Penumbra, Inc. (NYSE:PEN) Q1 2024 Earnings Call Transcript

Penumbra, Inc. (NYSE:PEN) Q1 2024 Earnings Call Transcript May 7, 2024

Penumbra, Inc. misses on earnings expectations. Reported EPS is $0.2793 EPS, expectations were $0.42. PEN 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 Ellie and I will be your conference operator for today. At this time, I would like to welcome everyone to Penumbra’s First Quarter 2024 Conference Call. 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]. Thank you. I would like to introduce Ms. Cecilia Furlong, Business Development and Investor Relations for Penumbra. Ms. Furlong, you may now begin your conference.

Cecilia Furlong: Thank you, operator, and thank you all for joining us on today’s call to discuss Penumbra’s earnings release for the first quarter of 2024. A copy of the press release and financial tables, which includes the GAAP to non-GAAP reconciliation, can be viewed under the Investors tab on our company website at www.penumbrainc.com. During the course of this conference call, the company will make forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding our financial performance, commercialization, clinical trials, regulatory status, quality compliance and business trends. Actual results could differ materially from those stated or implied by our forward-looking statements due to certain risks and uncertainties, including those referenced in our 10-K for the year ended December 31, 2023, filed with the SEC.

As a result, we caution you against placing undue reliance on these forward-looking statements, and we encourage you to review our periodic filings with the SEC, including the 10-K previously mentioned, for a more complete discussion of these factors and other risks that may affect our future results or the market price of our stock. Penumbra disclaims any duty to update or revise our forward-looking statements as a result of new information, future events, developments or otherwise. On this call, financial results for revenue and gross margin are presented on a GAAP basis, while operating expenses, operating income and adjusted EBITDA are presented on a non-GAAP basis. The corresponding GAAP measures and a reconciliation of GAAP to non-GAAP financial measures are provided in our posted press release.

Non-GAAP operating expenses and operating income exclude amortization of acquired intangible assets of $2.4 million in the first quarter of 2024 and 2023 and $4.8 million of nonrecurring litigation related expenses, including settlement costs and legal fees associated with wage and hour complaints filed against the company in 2023 in the first quarter of 2024, and adjusted EBITDA excludes such nonrecurring litigation related expenses and stock compensation expense. Adam Elsesser, Penumbra’s Chairman and CEO will provide a business update. Maggie Yuen, our Chief Financial Officer will then discuss our financial results for the first quarter of 2024 and Jason Mills, our Executive Vice President of Strategy will discuss our 2024 guidance. With that, I would like to turn the call over to Adam Elsesser.

Adam Elsesser: Thank you, Cecilia. Good afternoon. Thank you for joining Penumbra’s first quarter 2024 conference call. Our total revenues for the first quarter were $278.7 million, a year-over-year increase of 15.4% as reported and 15.2% on a constant currency basis. Our U.S. thrombectomy revenue grew 35.2% compared to the same quarter a year ago to $150.3 million driven by continued strong market growth and share gain with Lightning Flash and Lightning Bolt 7. International thrombectomy also exceeded our expectations in the first quarter growing 10.7% year-over-year against the challenging comparison last year. Overall, we had a strong start to the year and see positive trends in our core markets and our business with our computer assisted vacuum thrombectomy products in VTE and arterial and market leading portfolio in stroke.

This reinforces our confidence we can deliver strong growth of 27% to 30% in U.S. thrombectomy and 16% to 20% overall in 2024. In addition to our commitment to strong revenue growth, we are also focused on margin expansion and increasing profitability. We are ahead of schedule to deliver 100 to 150 basis points of gross margin expansion in 2024 and are confident we can increase our gross margins to more than 70% within the next 24 to 30 months. We’re also on track to deliver at least 100 to 200 basis points of operating margin expansion this year, inclusive of investments we are making in our U.S. commercial team and market access initiatives, both of which should help us sustain strong growth into the future. Operating income in the first quarter was $19.3 million representing 6.9% of revenue, increasing 260 basis points over the same period a year ago.

