Eargo Inc. Q1 2023 Earnings Call
Speaker 1: Today's conference is being recorded and all lines have been placed on mute to prevent any background noise.
Speaker 1: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number 1 on your telephone keypad.
Speaker 1: If you would like to withdraw your question, simply press star 1 once again.
Speaker 1: Thank you, and I will now turn the conference over to Nick Liddico, Chief Retail Officer. You may begin.
Speaker 2: Thanks, operator. Good afternoon, everyone, and welcome to the Eargo first quarter 2023 earnings conference call.
Speaker 2: As a reminder, this call is being broadcast live and a digital replay will be available on our IR website.
Speaker 2: Joining me on today's call are Christian Gormson, President and Chief Executive Officer, and Adam Lapones, Chief Financial Officer.
Speaker 2: 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 press release today.
Speaker 2: We wish to caution you that such statements are based on management's current expectations and beliefs, are forward-looking in nature, and are subject to risks and uncertainties, and actual events or results may differ materially.
Speaker 2: The factors that could cause actual results or events to differ include, but are not limited to, factors referenced in our press release today, as well as our filings with the SEC.
Speaker 2: Before turning the call over to Christian, I want to make note that we have posted a historical GAP to non-GAP reconciliation table on our IR website in the events and presentation section.
Speaker 2: With that said, I will now turn the call over to Christian.
Speaker 3: Thank you, Nick, and thank you everyone for joining us today. Through the first quarter of 2023, we continued to make progress on evolving year-go into a true omnichannel business. Retail once again led the way in our efforts to diversify our business growth. Thank you.
Speaker 3: with our direct-to-consumer cash-paid business seeing increased efficiency as we continue to refine our media spend.
Speaker 3: While still early, we also continue to pursue opportunities to expand our presence in the insurance market.
Speaker 3: Our first quarter volume growth combined with our continued capital efficiency initiatives led to increased cross margins, reduced operating expenses and a low on net operating loss.
Speaker 3: We believe the worst of the uncertainty impacting our business is behind us, enabling us to make incremental steps in the right direction each quarter. As such, we believe that quarterly net operating cash burn will continue to see modest sequential improvements in the remaining quarters of 2023.
Speaker 3: Moving to a summary of our first quarter business performance.
Speaker 3: First quarter net revenue was $11.8 million, up approximately 29% year over year and slightly down on a sequential basis.
Speaker 3: As a reminder, Q1 is typically a sequentially down quarter following the end of heightened holiday promotional activity in Q4.
Speaker 3: First quarter, Groschipn growth was primarily driven by sales to Vickra, our larger detail partner. In the first quarter, Vickra submitted an initial stocking order of year-go-7 hearing aid devices in addition to subsequent replenishment orders.
Speaker 3: Since announcing our nationwide partnership with Victra Last Fall, we have been pleased with the early progress in this new channel. Importantly, Victra reports that year-go devices continue to sell through Victra's approximately 1500 retail location.
Speaker 3: This positive trend gives us confidence in the future growth potential of the partnership.
Speaker 3: We continue to support our retail partners by training and educating their sales staff on how to communicate with consumers about two different shaders of the year go devices.
Speaker 3: We respect your partnership with Victor.
Speaker 3: Our focus of a remained of 2023 is to continue training and education of the Victra Salesforce, gathering customer feedback and improving the overall customer experience.
Speaker 3: From a direct to consumer cash pay perspective, our focus has been on media spend efficiency.
Speaker 3: And we continue to make incremental improvements to the cost of acquiring a customer as we refine our strategy and continue to optimize our media channel set. Turning to a brief update on insurance access.
Speaker 3: As we shared on our last call, we're currently accepting both FEHB and non-FEHB insurance as a method of direct payment in certain limited circumstances. In particular, when customers have undergone additional testing by a licensed healthcare provider,
Speaker 3: to establish medical necessity with supporting clinical documentation. In the meantime, we expect to continue to operate at low insurance volumes and believe meaningful volume lift will take some time. Before turning it to Adam, let me touch on Eargo 7, our seventh generation device.
Speaker 3: and an example of our long-standing commitment to innovation. We were thrilled to announce here goes seven earlier this year at CES.
Speaker 3: followed by a full commercial launch in mid-separate. Since then, the device has been available for purchase across all channels.
Speaker 3: We have been pleased with both the initial device optics of our, which has tracked well to our expectations and the customer positive customer feedback. Specifically, year go seven has received better overall customer reviews and reduce connectivity complaints versus prior year go devices.
Speaker 3: Following received received a 510K clearance from the FDA last quarter, Bureau 5, Bureau 6, and Bureau 7 can each be marketed as self-fitting hearing aids with the use of sound match via our mobile app. And each is currently marketed as over-the-counter person.
Speaker 3: to the FDA's new OTC regulatory requirements.
