Nevro Corp. (NYSE:NVRO) Q1 2024 Earnings Call Transcript

Nevro Corp. (NYSE:NVRO) Q1 2024 Earnings Call Transcript May 8, 2024

Nevro Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Nevro Corp. First 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. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. At this time, I would like to turn the conference over to Angie McCabe, Vice President, Investor Relations and Corporate Communications. Please go ahead.

Angie McCabe: Thank you, Audra. Good afternoon, and welcome to Nevro’s first quarter 2024 earnings conference call. With me today are Kevin Thornal, our CEO and President; and Rod MacLeod, our Chief Financial Officer. Before we get started, please note that our earnings release and the supplemental presentation accompanying this call are available on the Events and Presentation page of the Investors section of our website at nevro.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. 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. Please refer to Nevro’s SEC filings, including our Annual Report on Form 10-K for detailed presentations of risk. 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. In addition, management will refers to adjusted EBITDA, a non-GAAP measure used to help investors understand Nevro’s ongoing business performance. Adjusted EBITDA excludes interest, taxes, non-cash items such as stock-based compensation, depreciation and amortization, litigation-related expenses and credits, changes in the fair market value of warrants and other adjustments such as gain from extinguishment of debt and restructuring charges.

Please refer to the financial tables in our earnings press release issued today for reconciliations of GAAP to non-GAAP financial measures. I will now turn the call over to Kevin. Kevin?

Kevin Thornal: Thanks, Angie. Good afternoon, everyone, and welcome to our first quarter 2024 earnings call. A short time ago, we reported our first quarter results with revenue and adjusted EBITDA exceeding the guidance we provided on our fourth quarter 2023 earnings call in February. We also announced we are taking additional restructuring steps to further advance our strategy and accelerate our path to profitability, reaffirming our full-year 2024 revenue guidance, raising our 2024 adjusted EBITDA guidance to a range of negative $5 million to positive $2 million and providing our second quarter 2024 guidance. In addition, I’m thrilled to announce that Chris Christoforou, has been promoted to Chief Operating Officer. On today’s call, I’ll discuss the progress we are making in advancing our three pillar strategy, including highlights from the first quarter and the additional restructuring actions.

Rod will then discuss our first quarter financial results and provide more detail on our guidance for the second quarter and full-year of 2024. In the first quarter, we continued to advance our three pillar strategy of commercial execution, market penetration and profit progress, and this is reflected in our overall results. For the first quarter of this year and as compared to the year ago period, worldwide revenue was $101.9 million, an increase of 5.8% on a reported basis and 5.6% on a constant currency basis. This year-over-year growth was largely driven by a product mix shift to our newest generation SCS platform, HFX iQ as well as an increased number of long-term Nevro patients who are now suitable candidates for replacement device. As a reminder, our devices have rechargeable batteries with a very long functional life.

But even in this case, we believe these devices will eventually require replacement. Our earliest patients are now out about 10 years or more. We believe many of our patients will want to continue accessing our unique and successful high frequency therapy through a newer Nevro device. While this is currently a small part of our SCS business, we believe it may play a slightly larger role in our implant volumes over time. U.S. trials were down approximately 5.1% compared with the year ago period. This was largely in line with our expectations and mainly driven by two factors: First, softness in overall U.S. SCS trialing activity in the quarter; and second, the impact of interest among SCS customers in attending our SI joint fusion training sessions, which take physicians out of the practice for a day or two.

In fact, we added more training sessions in the quarter to accommodate physician demand to learn this procedure. We are conducting additional SI joint training sessions throughout the second quarter and the remainder of the year. From a cadence perspective, and Rod will discuss our guidance in a few minutes, revenue in the first half of this year is on track with our expectations. This combined with several factors such as: one, our continued focus on growing our SCS business by selling our superior therapy to competitive physicians; two, growing the market through our expanded indications such as PDN, which continued to show solid growth in the quarter; three, beginning to realize early results as our SI joint business gains traction in the second half of this year; and four, leveraging our SI joint business to sell more SCS devices into competitive accounts, gives us confidence that we can achieve our full-year revenue guidance of $435 million to $445 million.

We also reported a net loss from operations of approximately $35.8 million and adjusted EBITDA of negative $9.6 million. As it relates to the first pillar of our strategy, commercial execution, in the first quarter, sales reps who joined Nevro in the second half of last year continue to ramp up on the business, and we commenced the limited market release of our SI joint products. We also continue to focus on educating our customers on the benefits of our superior SCS therapy. We are driving the increased adoption of HFX iQ, our newest generation SCS system that brings a multitude of benefits to the patient and physician. HFX iQ represented 58% of our total permanent implants in the first quarter, a 5% increase from the fourth quarter of 2023.

