million.

Finally, we ended the quarter with $23 $5 million in cash cash from operations increased $9 6 million year to date, which allowed us to complete our second buyback pay a cash dividend and pay down our debt related to the kestrel acquisition by $4 million.

With that I'll turn the call back over to Thomas Thank you Dan.

As I stated previously we expect our fourth quarter revenue to come in between 48% and 51 million with adjusted EBITDA between 10 and $12 million.

This puts us.

And our position with our full year 2022 estimate for revenue in the range of 157, 4% to $164 million.

Representing growth of approximately 22% or.

The year of 2021.

Adjusted EBITDA for 2022 is estimated to be between 26, 7% and $28 7 million.

With that operator, please open the call up for questions.

We will now begin the question and answer session.

To ask a question you May press Star then one on your telephone keypad.

If youre using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Could you tell them to exclude bad guys at all.

And our first question will come from Adam Maeder with Piper Sandler. Please go ahead.

Hi, Good afternoon, guys. This is Ryan on for Adam. Thank you for taking the questions and congratulations on the quarter.

Maybe starting with a little bit more detail on the prestige of environment and just kind of the progression that you saw over the course of Q3.

It does sound like you've had record quarter volumes in September so.

Maybe just describe a little bit about how things have kind of played out during the quarter was there any sort of seasonality that impacted the business that could have led.

Led you to even executing even higher on the quarter or just.

Just any higher level thoughts there.

Okay.

So overall.

We've seen a significant increase in productivity of our sales reps and the.

The growth in this quarter was driven directly from that we have been putting a lot of effort initiatives into attracting a higher quality.

Higher quality sales reps and we've been successful at that we also put a new sales management structure in place.

As mentioned earlier and that has proven to be very successful at bringing our new reps up to speed, but also.

Existing reps that are helping them with their performance overall, so I don't think this is necessarily related to any seasonality. It is directly related to increased.

Performance or more efficient performance from our sales force.

Okay. Thank you and just with the sales Rep adds I think you said that you expect and October with 430 reps.

Could you maybe talk about what the sales force well look like exiting 2022, and just over the longer tour over the longer term.

What does.

Does it fully.

Please.

Fisher sales rep structure look like our commercial organization.

Okay.

Well.

Maybe yes.

Maybe I'll just start.

So the structure is already in place and the 800 territories.

It'd probably be in the ballpark of 450 sales reps by the end of the year.

And over the next few years populate.

Remaining part about half of our sales force.

Current sales or what you would call fully or near fully productive.

And the other half are still in the ramping up phase. So we lost this year.

Significant Brian Bob as we grow.

In terms of.

Revenue per rep.

So if we get closer to the $1 million million dollars per year in average revenue per rep.

And obviously as we saturate all the open territory is more.

Then will naturally.

Just looking at the math that goes into it we will start seeing the increased revenue productivity per rep.

In the coming years, but it's all about populating all 800 territories.

The management structure is in place and is working well.

Okay. Okay, Yeah, no that was perfect.

And if I could squeeze one last one in here just on the blood monitoring side.

A lot of commentary on the on the product and in the script today and just.

They're all within kind of.

Hearing about this ASP.

Aspect of the business kind of coming into play so I'm just curious as far as what kind of impact you anticipate that category will have on the business as we head into 2023 and then.

As they look at numbers for next year, it's still a pretty healthy increase even though.

It does seem like the sales rep.

Productivity is coming into the mix I mean are you comfortable with where the street thought as far as 2023 goes.

Thank you.

Oh, that's it.

So this is done Greg.

We have.

Product that's submitted to the FDA.

Our blood monitoring volume.

Device.

And we have a commercial strategy that we've aligned on.

For the organization for both sales and marketing.

Were expecting clearance here fairly soon.

And as we continue to.

<unk>.

Deliver on.

Product milestones.

We will begin.

Estimating in Q1.

So two following clearance to start.

<unk> net product.

The important thing is that we're playing in.

We're almost a $4 billion market across our pulse oximetry, subsys and what volume markets.

And we're expecting to compete with different technology in that category.

And win our fair share of business.

Across that.

And I would just add in so 2023.

We are pretty comfortable with what's out there.

We'll continue obviously as we go through the budget cycle to kind of fine tune those numbers.

But we feel pretty good about 2023.

Okay perfect. Thank you guys.

Our next question will come from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.

Oh, Hello, Tomlinson of John and Dan Henry too.

We're doing great. Thanks.

So I guess, firstly, a question for Ed or when you talk about the.

Sales productivity being up 30% year over year could you talk a little bit about kind of the the learning curve that you're finding and maybe some of those.

Aggregate number so you spoke about as far as annualized revenue on a median or immediate basis or a territorial basis.

Yes, I can talk about this.

I would say the learning curve.

So far has been more about.

More attention to our new sales reps that we're bringing on board from the leadership. So we increase the number of.

