Q3 2024 Nevro Corp Earnings Call
Good afternoon. My name is Christa and I will be your conference operator today at this time I would like to welcome everyone to never Corp's third quarter 2024 earnings conference call and webcast.
Today's conference is being recorded.
All lines have been placed on mute to prevent any background noise and after the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad I.
Speaker Change: I will now turn the call over to Angie Mccabe <unk>, Vice President of Investor Relations and corporate communications.
Angie Mccabe: MS. Mccabe. Please go ahead.
Angie Mccabe: Thank you good afternoon, and welcome to <unk> third quarter 2024 earnings Conference call with me today are Kevin Thornell, our CEO, and President and Rob Mcleod Chief Financial Officer.
Angie Mccabe: Before we get started please note that our earnings release and the supplemental presentation accompanying this call are available on the events and presentations page of the investors section of our corporate website at <unk> Dot com.
Also this call is being broadcast live over the Internet to all interested parties and an archived copy of this webcast will be available in the investors section of our corporate website. Shortly after the conclusion of this call.
Angie Mccabe: I'd like to remind everyone that comments made on today's call may include forward looking statements within the meaning of federal securities laws results could differ materially from those expressed or implied as a result of certain risks and uncertainties.
Angie Mccabe: Please refer to <unk> SEC filings, including our annual report on Form 10-K filed on February 23, 2024 for a detailed presentation of risks the forward looking statements in this call speak only as of today and the company undertakes no obligation to update or revise any of these statements.
Angie Mccabe: In addition management will refer to adjusted EBITDA, a non-GAAP measure used to help investors understand our ongoing business performance non-GAAP adjusted EBITDA excludes interest taxes, and noncash items, such as stock based compensation and depreciation and amortization as well as litigation related.
Angie Mccabe: Expenses restructuring and supplier contract renegotiation charges and other adjustments. Please refer to the financial tables in our press release issued today for a reconciliation of GAAP to non-GAAP financial measures I will now turn the call over to Kevin Kevin.
Kevin Thornell: Thank you Angie and thank you all for joining us.
Kevin Thornell: This afternoon, we issued our third quarter 2024 financial results.
Kevin Thornell: In my remarks today I will discuss the key factors that drove our financial results for the quarter and share why we remain optimistic about the future of our business and our ability to return to sustainable growth.
Rod will then provide details on our third quarter financial results as well as our full year 2020 for guidance.
Speaker Change: Our results for the third quarter of 2024 as compared with the third quarter of 2023 were as follows.
Worldwide revenue of $96 9 million decreased six 7% on a reported basis in U S revenue of $83 9 million decreased six 5%.
Speaker Change: U S spinal cord stimulation or SCS trial procedures declined approximately 15, 2%.
Speaker Change: Net loss from operations was $13 9 million compared with $25 6 million in the year ago quarter, and adjusted EBITDA was negative $1 8 million compared with a loss of $5 8 million in the year ago quarter, reflecting the actions we took through our restructuring earlier this year and our.
Speaker Change: Focus on expense management, as we drive toward profitability.
Speaker Change: And cash cash equivalent and short term investments increased $3 3 million to $277 million as of September 32024 from June 32024.
This increase reflects the benefits from our restructuring in the first half of this year and strong working capital management.
Speaker Change: And as Rob will discuss shortly we expect our cash position to increase further in the fourth quarter.
Speaker Change: Fortunately our balance sheet remains strong.
Speaker Change: On our second quarter earnings call, we discussed in detail. The challenges we are facing in the de novo spinal cord stimulation market as well as the opportunities where we can improve our commercial execution.
Speaker Change: And in the third quarter, we continued implementing actions, including changes to our sales territories as well as reallocating marketing resources to improve our competitive positioning drive market penetration return to sustainable topline growth and continue on our path towards profitability.
Speaker Change: As we previously discussed we promoted a number of our associate sales reps or <unk> to lead some newly created territories and.
Speaker Change: In 2025, we plan on continuing to add new territories, many of which will be filled by promoting associate sales reps.
Speaker Change: There will be a ramp up period throughout 2025 for these new sales reps as they get established in these territories and we look forward to fostering their growth.
Speaker Change: We believe these changes will allow our sales team to reach more customers. So deeper with physicians provide the high level of service our customers expect while also laying the foundation for new product introductions.
Speaker Change: It is imperative that we achieve sustainable profitability in one of our largest expenses is always been our commercial efforts.
Speaker Change: Over the years, we have made adjustments to align our commercial cost structure with our revenue base with the goal of achieving profitable growth and delivering shareholder value.
Speaker Change: As a reminder, we took more than $30 million in annual run rate expenses out of our cost structure through our two restructurings earlier this year.
Speaker Change: We had some difficult decisions to make as we went through those processes.
Speaker Change: As we were evaluating our operating expenses at the beginning of this year to accelerate our path to profitability. We made the decision to reduce our overall direct to consumer or DTC advertising spend as it is often difficult to measure the direct return on these investments.
Speaker Change: Furthermore, at that time, we believe that our strong referral network combined with our best in class clinical data demonstrating the effectiveness of our 10 kilohertz therapy would be enough to continue driving customer and patient adoption of our unique SCS treatment therapy.
Speaker Change: However, based on our subsequent analysis, we now know that our DTC advertising efforts had a greater impact on patient lead generation and our U S. SCS trials than we previously thought.
Speaker Change: We also learned that patients had a higher likelihood of moving forward with SCS therapy. When we spent more time educating them upfront before referring them to their chosen position.
Speaker Change: Accordingly, we began reallocating resources on these initiatives in the middle of the third quarter.
Speaker Change: At the same time, we are implementing improvements to our DTC advertising approach that are designed to effectively convert a higher number of patient leads into trials.
Speaker Change: We are beginning to see patient interest in response to our new DTC advertising campaign and are confident we will see a meaningful improvement in trialing activity in the second half of 2025.
Speaker Change: While it is still early we believe the actions we are taking including reinvesting in our DTC advertising are beginning to have a positive impact as the rate of decline in U S. SCS trials in October decreased.
Speaker Change: We are laser focused on returning to sustainable growth and are monitoring trends in sales activity on a daily basis.
Speaker Change: We continue to build and leverage our R&D pipeline and we are excited that in September we received FDA approval and announced the limited market release of <unk> IQ with HSA adaptive AI, which we believe further establishes our position as the leading developer.