To broaden access to this therapy for more patients in mid-April, we launched a solution for nearly half of the patients who do not have a compatible iPhone, including those with an alternative smartphone device. As we previously communicated, our real-world data shows that our HFX iQ system in combination with the cellphone app helps patients get back to pain relief faster than those who use a traditional remote by allowing the patients to have more input on and control over their therapy. We expect continued HFX iQ adoption as we educate the market on the benefits of this therapy. We also continue to advance our second strategic pillar of market penetration, where we focus — where our focus is on expanding into new indications, developing, and launching enhancements to our HFX iQ system executing on our robust R&D pipeline and as appropriate, targeting additive acquisitions to drive profitable growth.

In the first quarter, we focused on integrating our newly acquired SI Joint Fusion business, and as I just mentioned, commenced the limited market release of our SI joint products and prepared for the broader release of our SI joint products to the market throughout the remainder of this year. By expanding our product portfolio to include solutions for SI joint pain, we are now engaging with physicians who have not previously utilized our products to now offer treatment options for patients with different chronic pain conditions. Notably, we believe that 15% to 30% of low back pain is caused by SI joint dysfunction. In the U.S., approximately 1.9 million patients receive an SI joint diagnosis annually, representing a $2 billion market opportunity.

Through this expansion in therapeutic options for pain patients, we are now able to address more patient needs and leverage our SI joint solutions into business at competitive SCS accounts where we previously did not have access. During the quarter, we conducted several SI joint fusion training sessions for physicians and our sales reps with our primary focus on Nevro1, a stand-alone device with integrated trans fixing technology that has proven to immediately transfect the SI joint to allow the opportunity for long-term fusion. Year-to-date, more than 220 physicians participated in our SI joint training sessions. Many of them are current customers who took the time to learn a new SI joint fusion procedure so they can utilize our innovative products to treat their patients suffering from chronic pain.

Early feedback from physicians who attended our training sessions has been very positive, and they believe Nevro1 is an excellent treatment option for patients suffering for SI joint pain. We continue to see significant physician entrance and demand for training on our SI joint products, particularly Nevro1. As we roll out our SI joint products across the market, many of the physicians that we trained are identifying patients in the practice who suffer from mechanical back pain that could benefit from an SI joint fusion procedure. Importantly, we continue to train our sales force and are leveraging our commercial team to drive adoption and growth. Also, as adoption of our SI joint products increases, we will gain greater access to physicians who might be interested in using our SCS products to treat their patients, as many physicians should perform SI joint fusion procedures also implant SCS devices.

We are also thrilled that in February, the Food and Drug Administration granted 510(k) clearance for Nevro1 without the need to include the NevroFix group. This marks the first regulatory clearance, since we acquired Vyrsa late last year. Nevro1 as a stand-alone device represents a significant advancement in SI joint fusion and we believe it is the most efficient, effective, and safest SI joint fusion implant currently available on the market. As a health care company with a vision to free patients from the burden of chronic pain, we remain focused on increasing awareness of SCS as a treatment therapy for painful diabetic neuropathy or PDN, and other indications. At just under 1%, the PDN market remained significantly underpenetrated, and we are working to develop this market with our innovative technology and superior clinical data.

Diabetes is a major global public health concern and continues to grow in prevalence. It can lead to a variety of complications, including nerve damage, reduced circulation, diabetic ulcers and limb loss. In the first quarter, 24 months data from our SENZA-PDN RCT demonstrate improvement in sensory function that can lower the risk of diabetes-related ulcerations and traumatic amputations for patients suffering from severe side effects in diabetes was published in the Journal of Diabetes Science and Technology. We continue to be a leader in developing superior clinical data showing the efficacy of our best-in-class 10-kilohertz technology. As we’ve discussed on prior earnings calls, our PDN clinical sensory study is designed to more objectively proved the sensory improvements that we observed in our initial randomized controlled trial, or RCT, and to obtain an SES indication beyond just pain.

