PROCEPT BioRobotics Corporation (NASDAQ:PRCT) Q3 2023 Earnings Call Transcript

PROCEPT BioRobotics Corporation (NASDAQ:PRCT) Q3 2023 Earnings Call Transcript November 2, 2023

Operator: Good day and welcome to PROCEPT BioRobotics Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Matt Bacso, Vice President, Investor Relations, for a few introductory comments.

Matt Bacso: Good afternoon, and thank you for joining PROCEPT BioRobotics third quarter 2023 earnings conference call. Presenting on today’s call are Reza Zadno, Chief Executive Officer; and Kevin Waters, Chief Financial Officer. Before we begin, I’d like to remind listeners that statements made on this conference call that relate to future plans, events or performance are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. While these forward-looking statements are based on management’s current expectations and beliefs, these statements are subject to several risks, uncertainties, assumptions and other factors that could cause results to differ materially from the expectations expressed on this conference call.

A close-up view of a robotic arm printing on an industrial manufacturing floor.

The risks and uncertainties are disclosed in more detail in PROCEPT BioRobotics’ filings with the Securities and Exchange Commission, all of which are available online at www.sec.gov. Listeners are cautioned not to place undue reliance on these forward-looking statements which speak only as of today’s date, November 01, 2023. Except as required by law, PROCEPT BioRobotics undertakes no obligation to update or revise any forward-looking statements to reflect new information, circumstances or unanticipated events that may arise. During the call, we will also reference certain financial measures that are not prepared in accordance with GAAP. More information about how we use these non-GAAP financial measures as well as reconciliations of these measures to their nearest GAAP equivalent are included in our earnings release.

With that, I’d like to turn the call over to Reza.

Reza Zadno: Good afternoon and thank you for joining us. For today’s call, I will provide opening comments and a business update, followed by Kevin who will provide additional details regarding our financial performance and updated 2023 items before opening the call to Q&A. Starting with our quarterly revenue results. We are pleased to report another record quarter with both increased customer utilization and strong system placements. Total revenue for the third quarter of 2023 was $35.1 million, representing growth of 72% compared to the third quarter of 2022. Growth in the quarter was driven by strong U.S. system sales, increased U.S. utilization from our expanded install base, and increased international revenues. As we have previously discussed, we believe our strategy of focusing on outstanding long-term clinical data, gaining reimbursement coverage, and building a top-performing field team have led to consistent growth of the use of Aquablation therapy.

The third quarter, we sold 38 robots in the U.S., representing unit growth of 46% compared to the prior year. The number of robot placements in 2023 was driven by growing awareness of Aquablation therapy, and the addition of new capital reps in Greenfield territories. As a reminder, we added 10 new capital reps in late Q4 2022, which expanded sales capacity by 50%. As expected, the capital reps added in the fourth quarter of 2022 have hit their stride as a typical productivity ramp is six to nine months. While we recognize and monitor the challenges of the macro environment very closely, we entered the fourth quarter of 2023 with a robust capital pipeline that continues to grow meaningfully. Given the current hospital capital spending environment, and now having the largest and most senior capital sales force in the company’s history, we continue to feel very good about continuing our strong commercial execution in the fourth quarter of 2022.

Next, touching on quarterly utilization. U.S. handpiece and consumable revenue increased 113% compared to the third quarter of 2022. When analyzing our accounts, we continue to be extremely pleased with overall utilization trends. Our U.S. install base in nine months has grown 62% compared to the end of 2022. And while new accounts take time to ramp, we delivered monthly utilization of 6.4 handpieces per account in the third quarter. We are encouraged by what we are seeing on account specific utilization, and have multiple proof points where Aquablation therapy is viewed as the receptive standard of care within a given hospital. The primary drivers of procedure growth continues to be active surgeon growth, which is a combination of new surgeons performing procedures and active surgeon retention rates of approximately 90% for the first 9 months of 2023.

We define active surgeon retention as any surgeon who performed a case in both the current and previous quarter. As a company, we benefit greatly from this high level of surgeon retention as our commercial team can focus on training new surgeons. Given our strong underlying momentum in utilization across our install base, the addition of United Healthcare coverage and seasonal tailwinds from elective procedure volumes. We remain confident in our ability to deliver sequential increases in monthly utilization in the fourth quarter. Our revenue guidance, as Kevin will go through shortly, continues to be informed by what we are seeing in our pipeline, how opportunities progress, what customers are telling us regarding their outstanding real world experience, productivity ramp of new capital reps, and overall growth rates.