Speaker Change: Of innovative technology using data driven solutions for pain management.
This is the only SCS technology using artificial intelligence and is built on a strong foundation of landmark evident clinical research and big data leveraging 100 million data points in 10 years of data acquisition innovation and patient care.
Speaker Change: We know that chronic pain is a dynamic multifaceted conditions unique to each individual therefore therapies must be personalized based on the patient's changing experienced the pain.
Speaker Change: Competitor STS systems require programming paresthesia to a preferred setting in the physician's office using trial and error methods.
This often results in patients requiring frequent in office reprogramming visit over many months.
Speaker Change: Only hs bags adapted AI engages with the patient to personalize the delivered SCS therapy, using evidenced based algorithms derived from our proprietary data set for specific indications.
Speaker Change: Through AI the algorithm it just programming in real time, using multi dimensional metrics of pain relief sleep quality function and satisfaction.
Speaker Change: It is also important to remember that HFF is a paresthesia free therapy.
Examples of the advanced technology incorporated in HFF adaptive AI include tailoring dosing over time, while maintaining pain relief provides the opportunity to dramatically reduce charging requirements to as few as six times per year.
This is compared to previous generations of our SCS devices that require some patience to charge once per week up to 52 times per year.
Speaker Change: <unk> bipolar interlacing technology that stores, the patient's programming usage and pain relief history to create bespoke programming sequences that brings patients back to painterly faster or even to improve patient that have already achieved pain relief of greater than 50%.
Speaker Change: <unk> adaptive AI is raising the bar on what is considered adequate pain relief.
Speaker Change: Continuous device based monitoring of the patients pain relief state device performance and usage that automatically alerts our field based care team to contact a patient to resolve clinical or device performance issues that might arise.
Speaker Change: Active intervention is now a reality.
<unk> adaptive AI is truly a game changer for patients physicians and net ROE and importantly closes the loop that matters.
Since the limited market release in late September <unk> adaptive AI is off to a great start and already delivering improved clinical outcomes to patients.
Speaker Change: Our early data demonstrate that patients are achieving pain relief, 41% faster when compared to our prior version <unk> IQ1 point out page.
Speaker Change: Patients are achieving and maintaining meaningful pain relief plus feeling the benefit of our smart power and bipolar interlacing additions.
Speaker Change: Importantly for our shareholders <unk> adaptive AI is also providing significant reductions in the administrative and clinical burdens to our organizational infrastructure that would otherwise be needed to provide long term clinical care to these patients.
In patients who are now utilizing H FX adaptive AI, we are seeing and all of those 40% reduction in the number of patient calls to our support teams with an almost 50% reduction in call time duration and a 20% reduction in office patient reprogramming visits when compare.
Speaker Change: <unk> de Novo H FX adaptive AI patient two omnia a previous generation of net Roes non AI driven SCS platform.
Speaker Change: While we are still in the early days of this product release, we are extremely pleased with both the benefit we are providing to patients and the significant expense reductions we should realize with this product over the long term.
Speaker Change: This is a limited market release marks a major milestone not only for our product offerings, but the SBS market as well as it is the first therapy to put patients in control of their pain relief, while at the same time, providing physicians the ability to monitor the patients pain journey.
Speaker Change: Look forward to the full U S market launch later this month.
Speaker Change: We are also thrilled to announce that we recently received regulatory approval to offer H FX IQ in CE Mark countries in the European Union.
Speaker Change: <unk> IQ will be available in select regions of the EU through a limited market release, beginning later this month.
Speaker Change: Anticipate a full market release in the first quarter of 2025.
Speaker Change: This marks a major milestone in advancing our efforts in the EU and I want to congratulate our team worked long and hard to get this approval over the finish line.
Speaker Change: As part of our longer term plan to become a more comprehensive pain management company and drive market penetration and very large and underserved markets over the next few years, we are working to grow our business through expanded Sds indications next generation SCS therapy and alternative therapies that are earlier in the care continuum.
Speaker Change: As we've communicated previously the PD end market remains underpenetrated at less than 1%.
Speaker Change: We continue to focus on growing this business by educating referring physicians and raising patient awareness on the benefits of Ses is treatment therapy for these patients.
Speaker Change: Building on our strong foundation of robust clinical data New data was recently published in the journal of pain research demonstrating long term improvements in pain intensity with our high frequency SCS therapy, notably the analysis is the first study of Ses to demonstrate long term significant in <unk>.
Speaker Change: Initially meaningful reductions in hemoglobin <unk> C and weight and study participants with PD in and type two diabetes, who received high frequency SCS therapy.
Speaker Change: It was this data that led us to initiate a feasibility study to specifically evaluate the use of 10 kilohertz therapy to affect H b.
<unk>.
Speaker Change: At the 12 month point of this study we are seeing very encouraging and similar results as with the PD and study with patients demonstrating significant and clinically meaningful reductions in <unk>.
Speaker Change: Our clinical work in this area is very exciting and there is a signal of the possible metabolic benefit of 10 kilohertz Ses for diabetic patients.
Speaker Change: This clinical work continues to build evidenced on the importance of new treatment options, such as 10, kilohertz SCS therapy for patients who suffer from <unk> and other diabetic related co morbidities.
Regarding to send the sensory RCT. The interim analysis is ongoing and we continue to expect to read out in early 2025.
Speaker Change: Recall that this trial is designed to more objectively prove the sensory improvements we observed in our initial randomized controlled trial and to obtain an scf indication beyond just pain.
Speaker Change: Depending on the outcome. This may allow for early publication, followed by potential review in specific inclusion of narrows proprietary 10, kilohertz SCS therapy into evidence based guidelines, particularly those published by the American Diabetes Association.
Speaker Change: We're excited that our <unk> protocol design abstract has been accepted as an oral presentation at the 2025 NAND annual meeting and will be presented by Dr. Erika Petersen director of the section of functional and restored of neurosurgery at UA Immerse Medical Center.
As we've shared previously our SCS devices had rechargeable batteries with a very long functional life, yet they will need to be replaced.
Speaker Change: We began treating a significant number of patients commercially beginning in late 2015.
Speaker Change: Means that ipg's implanted at that time are now nearing end of life.