We’re pleased to share that enrollment in the study now outstands at 143 patients ahead of our plan. As a result, this robust enrollment in the strong outcomes demonstrated in our SENZA RCT, we are pausing enrollment in the PDN sensory study to allow interim primary endpoint analysis of all subjects who are randomized from this existing cohort. While the results of the analysis may indicate restarting enrollment in the future, our goal is to bring trial results to publication as soon as possible for the benefit of patients and review for inclusion in therapeutic guidelines. The third pillar of our strategy is profit progress. We remain focused on executing key initiatives to become more efficient, scaling our Costa Rica manufacturing facility and maintaining disciplined expense management to expand margin and achieve profitable growth.

We made good progress on this front in the first quarter, as demonstrated by adjusted EBITDA coming in ahead of our expectations. We are taking additional restructuring steps to make Nevro a stronger, healthier and nimbler company so that we can advance our three pillar strategy and accelerate our path to profitability. We are laser-focused on managing our expenses and aligning our cost structure with our business and have identified areas and key initiatives that we believe will drive growth and profitability. We continue to invest in our R&D pipeline to develop and commercialize innovative treatment therapies for patients suffering from chronic pain. Rod will discuss our full-year guidance in more detail, but as a result of our first quarter performance, additional restructuring steps and outlook for the remainder of this year, we are raising our adjusted EBITDA guidance to a range of negative $5 million to positive $2 million.

As part of these steps, I’m thrilled to announce that this Chris Christoforou has been promoted to the newly created role of Chief Operating Officer. In addition to his current responsibilities leading our manufacturing processes and research, development and innovation efforts as well as spearheading the integration of Vyrsa into our operations. Chris will now have oversight of clinical and regulatory affairs and quality assurance. Chris has been with Nevro for eight years, and during this time, he has proven to be a valuable member of our team. His strong leadership skills, technological experience, and deep knowledge of the med tech industry makes him the right choice to serve in this role. We continue to transition more of our manufacturing to our Costa Rica facility, and as we sell down inventory that is produced by our second source supplier and manufacture more in Costa Rica, we expect to see increased margin expansion over time.

We will also leverage our Costa Rica facility, which is supported by best-in-class manufacturing experts and technology as we grow our business through new products we develop as well as tuck-in acquisitions. In summary, over the past year since I joined Nevro as CEO, we’ve made significant progress in advancing our three pillar strategy to further position our company for the opportunities ahead of us. We’re excited about our future as we have multiple growth drivers in the SCS market, including through expanded indications as well as the SI joint fusion market. We entered the fast-growing SI joint fusion market through our acquisition of Vyrsa and are focused on ramping up that business. We will continue to differentiate ourselves through our unique 10-kilohertz technology that produces superior outcomes, and we will continue to capitalize on meaningful leverage opportunities to drive long-term profitability, generate positive cash flow and deliver shareholder value.

I will now turn the call over to Rod for a discussion of our first quarter financial results and 2024 second quarter and full-year guidance.

Rod MacLeod: Thanks, Kevin, and good afternoon, everyone. To echo Kevin’s remarks, we are pleased with our first quarter 2024 performance as we made further progress on advancing our three pillar strategy. For the first quarter of 2024 as compared with the year ago period, worldwide revenue grew to $101.9 million, an increase of 5.8% as reported and 5.6% on a constant currency basis and was primarily driven by a high mix shift to higher-priced products as well as the growing number of patients who are now suitable candidates for a replacement device as Kevin discussed earlier. Also, there were 64 selling days in both the first quarter of this year and last year. U.S. revenue grew 5.7% to $87 million. International revenue was $14.9 million, increasing 6.1% as reported or 4.7% on a constant currency basis.

Gross profit increased 10.7% to $71.5 million and gross margin increased 310 basis points to 70.2%, driven primarily by a shift to higher margin products that are manufactured in our Costa Rica facility. Operating expenses increased to $107.4 million compared with $100.9 million in the prior year period, and included the impact of the following items: First, a $5.5 million charge related to our January 2024 restructuring; and second, two Vyrsa acquisition-related items comprised of a $3.5 million charge related to the change in fair value of the contingent consideration liability as well as $700,000 of intangibles amortization. Excluding these items, operating expenses decreased approximately 3.3% versus the prior year quarter, reflecting our ongoing focus on disciplined expense management and driving operational efficiencies throughout the organization.

