Paragon 28, Inc. (NYSE:FNA) Q1 2024 Earnings Call Transcript May 11, 2024
Paragon 28, Inc. 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. And welcome to Paragon 28’s First Quarter 2024 Earnings Conference Call. Currently, participants are in listen-only mode. We’ll be facilitating a question-and-answer session at the end of today’s call. As a reminder, this call is being recorded for replay purposes. I would now like to hand the conference over to your host today, Mr. Matthew Brinckman, SVP of Strategy and Investor Relations. Mr. Brinckman, please go ahead.
Matthew Brinckman: Good afternoon. And thank you for joining Paragon 28’s first quarter 2024 financial results and earnings call. Presenting on today’s call are Albert DaCosta, Chairman and Chief Executive Officer; and Krissy Wright, Interim Chief Financial Officer. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements made as to the company’s or management’s intentions, hopes, beliefs, expectations or predictions of future events, results or performance.
These forward-looking statements are subject to a number of risks, uncertainties, estimates and assumptions that may cause actual results to differ materially from these forward-looking statements. All forward-looking statements are based upon current available information and Paragon 28 assumes no obligation, except as required by law, to update those statements. Additional information concerning certain risks and uncertainties that may impact these forward-looking statements is contained from time-to-time in the company’s SEC filings and in the press release that was issued earlier today. During this presentation, we will refer to the non-GAAP financial measure of adjusted EBITDA and constant currency net revenue growth. A reconciliation to the most comparable GAAP financial measure, net income and reported net revenue growth is contained in our press release issued earlier today.
And with that, I will now turn the call over to Albert.
Albert DaCosta: Thanks, Matt. Good afternoon and thank you for joining us for our first quarter 2024 earnings call. I am pleased to have our Interim CFO, Krissy Wright, joined us for today’s call. Krissy has been an incredible partner on our Board since 2021, serving as our Audit Committee Chair and as a member of our Nominating and Governance Committee. I’m now going to kick things off with a review of our first quarter performance, followed by recent highlights. After that, I’ll pass it over to Krissy to provide further details on our first quarter financial results and guidance. Global revenue for the first quarter of ’24 was a record $61.1 million, representing 17.4% reported and constant currency growth in line with the top end of our preliminary revenue results reported on April 4.
Overall, we are pleased with our growth through the first quarter of ’24 compared to our strong growth comps in the first quarter of ’23 despite one less billing day this year. We also saw a modest step up from the fourth quarter of 2023, which is typically the seasonally highest revenue contribution of any quarter each year. Importantly, we continue to see balanced top-line performance across all five foot and ankle subsegments. Looking at the U.S. business performance, net revenue for the first quarter of ’24 was $51.1 million, representing 13.5% reported growth. During the quarter, we increased our US producing sales rep roster by 6% to 261 reps compared to the first quarter of ’23 and saw an 8% increase in productivity across our rep base.
Over the same period, we grew our surgeon customer base by 12% to a record 2,275 surgeons. Medical education remains a core part of our commercial strategy, and our two mobile labs have been important drivers of surgeon adoption to start the year. We are excited to see solid growth in these leading commercial indicators and expect to see continued momentum in these areas throughout the year in line with our typical seasonal trends. First quarter international net revenue was $10 million, representing 42.2% and 42.5% reported and constant currency growth, respectively. International growth was driven primarily by the United Kingdom and Australia. Overall, I am thrilled with our international momentum. Our foundation is set for sustainable growth as we drive further investments to clear and launch additional products and new markets outside of the United States.
Turning next to our product portfolio, 2024 is off to an incredible start with six four product launches and one limited market release in the first quarter of ’24. We remain focused on innovating across all segments, but it’s important to note that all products launched so far in ’24 are in high-growth Foot and Ankle segments like bunion, soft tissue and minimally invasive surgery. Ultimately, these most recent launches will help advance Paragon 28’s portfolio in the fastest growing subsegments in our market and position the Company well for sustainable long-term growth. Most recently, we launched the Grappler R3INFORCE Repair System, adding to our suite of novel centers, most U.S. repair solutions and broadening our rapidly growing soft tissue portfolio.