Speaker 3: With our self-fit technology, year-go-7 does not require traditional in-office visits for fitting or adjustments like overhearing aids. This benefit has really resonated with customers so far in our retail and direct to consumer settings, as they're able to get set up and personalize their devices at home quickly and easily.
Speaker 3: We're incredibly proud of our first quota results, especially in the context of an evolving hearing aid industry.
Speaker 3: We believe that the distribution of hearing aids in the US through the physical retail channel will continue to grow and believe we are one of the leaders in this market evolution.
Speaker 3: Let me now turn it over to Adam for a more detailed summary.
Speaker 3: of our first quarter financial and operating results. Thank you, Christian.
Speaker 2: given Christian summary of net revenues, I will begin my commentary at the growth shipment line.
Speaker 3: First quarter growth system shift for 8,705 up approximately 51% year over year and roughly flat sequentially.
Speaker 3: The year-over-year increase in growth systems shipped is primarily driven by sales to electric.
Speaker 3: As Christian noted, first quarter net revenue was $11.8 million, up approximately 29% year over year, and slightly down on a sequential basis.
Speaker 3: We derive approximately 22% of our net revenue in Q1, 2023 from sales to Victor.
Speaker 3: It is important to note that there is shipment volume in both the fourth quarter of 2022 and the first quarter of 2023 were impacted by large stocking orders from Vickdra as they made significant purchase to build and maintain inventory levels at their approximately 1500 retail locations.
Speaker 3: Going forward, we may not be able to accurately predict the timing or size of any future victor orders, which may impact our net revenue and the consistency of our results on a sequential basis.
Speaker 3: The first quarter 2023 sales return rate is 37.4%.
Speaker 3: up 3.5 percentage points year over year, and 2.5 percentage points sequentially.
Speaker 3: The increase in the sales return rate is primarily driven by a sales channel mixed shift given the larger percentage of sales attributed to our retail partner Vickra, where we have only recently implemented sales return reduction in the shifts.
Speaker 3: These initiatives are similar to those implemented in a direct to consumer cash pay channel years ago.
Speaker 2: which ultimately reduced and stabilized our sales return rate into the mid-30s.
Speaker 3: and therefore believes the higher actual sales return rate experience in the first quarter is transient. Moving to non-GAP gross margin and non-GAP operating expenses. Our discussion of financial metrics in the gross margin line below will be on a non-GAP basis, which excludes stock-based compensation expense. Please refer to our GAP to non-GAP reconciliation, included in today's earnings release, and the historical GAP to non-GAP reconciliation table on our IR website in the events and presentation section.
Speaker 3: First quarter non-gap gross margin was 43.8% compared to 40.5% in the first quarter of 2022. We are pleased with our ability to expand gross margins consistently as we continue the scale volumes.
Speaker 3: or 12.5 million or 100.5 percent of net revenues compared to 12.6 million dollars or 137.9 percent of revenues in the first quarter of 2022. Non-gab research and development expenses $3.9 million or 33.5 percent of net revenues compared to $4.9 million or 53 percent of net revenues in the first quarter of 2022. The decrease is primarily due to lower personal related costs and lower third-party costs. Non-gab general and administrative expenses were $8.1 million
Speaker 3: or 68.5% of net revenues. Compared to $13.6 million, or 148.1% of net revenues in the first quarter of 2022. This decrease was primarily due to a reduction in professional fees, partially offset by an increase in personnel and personnel related costs.
Speaker 3: Non-Gap Net Operating Loss, the first quarter of 2023 was 19.4 million compared to the first quarter of 2022.
Speaker 4: Moving to the balance sheet.
Speaker 3: We had cash and cash equivalents of $79.8 million at March 31, 2023. This compares to 101.2 million as of December 31, 2022.
Speaker 3: Our net operating cash firm, which we define as cash used in operating and investing activities, in the first quarter of 2023, was approximately $21.59.
Speaker 4: Now turning the cache for a gun.
Speaker 3: The company expects modest sequential improvements to net operating cash firm in the remaining quarters of 2023.
Speaker 3: Thanks Adam. When we last spoke with you in March, we ended on a note of optimism with a belief that we were well positioned to capitalize on our recent progress in 2023 as we worked to return here to growth mode. Standing here today with the first quarter of 2023 now behind us, I'm pleased to report we have even greater confidence in our ability to transform our business and execute our omnichannel strategy.
Speaker 3: We believe that the first quarter of demonstrated momentum in our business, laying the groundwork for further year-go success.
Speaker 3: While we clearly have work to do, we do believe the worst of the uncertainty impacting our businesses behind us, enabling us to make incremental steps in the right direction each quarter. Most importantly, we remain steadfast in our belief that Yugo is driving a revolutionary change in the curing industry.
Speaker 5: backed by innovative technology and robust remote customer care.