All these indicators continue to trend positive as awareness around Aquablation therapy grows, which gives us confidence in achieving our 2023 growth targets. Turning to clinical updates. Since the inception of Aquablation therapy, many of our key opinion leaders have been encouraging us to pursue a prostate cancer treatment option. Having now treated greater than 30,000 BPH patients, we felt investigating the merits of Aquablation therapy to treat prostate cancer was a logical next step. In the second half of 2022, we initiated a small feasibility prostate cancer study that treated men who had both BPH and localized prostate cancer with the purpose of assessing safety of Aquablation therapy. The results were encouraging, which gave us confidence to invest further in this clinical area.

Specifically, we will be expanding enrollment to 125 patients across seven sites globally. The study will include men with BPH who also have grade three or less prostate cancer. Furthermore, when combining legacy BPH data along with data from our feasibility study, we were able to provide support to the FDA to remove the prostate cancer contraindication for Aquablation therapy for men with BPH in September 2023. In September 2023, we also announced the IDE approval to investigate the safety and efficacy of Aquablation therapy specifically for prostate cancer. The IDE approval allows us to initiate a single arm study in the United States and enroll 20 grade group one and two patients for localized prostate cancer at three of the most prestigious U.S. cancer centers.

I want to stress that we are still very early in our research of prostate cancer and that we remain in the evaluation phase. That said, given the traction we are experiencing today in BPH, the relationships we are developing with urologists globally, and the desire of those urologists to pursue this research, if Aquablation therapy can deliver effective and safe outcomes relative to the current prostate cancer alternatives, this would be a significant future opportunity for PROCEPT. With respect to international market development activities, last month we announced that in the United Kingdom, NICE granted its strongest endorsement standard arrangement recommendation for Aquablation therapy. With this strong clinical recommendation, our pipeline of large NHS hospitals has grown meaningfully.

Given the accelerating interest from U.K. surgeons and strong unit economics on the handpiece and system average selling prices, we plan to make additional investments over the next 12 months in the U.K. to accelerate growth. Turning to Japan, we are more than halfway through enrolling patients in our post-market survey and expect to complete enrollment in the fourth quarter of 2023. While we do not expect meaningful revenue contributions from Japan in 2023, we view Japan as a very attractive market long-term. Like the U.S. and the United Kingdom, our strategy is to beat the clinical data to support a more robust and sustainable commercial launch. Lastly, in early August, we successfully completed an equity follow-on offering, raising an additional $162 million of net proceeds.

The primary goal of the financing was to fortify the balance sheet from a position of strength to allow us to continue to execute on our long-term strategy to become the standard-of-care treating men with BPH. As of September 30th, we had approximately $287 million of cash on the balance sheet, which we believe will allow the company to reach cash flow break-even without additional financing. We also officially moved our corporate headquarters to San Jose in mid-September, which is four times the size of our previous facility. In this new facility, we will have more than enough space to meet our future growth goals. In closing, while we are not providing 2024 financial guidance at this point, we have a high degree of confidence in our ability to achieve our long-term growth plan.

Every metric we track is moving in the right direction. And to summarize these catalysts, our pipeline and sales funnel continue to consistently grow driven by an experienced capital sales team and growing awareness of Aquablation therapy. Monthly utilization accelerated sequentially in Q3 and continues to reinforce the growth of our business and strong relationship with surgeons. With the addition of UnitedHealthcare in mid-2023, we can now offer Aquablation therapy to roughly 95% of all men in the United States. We demonstrated good and cost control in Q3 and successfully completed an equity financing to bolster our balance sheet, which we believe will take us to profitability. And lastly, we received IDE approval to investigate Aquablation therapy for prostate cancer.

We remain excited about the progress we have made since becoming a public company and our ability to execute on our plans each quarter. With that being said, our opportunities remain vast. Aquablation therapy currently represents only 6% of annual receptive BPH procedures in the United States. Also, we expect to exit 2023 with greater than 310 hospital customers, which only account for 11% of the 2,700 hospitals performing receptive BPH surgery. With that, I will turn the call over to Kevin.