Looking forward, we expect our operating margin expansion to outpace gross margin expansion for the foreseeable future. Notwithstanding the strong growth we have seen in U.S. thrombectomy over the past few years, clinically significant clot burden is still one of the most undertreated acute issues in health care today. We are well positioned to expand access to CAVT and make the treatment of these patients safer, simpler and faster, which we strongly believe and are committed to continually prove accrues to the benefit of patients, physicians and hospital systems. Over the past several quarters, we have delineated our strategy to deliver outsized revenue growth in thrombectomy over the near, medium and long-term through a combination of continued innovation with our CAVT platform, optimizing our commercial team in both the U.S. and international markets and developing robust clinical and health economics evidence on our CAVT products.

With this collective work, we are confident we will continue to catalyze adoption of CAVT and drive utilization to the majority of the 1.25 million applicable clot patients in the United States each year across the five vascular beds we address today. We fully launched Lightning Flash 2.0 in late April on the heels of outstanding outcomes from the evaluation cases done in early April. Flash 2.0 is proving in practice what we saw on the bench. The product further optimizes the advantages of CAVT and VTE. We are seeing pent-up demand for Flash 2.0 and coupled with the larger commercial team we’ve developed over the past two quarters, our U. S. thrombectomy business is in a strong position to continue to catalyze growth for us in these markets of this year and beyond.

We’re also seeing meaningful progress within our innovation pipeline and are on track to launch three additional CAVT products within the next 12 months, at least one of which we expect before the end of 2024. Overall, we are committed to continued innovation to augment the utility and reach of CAVT head-to-toe. In addition to VTE and arterial, stroke will be the next vascular bed we address with CAVT. Enrollment in our THUNDER study is going very well and we are very encouraged by outcomes and physician engagement. We now hold nearly 60% market share in the U.S. Stroke market and expect to gain more share through 2024 ahead of a Thunderbolt launch, which will further extend our leadership position. We’re also seeing more energy and engagement from large health care systems seeking to work with us as the industry leader on ways to further extend interventional stroke care to many more patients within their networks.

Our proprietary technology portfolio in stroke, our reputation in the field and our scale gives us the unique ability to do this work with health care systems going forward. I’ll now turn the call over to Maggie to go over our financial results for the first quarter of 2024.

Maggie Yuen: Thank you, Adam. Good afternoon, everyone. Today, I will discuss the financial results for the first quarter of 2024. As a reminder, financial results on this call for revenue and gross margin are on a GAAP basis, while operating expenses, operating income and adjusted EBITDA are on a non-GAAP basis. The corresponding GAAP measures and our reconciliation of GAAP to non-GAAP financial measures are provided in our posted press release. For the first quarter ended March 31, 2024, our total revenues were $278.7 million, an increase of 15.4% reported and 15.2% in constant currency compared to the first quarter of 2023. Our geographic mix of sales for the first quarter 2024 was 75.2% U.S. and 24.8% International. Our U.S. reported growth of 22%, driven by 35.2% growth in our thrombectomy franchise.

Our international regions declined a modest 0.7%, reflecting decline in our overall embolization and access product revenue offset by growth in thrombectomy volume in Europe, APAC, Canada and Latin America. Moving to revenue by products. Revenue from global thrombectomy business grew to $187.7 million in the first quarter of 2024, an increase of 29.5% reported and 29.3% in constant currency compared to the same period last year. Our U.S. growth of 35.2% and international growth of 10.7% compared to the same period last year reflects strong momentum in CAVT products. Revenue from our embolization and access business was $91 million in the first quarter of 2024, a decline of 5.7% reported and 6% in constant currency, primarily driven by an overall decline in international markets.

Turning to gross margin. Gross margin for the first quarter of 2024 was 65% compared to 62.6% for the first quarter of 2023. We delivered 240 basis point improvements driven by favorable thrombectomy product mix across all regions and strong productivity, partially offset by material cost increases and investment in direct labor capacity for new product launches and higher demand. We are on track to deliver 100 to 150 basis point gross margin expansion in 2024. Now on to our non-GAAP operating expenses, non-GAAP operating income and margin and adjusted EBITDA. Total operating expense for the quarter was $161.8 million, or 58.1% of revenue compared to $170.7 million or 58.3% of revenue for the same quarter last year. Our research and development expenses for Q1 2024 were $24.6 million compared to $20 million for Q1 2023.

