Q2 2019 Earnings Call
We would like to remind everyone that participants on the call will make forward looking statements.
These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially.
These uncertainties are detailed in documents filed regularly with the SEC During this call you may hear the company or for for to reported amounts which are in accordance with U.S.G.P. as well as non GP or pro forma measures reconciliations of non G.A.P. measures to U.S.G.A.P. can be found in the supplemental financial tables included in the press release, which identify identify and quantify all excluded items and provide management's view of why this information is useful to investors.
Joining us on the call today, we'll be Eightx, chairman and CEO , Pat miles and CFO .
Jeff Black.
Now I will turn the call over to Pat miles.
Thank you very much kidney and welcome everybody to the Q2 conference call.
When we pivoted this company.
We knew that there are several things we have to do to make this a growth company.
Really the first thing was to create a new team and so just to refresh everybodys memory as we turned over a 100% of the executive team, 90% of the board and 75% of the company. This truly is a new organization. We also knew that if we're going to create this growth company. What we had to do is distinguishes distinguish ourselves clinically and hence crusade inorganic innovation machine and realize that in the entire process get our focus had to be in the operating room.
And so when you look when you look when you look back and say gosh. Good we do those things I think you have to look for now and say you know at 29 team how did we do and how are we with regard to to those commitments that we've made.
And so.
The commitments we made for 2019 included creating clinical distinction with 12, new products. So through the first half of the year were seven new products in.
Expand the new product revenue contribution from less than 10% a year ago, 2% to 30%. This year were 27% of the way in terms of reflecting revenue from new products.
Also how do we start to drive revenue growth of approximately 30% with the strategic part of our sales network. We're at 40% and then how do we increase revenue per case was another.
Commitment and so weve increased revenue per case by 14%. So based upon that performance, we really went back and reevaluated our guidance and so what we're doing is we're upping. Our overall revenue guidance from 98 to one of the three to 104 to 109, that's total revenue.
From a domestic perspective, what we're doing is going from a 94 to 98 previous guy who's to 100 to 104.
And so when you look at the the growth of the market place.
The domestic marketplace, that's over 20% topline growth for our our U.S. business and that in in same rule of the headwinds that the that exist with regard to are continuing to trends translate some of our distribution out of the company and so going on to the next slide what I'd like to do is really kind of focused on Q2 and what the performance look like in Q2, So the financial reflection looked like this we grew 28% year over year.
Our Mds or average daily sales grew 28% as well that's the largest are the highest weight of a U.S. quarterly revenue growth in 10 years for this company.
Our sequential growth was 14% Q1 to Q2, and it's the third consecutive quarter of double digit growth and so I would tell you that I believe our progress to be solid.
And so.
When you start to think about what our priorities are we started 2019 with really three core priorities. One of them was the curry clinical distinction one was to compel surgeon adoption and the third one was to revitalize our sales channel and so we would really like to delve more deeply in that and look at how we performed a within the within our core priorities and so if you say 2019, what we deem to be successful was htwo products or seven him.
Also we said if we do 12 products what percentage of the revenue will be attributed to those new products and we said, we thought 30% would be successful and so we're going to elevate that to 35 based upon the quarterly contribution of 32% of our revenue being from new products in the second quarter.
So.
Theres a picture if you're if you're looking at this from a presentation standpoint of the seven new products that we've launched which will go into and then we also continue the evaluation of our Safestop platform moving forward.
So could delve a little bit more into the two the safe up platform when we think of clinical distinction.
Clearly the shape up platform comes top of mind and and so all indications are that we are creating a safe and reproducible surgery through this platform. So we're providing as a reminder, objection.
Our objective actionable feedback or integrated into surgery, we're doing that through automating M.G. and automating SSC Pete.
A key to the success of Safestop is is the work flow in terms of how we integrate it we talk about Convoyed sales meeting yeah, you sell multiple products into surgery and so a key to the success of this product is that we have these things work together the peripherals for say if I will not be.
Available until Q4, so we've decided to launch the entire platform in Q4.
Next is in addition to the shape up a platform.
We also launched approach specific identity implant systems. These are the currency of.
Of our product portfolio and so these implants are porous titanium they're made of a proprietary poor structure for to better facilitate fusion a similar dismissed a bone.
There's a reduced density so that the images better and are made out of their made via a subtractive manufacturing process, which ultimately gets greater predictability and so.
We launched since Q1, both the identity Telus and the identity live implant systems.
Next.