Kevin Waters: Thanks, Reza. Total revenue for the third quarter of 2023 is $35.1 million, representing growth of 72% compared to the third quarter of 2022. U.S. revenue for the quarter was $32.3 million, representing growth of 73% compared to the prior year period. U.S. handpiece and consumable revenue for the third quarter was $17 million, representing growth of 113% compared to the third quarter of 2022. U.S. handpiece revenue growth was driven by an increase in the install base of robotic systems. Monthly utilization per account of 6.4 increased sequentially by 5% compared to the second quarter of 2023. U.S. handpiece revenue growth in the third quarter was driven by both strong surgeon interest at new accounts, with most program launches having multiple surgeons.

Additionally, we continue to see increased account level utilization over time as we continue to train new surgeons and increase utilization of our existing surgeon base. We shipped 4,873 handpieces in the U.S. in the third quarter, representing unit growth of 112% compared to the third quarter of 2022, with average selling prices of approximately $3,140. In the third quarter, we sold 38 robotic systems, generating total U.S. system revenue of $13.5 million, an increase of 37% compared to the third quarter of 2022. Our U.S. install base at the end of the third quarter is now at 271 systems, which is an increase of 95% compared to the third quarter of 2022. Third quarter system average selling prices were $353,000 and remained within our expected range given quarterly variability.

International revenue for the third quarter was $2.8 million, representing growth of 62%. Growth margin for the third quarter of 2023 was 54% compared to 50% in the prior year period. Growth margin expansion in Q3 is primarily due to the increase in revenues and our ability to absorb overhead expenses over a larger number of units produced. Moving down the income statement. Total operating expenses in the third quarter of 2023 were $44.5 million compared to $32.3 million in the same period of the prior year. When compared to the second quarter of 2023, total operating expenses increased by only $400,000, which is the lowest sequential increase over the previous two years. The increase was driven by increased sales and marketing expenses, primarily to expand the commercial organization and variable compensation expense.

Increased research and development expenses and general and administrative expenses. Total interest and other income were $1 million at the quarterly interest expense from our $52 million term loan was offset by favorable interest income from our cash balances, which were significantly increased with our recent equity financing in early August. Net loss was $24.6 million for the third quarter of 2023 compared to $22.6 million in the same period of the prior year. Adjusted EBITDA was a loss of $19.4 million compared to a loss of $18.3 million in the third quarter of 2022. Our cash and cash equivalents balance as of September 30th was approximately $287 million, which includes the $162 million of net proceeds raised in our equity offering in August.

Moving to our 2023 financial outlook. We are increasing our full year 2023 total revenue guidance to approximately $133.5 million, representing growth of 78% compared to 2022. We are increasing our revenue guidance based on the following factors. Starting with U.S. systems, we now expect full year system sales to be 145 systems. Given normal seasonality and a more experienced capital sales team, we expect fourth quarter system sales to increase relative to the third quarter. Turning to U.S. handpiece revenue, we continue to expect full year utilization to be approximately in the mid-sixes as measured by weighted average handpiece sold per account per month, which implies approximately 6.75 handpiece sold per account in the fourth quarter. Given normal fourth quarter procedure seasonality, we believe this will more than offset the expanding install base, thus allowing utilization to continue to increase sequentially.

Additionally, we expect handpiece average selling price to be comparable to the third quarter and our other consumables revenue to be $1.9 million. Lastly, on revenue, given another strong quarter and positive momentum, we now expect full year international revenue to be approximately $11.5 million. Moving down the income statement, we now expect full year 2023 growth margins to be in the range of 54% to 55% and continue to expect operating expenses to be approximately $174 million. Given our recent capital raise and subsequently larger cash balance, we expect Q4 net interest income to be $2.1 million, resulting in full year net interest income of $3.3 million. Lastly, we expect adjusted EBITDA to be a loss of $76.9 million. With that, I will turn the call back to Reza for closing comments.

Reza Zadno: Thanks, Kevin. In closing, I want to thank our employees, customers, and shareholders for all their support to help us along our journey to becoming the standard of care for BPH. We will continue to leverage our commercial and clinical investments to execute on our long-term strategy. Have a great day and I look forward to seeing many of you at upcoming investor conferences. At this point, we will take questions. Operator?

Operator: Thank you. [Operator Instructions] Our first question will come from Craig Bijou of Bank of America. Your line is open.