Speaker Change: We believe many of our patients in consultation with their physicians will want to continue using our best in class clinically proven treatment therapy and they will now have access to the significant benefit of FX adaptive AI technology in treating their chronic pain.
Speaker Change: We believe that over time, a growing number of our implants will be in patients who have already enjoyed effective high frequency SCS therapy with <unk> technology for many years and whose devices are nearing their natural life of their IPG battery.
Speaker Change: Remember that we began treating a significant number of patients commercially in late 2015, and now more than 115000 patients globally are using our 10 kilohertz SCS therapy.
Speaker Change: Our longer term goal is to become the leading provider of treatment options with the most diversified differentiated and innovative product portfolio in the pain management space.
Speaker Change: We continue to ramp and scale, our Si joint fusion business.
Speaker Change: Dissipate it will contribute more meaningfully to our growth beginning next year.
Speaker Change: Joint pain is seriously Underdiagnosed and our fusion technology provides a new and simpler approach to this procedure.
Speaker Change: One of the ways, we are educating surgeons and standing out from legacy devices is through the publication of positive clinical data.
Speaker Change: We are pleased that comparative biomechanics data on <unk>, our novel Posteriorly integrated single Cage system has been accepted in a peer reviewed publication assessing the by mechanical fixation invasiveness confusion characteristics of the <unk>, one Si joint Transfixing.
Speaker Change: Infusion system as compared to other commercial Si joint Transfixing devices.
Speaker Change: <unk> was found to be equivalent or superior to these devices, including the lateral triangular rod system.
Speaker Change: The authors conclude that narrow one provides a significantly better opportunity for robust Si joint Arthur thesis.
Speaker Change: We continue to receive positive feedback from physicians, who are trained and now performing Si joint fusion procedures with never won.
Speaker Change: We believe that the success of our expanding portfolio of Ses and Si joint products will help create the type of scale growth operating leverage and sustainability to unlock the kind of shareholder value that our board and management team are intent on creating.
Speaker Change: With.
Speaker Change: Respect to our previously announced the exploration of strategic options to accelerate growth diversify our product portfolio and deliver shareholder value. The activity is ongoing and we are evaluating several options.
Speaker Change: Beyond this we will not provide any further comment or update on the process.
Speaker Change: In the meantime, we remain laser focused on executing our strategy and the actions we implemented to return to sustainable growth and drive towards profitability and are excited by the direction of the company as we begin to close out 2024 and head into 2025.
Speaker Change: We have the most advanced technology in this space supported by robust clinical evidence.
Speaker Change: With our launches of HFF adaptive AI in the U S and <unk> IQ in the EU the growth opportunity in an underpenetrated SCS market and our diversification into the Si joint fusion space, we have an exciting and compelling path ahead of us.
I'll now turn the call over to Rod for a discussion of our third quarter financial results and guidance for the fourth quarter and full year 2024.
Speaker Change: But.
Rod: Thanks, Kevin and good afternoon, everyone.
Speaker Change: To Echo Kevin's comments, we are proactively making decisions and reallocating resources to better execute commercially while embarking on a process aimed at accelerating our growth.
Speaker Change: First defining our business and creating stockholder value.
Speaker Change: Note that Q3, 2024 had one additional day versus prior year.
For the third quarter of 2024, and compared with the year ago period.
Speaker Change: Worldwide revenue decreased six 7% as reported and 7.0% on a constant currency basis.
Speaker Change: U S trial procedures decreased approximately 15, 2%, mainly due to competitive pressures ongoing softness in the core U S SCS market as well as commercial execution.
U S revenue decreased six 5% to $83 $9 million, primarily due to the aforementioned factors and international.
Speaker Change: <unk> revenue of $13 million decreased seven 7% as reported.
Speaker Change: And nine 6% on a constant currency basis.
Speaker Change: As was the case in the second quarter of this year.
Speaker Change: Our international business was primarily affected by the short term impact of negative Ses related media reports in Australia, where we have the largest market share that resulted in cases being postponed or cancelled as well as the impact of healthcare reform in Germany that caused the delay in procedures in the.
Speaker Change: Current year quarter the impact of these two factors did abate somewhat in the third quarter, we began to see an uptick in procedures in both of these markets.
Speaker Change: Gross profit of $64 6 million.
Speaker Change: Increased seven 1% compared with the third quarter of last year.
Speaker Change: Gross margin was 66, 7% in the third quarter down slightly from the same period, a year ago, primarily as a result of a meaningful charge for previously capitalized variances in overhead as we discussed on prior quarters earnings calls.
Speaker Change: We continued to make progress in shifting additional work towards Costa Rica manufacturing facility to further leverage our investment there and continue on the path towards achieving our long term gross margin in the mid 70% range and drive towards profitability.
Operating expenses decreased to $78 5 million compared with $95 1 million in the prior year quarter.
Speaker Change: Excluding restructuring charges intangible amortization contingent consideration revaluations in the year over year decrease in litigation related expenses, Opex was $83 5 million or an approximately 12, 2% year over year improvement over the year ago period.
Speaker Change: This improvement reflects the benefits from our restructuring activity in the first half of this year as well as our continued focus on expense management and operational efficiencies.
We also strengthened our cash position in the third quarter cash cash equivalents short term investments were 277 million at September 32024, increasing $3 3 million from June 32024. This increase reflects the benefits from our two restructurings.
In the first half of 2024 as well as our focus on working capital management.
Turning now to our 2020 for full year guidance, we are maintaining our full year 2024 worldwide revenue guidance of approximately $400 million to $405 million, representing an approximately 5% to 6% decrease from.
Speaker Change: Our 2023 worldwide revenue on both a reported and constant currency basis.
This guidance takes into account the impact of market challenges that we're facing and reduced DTC marketing spend from earlier this year as well as some impact in the fourth quarter from the two hurricanes that hit the southeast that caused the shortage in IV bags and that's the delay in procedures.
Speaker Change: While we are stepping up our commercial execution by optimizing our sales territories and amping up our DTC advertising program, we don't anticipate seeing the benefits from these actions and U S. SPF trailing growth rates for a few quarters.
Speaker Change: We continue to expect full year gross margin to be approximately 66% or 68%, excluding the $6 million supplier charge that we discussed on our second quarter call.
Speaker Change: We continue to see our Costa Rica manufacturing facility produced excellent results.
Speaker Change: With labor and material costs meeting our expectations for manufactured product.