SG&A expenses for Q1 2024 were $137.2 million or 49.2% of revenue compared to $120.7 million or 50% of revenue for Q1 2023. With higher seasonality expenditures in the first quarter, we expect continued leverage in our SG&A expenditures as a percentage of revenue. We recorded operating income of $19.3 million or 6.9% of revenue in the first quarter of 2024 compared to an operating income of $10.4 million or 4.3% of revenue for the same period last year. We expect to continue operating margin improvements of 100 to 200 basis points throughout 2024. We posted adjusted EBITDA of $37.6 million or 13.5% of total revenue compared to 11.4% in the first quarter last year. Turning to cash flow and balance sheet. We ended the first quarter with cash, cash equivalents and marketable security balance of $313.5 million and no debt, an increase of $24.3 million driven by operating profitability and improvements in working capital turns.

We expect positive operating cash flow trends to continue in 2024. And now, I’d like to turn the call over to Jason to discuss our guidance.

Jason Mills: Thank you, Maggie and good afternoon, everybody. Strong trends in our U.S. thrombectomy franchise through the first quarter, the recent launch of Lightning Flash 2.0 in the United States and continued productivity momentum from our expanded U.S. commercial team reinforce our expectation for strong U.S. thrombectomy and total revenue growth of 27% to 30% and 16% to 20%, respectively for full-year 2024. Consistent with the cadence commentary we provided on our earnings call in February, we expect global revenue growth in the first half of the year to be in the mid-teens range, primarily based on currently forecasted orders from our international distributors and timing of new product launches. We then expect growth to accelerate to the high end of our 16% to 20% guidance range or above in the second half of the year.

We continue to expect growth in U.S. thrombectomy to be consistently strong in our guidance range throughout the year, and we now expect growth from our international thrombectomy franchise to be slightly stronger than we conveyed on our last earnings call. Mid-to-high single digit range for full-year 2024 compared to flat to modest growth conveyed on our last call. For our Embolization and Access business, for the full-year, we expect mid-single digit growth in U.S. and flat internationally. That said, we expect year-over-year growth rates for both U.S. and international Embolization and Access businesses to strengthen throughout the year to the low teens range by the fourth quarter from new product launches and increasing productivity from our larger commercial team.

Lastly, we continue to expect strong expansion in both gross margin and operating margin in 2024. We reiterate our guidance for 100 to 150 basis points expansion in gross margin and 100 to 200 basis points expansion in operating margins each quarter on a year-over-year basis as well as for the full-year. Operator, we can now open the call to questions.

Operator: We are now opening the floor for question-and-answer session. [Operator Instructions]. Your first question comes from Margaret Kaczor from William Blair. Your line is now open.

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Q&A Session

Margaret Kaczor: Hey, good afternoon folks. Thanks for taking the question. Yes, I maybe wanted to ask first, just on some of the comments around optimizing the sales team, both the U.S., no U.S. obviously, thrombectomy growth. In those markets seems like it’s picking up nicely, and maybe a little bit stronger frankly than what we experienced. So how much of it is — it’s that, how much of it is it around current market growth and some of the continuation of what you saw last year? And specifically, what metrics are you focused on with regards to those investments? Is it geographies? Is it certain market access? Where are you focused on?

Adam Elsesser: It’s a great series of questions, Margaret. Let me try to break it down and remind everyone, philosophically, we typically hire behind our growth, sort of not ahead of our growth, and I think people have known that. And so we were looking at last year with a huge demand for the new CAVT platform, and we just didn’t have enough people. And we brought them on late in the year, got them up and going, added some more in the first quarter. So we — the benefit — this quarter wasn’t really the product of a lot of the new people. They’re now in place going forward for the second, third and fourth quarter. And so what really is driving the growth in the first quarter is really just the work that we laid out all of last year around both Lightning Flash and Lightning Bolt, and how good they are and how many people are experiencing them and trying them and continuing to do it.

