Q1 2023 Conformis Inc Earnings Call

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Good morning, and welcome to the first quarter 2023 earnings Conference call for Conformance incorporated my name is Tanya and I will be your conference operator today 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 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 section of conformance public filings with the U S Securities and Exchange Commission.

You should not place undue reliance on these forward looking statements conformance 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 is accurate only as of the live broadcast today.

May eight 2023, I will now turn the call over to Mark Bogusky, President and Chief Executive Officer of Conformance.

Okay.

Thank you and good morning.

With me. This morning is our CFO Bob Howe.

We had a mixed quarter performance with many positive results offset by lagging revenue growth.

From a positive perspective, we saw improving revenue performance within our hip franchise and international markets, increasing demand from patients for our platinum services offering and improved gross margin results.

Operationally, we reduced opex and delivered a higher than planned cash balance.

However, our USB revenue has not yet returned to growth the lingering effects from our shift to the new business model and our operational challenges have kept pressure on this important part of our business.

Nevertheless, we believe we have the right business model and we will endeavor to Reengage surgeons and drive patient awareness of our platinum services program.

With our platinum services program, we now have over 225 facilities that have access to our new service. This represents approximately 70% of our U S business now being under contract or having access to PSP.

Change is hard and while we are disappointed that not all of our customers who have elected to enroll in the platinum service program. Our platinum services orders continued to move in the right direction.

In Q1, we had around 500, PSP orders, which is 32% growth from the 380 orders in Q4 and up from the 110 orders in Q3.

We'd like to trend and believe it continues to reflect the strong value proposition of our PSP offering.

Our commercial team continues to seek creative and effective ways to drive interest and engagement to sell our program to ASC and hospital system in today's challenging economic climate and the competitive environment that is increasingly focused on robotics.

One recent action that is showing positive signs is the launch of our TV advertising campaign. We launched this campaign back in February where we targeted surgery ready patients to explore the benefits of a truly personalized performance fee.

Our first two markets yielded $2 2 million households in television and social media reach and $10 6 million impressions as most household side the TV commercial around seven times. This resulted in a lift in patient leaves for many surgeons in those markets. The challenge now is converting patient leads into into surgical orders, we will continue to monitor the.

Overall performance of this advertising campaign as we move forward with it.

Our hip business had a nice quarter, although it is still working off a smaller base. We did see growth, which is driven by the recent launch of our newest product <unk>.

Surgeon feedback has been favorable and the commercial opportunity is there we need to address some outstanding supply chain constraints and execute better across our organization to take advantage of the general surgeon interest in this new hips there.

Before I turn the call over to Bob I would like to briefly cover a few other important updates.

We are pleased to announced on April 27th we received FDA clearance for our new cruciate stabilizing Rcs probably insert for imprint.

Total knee system.

Krish, it's stabilizing is a growing segment and knee arthroplasty and we're pleased we'll be able to provide this option for surgeons in the near future.

Over the past few quarters, we have implemented many cost reduction measures to improve our cash position to extend our operating runway. We will continue to manage this extremely closely and will further align our cost structure with our current revenue and gross margin performance as needed.

We are making strides with our operations on time deliveries improving order lead times are becoming more predictable and the plant is performing better wherever the transition to the new business model introduced new processes, new workflows, which remain inefficient. Although we plan for many of these changes and additions from our historical ways of doing things has taken.

Any longer than anticipated we are actively managing these activities and expect to realize improvement in the future.

Our company has always been focused on looking at every way possible to deliver a return for our shareholders and that continues today as we have done with our paas licensing deals.

Our recent business model change and the new product introductions, we will explore all options available to us to create incremental value.

Finally, I'd like to extend my appreciation to the entire organization.

We've been going through a complex transformation over the past 18 months the LNG. Our team shows on a daily basis is incredible and we feel we have the leading hip and knee solution on the market and we will keep pushing forward to help patients live better lives through conformance.

I will now turn the call over to Bob to provide more details about our financial performance for the quarter as well as share thoughts on our outlook.

Thank you Mark and good morning, everyone.

As I, usually do I will start with product revenue, which was $12 7 million for the quarter and down 15% on a reported basis and 14% on a constant currency basis as compared to the first quarter of last year.

Although this fell at the high end of our guidance range. It still reflected headwinds to our business model transition and our operational challenges.

Our hip business was up 3% in the first quarter, which we versus the declines we had seen in the past few quarters.

We believe that carrier, which only just recently launched in November of 2022 will be a growth catalyst for our hip business.

We are continuing to build inventory to support our existing surgeons and look to expand our surgeon base once our inventory levels improve.

Product gross margin was 39, 1% in the first quarter, a sequential improvement from the fourth quarter and above our mid <unk> guidance.

We are working hard to keep our product gross margin moving in the right direction, but it is important to note that we continue to face headwinds due to increased labor and material costs operational inefficiencies and lower unit volume as we transitioned to a new business model.

Total operating expenses for the first quarter were $14 5 million a decline of $5 9 million or 29% reduction from the first quarter of last year.