Speaker Change: Additionally, we have continued to move head count from the United States down to Costa Rica to leverage our investment.
Speaker Change: As I mentioned earlier in my remarks, we continue to project long term gross margins in the mid seventies, assuming pricing holds at current levels.
Speaker Change: Also as we previously communicated on our first quarter earnings call.
Speaker Change: We projected we would see second half gross margin headwinds due to the accounting of inventory variances in overhead that occurred in 2023 as we are transitioning from a heavy reliance on contract manufacturing to bringing manufacturing in house.
Speaker Change: Therefore gross margin in the fourth quarter of 2024 will be lower than what the business delivered in the first half of this year.
Speaker Change: Also note that lower production volumes from decreased sales in 2024 will continue to create some margin headwinds next year.
Speaker Change: We would expect our full year 2020 for operating expenses to be approximately $369 1 million down $20 2 million or down five 2% from 2023.
As we communicated on our second quarter 2024 earnings call, we expect our restructuring efforts to generate savings of more than $25 million in 2024, and full year annualized run rate savings of over $30 million.
We remain laser focused on maintaining our cost structure aligned with the size of our business and continue to look for additional efficiencies to drive margin improvement.
Speaker Change: We are also raising our full year 2024, adjusted EBITDA guidance to a range of negative 18 million to negative $16 million from the prior guidance range of negative $20 million to negative $18 million.
Speaker Change: It is also important to point out that our restructuring efforts and focus on managing working capital should also drive an increase to our cash cash equivalents and short term investments in Q4 2024 as well.
Speaker Change: While we aren't providing 2025 guidance at this time as we look ahead to next year, we expect to reap the benefits from the changes to our commercial team and territories to drive growth and market penetration.
Speaker Change: Increased investment in DTC advertising continued ramping of our Si joint fusion business and greater revenue contributions from ITG replacements as we move throughout the year.
Speaker Change: In closing as we look to close out this year and ahead to 2025.
Speaker Change: Entire narrowed team remains committed to executing our strategy to grow and diversify our business and getting us back on the path to profitability and value creation.
Speaker Change: We will now open the call up for questions.
Speaker Change: Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star one on your telephone keypad to raise their hand and join the queue and if you'd like to withdraw that question again Crestar. One. We also ask that you limit yourself to one question and one follow up your first question comes from the law.
Speaker Change: Line of Chris Pasquale with Nephron Research. Please go ahead.
Speaker Change: Thanks, and congrats on some of the cost cutting initiatives starting to show through in the reduced Opex and cash burn this nice to see.
Speaker Change: Kevin I wanted to ask kind of a big picture question about the outlook for the core SCS business.
Speaker Change: By our math your trials, excluding <unk> had been declining now for the better part of the last three years and the trend. This year has been really a bigger decline.
Lines each quarter, there's competitive noise in there and some launches that it probably impacted share, but it really feels like there is less interest or at least stagnating interest in SCS in general as a solution for these patients you talked about the great work, you're doing to develop clinical evidence on the PDL side on the Si joint side.
Speaker Change: I'm wondering if you feel a need to maybe generate some new data to really support the use of FCS in the core market.
Especially given the fact that your technology has evolved quite a bit since the last really big clinical initiative, you had for back and leg pain.
Speaker Change: Yes, Chris Thanks for the question and for the Shout outs, there with our restructuring cost look we look at all of our competitor data. We do the same analysis you guys do on what's going on in the market.
As you know historically this.
Speaker Change: Yes market is traditionally volatile as new products launch back and forth between competitors and what have you. In addition.
Speaker Change: We're still focused on creating that clinical data we've done so both on the PDL side as well as non surgical back pain, which is a new indication that we did just a few years ago as well.
Speaker Change: Will take some time to be able to ramp that up and that is in the core back in the leg space. If you also recall in the second quarter earnings call. We talked about those procedures that are often in front of Ses and those procedures continue to grow and we believe that those patients will continue to get back to Ses to complete their full pain management.
Speaker Change: Journey, and so with that I think that.
Speaker Change: When you look at our direct to consumer spend we've talked about it on the call. We turned that down we saw an effect that was not just in PD and but also in our core backend leg market. So as we turn that dial back up and really began to be more focus on those efforts and nurturing those patients were actually seeing a return of trials and all of those areas.
Speaker Change: So we have to control what we control and we're excited about adaptive AI and our launch there to be able to compete against against our bigger competitors as well.
Speaker Change: Do you have any plans to capture the impact of adaptive AI in a way that's <unk>.
Speaker Change: Comprehensive income generally some publications to really put that in front of physicians.
Yes, we always look at what we can do in real world data to be able to bring new new points out there as you heard during our call. We talked about statistics of what we're already seeing in our limited market release, and we believe some of those physicians that were involved there would love to do.
Speaker Change: Investor initiated trials, there and so we do want to continue our focus on clinical trials as we always have to bring out important data and not only does this bring clinical data.
Speaker Change: It fits for the patient benefits for the physicians because they are getting less phone calls because the patients are actually getting back to pain relief really quickly automatically from the algorithm, but also we're seeing less of a burden on our internal staff on reaching out to those patients because they are getting back to that pain relief on their own using the app.
Speaker Change: Rhythm and just answering for easy questions. Today. So we're excited about it bringing not only clinical value, but also commercial value and quite often going to be some cost avoidance and cost savings for us as an organization as well.
Thanks.
Your next question comes from the line of shotgun <unk> with RBC capital markets. Please go ahead.
Speaker Change: Great. Thank you so much for taking the questions.
Speaker Change: I guess I just wanted to again back to the U S trial is down 15%.
You call that competition SCS market execution, and then you did call out the DCM backs that it sounds like can take up to second half two of 25.
Speaker Change: Two really yield some results can you just elaborate on each of those buckets, where are you seeing more pressure versus the other and I guess just as a follow up can you elaborate on your U S sales force dynamics.
Speaker Change: How much of the heavy lifting is behind you what still needs to be done as we look into 2025 that would be helpful. Thank you.
Speaker Change: Sure, Yes, I'll start with the last one first our commercial efforts in the U S. As you recall in 2023, we've made quite a bit of a structural changes in reporting line changes and brought on a lot of new people and most of those were in entry level type sales positions called associate sales reps and Thats why I know those reps have been out in the field for.