Litigation related legal expenses were $2.8 million compared with $3.8 million in the first quarter of 2023. We are pleased with the recent ruling in our favor in our arbitration against the Mayo Clinic and Flathead partners. We now consider the matter concluded with no finding of liability against Nevro. Cash, cash equivalents, and short term investments were $281.5 million at March 31, 2024, a decrease of $41.2 million from December 31, 2023. This decrease was primarily due to customarily higher cash outflows that occur in the first quarter, a $9.8 million versus related milestone payment made in the quarter related to the FDA 510(k) clearance that Kevin discussed earlier and that was achieved sooner than we anticipated and $4.4 million in restructuring-related payments.

As Kevin discussed in his remarks, in the first quarter, we focused on training physicians and the salespeople who support them in performing SI joint procedures using our portfolio of SI joint fusion products. We are in the early phase of ramping up this business and will continue to train physicians in our field force throughout 2024. As a result, we anticipate that the second half of this year will begin to reflect increasing revenue traction in this business. As we communicated previously, while we continue to expect the Vyrsa transaction to be accretive to both revenue and adjusted EBITDA this year, we also expect the revenue contribution from our SI joint business to be immaterial to the overall year. Turning now to our 2024 full-year and second quarter guidance.

First, for the full-year 2024, we continue to expect worldwide revenue of approximately $435 million to $445 million. This reflects our outperformance in the first quarter, our expectations for the second quarter, which I will discuss in a moment, and our outlook for the second half of 2024. We expect gross margin to be approximately flat with 2023 gross margin of 68%. Our Costa Rica manufacturing facility continues to produce excellent results with low labor and material costs for manufactured products. We remain excited about the cost improvements Costa Rica can deliver, and we continue to project long-term gross margins in the mid-70s, assuming pricing holds for current levels. We expect our full-year 2024 operating expenses to be approximately $390 million and largely flat compared with 2023.

Keep in mind that our 2024 operating expenses also include restructuring-related charges of $10 million, Vyrsa related amortization and milestone revaluations totaling $6.5 million and key SI joint investments as we continue to scale this exciting new business. Excluding the above items, we expect our operating expenses to be down approximately 7% and on a year-over-year basis. In total, we expect our January and May 2024 restructuring efforts to generate savings of more than $25 million in 2024 and full-year annualized run rate savings of well over $30 million. Importantly, and as we mentioned in our Q4 2023 earnings call, through our restructuring and other efforts to drive improved efficiencies and expense management, we are redirecting portions of our resources to key areas of our business such as adjacent technologies, next generation R&D projects, investments in PDN and SI joint-related investors to deliver a world-class transfixing solution to patients.

We are laser-focused on aligning our cost structure with our business and are taking additional restructuring steps to reduce our costs, improve efficiencies and focus our resources on executing our strategic priorities. Given our outperformance in the first quarter and the actions we are taking this year to accelerate our path to profitability, we are raising our adjusted EBITDA guidance for the full-year to be in the range of negative $5 million to positive $2 million, which roughly reflects a $9 million to $10 million improvement in adjusted EBITDA compared to the guidance we provided in February 2024. For the second quarter of this year, we expect worldwide revenue to be in the range of approximately $106 million to $108 million, which is in line with our expectations for the first half of this year.

As we have previously communicated, the SCS business can be a bit lumpy. While we are pleased with our first quarter performance, which exceeded our expectations, we still believe that our first half will largely finish in line with our initial expectations of approximately $208 million to $210 million, which is up 1.4% to 2.4% for the first half of this year versus the prior year period. We expect second quarter 2024 adjusted EBITDA to be in the range of negative $3.5 million to negative $2.5 million. In closing, we are pleased with our first quarter performance and are excited about our future. We know we have more work to do, and we remain committed to executing our strategy, operating with an eye toward achieving profitability by capitalizing on the significant growth ahead of us and aligning our cost structure with where the business currently stands to deliver value to our customers, the patients they serve, our employees, and our stockholders.

Audra, will now open the call for questions.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions]. We will take our first question from Joanne Wuensch at Citi.

Unidentified Analyst: Good morning. This is actually Anthony on for Joanne. Thank you for taking our questions. I guess the first on guidance, just given where the second quarter is, it implies a pretty steep acceleration in sales in the back half of the year? And then similarly for EBITDA, can you just maybe talk about what gives you confidence both in the revenue and the EBITDA number, maybe just talk about some of the cost cutting you’re pursuing? Thank you.