Speaker 5: There remains a very large and unpenetrated market opportunity for us to capitalize on, particular in direct-to-consumer, and we look forward to providing future updates on our progress over the course of 2023.
Speaker 5: I will now turn the call over to the operator for Q&A.
Speaker 1: Thank you. At this time I would like to remind everyone in order to ask a question, press star and then the number one on your telephone keypad and we will pause for just a moment to compile the Q&A roster.
Speaker 1: Thank you. At this time I would like to remind everyone in order to ask a question for a star in the minimum one on your telephone keypad, and we will pause for just a moment to compile the Q&A roster.
Speaker 1: And we will take our first question from Margaret. K for with William Blair, your line is open. Good afternoon guys, thanks for taking the question. I wanted to start with Victoria and I apologize, I've got a series of questions. But can you give us a sense of how many victor stores at this point have any or go device given?
Speaker 1: at least based on the return rate, how much that may suggest for self-through. You know, either the percentage or the number of verses of selling.
Speaker 5: Thanks, Margaret. Let me start here and I'll see if Adam has some more details that you're looking for. But at the highest level, we've sold into all Victor stores. All 1500 have, you know, inventory of Yergo. So you can get Yergo 7 at any Victor of a Verizon store, assuming they haven't just recently sold out. But there is.
Speaker 5: So we are seeing, you know, QO or Q improvements into cell through. Obviously, it's being mapped to that level about the actual cell in of inventory, which is what we're reporting on financially. Adam, anything any further color? I don't think we have further color to get right now. I think Christmas at a well market. We did see sequential improvement in the cell and.
Speaker 3: It's self-throw, but the cell and still exceeded the cell through even in Q1.
Speaker 3: But we're still in that dynamic of building up inventory. If you want to say your question of, is it done at this point? Where are the steady state now? Where we've got inventory in every store, and we are seeing continued momentum itself through. In terms of RC dynamics, yes, we are seeing an increase in RC, so we are seeing that self-drew. But we're also now implementing the trainings across the country and the other actions that we think, we did back in the 2018-2019 that can positively back that RC rate over time. So moving to that return rate, can you give us a sense of how quickly those initiatives maybe did help the DTC business with the matter of quarters?
Speaker 3: of the, we call it refurbishment capabilities of our products. We are able to refurbish all the year go five, six and seven lines that get returned to us. So we, it does minimize that impact growth margin when there is a higher return, but we're still sensitive to it from both the customer experience as well. There is still some cost associated with that we work.
Speaker 1: Okay. Yeah, two more questions. So, you know, number one, on the victor experience, obviously you're seeing some success there. So, does that suggest you may want to expand these types of partnerships? And so, if so, why and then if not, you know, what metrics do you need to see to want to expand any further? Okay.
Speaker 5: Yeah, no, let me grab that. Clearly, we believe that the best way to grow hearing penetration, which is the overall goal and the mission of year go helping more people hear better, is to meet people where they are. And I think we're getting strong feedback that those people are in locations like Victra throughout the rising stores.
Speaker 5: So that basically is the whole strategy that we're building on. It's also clear that it's a new location. People are not walking into a Verizon store expecting to buy a hearing aid. So it is that journey of educating consumers that you can actually now get a health product in such a location.
Speaker 5: But it's something we are as committed to, as Adam also mentioned, it's an area that we are actively investing in our organization's capability to support into. And then we've continued investing through the quarter here and we'll continue to do so through the rest of the year. So absolutely, and the KPIs we'll be looking for is ultimately not the sell-in, it's the sell-throughs, combined with the return rates. And ultimately the most important is the customer experience.
Speaker 5: And so far, what we're learning is customers did not expect it, but they appreciate that opportunity. So it's a journey that we have literally just embarked on, but we're excited about for the future. Okay, last question. You know, you mentioned most of the increase in sales seems to be from Victra, but can you give us a sense around
Speaker 1: DTC growth on a year of your basis, and then how that might change with the latest year go seven launch and any potential marketing that some of you may have. Thank you.
Speaker 3: Yes, in market, when you look at the 20% revenue coming from retail, you can kind of back into it, is that you're on year or essentially between the repeat business and our good thing, the DTC business, or roughly flat, even slightly down depending on how you cut it. So to me, we are focused on optimizing it, and that's really where you're seeing the improvement in sales and marketing.
Speaker 3: and driving that first and then building off the growth from there. We are seeing though that there's cross-pollination effect. A customer goes into the victor and creates a lead to thinking, convert in online or at the phone, and vice versa, a customer goes on the phone and then go into the victor. So the two are combing with each other as well. That's a phenomenon that we want to see, but we expect to see more of that as we go.
Speaker 4: or. Great. Thank you, guys.
Speaker 1: Thank you. And ladies and gentlemen, this concludes today's conference call and we thank you for your participation. You may now disconnect.
Speaker 6: I.
Speaker 6: A.