Speaker Change: For a year and a half and are ready to take on their own territories that was planned all along so that they can hit the ground running much quicker than someone who is coming from outside of the spinal cord stimulation market. Most of those are taking over expansion territories that are within the territory in which they were providing assistance over the last year and a half so they know the physicians they know the doctors.
Speaker Change: Or in that area and areas, where they can go out and convert competitive business as well if you go through and look at what components, where the headwinds are that 15, 2%. There's one thing just to remember here as a replacement to continue to grow and be more part of our overall business.
Speaker Change: Youll see a disassociation between Trialing and revenue because you do not do a trial when you're replacing the IPG just wanted to make that point.
Speaker Change: You can still see revenue growth despite some pressure on trials the.
Speaker Change: The second is DTC. These are really hard things to measure we have some great board members that sit on companies that also spent a lot on direct to consumer advertising and it's always difficult to tell how much of an impact they are having or not having an impact until you increase it are you decreasing see the effects of that and so we made that decision back in earlier in <unk>.
Speaker Change: 24 to turn it down a bit it takes a little bit of time before you see the effects on that but as soon as we did we were now able to realize that it does make an impact in returning that volume back up and we're already seeing the benefits of that in the early days since we since we turned the volume back up so it's really difficult to try to put a percentage of what is.
Speaker Change: Providing that headwinds, but we do believe that all of our changes in all of our responses to that will reverse that trend.
Thank you.
Speaker Change: Your next question comes from the line of Robbie Marcus with Jpmorgan. Please go ahead.
Speaker Change: So Chris is.
Speaker Change: Congratulations on some pretty impressive cost cuts here and maybe to that point I wanted to ask on.
Speaker Change: On R&D spend.
Speaker Change: It came down pretty meaningfully about third it's the lowest I believe outside of the depth of Covid since 2017.
Speaker Change: How do we balance sort of the cost cutting initiatives versus <unk>.
Speaker Change: Future innovation here and maybe you could give us a little insight into what was how was cut and how you think about this impacting.
Speaker Change: <unk> growth and then I have a follow up.
Speaker Change: Sure.
Ron: This is Ron I'll take that.
Ron: There's a couple of things to keep in mind here, we always want to be investing in what could be driving future growth and we really protect those investments that are going to provide an ROI I think what youre seeing here is <unk>.
Ron: Focus in the organization towards those projects that do have an ROI associated with them.
Ron: Also note that there are some clinical spending that goes on in that category and we saw some.
Yes, some reduction or some focus in that area as well so we've got a bias towards growth, Kevin and I we are.
Ron: Our entire careers have been about driving growth in our business and we're really going to try to drive that focus in an organization towards those projects that can generate revenue returns over the next couple of years.
And I'll add a little bit here, Rob it's Kevin.
Speaker Change: That clinical side, you will see some some bolus is up or down just based upon the enrollment and the timing and so we obviously had a couple of clinical trials roll off and come to completion and we have our sensory trial, that's ongoing but it's at the Preplanned midterm.
Speaker Change: And so youll see a reduction in spending as that occurs so that will go up or down and that's in our R&D line.
Speaker Change: As Rod mentioned, we are still focused on the diversification of that product portfolio, along with spinal cord stimulation next generation devices. As you can see with adaptive AI. That's not the last one will continue to focus on innovation, there along with getting us into new markets that are already.
Speaker Change: Established in the pain management space today.
Speaker Change: Great and.
Speaker Change: It's been touched on in some questions already but.
Speaker Change: Maybe just help US understand this year you cut expenses cut head count and sales came down and we're going to see.
Speaker Change: Probably one of the flattish third to fourth quarters, the company's ever had coming up now.
Speaker Change: <unk>.
How do you.
Speaker Change: Especially I imagined head count exiting the year is going to be lower.
Speaker Change: Hi, good amount than entering the year and I know youre, adding some territories next year, but how do we think about the plan to grow revenues in 'twenty five despite some pretty meaningful.
Speaker Change: Spence and likely head count cuts throughout 24, so I imagine youre going to have tough comps at the beginning of next year on that count just help us understand how you can balance a lot less spending with growth. Thanks a lot.
Speaker Change: Yes. This is Ron again, it's a good question I mean as you look at the 30 plus million that we've pulled out on an annualized basis I think we got probably close to 90% of it right. When you when you do.
Make those sort of reductions you are going to find a couple of areas, where like Kevin mentioned on BTC, where maybe we turned down the volume a little bit too much.
Speaker Change: I think as we sit here right now we are confident that we have a much better sense as to.
Speaker Change: What is going to drive that revenue what is impact of that revenue and we feel confident that we can that we can close that gap that we saw in Q3, there with with the cost structure that we have in place, Kevin Thats, where that we're dialing up the DTC or making some key investments in certain parts of the commercial.
Speaker Change: Execution in the commercial organization to help drive that growth into the future. So I think we got the majority of it right, but there were definitely a couple of areas where.
Speaker Change:
Kevin Thornell: Where it may have had a little bit of an impact on the business, yes, it's Kevin here just to add into.
One of the exciting portions and the reason we put it in the prepared remarks around adaptive AI is the ability to grow without needing to add one to one ratios with that new patient population that continues to expand right as we implant more new patients that means we have more patients to take care of however.
Kevin Thornell: Those new patients start on adaptive AI and those that will eventually be replaced with adaptive AI as their old ipg's sort of go to their end of life re enter their battery.
Need less people to be able to take care of those patients. So that's what AI does across all the industries right. It's making those changes automatically that used to be people that used to have to do a lot of that work and so as we expand into future technology will allow us to do that as well.
Speaker Change: Your next question comes from the line of Matt Taylor with Jefferies. Please go ahead.
Matt Taylor: Hi, Thanks for taking the question.
Matt Taylor: So I just wanted to be clear about the comments on trialing, because he said that ramping back up DTC would improve them.
Speaker Change: <unk> My second half 'twenty five.
Speaker Change: Are we expecting the next few quarters.
Speaker Change: For the trailing trends to be similar to what we saw in Q3, and then could you provide any color on the quantum of those DTC spending that you've toggled down enough. It sounds like you said, 90% right. So that 10% of the $30 million that Youre toggling back up.
Speaker Change: No we can't really do that math on the expanding the good news is in today's world getting to our patient population is pretty targeted and we even got better now than we did before by the channels in which we can find these patients easier. The reason why there's a little delay there is obviously as these patients called in to learn more about this.