Kevin Thornal: Yes. Thanks for the question. Yes. So we do have it ramping in the back half of the year. As you recall, this business has a lot of seasonality with the fourth quarter always being substantially the biggest quarter of the year. So we predict that seasonality will continue. We also obviously have our SI joint business that will provide a little bit of tailwinds to us as we get into the back half of the year. And then also, don’t forget, last year, we had a pretty big change in our sales force and people were higher towards the back end of 2023, so they’re still ramping up as the year goes on. And a lot of those newer reps are starting to hit their stride out there in the field. And we also, as we indicated, it’s still a small portion right now, but we have the people that have had a previous Nevro device that are coming back to continue their therapy after maybe nine, 10, 11 years of great success on the treatment, but want to continue that therapy.

So we see that progressing as the year goes on as well.

Unidentified Analyst: Okay. Thanks. And just a quick follow-up on your second point on the replacement opportunity. How much of that is baked into guidance for this year?

Kevin Thornal: Yes. Everything trials and replacements and competitive conversions and new patients are always baked into the guidance. So it’s all baked in right now. We’re not going to get into calling out. It’s a really small part of our business right now. And so we’ll continue to include it as we give our guidance for the rest of the year.

Unidentified Analyst: Got it. Helpful. Thank you.

Operator: We’ll go next to Nathan Treybeck at Wells Fargo.

Nathan Treybeck: Hi, thanks for taking the question. Just can you provide a little more color on your ’24 guidance assumptions? I mean, you beat Q1 by about $4 million, but you didn’t make it the full-year guide. And Q1 was also your toughest comp for the year. I guess — are you assuming Q2 to Q4 lower than your initial outlook?

Rod MacLeod: Yes. I mean, just mathematically, we overdelivered in Q1, and we’re holding the full-year at the same level. So yes, you’re correct. We feel like Q1 was a touch stronger than what we were anticipating, and we’re really — as we look at the first half of the year, it’s still really coming in line with how we initially thought the first half of the year would play out. So with the first quarter being a little bit stronger, second quarter is just a touch softer than maybe what we would have projected when we put that Q1 guidance out.

Nathan Treybeck: Okay. And can you provide a bit of color on the additional restructuring that you’re taking? And do you expect more disruption from this through the rest of the year? Thanks.

Rod MacLeod: The short answer is, no, we don’t expect much in the way of disruption. A lot of this was just driving increased focus on the projects and the strategies that as an organization, we’re really going after. And we were able to shed about $25 million in reductions for this year alone on an annualized basis, it’s north of $30 million. So a lot of good work by the team to just drive focus on really the key aspects and strategies of this organization.

Nathan Treybeck: Okay, thanks.

Operator: Our next question comes from Robbie Marcus of JPMorgan.

Unidentified Analyst: Hi, this is actually Robin on for Robbie. Thanks for taking our question. I just had a couple of questions. First on Vyrsa, I know you mentioned that you expect kind of tailwinds from the site joint business in the second half of the year. Can you elaborate a little bit more on how much of that is baked into the guidance? I mean I think some prior commentary pointed to roughly $20 million in sales. How should we think about that just for the full-year and also just quarter-to-quarter, that would be helpful.

Kevin Thornal: Yes. Thanks for that. Yes, we’re excited about Vyrsa, but it is still a nonmaterial part of our business. We have never put out a number that’s a $20 million number. So I want to make sure people don’t think that we gave out any of those numbers because we have it. We still have to scale that business. A lot of it is around the sort of the internal scaling of making sure we have the trays that are utilized for the procedure and ramping those up. So our sales reps can have them available to them and available for the procedures. And we also are making sure that we train physicians and our sales reps the right way. We go through a pretty exhaustive list of things that the reps have to show before they can start to cover some cases by themselves.

And so it’s going to take us some time to continue to get all of our sales reps up to speed. But as I mentioned, right now, we’ve trained over 220 physicians and the waiting list was much bigger than that. So we’ll continue to add on just by joining training classes, but it does take time for physicians after they get trained to go back, identify patients and start doing those procedures. So we’re excited about it, but it’s nowhere near that size of the business as we move on through the year. As we said, it’s going to be an immaterial part in 2024.

Unidentified Analyst: Got it. That’s really helpful. And then the second one is just on gross margin quickly. You had a pretty solid gross margin in the quarter, came in out of expectations, and still kind of expecting it to be roughly flat for the full-year with 2023. So can you just walk through why you expect the sequential decline just given you had a strong quarter, you mentioned that a lot was due to the Costa Rica manufacturing ramp, which obviously should continue throughout the year. So just talk to some of the puts and takes there, that would be helpful.