People and sales management overall and they have less direct reports that they can give more attention to and that's proven to be successful.

We're also monitoring the activity of our reps, making sure that they're set up for success.

And they're seeing more clinics and capturing more business that way.

I would also add Jeff.

We are Thomas talks a lot about the $1 million productivity Mark.

Were over 40% of the way there we've talked about the average for a rep to get to that $1 billion in somewhere close to three years, an average tenure of our rep right now is.

Just over a year. So we're really on track or ahead of track as.

As far as projections, we've given per rep and based on the tenure of the reps we have on board.

Okay got it that's helpful Dan.

Dan or Thomas could you talk about the EBIT margins it looks like Youre, the middle jewelry, and just come in and around 72, 4%.

This is for 2023, just curious how that how does that feel to it seems like the past couple of years have been.

From high teens to mid twenties from 18 19 in 2020 does it feel like that should <unk>.

Stabilize and I guess without the effect of Don in your case by some of these product introductions coming to market in 'twenty three we hope.

Yes, that's the biggest piece, we did 20% last year. This year, we're kind of high teens like you said somewhere in that 17% range and the biggest difference is the investment we made in monitoring solutions without that we'd be in the low twenties. So yes, we would expect it to kind of stabilize and I think.

We're looking to.

Hop back into the Twenty's, we're going to be at 20%, obviously in Q3 and in Q4.

We would expect to be there in 'twenty three as well.

Okay got it and then finally Russ maybe.

Thomas could you talk little bit about Q4 in the general sense of the business or you've got a pretty strong range out there.

For Q4, and pretty strong year from a pull through in the fourth quarter, how does that feel and how does that sort of carrying through or is that going to be continued acceleration with the potential for.

The three platforms to bolt on to what we've seen over the past few years on a 1600 substation at some point the pulse ox.

Yes.

Thus far while tariffs so you.

I assume youre familiar with the seasonality that we happen I would assume other companies have.

And in medical devices that Bill Bill insurance companies.

In the fourth quarter is always the strongest we see here.

In October .

Nearly nearly complete that.

Order growth versus last year continued what we saw in.

August and September so that's very encouraging.

So the fourth quarter is traditionally very strong in terms of orders, but it's also strong in terms of cash collections as well as revenue recognition simply because.

More and more patients have met their deductible so.

Typically more procedures et cetera, being carried out and we benefit from a doctor is being being at work more than the.

Maybe in the earlier parts of the year.

So in terms of orders in terms of revenue in terms of cash collection. So that's always the.

The strongest quarter in the year, and then we dropped back down and kind of start from scratch again in the first quarter et cetera.

And as we continue to grow the numbers.

Or just better so you're right it's a sequentially.

<unk> Big leap, but it's in line with what we normally see.

The percentage of twice at the at the fourth quarter as compared to the first three quarters of the year, So I'm very comfortable with that.

Okay got it and one more quick one if I could as far as inventory. It looks like remained strong at 43 I know it ticked up early in new year anything to read in there.

Supply chain or inventory for the quarter or going forward.

We have had and have no supply issues supply chain issues whatsoever. So that is.

I mean, that's obviously driving that part of the business and has done its exceptionally well the.

The past couple of years.

Got it okay. Thank you all for taking the questions.

Thanks.

Our next question will come from <unk> Chen with H C. Wainwright. Please go ahead.

Thank you for taking my questions could.

Could you give us a more granular estimate as to how many reps will be available at the end of 2023.

So that's a tough one.

Way out so I think a lot of it just depends on the labor market and it's been so up and down.

Think we've seen a good trend recently like Anisette and Thomas mentioned, then we expect to be.

In the $4 50 range by the end of the year, but I think it would be premature for us to put something out on 2023.

Okay got it.

Yeah.

During the remainder of 2022 shall we expect to see results coming out of the clinical trials of <unk> hundred.

Yeah, we actually have results from several of the trials that we've actually completed.

We have several other trials that are actually in phase some of those are longer duration than others and just as a quick recap we have a whole blood study that is a multi site study, it's about 500 subjects or so and initial analysis of this data is collected.

Providing a better understanding of parameter accuracy on a relative index behavior on low volume blood loss studies.

And this is across a diverse subject population.

Other studies that we have going on is our dialysis study monitoring study at Davita.

And that specifically is.

Monitoring patients across three different a dialysis sessions and Theres a.

These are these are volunteers that have multiple confounding medical conditions relevant to normal hemodynamic and fluid dynamic control.

This has shown a lot of promise because our device has had no intra subject variability.

Supporting our relative patient approach and.

We have a <unk>.

<unk> donation study that has been.

<unk> is currently enrolling this is designed to test two under and understand how the physiological parameters and relative index change.

In blood component fluid protocols. This is.

As I said continuing at this point, but there is a blood shortage crisis in the U S and physicians are using more blood components of non blood fluids for patient patient resuscitation at this point, so it's very relevant area for us to study and understand.