Speaker Change: <unk>.
Citing therapy to help them out.
Speaker Change: Specifically with their back and leg pain or painful diabetic neuropathy. What we've learned is we need to nurture those patients and educate them before we hand them off to their preferred physician and we've seen a really good increase of those referrals and those leads going into consultations with their preferred physician.
Speaker Change: And that typically takes four to six months after they have their initial consultation before they would have a trial that would leave to lead to a permanent implant. So that's why it's going to take a little bit of time as these patients the patient flow starts coming back in as far as what we're spending on DTC, we've never put that number out there before but we're able to do so.
Speaker Change: It wouldn't have an effect on the 30 million.
Speaker Change: That we said is going to be saved this next year.
Speaker Change: And Matt just to pile on there a little bit so.
And some of our.
Speaker Change: Our press release or slides, we said that for Q4, we're not commenting on 2025 at this point, but for Q4, we did we assumed the trialing doesn't improve.
And as Kevin mentioned, it's.
Speaker Change: We still believe that our $30 million of annualized cost reductions are in place and will continue to see some benefit of that.
Speaker Change: But if it is.
Speaker Change: Your math it is not a huge investment.
Speaker Change: It's something that we once we realized that it was having a fact, we were able to.
Speaker Change: Turn on and get that get that investment flow going pretty quickly.
Speaker Change: Alright, great. Thank you guys.
Speaker Change: Thanks, Matt.
Speaker Change: Your next question comes from the line of Joanne Wuensch with Citi. Please go ahead.
Speaker Change: Hey, guys. Good afternoon. This is app now for Joanne.
Speaker Change: I guess your gross margin guidance on EBITDA guidance for the year.
Speaker Change: Step up in Opex in the fourth quarter is that all related to DTC and expanding sales force or is there anything else in there that we should keep in mind.
Speaker Change: Yes, I can take that.
Speaker Change: We had first of all we had a pretty strong Q3 from an adjusted EBITDA perspective, and some of that was related to the revenue over performance versus.
Speaker Change: Versus where we guided to.
As well as some spend reductions as well as some timing on some expenses from a timing perspective, some of that timing is pushing into Q4.
Speaker Change: And there are some additional investments.
Speaker Change: Some commercial related some related to adaptive AI that are that are impacting the P&L.
Speaker Change: From a timing perspective, some of those we thought would have hit in Q3, but it looks like they are going to be more of a Q4 expense. So it's primarily timing.
Speaker Change: In terms of that shift really from Q3 to Q4.
Speaker Change: Okay. That's helpful.
Speaker Change: And then just one on <unk>.
Speaker Change: Talk about how that integration is going.
Speaker Change: And if thats performance here.
Speaker Change: Two internal expectation so far.
Speaker Change: Yeah. Thanks, Anthony So we're still in the integration process as a reminder, it was a small spin out of a small <unk>.
Speaker Change: Spine company, there and they handed us great technology, but we have to had to build up a lot of the things needed to be able to fully launch that one of which is the trade that you need to perform the procedure that need to be turned and flip back out. We now are finally at full capacity. There. So that we're able to cover any kind of the trials that's ongoing.
Speaker Change: One of the things we talked about before is that we are changing the paradigm for where those patients are treated traditionally they have been treated by neurosurgeons orthopedic surgeons because of the procedures that were commercially available we're pretty intensive and if you needed. Some help if you did something wrong during that procedure you needed to have a little bit.
Speaker Change: Different skills then.
Speaker Change: The physicians that we normally call on now with this poster your approach it's opened up a new world for the interventional is to do this procedure and we spend a lot of time training physicians for the first time and so instead of them, referring those physicians generic surgeons like they had in the past. They are now able to keep those patients in their own practice, but thats going to take them some time to be a.
Speaker Change: Well to buildup that patient flow and that patient base that stays within their practice. So we're liking how it's progressing obviously you always want more than what you have right now but were in line with where we want to go as far as the training. The number of physicians that are trained how they're building their practices and our reps ability to.
Speaker Change: Learn and be able to upscale to be able to be proficient in covering those cases, and we expect that it will have a more meaningful impact as we said as we head into 2025.
Speaker Change: Great. Thanks for taking the question.
Mhm.
Speaker Change: Your next question comes from the line of Brandon Vazquez with William Blair. Please go ahead.
Speaker Change: Hi, everyone. Thanks for taking the question.
Speaker Change: First I just wanted to focus on the P&L you guys have done a great job here of taking some costs out.
Speaker Change: I guess the question being those who go to 25 plus is kind of the next leg of improvements in profitability going to be coming from just accelerating accelerating the top line or is there another leg of opex that might come out next year as you guys look towards moving even closer to breakeven and eventually profitability.
Speaker Change: Yeah, Hey, Brian This is Ron I'll take that.
As we.
Speaker Change: Continuing to run this business, where we continue to look for areas, where we can.
Speaker Change: Drive focus in the business and get more efficient in what we're doing right size the business for.
Speaker Change: The size of that particular aspect of the business. So we still have some projects in areas that we're going after to drive efficiencies in this business.
Speaker Change: And we'll continue to do that on a.
On a go forward basis and Additionally, we will continue to go after working capital we saw pretty good.
Speaker Change: <unk> reductions in inventories and.
Speaker Change: And receivables in the third quarter and that can be a strong part of our offense as well.
We're really trying to drive this business towards a place where we control our own destiny, both from a profit and a cash flow perspective, and I will just add onto that Brian as we talked about in the prepared remarks. We also are moving some people down to Costa Rica. So they can be closer to the manufacturing plant when their manufacturing engineering.
Speaker Change: And people like that as well and so that will continue to have some benefits that we don't fully realized yet and then as I mentioned earlier on another question, we really believe that using AI and not only in our product, but across the organization will give us opportunities for us to become more efficient and allow us to grow our top line without.
Speaker Change: Having to add.
Speaker Change: One to one ratio if you will of people to be able to take care of our large and growing installed patient base and so that will be a cost avoidance and allow us to be able to do more with less people because adaptive AI is doing a lot of that work.
Speaker Change: Right now or in previous generations, a person would be left to do to reprogram and that additional work that they were doing doesn't really give meaningful reimbursement to the physician nor zero reimbursement for us at <unk>, our revenue for us at <unk>. So it's not only a cost avoidance, but allows us to do more meaningful things that actually can drive the top.