We've also Washington is literally just this week I'm really a foundational product in Invictus. What this is is a comprehensive raco lumbar fixation system.
I think so often people use terms like best in class.
And they're hackneyed terms I will tell you. This is more than best in class and this has also created by a group of people who have done this multiple times and so they one they did it in a record amount of time, but also they created literally a best in class solution is designed to treat a wider range of pathologies from an m. is open at hybrid it all works together and it fully integrates with our safe up Mg technology for objective actionable real time feedback so cannot be more excited oftentimes. These are a proxy for the sophistication that will be reflected across the entire portfolio and really can't say enough about literally the suppliers the design team.
The surgeon, who helped the surgeons, who helped us on this the entire effort was a family affair and I just can't be.
More enthusiastic about the launch of Invictus and so really congratulations to the organization.
So we talked a little bit about about clinical distinction then now will you start to see a week compelling surgeons are they moving over to us.
And what does success look like and I would say its success looks like traction meaning.
What's the number of products used in and that and you'll get revenue as it as easy as an indication of how we're doing and so.
You look at the revenue growth from the top 20 surgeons was approximately 80%.
You look at the number of people, who are wanting to come into the company and better understand what we're doing and participate and educational programs grew by <unk> was about 43%.
The growth and then the increased revenue per case of 15%, which is often times an indication of confidence are we doing more complex surgery with them and then are they using more products per surgery and so these are all confidence drivers that ultimately give us an indication that the.
That that we are compelling surgeon adoption and also the last one I think is is really Kennedy a proxy for our approach.
Strategy, which is how many products per surgery, and we're up to 1.5 products per surgery.
And so.
The the next really key priority is is revitalizing the you know the the sales channel.
I'll tell you when we when we got here.
There was substantial work to be done in terms of revitalizing really a broken sales channel and I'm very excited about whats going on especially from a leadership perspective, I think they sponsor lemery Rudy we hired a another striker guy why its stanfield and Greg Reinhart our are all prolific in there right I think.
I am exceedingly bullish in terms of our ability to to really create traction in the marketplace and so I would tell you. This is still a work in progress but were seeing.
Success being enjoyed and so.
We're seeing 45% revenue growth from our top 20 distributors.
Also we are seeing 45% growth year over year.
From from from all distributors.
And that's that's when you start to look at where we moving a lot of distributors were adding a lot of distributor. So theres a lot of activity going on and then you look at what the contribution is from our strategic network. In this strategic network is the one that we believe the holding March to exclusivity with us and there were grown at.
Around 41% and so when you look at what's going on and you start to see.
What's.
What's functioning well was functioning well is we're starting to assemble a sales network.
That is growing at a very rapid rate and we continue to discontinue legacy and non strategic relationships.
Because this is such an important element in the continue to delve in a little bit more deeply.
As stated we see a continued significant contribution from the strategic.
Network and that this is all three who were building the company around and what you're what you're what we're finding is really were earning.
Really increased contribution and you really start to see cash as we Inc.
Increase the contribution these guys start to gain more confidence in us, they're really becomes a much more direct route to to exclusivity.
From a non strategic channel and you start to look we continue to wind down these relationships.
If you look at it numerically we have a limited $30 million in annualized revenue since 2017. So when we start to talk about the lumpiness of the topline you start to see that type of revenue come out of this little company I think that you'd have to appreciate the significance of that also what we're finding is is some of the Nash strategic as you want to stick around longer based upon the stickiness of the.
Of the new products, but the point is is we're winding that down we're continuing to build on the strategic side of it just becomes a predictor of consistency, which.
In our effort to become a very very predictable entity that becomes a key component so with that let me turn it over to Jeff.
Great. Thank you Pat good afternoon, everybody.
I'll spend just a few minutes reviewing again revenue results talk a little bit about gross margin the piano and then wrap up with the balance sheet.
On on revenue us revenue growth from our strategic distribution channel as Scott mentioned was ahead of plan for the second quarter and for the first half of the year.
We're seeing this growth on the strength of new product introductions continued surgeon adoption and increase in revenue per case.
And while slower than anticipated we did see a continued wind down of our legacy distribution revenue revenue as part of our planned transition of that channel.
This headwind will continue in 2019, we still have about 12% of our newest revenue contribution coming from what we consider a hobby.
Unpredictable channel.
Revenue from our international supply agreement continued to decline consistent with our expectations as our supply relationship with Globus winds down over the next one to two years.
Overall Q2 revenue results above expectations were continuing to be encouraged by the performance of our strategic distribution channel. We will we will continue to see some lumpiness and unpredictability than our legacy distribution channel.