Obviously, we talked about April being the quarter that we started to do Flash 2.0 cases. So that’s not in the first quarter number. That’s yet to come, obviously.

Margaret Kaczor: Okay. And as it relates to guidance, obviously, a great quarter again. So I’ll push on that a little bit more, especially for U.S. thrombectomy. You’re on the high end of the range, obviously, an easier comp in the first quarter. So I get that from that perspective. But on the same token, you have these commercial investments that you’re making, that should ramp up. You’re also, we’re going to see some data that maybe helps the entire market grow a little bit as we go on throughout the year. Why shouldn’t we continue to expect things there if not even accelerating a little bit? Thanks.

Adam Elsesser: Yes. Margaret, it’s a great question. Our current guidance obviously reflects already a faster growth as the year progresses. We’ve taken that into account. And this quarter’s strong start reinforces our confidence in our business. And our guidance, in particularly our U.S. thrombectomy guidance for the full-year, reflects both that strength and the momentum from our products and our commercial team. So I think we’re in pretty good shape as we think about how the year unfolds.

Margaret Kaczor: Okay. Thanks.

Adam Elsesser: Thank you.

Operator: The next question comes from Joanne Wuensch from Citi. Your line is now open.

Joanne Wuensch: Good evening, and thank you for taking the question. Two questions, really. OUS sales, looks like they are improving or expected to improve throughout the year. Could you please sort of remind us why that may be? And then my second question has to do with margins. It sounds like you have a little bit more of an increased focus on gross and operating margins. And can you please outline not just gross margins, but throughout the income statement, what levers do you have to pull to get there? Thank you.

Jason Mills: Yes. Margaret or Joanne — I’m sorry. It’s Jason. I’ll take the first one, and then Maggie and Adam can take the second one, if that’s okay. The international cadence typically does escalate as the year goes on. We also have, in Europe, taking that for example, our newest RED stroke products are just being launched there. And so you can imagine the cadence of that will we expect to improve. And then in the second half of the year, we think in Europe, they’re going to get the new CAVT portfolio. In addition to that, around the world, the timing of international orders as we’ve talked about, we have pretty good visibility into. So that’s why the guidance, the comprehensive guidance sort of reflects that cadence for total revenue throughout the year. Maggie?

Maggie Yuen: Yes. And in terms of our operating margin focus, I mean, in addition to the product mix improvement that you see in gross margin on the operating side, I mean, a lot of the G&A infrastructure investment that we made in the last couple of years will continue to see scalability and frankly across all SG&A area.

Joanne Wuensch: Excellent. Thank you.

Jason Mills: Thank you.

Adam Elsesser: Thank you.

Operator: Our next question comes from Bill Plovanic from Canaccord Genuity Fund. Your line is now open.

William Plovanic: Great. Thanks for taking my question. Good evening. So just on the U.S. thrombectomy market, it seems we get a lot of questions on this, obviously, a big driver for you. I was wondering if you could help just parse out how much of that growth is VTE versus arterial? And then how much of this is ASP versus just pure volume driven? Because my understanding is you haven’t gotten an ASP boost over the last year. I’m just trying to understand just a little more granularity if we could? Thanks. Appreciate it.

Jason Mills: Yes. I think it’s a great question. Let me try to give some color to it. Obviously, our CAVT products drove most of that growth with Flash continuing to take share and catalyze new adoption. Both also continue to perform well on the arterial side. Also our Stroke business had really strong growth sort of within our guidance range that we’ve given as stroke continues to see significant gains and we expect that to continue. If I would sort of think about it, last year there was some mix between price and volume obviously, but now we’re anniversarying that. That happened, we launched Flash at the end of — at the beginning of last 2023. So almost all of this is new business and price isn’t really reflective in the growth number. It’s really business, both as the market continues to grow and we catalyze adoption and of course some share gain.

William Plovanic: Great. And if I could, just on the litigation expense $4.8 million you backed it out. Just kind of curious what that was? Is it one time in nature? Or is that going to occur for a couple more quarters? I don’t know if it’s ongoing litigation. Just any help for us to understand and how we should be thinking about that? Thanks.