Particularly for our products.

Providing some insights into the parameters accuracy and relative index sensitivity and specificity and so this is showing some very good promise. We've also completed a couple of lower body negative pressure studies that stimulate haemorrhagic shock and.

There is significant.

Significant.

Promise in this category of our of our device. So this is showing how our system an algorithm is working.

What we would call a high volume blood loss, where it's normal to see various stages on hypovolemic shock. So it's exciting that our parameters are responding to the changes despite anticipated.

<unk> mechanisms.

This is important study for us and the refinement of our algorithm to perform optimally in complex cases.

Hopefully that gives you a pretty good insight into that.

Yes. Thank you so you still expect.

Two to secure the marketing clearance before the end of this year correct.

It's hard to anticipate what the.

FDA the agency is going to do but we've been in rounds of questions with them and we're continuing through that.

And so it's hard to speculate when we'll actually get through all of that but I'm expecting that we're going as fast as we can at this point with the agency.

Got it and could you comment on the plan for Niko Oximeter.

Mark's oximeter in 2023.

Yes, I think we've been consistent that we plan to have that submission to the FDA in mid 2023.

And we are.

On track for our milestones and then some many of those in our program. We are actually ahead of schedule. So I think that from a risk standpoint, and all programs that we're doing fairly well.

Okay. Thank you you bet Youre welcome.

Our next question will come from Mark Weisenberger with B Riley Securities. Please go ahead.

Thanks appreciate taking the question can you talk about the introduction of new products beyond the next wave over the last few quarters and how do we think about them as a percentage of the total orders kind of growth rates relative to the next wave and their respective margin profiles.

Yes, the most significant introduction we have done.

<unk> has been obviously let.

Let me take one step back outside of the next wave. We also promote so the contraction devices.

<unk> portal lso devices.

Ice.

Cold and hot therapy machines and.

Now we have and of course, we have to the new move devices drove we happen in the.

The contents device that we're not promoting much right now but.

We have recently introduced knee braces and that has gone really well.

We adapted to different kinds.

Osteoporosis.

So right as OE prices and.

Post up.

Post operation.

The <unk> and the.

All of these devices go really well with the next wave for pain management and being able to patients many of them.

Being used right after the surgery. Some of course, we see a lot of prescriptions from orthopedic surgeons.

And I'd say the NIE basis.

Doing really well so if we go back a few earnings calls and we've been talking about.

How much of the.

The autos.

We're coming from from other products in the next wave we were talking about 15 16, 17% and we are now looking at just over 20% coming from other products. So it's.

<unk>.

Cold and hot therapy machines that are increasing so the contraction is increasing <unk> support and then with the extra little notch coming from.

From the NIPA basis. So it's good to of course of course, we have the monitoring division.

It's going to long term help us with a significant amount of diversification, but it's good to see that that.

We are spreading out.

Oh, the orders are coming in on.

On other products in the pain management Division.

Helpful. Thank you.

Dan anything to call out in terms of the strong.

Cash from operations this quarter it looks like.

The adjusted EBITDA conversion to cash from operations was about 91%.

And given the fourth quarter guide for adjusted EBITDA between tend to.

12.

Is there any reason to believe that we won't see record cash from operations in the fourth quarter and have kind of a similar conversion rate.

<unk>.

It's one quarter, so I'm more on the conservative side, but I would say, yes, we expect to have good cash flow. We typically you have good cash flow in the fourth quarter. So.

We would expect there to be a pretty high conversion rate there obviously.

There are some timing things that can get you you know if it comes in a week early week late but.

But generally I would say, yes, we expect to have a pretty high conversion rate during Q4.

Got it okay. Thanks, and then just the last one.

Consensus is kind of looking at 'twenty, three revenue up around kind of 22% and opex up kind of around 20%.

And Thats, maybe stripping out maybe one of the outliers in there but.

Given the investments that are needed for the monitoring segment is that a reasonable expectation to still think that.

Revenue for sure will outstrip opex growth and maybe frame it another way how much investment is still needed really are going to be needed to achieve the objectives of the monitoring division next year. Thank you.

So some of its run rate right. So the spend has increased every quarter. This year. So youre talking what our exit rate is versus the entrants right. So we said we were spending an extra $5 million.

So about $8 million this year.

But based on that exit rate, obviously, it's still going to be up but I think again I think the percentages and the 2023 as.

As we see it right now we haven't put out guidance, yet, but as we see it right now we think it's we think it's in the ballpark.

Got it very helpful. Thank you.

This will conclude our question and answer session.

Like to turn the conference back over to Thomas Sungard for any closing remarks.

Yes.

Yes. Thank you for joining us today, we look forward to maintaining our profitability and leveraging growth opportunities in the quarters and years to come.

We appreciate your interest in <unk>.

Sure.

Excuse me enjoy your evening. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.