Speaker Change: The line.
Kevin Thornell: Got it and Kevin on that last point that you were making.
Speaker Change: I think with Hff's IQ, even you are already starting to lower some of the barriers or some of the pain points of programming in managing these patients. So maybe can you walk us through a little bit of like what's the patient workflow look like for an IQ versus an adaptive AI patients when they are coming in and then later down the road just so that we can understand a little bit of whats the incremental.
<unk> pain points here that adaptive AI can really take the next leg on thank you.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: It was the first AI powered big data driven device, but we didn't put AI and the name because we werent using the full capabilities of our AI power and so now we're up to over 100 million data points that we can leverage and so the adaptive AI now gives us a full range of capabilities and all of the programming.
Speaker Change: Available.
Speaker Change: On our devices high frequency low frequency.
IQ mode.
Ton of different modes, and I don't want to Miss This point, because I've said it pretty quickly in the prepared remarks, one of the biggest differences here is because the algorithm is changing.
Speaker Change: <unk>.
Speaker Change: <unk> therapy quickly, we're now able to dial that in and likely reduce for many patients the burden of the energy use of the battery of the device and so you think about someone who maybe was on our older generation device that needed to charge once per week because their IPG was still set on that initial first higher power.
Speaker Change: Type wave form now over time, as we get to dialed in and personalize that therapy. We see patients now that are only going to need to charge six times per year. So that's a massive decrease in the burden of charging and something that we're really excited about this new adaptive AI that wasn't available in the IQ system previously.
Speaker Change: <unk>.
Speaker Change: Your next question comes from the line of Bill <unk> with Canaccord. Please go ahead.
Great. Thanks, Good evening and thanks for taking my questions. Just first off I was wondering if you could help quantify the magnitude of the changes for the territory managers as you promote these maybe from.
Speaker Change: Probably the low point of right after the.
Speaker Change: Changes you made earlier this year in cost cuts and then kind of where you expect to be next year.
Speaker Change: Are you increasing at 10 20, 30% and then I have a follow up.
Speaker Change: Yes, we havent given a number yet but there is quite a few people that we hired in 2023, there were assistant sales reps or therapy consultants that are now ready to take on their territory and just.
Speaker Change: <unk> been watching the story for a long time so.
In past, sometimes we would add territories that were pretty much brand new dirt that had zero revenue and you put in a high priced sales rep to sort of grow that business, even the best of the best takes years to be able to build up a sizable business and converting those physicians from competitors. So the approach is since 2023 was you put in these assistant.
Speaker Change: Those reps in territories that have a full line sales rep that is already proficient and been in the space for a while where they get to learn from them and go to the out reaching areas. If you will from that where that sales rep is located today and so a lot of these <unk> are taken over a piece of dirt that they know that is sort of adjacent to.
Speaker Change: The territory in which they have today. So we believe that there'll be more effective sooner than just pulling somebody off the street, but we've not given any numbers for how many.
Speaker Change: That we've added.
Speaker Change: Okay, and then just on the <unk>.
Speaker Change: The adaptive AI product as you start full launch that you had the <unk> IQ historically, you've seen a price premium for new products as you bring them to market.
Speaker Change: How should we think about that as you go full launch on the adaptive AI.
Speaker Change: Yes, we are.
Speaker Change: A lot of these things are done through contracts and it takes some time for us to get through additional products on contract. So we're just now having those conversations we couldnt do it until we get received FDA approval of course, so we're still just a few weeks into that but where applicable obviously, we'll always be able to drive a premium for new technology.
Speaker Change: If it brings value to those physicians, but its really early right now to try to give an ASP increase because it's still going to be starting off as a smaller portion of our total implants.
Great. Thanks for taking my questions.
Speaker Change: Your next question comes from the line of Suraj Kalia with Oppenheimer. Please go ahead.
Speaker Change: Kevin I mean, thats airports, so pardon the background noise I'll ask both of my questions upfront.
Speaker Change: So Kevin you mentioned adaptive IQ and if I heard that correctly, 20% reduction in office was at 41% sooner reduction in pain.
Speaker Change: Relative to its effects, one point or maybe you can just give us how does that compare to other platforms to the extent that you can talk about it and also how should we think about the robustness of the 100 million data points that you referenced in your prepared remarks, and the second question if I may.
Speaker Change: Hey, Kevin.
What percent.
Nevertheless systems.
Speaker Change: Our <unk> 10 versus the.
Speaker Change: A more modular waveforms. Thank you for taking my questions.
Speaker Change: Yes, Thanks Raj safe travels.
Speaker Change: Adaptive AI not adaptive IQ just want to make sure I was sort of blended those together and talking and look we've compared against our previous version adaptive AI versus Hff's IQ and those brand new patients and seen how quick quickly they get to pain relief and so that was that 41% number and then.
When you look at our 40% reduction of patient visits 50% reduction in call time, and 20% reduction in office patient re programming that's versus Omnia, which was our previous version before IQ that did not have any AI powered technology in that and so we.
Speaker Change: Have not done any head to head against any of the competitors out there because again, we're still in limited market release.
Speaker Change: And so we will continue to provide some of those data points as we get into full market release. Starting later in this month as far as percentage of <unk> 10 versus the other we exited the quarter with.
Speaker Change: Yes. So we Q3 was about 68% of our mix of IQ product and.
Speaker Change: Yes.
Speaker Change: If you're specifically talking about Hs 10.
Speaker Change: Almost all of our patients exclusively use.
Speaker Change: The <unk> 10 therapy versus any of the other wavelengths in fact, it's probably north of 95%.
Speaker Change: Your next question comes from the line of Richard <unk> with <unk> Securities. Please go ahead.
Speaker Change: Hi, Thanks for taking the questions.
Speaker Change: Maybe just on the on the first going back to the DTC just curious.
Speaker Change: Am I reading this right that if youre expecting a back half 'twenty five impact from turning the switch back on midway through <unk>.
A longer timeframe to CEB.
Roy: Roy from that investment in DTC versus what what happened when you turn it off at midway through <unk> hitting in the third quarter.
Speaker Change: Are they equal timeframes or why would it be longer on the backend.