But our revenue guidance updated hundreds 100 for us revenue represents up to 24% year over year growth from.
In product revenue and up to a 39.
Per cent or 340% decrease.
I'm sorry 39.
Increase in AR from our strategic distribution channels. So encouraged by performance and encouraged by the outlook for the second half of the year.
On margin.
You Escos merger gross profit of 18.8 million. It's in absolute dollars was our highest level of gross gross profits in 2016.
Year over year on a GAAP basis, our gross margin percentage decreased by about 360 basis points to about 72% compared to Q1 of 2018.
However, on a non-GAAP basis, excluding noncash obsolescence charges, our year over year gross margin improved by 310 basis points to nearly 81% and this is on the strength of new product introductions.
As we reported in Q4 and in Q1, we saw margin pressure much like we did in Q2 from noncash obsolescence.
Related to our legacy products, we expect to see continued margin pressure over the mid term as we introduce new products and obsolete. These legacy products. So we think of non-GAAP view of gross margin as a valuable valuable metric to track through this transition.
At scale, we continue to believe that our gross margin will be in line with our peers in the mid 70% range.
On the piano a couple of highlights on operating expenses, our operating expenses here, we present on a non-GAAP basis.
To reflect what we consider normalized R&D and SGN, a excludes stock based compensation litigation expenses.
Restructuring and other nonrecurring or onetime charges or gains.
As you know as as we continue to.
Two.
Talk about we continue to invest in our product pipeline reflected in an increase in R&D expense in both absolute dollars and as a percentage of revenue in the second quarter compared to last year and we do expect to continued investment to support new product launches and longer term product development.
As well our SGN a increase in absolute dollars and as a person in the first quarter as compared to last year. Most of this increase was driven by variable sales compensation, which is tied directly to revenue increase we've also made strategic investments in product marketing and the broader sales channel.
In fact, our core GE, they expenses, which is including this DNA have actually remained relatively flat over the past six quarters.
Still well below where we where we exited 2016, when we initiated the company's transformation.
So we'll continue to invest in the sales channel, we should start to see us DNA expense.
Beverage in 2020 as we as we see continued revenue ramp from our 2019 product launches.
So no there were several quarters in the transformation of of Atech, We thought it'd be helpful to look back on work, where we began and where we are today.
This historical look is a bit of an eye chart, but a few relevant points to highlight.
First is our commitment to drive revenue growth is coming to fruition now.
In the first quarter 2019, we delivered our largest us revenue quarter since the first quarter of 2017.
Second we are delivering on our commitment to transition the sales channel to scalable committed strategic distribution partners revenue channel revenue growth from this channel is now far outpacing declines from the non strategic channel.
We've walked away from legacy unpredictable non strategic tenant relationships, which has clearly been a revenue headwind.
In fact, we exited the first quarter of 2017 with an annualized run rate of about $44 million from this channel representing more than half of our us revenue and we exited Q1 of 2019 with about $12 million in annualized run rate, which represents less than 15%.
Of our US revenue since the transition is coming has come to fruition.
It's been lumpy and at times painful but.
It's a decision that set us up to two for growth from the right strategic long term partners.
And finally, we've invested for growth R&D has grown from 5% of revenue in 2017 to about 12% today and our SDK FC in a growth has primarily been strategic investments in sales.
In product marketing and all of these investments have enabled the growth trajectory, we're seeing today.
And finally on the balance sheet before I turn the call over to Pat we ended the quarter with just under $18.5 million in cash operating burn decreased from 9.2 million in the first quarter to 8.5 million in the second quarter. We continue to hold the line on operating cash use but we also continue to expect.
2019 to be an investment year.
As we support new product launches with Capex for new instrument, an implant sets and expand our sales channel.
During the during the second quarter, we made a $10 million draw on our credit facility with squadron.
And we have $20 million remaining on that line.
And while we realize we have some work to do on the balance sheet. We are well positioned now to execute on the business and approach planning financing solution to more strategically and opportunistically.
And with that I'd like to turn call back over to Pat.
Thanks, much Jeff I think it is much as anything I think you're seeing the resolution of of the level of predictability that we're trying to bring to this company and adding to step back for a second and and look at the market place I think so often people see the spine market, which is a big mistake as being Commoditized and we believe that their misreading this marketplace and certain items may.
Appear.
Within the context of spine devices as being commoditized, but spine surgery is far from predictable, which creates an unbelievable opportunity for us to innovate and that is why the spine market needs a new atech.