As a reminder, early in the first quarter, we launched three other soft tissue solutions with the Grappler Knotless Anchor, Bridgeline Tape and Mister Tendon Harvester, all of which will typically be used in conjunction with other products and are highly complementary to our existing plating and screw systems. Another solution is our FJ2000 Power Console and Burr System designed specifically for the extremities and MIS surgery. Lastly, we launched the PRECISION MIS Bunion System and have our Lapidus clamp, the Bun-Yo-Matic, which is on limited market release with full release expected later this year. We continue to see strong momentum from our 2022 and 2023 product launches, which have continued to be significant drivers of growth for the first quarter of this year, especially in areas of external fixation and hindfoot fusion, where we launched our Monkey Rings, Monkey Bars in Phantom Hindfoot now in 2022.
Our product launches in 2024 are still relatively fresh and have not yet contributed materially to the revenue in the first quarter, but they’ve been generating a ton of buzz with our rep base and within the surgeon community. These launches give us confidence in our guidance for 2024 and P28’s ability to drive further growth later this year and beyond. As we look further into 2024, we expect to continue investing in our commercial and educational opportunities to enable P28 to realize the full potential of our new product launches as well as legacy products, both in the US and internationally. In closing, when we founded Paragon 28 in 2011, we set out with the mission to continuously improve the outcomes and experiences of patients suffering from foot and ankle conditions that remained our mission through our IPO in 2021 and continues to be our top priority today.
Everything we do and every decision we make is to advance P 28 along that mission and I attribute our success to the team’s dedication to that unified goal. This is a long-term journey. And while I am incredibly proud of what we’ve achieved in the past several years, I could not be more excited about the Company’s future. With that, I will now turn it over to Krissy.
Krissy Wright: Thank you, Albert. Turning to the rest of the P&L, beginning with gross margin, gross profit margin for the quarter was 80% compared to 82.9% in the first quarter of 2023. The decrease in gross profit margin is primarily the result of higher prices from suppliers as well as product and geographic mix shift. First quarter research and development expenses were $7.6 million or 12.4% of net revenue compared to $7 million or 13.5% of net revenue in the prior year period. We continue to invest in new product development to improve patient lives through our product pipeline, which remains robust with over 25 active projects in development, including several tied to Smart28. Selling, general and administrative expenses in the quarter were $54.2 million, a $10.4 million or 23.7% increase from $43.8 million in the first quarter of 2023.
As a percentage of net revenue, SG&A was 88.8% compared to 84.2% in the prior year period. The increase in SG&A was primarily driven by increased headcount annual merit increases. Investments in the commercial team, increased variable sales representative commission expenses related to net revenue growth, an increase in professional services fees and an increase in depreciation expense. Adjusted EBITDA for the first quarter of 2024 was a $5.5 million loss compared to a $1.4 million loss in the prior year period. The decrease in adjusted EBITDA is primarily attributable to an increase in operating expenses. While we remain laser focused on driving operating leverage across the P&L in the months and quarters ahead, the impact of investments made in Q1 has slightly pushed out our expectation for EBITDA breakeven in 2024.
Importantly, we are prioritizing initiatives directly associated with our growth strategies and top line performance. Operating cash flow for the first quarter of 2024 was negative $11 million compared to negative $5 million in the prior year period after adjusting for the $9 million legal settlement payments made in Q1 2023. The increase in cash used is attributed to higher operating costs and net changes in working capital items. We ended the first quarter 2024 with $108 million of total liquidity, consisting of $58 million of cash on the balance sheet and $50 million available through our credit facility. Now turning to our 2024 revenue guidance. For the full year 2024, we are reaffirming our previous net revenue guidance of $249 million to $259 million, representing reported growth of 15.1% to 19.7% through the rest of 2024, on a quarterly basis and anticipate the impacts of seasonality to be consistent with 2023.
Our net revenue guidance assumes foreign currency translation rates remain consistent with current translation rates. That is the end of our prepared remark.
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Q&A Session
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Operator: [Operator Instructions] Our first question comes from the line of Matthew O’Brien with Piper Sandler.
Matthew O’Brien: Great. Thanks for taking my questions. Maybe just for starters here, Albert or Krissy, just the revenue that you generated in Q1 was good. Actually that acceleration on a two year stack basis, but as I look at the rest of the year here, you’re getting easier comps that you’re kind of keeping the growth outlook is static. And so I’m just wondering what is it, is there something specifically domestically or internationally that you’re hesitant about? Or is competition getting more challenging? And then the split between the two, should we expect more international to drive most of the growth or more of the growth this year and next? And then I do have a follow-up.