The cost reductions impacted all functions and were in line with our previously communicated plan.

This is the second consecutive quarter with a significant expense reduction relative to prior year.

As Mark mentioned, we will continue to actively manage our expenses as we work through our topline challenges.

Moving to our balance sheet, we have cash and cash equivalents of $37 8 million at the end of the first quarter.

We continue to prudently manage our cash and our recent cost reductions have certainly helped in this regard.

And finally, I'd like to outline our current outlook.

We expect our second quarter product revenue to be between 11% to $13 million.

This expanded range reflects the reduced predictability due to our business model transformation.

Greater uncertainty given our operational challenges and the fact that adoption of imprint in platinum services is taking longer than expected.

With that Mark and I happy to take your questions.

Certainly as a reminder to ask a question. Please press star one on your telephone. Please wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.

And one moment for our first question.

Okay.

And our first question will come from Eric Anderson of <unk>.

Cowen Your line is now open.

Hi, guys How're you doing thanks for taking the question.

Wanted to get your thoughts on revenue growth for the remainder of 2023.

Do you think that's going to be coming mostly from reaching new customers within with your portfolio or that can be from increased utilization within the existing surgeon base.

Well I would say hey, Eric Good morning. This is mark.

I think there'll be a combination of both.

We have plans to do both obviously, we want to reengage with existing customers. We definitely have continued interest in our platinum services program.

And how to support that and launch that in the efforts around that.

We have to see US launch, we think we'll get a little bit of incremental growth from that and clearly that will come from some new customers, but to get back to real growth.

Reinvigorate the business, we're going to have to get new customers. Our agents have to do that so we're going to continue to support them I would hope that with the you know the imprint model that we have where we reduce lead times, you've got a nice price point, we've got the search in a box.

Again take advantage of this shift to ASC, we should be able to engage with your customers that way.

Deal that's been a little distracted trying to implement PSP to existing customers. So now we have to sort of re engage new customers and then really after it's going to get some new customers as well were bringing in investing in some of the assets that will come in here later in the second quarter and we.

We will definitely.

Add new hip customers with that Paris, so that'll be that should be fine.

Yeah.

Yes, Hi, Greg.

Thanks for the question Eric.

Of course, if I could squeeze one more in.

Curious, how youre thinking about the potential opportunity to establish partnerships going forward have you signed the Stryker partnership a year or two ago, a partnership something that intrigues you guys going forward.

Yeah as I stated in my prepared remarks, I mean, we're always looking for at all options.

We are open to considering things that makes sense for shareholders.

Our track record as you've mentioned with the Stryker when we've done that we will look to do that in other areas hip knee and shoulder were actively pursuing and discussing our continued licensing deals which are in royalty deal. So.

We will do that I mean, I think you know.

It's a little tougher now with.

Some of the other things, but our IP portfolio remains strong and there is the opportunity to license does there and if other.

As you say partnership opportunities present themselves, we'll certainly explore those.

Understood. Thank you. Thank you.

One moment for our next question.

And our next question will come from Steve Lichtman of Oppenheimer. Your line is open.

Thank you.

Guys I was wondering if you could.

Can you provide some color on just how some of the customers who had been on platinum services for a quarter plus.

Sort of quarter to quarter trends youre seeing in terms of.

Patient interest and what Youre hearing from them in.

In terms of the positives and challenges in terms of getting patients to go through that model.

Well.

Interesting the <unk>.

Personally when I talk to physicians that I talked to some of our agents. It's not it's not really a challenge with the patients the bigger challenges or just the.

The bureaucracies and the.

The flow through the existing workflow of the of the customers because they have to.

Add this little bit so they struggled with it frankly, a little more than the patients do the market research has been pretty clear in our real world experience is pretty weak there.

The patient to understand the story, Steve are they understand like Hey.

<unk> pays for a standard implant.

Wanted to I can upgrade to a custom and.

They see the marketing messages that we've got and.

And about 30% of the patients pretty routinely it's pretty strong 30% of patients choose to upgrade.

That's not a problem, we've actually made it easy for patients to do that and how they pay and.

And that Hasnt been hard the real challenges.

Getting customers over the hump that this is something they wanted to they wanted to do and adding to their workflow because it's a new.

It's a new step in the process so to speak.

Sure.

Alright are you.

Okay.

Wondering if you could provide an update on this list knee is that something that you are targeting.

A limited launch still around the end of the year.

Yes, we are I mean, we're struggling mightily to make sure it stays in the year window with any projects. Steve There is there is.

Good days and bad days as far as you know is the schedule going to be able to pull in or push out.

But.

Recently, it's been sort of.

Sort of generally positive. So we still think we have the ability to do that.

So anyway I don't.

Get into the sausage, because we actually where we're working hard on that just last week <unk> was meeting to make sure that we could still.

Keep that project on track so that is the plan today, we will keep you updated but that is the plan today and rest assured the team knows it's critical.

Product to launch given the growth in interest in some Atlas.

Got it and Bob I was wondering if you can give us.