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Q&A Session

Craig Bijou: Great. Good afternoon, guys. Thanks for taking the questions and congrats on a very strong quarter. I want to start with utilization, as I usually do, and it seems pretty important to you guys. Reza, I appreciate your comments on trends of previous cohorts, but would love to hear as you’re adding a number of new systems, how those system utilizations, the newer systems, how they ramp and just a little bit more color there.

Kevin Waters: Craig. We’re going to give us one second here. We just had a fire alarm go off in the building. It’s just turned off. I apologize to everyone here. Can you please repeat your question? We’re going to reset here. Thank you very much, Craig. Sorry about that.

Craig Bijou: No problem. All right. So Utilization. So I guess the question just comes down to I wanted to know how you guys are seeing utilization with some of the new systems that you’re adding. I appreciate Reza’s comments that the older cohorts are still increasing, but I wanted to understand when you place a new system, how you’re seeing that ramp.

Reza Zadno: Thanks Craig. Sorry for the disruption. We are very happy with the utilization we saw in Q3, and some of the underlying trends. I want to talk about those. Historically, Q3 is flat, but we saw in this quarter, we saw an increase. That was number one, our existing surgeons. Generally, existing [Ph] surgeons is flat. We saw an increase in our existing surgeons. We also had the largest number of new surgeons in this quarter that entered, and that contributed to this increase in utilization. And also the retention. So these are the three factors that led to a very good utilization in Q3. I’ll let Kevin to add to this.

Kevin Waters: Yes, it’s a good summary. Craig, when we look at new accounts, we are seeing today, and I think it’s a testament to our focus on our Aquablation sales rep team and focusing on utilization. So when we launch new accounts today, we typically have two to three surgeons in that account. And again, a lot of that is due to our sales team, but a lot of it is due to general growing awareness and market acceptance of Aquablation. If I go back two years, pre-IPO, most accounts would launch with one surgeon. Now, we’re seeing two to three. On top of that, we’re seeing many program launches within the third quarter. It was a really nice quarter for new account launches.

Reza Zadno: And we are also hearing our surgeons telling us that the patients are asking. Awareness among patients has increased and they are asking for this treatment.

Craig Bijou: Great. That’s helpful. And I want to ask also about the sales funnel. You guys have tracked that rather closely. I appreciate you guys expect a sequential pickup in systems in Q4 versus what you saw in Q3. I just wanted to see any changes in the conviction or the confidence that you have in your visibility and any lengthening of sales cycles or anything else that may be capital market or capital purchasing impacted.

Reza Zadno: I want to answer the first part of your question. The demand is really driven by surgeons. As we have said in the past, once we identify the surgeon champion, it’s very difficult to lose that deal. It generally goes to the finish line. There is a demand by surgeons for our technology. We have also increased our sales force this year. It’s about 50% larger than the same time last year. Awareness among the surgeons has increased. These are the parameters driving for the capital and that’s what gives us confidence. And Kevin to add…

Kevin Waters: Yes, I think specifically, Craig, to your question, I think we have a higher degree of confidence and conviction today in our capital pipeline than we did when we entered the year. Our guidance still suggests that 55% of all of our sales are going to come in the back half of the year. And now that we are kind of only one quarter left to go in the year, we feel much better about our ability to achieve that number given the times gone by. The second point is this is the first year where we had such a large addition to our capital team. We were really dependent on those folks being productive in the back half of the year. That was not known at the beginning of the year. And I think now we see in our pipeline these reps being productive. We see deals coming into the funnel. We see the same sales cycle. We don’t see any lengthening. We see similar close rates. So I think all of those things give us more confidence today than when we entered 2023.

Craig Bijou: Thanks for taking the questions, guys.

Kevin Waters: Thanks, Craig. Sorry again about the hiccup there at the beginning.

Operator: Thank you. One moment please for our next question. Our next question will come from Joshua Jennings of TD Cowen. Your line is open.

Joshua Jennings: Hi. Good afternoon. Thanks for taking the questions. And congratulations on another strong quarter. I wanted to follow up on Craig’s question, Reza and Kevin. Just thinking about 2024, streets just north of 200 million, applies 50% plus, revenue growth. I think you probably had some of the key drivers of strong revenue growth in 2024. I know you’re not issuing guidance. I was hoping you could just take us through some of those key drivers and how we should be thinking as we’re thinking about updating our models and forecast for 2024.