Albert DaCosta: Hey, Matt, it’s Albert. Thanks for the question. But maybe for starters, I’ll say we have a we’ve got a lot of confidence in the numbers that we set out in February, and we expect net revenue to be $249 million to $259 million. That’s around 15.1% on the low end to 19.7% on the high end, the assumptions haven’t changed. I’m going into that number and we are definitely thrilled with the performance for Q1. It’s always really nice to see an uptick in Q1 versus Q4, and we have a lot of our KPIs hit, and we have a lot of confidence in the range that we set out in February. So one thing I’ll say is we’re going to keep analyzing that and report back as there are changes to be made. On the international question, the one thing that I’ll tell you, I actually couldn’t be more thrilled about the performance of the business overall.
But the international business in particular, we set out as our mission to improve outcomes for foot and ankle patients and to really put a mark on this market and you can’t do that as a domestic-only company. You really have to be global and our international reception has been phenomenal. We’ve made a lot of investments in the international business. And so you’re seeing a lot of those paying off. It’s on a smaller scale, obviously than the US. So the growth rate is higher there. And we expect that to continue, but the ability to participate with global KOLs and really help craft the message about where this market is going and how it’s going to get there is thrilling for us.
Matthew O’Brien: Got it. Appreciate that. And then the follow-up is around the EBITDA commentary, the pushout, is that just for pushing it up to ‘25 and then the investments that you’re making? Are those investments to help you grow faster? Or do you have to spend more to kind of grow at these rates? Thank you.
Albert DaCosta: Yes, thanks again for the question, definitely those investments were to help us grow, right. We took some opportunities to invest in the commercial team and we had some R&D investments that we took in Q1. One thing that we’ve always been really passionate and committed to is we want to make sure that we’re spending every dollar to improve this business and to help us get to where we’re going. The one thing we want to do is I’d look at efficiencies and really look across the P&L to find operating leverage as we grow this thing. So that we continue to build the best business we can. So yes, we took some opportunities to invest in additional opportunities to grow. We think those investments are really going to support us moving forward. And on the other side of it, as we’re always looking for leverage, we’re always looking for efficiencies to drive better management of the capital. The precious capital that we’ve got.
Matthew O’Brien: Okay. And sorry to push a little bit, Albert, just is it investment to grow faster or investment just to keep growing it better, still elevated level.
Albert DaCosta: Investments to grow faster.
Operator: The next question is from George Sellers from Stephens Inc.
George Sellers: Good afternoon. Thanks for taking the question. Maybe to shift back to the guidance, I’m just curious, what does that assume from contribution from some of the new devices you launched in the first quarter and towards the end of last year? And also what does that assume in terms of the underlying market and the competitive dynamics there and some others in the market as commented on recently?
Albert DaCosta: Yes. Hey, George, thanks for the question. And maybe to start, this is a tickle point for me, but on the products, we’ve launched, honestly, really since the beginning, but more importantly, this class of launches and the ones you’re referencing late last year and early this year, generating so much excitement. They are going to high value, high growth segments of the market and the reception we’re getting is phenomenal. Now modeling that and I will tell you products we launch in Q1. We don’t expect to be as material early and we would expect maybe in the latter half of the year and into next year to see some meaningful contribution from those products. But the reception that we’ve gotten so far has exceeded our of expectations and we’re thrilled.
We just keep, our goal in this market is learning so much every day and we take that information and we go back and we see how we can improve these outcomes and refine systems and improve the offering out there. And the reception that the products have received tells us that we are definitely hitting the mark there that this market is young. There’s a lot of room for improved outcomes, and we feel like we’re the company on the front of that mission to do that. And so I just to put that there, I’ll tell you those new products are already generating some momentum for us earlier than expected. And we do have a lot of excitement too about what’s coming in the second half of the year. We got a lot of good products and one that I had mentioned on several calls is Smart28 launch is still on plan.
And so we’re just we think there’s going to be a really good year for that.
George Sellers: Okay. That’s great to hear.
Albert DaCosta: And mean one thing I wanted to say that. Yes, I’m sorry, George, one thing I was going to say I don’t mean to minimize the excitement around the salesforce expansion that we also are pretty excited about this year. We’ve got some great new sales folks that we expect to start contributing later in the year. And so I didn’t mean to emphasize everything on product, but we think there’s a lot of KPIs that are that are going to contribute nicely this year.
George Sellers: Okay. That’s helpful to hear. And then maybe digging into that sales commentary and some of the adjusted EBITDA commentary a little bit, the SG&A line really reaccelerated on a year-over-year growth basis this quarter. I’m just curious how we should think about the cadence for growth through the remainder of the year. And maybe to follow up on a prior question, how far out did and this quarter sort of pushed that adjusted EBITDA breakeven plan one?