A little bit of color.

Gross margin sure I guess sequentially here in this quarter and then exiting the year.

And then also same on Opex I mean.

Is this the level from this level how much further do you think we can see you guys go over the next few quarters.

Yes, So let me start with Opex.

I think the Opex results that you've seen we will probably be <unk>.

<unk> quarterly obviously, there is as you know theres a variable dynamic that will change with with revenue.

So thats a little bit of a wild card, but as far as the stuff that we can manage I think the rate that we had seen should be relatively stable to what you saw in Q1 potentially.

Down a little bit, but nothing dramatic.

As far as margin again margin, obviously has a huge impact on revenue and where we go so it's a little tricky to say, how we're going to exit at this point really a lot of that depends on.

Revenue trajectory.

But if you look at.

Q2.

And the range there I would say it'd be expecting something similar right I mean, if we're at the higher end of range I could see some improvement for the low end of the range I could see it being down a touch but I would expect similar in Q2, and then I think Q3 and Q4.

Are very dependent on how we're progressing on the top line.

Understood. Thanks, guys.

One moment for our next question.

Yes.

And our next question is going to come from Joshua Jennings of Cowen. Your line is open.

Hi, good morning, gentlemen.

Wanted to just ask a couple of follow ups first on.

<unk> Platinum service program.

I think we've gone over this before but just to be clear.

Worked through year historical surgeon base now and I think you can cut out 225 accounts that are kind of adapting the PSP.

Are there more than historical.

Customers to work through or is that process has been completed.

Well.

I would say, there's probably more Josh but you have to understand.

Give details of your question, we have a lot of historical customers right. The nature of our business being a little different we've got customers that have ordered from us in the past, but maybe you have an order from us recently so.

If you use the word historical I differentiate that from what we call sort of like active.

So there's certainly still room to go back with this story in PSP and do contracting with quote the customer database that we have in our historical customers and so we're working through that I forget the exact number I think we quoted five may know, but.

We've got of our sort of overall customer list and certainly that includes all historical customers I think we've got over 70% or so.

Signed up right to the PSP. So I think we've been pretty successful there now. The key is is I think it was mentioned earlier by Eric We Gotta get.

We got just because they are accessing that got to get them being active with PSP. That's the next thing is the next step Josh as.

As well as new customers to <unk>.

That's where I think youre going.

And we'll.

We'll continue to do that I mean, the reality is PSP is letting us engage.

With new customers that we otherwise wouldn't be engaging with.

But as I think I've indicated to you before it is a little bit like a capital sale leg. It's got it's a bit of a longer process. I mean anytime you are trying to you know.

Transition to transition account.

<unk> is a long lead time in orthopedics, and it's even a little bit longer as they get through this but the interest is there and we'll keep pushing.

Understood. Thanks for that Mark and wanted to just ask also about the ASC opportunities imprint I know Salesforce is.

<unk> focused on <unk>.

Converting your customer base <unk> PSP model.

How should we be thinking about.

The engagement with imprint and trying to drive growth with that product line.

And just I guess the follow up to that is just maybe an update on our player square yourself, where <unk> seen.

Seamless much attrition or if you felt like you've been adding more than and subtracting.

So far in early days of 2023.

Yes, I think taken them in reverse order. The early days of 2023, and I don't know Bob here any color. My sense is there's been less activity than in the past I haven't seen as much as exits in starts we I would say, we probably been relatively flat maybe growth slightly and.

We've certainly added as much as has taken away and I'm actually seen actually in a couple of the new agents that we have added some experienced and actually doing well.

<unk>.

Then going to your next question, we are seeing a shift in our business and we're actually at least as far as we can tolerate that it's not perfect, but as far as we can tell the <unk>.

Percentage of business coming from the ASC is growing right versus versus hospital base. So so obviously with our sales numbers you can deduce from that that that means where we're getting hurt in the hospital more than we are in the <unk> and I think thats that makes sense because of the robotic trend right Josh.

So the opportunity is there what I said in one of the answers questions before I believe is real I think that.

Sure.

We have not fully realized it really pushed the imprint opportunity aac's because the field has been very inward looking and busy transition.

Current customers to imprint as well as the PSP mile and so that's taken away time, and frankly confidence going after and getting new customers and some of that rightly. So because we have the operational challenges behind that rate with only so much.

Print available I'm not getting the right lead time, we wanted so we've worked through most of those so I'd like to think as we head into the second half of the year. We're building back some confidence in our in our agent sales force and we will go after those new ASC customers, because we really do really do you have a good solution for them, especially.

Especially now with the CFS launching and then the <unk> opportunity and print down the road. It's just it's a really good product.

And the business model, we have for the ASC.

The delivery model all of that stuff really makes sense. So hopefully we'll get some more engagement with new opportunities here in the second half.

Okay.

Great. Thanks, so much mark.

Thank you Jeff.

And I'm showing no further questions. This concludes today's conference call. Thank you for participating you may now disconnect.

Thank you operator, thank you Sir.

Michael.

Okay.

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