So Q2 would suggest that we are making solid progress.
On our priorities I think the innovation.
The organic innovation machine continues to reflect success in all three of our core priorities for the organization, which is creating clinical distinction.
Compelling surgeon adoption and revitalizing the sales channel and so.
We.
We deem ourselves.
The most experienced students in spine and on our way to building a.
A very formidable organization and so with that.
That concludes the presentation and that would welcome questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press the star and the number one key on your telephone keypad. If your question asked and answered or you wish to remove yourself from the queue. Please press the pound key to prevent any background noise. After you. Please. Please your line on mute. What's your question has been stated.
And our first question comes from the line of Brooks O'neil with Lake Street Capital. Your line is open.
Good afternoon, guys and congratulations on the terrific progress you're making.
Thank you.
I have a couple of questions.
Obviously, we're in the seventh month of 2019 in you think introduced are launched formally.
The new products would you expect.
Sort of the pace of additional new product.
Reductions to get the 12 to kind of go along.
With that sort of one per month kind of pacing in and do you think there's any remaining products then.
Might be particularly significant to help with that going forward.
Yes, Thanks Bronson and.
I would tell you that there is not an insignificant product close to two decades, and so I think the one that's going to most most stand out is going to be the the safe our platform and really started integrate information into surgery and so were so reliant upon building spine approaches and and so the ability to start to.
Apply technology that integrates with each other such that we're architecting.
The approach, which will be reflected in convoyed sales.
And so I would say I would say that's a big one was another one that is part of the Invicta system and it's called single step and Thats about a month away and Thats another one that that.
That enables a technique within the confines of less invasive fixation.
That will really be a.
A unique contributor to attack and so when you start to integrate all of these things what were doing is were making surgery better and when you start to look at companies that I think that have grown over the past several years, it's the ones who have been profoundly focused on what's going on in the operating and Thats, who we are as a company and that's what you'll be skewed you'll see reflected throughout the year.
Great. So then I'm curious you Didnt talk about it and I know, it's sort of forward looking but.
Given that you.
Prepared for and you're on track to launch 12, new products in 2018.
Can you say generally or with any degree of specificity what is what the outlook might be for 2020 should we expect continued organic innovation from a tech next year.
I think as far as the I can see.
Our.
Commitment is eight to 10 products a year and so when you start to think about what that does to the priorities. What happens is those those sales people who are profoundly interested in.
Providing innovative solutions to their surgeons start to come our way and so that all of these feed one another and so as far as I can see will be into 10, new products per year and that's that's why do you start to see and it's fun to see the reflection of that in the financial metrics that Jeff presented is.
You start to see an increase in the R&D spend and now what we're going to do is we're going to appreciate the requisite for.
Yeah. That's good and then just last question I had was obviously and I understand the importance of safe Bob.
And they have some sense that it's not going to be a tremendous revenue generator. So can you talk just a little bit about see bumps specifically in terms of revenue and contribution then how you see Bob driving revenue growth from other products that you're you're reducing today are innovating in the future to drive faster growth from a debt going forward.
Yes.
Thanks, protect there's a theres a bit of a interesting situation in spine in match implants are the currency items and they are the ones that generate most of the currency. The challenge is is that the currency that's been defined and what the surgeon requires to do predictable surgery are not wanting the same and so what happens is a lot of companies won't.
Create the requirements of surgery, because financial they don't appear as viable, but I think as you look at things.
With regard to a procedure and the integration of the tools being used to fulfill his specific surgical need what you see as you see the expanse of.
Of the currency items based upon the ability to deliver clear objectionable clear excuse me objective actual information and so.
The the opportunity there is that you will see a vast minority in the contribution from the.
Shape, our platform, but it will be.
Responsible for the.
The revenue gained if you will.
Yes.
Okay, Great I've got it congratulations keep up all the good work.
Thanks, a lot. Thank you works.
Thank you and our following question comes from the line of Swayampakula Ramakanth with HC Wainwright. Your line is open.
Thank you.
Congratulations Pat and Jeff couple of quick questions.
So.
Obviously this quarter.
The growth is quite interesting.
Not only that you also.
David.
And have you updated your outlook financial outlook for the year end.
Coming up with them under them for 209, obviously higher than what it was in the previous guidance.
But when you look at the six month revenue run.
Is basically kind of Annualizing, where you are.
At this point at least on the on the on the bottom end of the.
A range that you're giving us.
So in a water the pushes and pulls for that number.
Not to be.