Speaker Change: Yes, so as we said earlier what will you do when you turn it back on you get patients to see the ads and they say Wow. This is great technology I want to learn more about it to have a call to action, which goes into our call center within our our team and great team by the way these.
Speaker Change: Capex coaches that we have to take care of the patients. So I'm going to give a shout out to the great work that they're doing and then they talked to them numerous times to get them to along the pathway towards getting referred to their physician of choice and once they do we see those.
Speaker Change: The referrals turned into consultations because we know when they get.
Speaker Change: Booked in to see the physician after their book to see the physician is going to take four to six months for those patients to then go through that care continuum to make sure. They are worked up.
Speaker Change: Ready for the procedure, so that's a little bit where you see the delay as far as on the front end right when youre doing direct to consumer you have months and months of those patients that are part of the it's still part of the process and so when we turned it down you don't see an immediate impact of that because there are still patients within the within that process and so.
Speaker Change: As soon as we saw it start to dip down as those patients were out of the final. That's when we turned it back on and as we said in the prepared remarks that was in the middle of the third quarter.
When we started reinvestment and as we also said in October we already have seen a flow of those patients back in and already two consultation and it'll take some time before they go to trial and then to affirm procedure.
Speaker Change: Okay. Thanks for that.
Speaker Change: But what gives you confidence that you Havent I mean, congratulations on the work you've made on <unk>.
<unk> the P&L, but what gives you confidence that you haven't cut too far into muscle and that it's limited to the DTC area that.
Speaker Change: But perhaps you went a little too far and then just one follow up would just be any any commentary you can provide on kind of the <unk> as a jump off point to 25.
For expenses and anything we should be considering as we refine our 25 models based on where the consensus assets. Thanks.
Speaker Change: Yes, as Rob said, we we've.
Speaker Change: Got about 90% of it right what we missed was the DTC the other areas, while it's never easy.
Speaker Change: Exciting or fun or even it doesn't feel good as a human being to have to make readjustments and refocus teams and restructure like that we do believe we were very thoughtful in how we went about that.
Speaker Change: In.
Speaker Change: Really focusing on those areas that will have a bigger impact on our revenue and profit over the next strat plan period of time versus maybe some of those expenditures that would be great possible homerun or a moonshot that could turn into something maybe 15 20 years from now on.
Speaker Change: Obviously, we had to make the hard decisions to say hey, let's focus on the ones that are more burden. The hand that are that are great projects that we should continue to fund. So we believe we did a good job on.
Speaker Change: Trying not to affect the top line in fact as Rod mentioned, we are investing into our sales channel now as we expand these territories, we have new products that are launching and we're educating more physicians than we ever have on our courses and so we still feel good about our commercial efforts as far as an investment perspective.
Speaker Change: As far as expenses as we head into 2020, followed I'll, let rod answer that one yes, we're not we're not providing any guidance at this point what I, what I'd say is similar to what we spoke about earlier and that we're going to continue to look at areas of the business, where we can drive efficiencies.
Speaker Change: Both internally and also as it relates to products, Kevin mentioned adaptive AI helps drive a lot of efficiencies in our overall commercial model. So we still got some work to do we've got some areas that we're going after we continue to leverage our Costa Rica.
Speaker Change: Investment both from a manufacturing as well as.
Speaker Change: Kind of more of a back office perspective, and we'll continue to look at those as we go into 2025 and the years thereafter.
Okay. Thank you guys.
Speaker Change: Your next question comes from the line of David Ross Scott with Baird. Please go ahead.
Speaker Change: Oh, great. Thanks for taking the questions.
Speaker Change: <unk>.
Speaker Change: The adaptive AI platform and I'll ask them both upfront.
Speaker Change: The improvements on the.
Speaker Change: Reduction in patient visits and.
Speaker Change: <unk>.
Speaker Change: Patients are on the phone with the Rep may be.
Wendy adaptive Mag program, I think some pretty promising and so my first question is how.
Speaker Change: Applicable do you think this becomes as you roll this out to a broader number of patients that are out there when you compare that to those etcetera and the earlier launch versus those when you have an expansion and a higher number of reps are patients out there and then the second piece.
Speaker Change: Feels like one of the bigger kind of pain points again has been around the higher.
Speaker Change: New programming rates versus what you see from other kind of stimulation technology.
Speaker Change: What im wondering more on the adaptive AI platform side as if this is the technology that may be kind of.
Speaker Change: Leveled the playing field level, playing field, but I guess, just bring up your margins or bring up your.
I guess you have better margins.
More rep time.
Speaker Change: When you have this type of technology out in the field. Thank you.
Speaker Change: Yes, we believe it will and we're seeing it in the early patients and while we're not telling you how many patients we've implanted during the limited market release.
Speaker Change: It's a plenty the inn is very large and so it gives us high degree of confidence that it will have these impacts across a broader installed base. If you will.
Speaker Change: Also don't forget when we launched IQ, we talked about it being a platform technology that will allow us as the only company to be able to go backwards compatible for patients who would like to upgrade just the software portion of the device and so a portion of those patients that have been on adaptive AI that we've seen the stats are.
Patients that had the first generation of <unk>, we brought them back in and downloaded the new software for adaptive AI on their old older IPG and we're seeing those benefits from where they were just a week before to where they are a week afterwards and so it gives us a high degree of confidence that not only in de Novo <unk>.
Speaker Change: And new patients install with adaptive AI, but those that we've also upgraded we've seen those benefits.
Speaker Change: And as far as reprogramming rates, yes. Those are some of the biggest cost burdens on us as an organization as well as physicians because it involves drive time involves trying to find the time on the physician's calendar and you sort of have to meet three people all at once to be able to make that reprogramming happen, whereas now it's happening in the cloud behind the scenes.
Speaker Change: One of the other things that we're excited about that we saw is we in our systems, we get alerted when patients aren't doing well and so this is for the first time that we see proactive management what it allows our people that are on the phone to reach out to those patients and be able to rectify anything that needs to be rectified without a probe without them calling into us.
Speaker Change: Or into their physician and proactive.
Speaker Change: Taking care of patients is always more cost effective than waiting for something to happen.
Speaker Change: So we're excited about it.
Speaker Change: Thank you.
Speaker Change: That does conclude the question and answer session and with that that does conclude today's conference call. Thank you for your participation and you may now disconnect.
Speaker Change: Please wait the conference will begin shortly.
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Speaker Change: Thanks.
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