North of that range.
If you don't know what needs to get done so that we can see that kind of a.
Yearend number so I'm talking more like a 110 to 100 and Paul kind of the number what needs to happen.
And also work could be potential challenges.
I want to get to 104.
If we need to kind of think through that.
The RK I'm going to let Jeff speak to some of the numbers directly but one of the one of the interesting dynamics. In this company has been historically one that I would suggest has not been as predictable as we'd want it to be.
And so what we're trying to do is be exceedingly thoughtful with all of the.
What I'm trying to weigh the all of the headwinds and all of the Tailwinds and so we feel like growing at 20%, 24% in the U.S. marketplace is meaningful growth and so as we start to look at what's transpired in the first half of the year and where we are we felt like that that was that was reasonably aggressive.
Yes, the other thing is.
We still suffer from some of the uncertainty associated with a non strategic legacy distribution, and so where it's probably done a little bit more than we expected in the front half of the year candidly that that's the part that creates some unpredictability forward and so our desire is to be thoughtful stewards of our growth and since we're going to be at this for a long time, we just want to be methodical.
Jeff you want to add yes, RK look I think when you think about first half last year versus this year. So admittedly last year, we bottomed out on revenue right and a lot of that we were just really beginning the transition from.
Shedding the legacy distribution and ramping up strategic distribution, so I think the.
The baseline of the denominator in the first half.
Was much little easier than it than it would be in the in the second half I think when you look at the second half and our guidance, we're still projecting on the dedicated or sort of the strategic distribution.
30% growth year over year. So we'll continue to see headwinds, but we still believe that there is a real opportunity to continue to ramp is the strategic distribution.
But at the same time, we're we're aware that there will be continue to be headwinds.
Okay. Thank you for that so.
The other.
And the longer outlook that we have been talking about.
Is that 222 outlook that we are talking about.
So our this current growth rate.
Let's say some 10% middle of your range that you provided us today.
You know, obviously that it has to be a little bit north of that you know just to get to that number Steve.
So for that to happen.
Wapas How're you.
Placing.
As for that.
In the marketplace, such that you gain market share.
Across across the radius.
Product categories. So that you can.
Either maintain or something percent are actually going north of that 17% and what are the long term strategies that.
You as a management have started I'm not trying to work.
Correct. So that we can kind of keep that keep them.
To to keep ourselves looking at it.
As metrics going forward.
Yes.
I think I think the key.
Thing in what we're trying to.
Yeah really be clear about is the contribution by new products and what will happen what will happen to this company is we will continue to do a new product developments in AD products that are relevant to specific approaches that address specific pathology.
And so what you'll see is you'll see us turning from a new product company to an approach company and what that will mean.
Reflectively will be you will start to see more and more products used within the context of a specific surgery and so.
We believe that we will compel people and so we'll need the right salesforce and we'll need to compel the surgeons. So what we'll see is through this new technology, we will expand the opportunity not only from a number of products used but also the number of cases done based upon the.
And unique.
Innovation Thats created within the context of those assembled products.
And also are there any.
Cost.
Cost cutting.
Strategies being put forward, our because as you said if you had to.
Get to a certain growth rate you also have to spend.
In terms of getting the right.
Sales force in place and also get the right message out there so but at the same time, you don't want to lose your room side on the bottom line.
So is there anything that youre doing towards that end as well.
Our we're bundling some of these products are held in improving the operating margins.
Yes. This is Jeff I'll answer that.
So.
I think just from a from a cost structure structure perspective, when you look at the GNS payload on the company Thats remained pretty stable for the past.
Really.
Seven or eight quarters in fact, this lower today than it was when we when we started this transformation. So I would say, we've got DNA pretty dialed in.
I would also say that that keep in mind that a significant portion of our opex is variable selling.
And so we are going to continue to make investments sales channel and product marketing we have to continue to make investments in R&D leader to keep the pipeline where it needs to be.
It really to us it's about ensuring that we are growing the top line and that we are controlling the fixed portion of costs that don't directly contribute to revenue.
Okay.
Thank you.
Thanks for taking all my questions.
Thats circuit.
Thank you ladies and gentlemen, once again, if you have a question at this time. Please press the star and the number one key on your telephone keypad.
And there are no further questions at this time I would now like to turn the call back to Pat miles for any further remarks.
Just want to say thanks to the level of interest out there on the on the Atech clearly there is an undercurrent of enthusiasm about the company and.
I just want to thank everybody for their time.
Take care.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect everyone have a great day.