I’d also suggest that in BPH procedures, it is an elective procedure. We do expect some normal seasonal tailwinds from our existing surgeons in Q4 as they do more procedures than they did in the previous quarter. And I guess just the last point around kind of how we are comfortable with expanding utilization, our historical growth in 2022 was that the growth we experienced last year in our fourth quarter, the guidance we are giving today is very comparable to that sequential growth. It’s about 5% to 6% sequential increase in utilization in Q4 2023, which would be very comparable to what we did in Q4 2022 as well. So the multitude of factors that get us comfortable that we could continue to expand utilization even with a greatly expanding install base in the fourth quarter.
Matthew O’Brien: Got it. Appreciate that feedback. And then, Kevin, another one for you. Just more on the margin side of things. Gross margins down just a little bit, not the end of the world. Love to hear what happened there. But then also it looks like the cash burn came down quite a bit. And I know that’s an area investors have been focused on. So can you just talk about some of the levers that you’re pulling on, on the operating margin side of things and the cash burn side of things? Thank you.
Kevin Waters: Yes, I’ll address both. So first, margins. So those gross margins, they were around our expectations. But as you pointed out, down sequentially. But the main contributor for margin being down sequentially is really the impact of our system ASPs and the impact of that on overall gross margins. If we had capital pricing similar to Q2, our growth margins, in fact, would have been roughly 180 basis points higher, which would have translated to 56% versus 54%. But as we’ve continually said on previous calls, we do expect quarter to quarter variability on system pricing. And we actually see that rebounding back to 370 in Q4. So we think that’s kind of a temporary situation. I’d also point out, while not as material as pricing, we did produce as a company relatively fewer units in the third quarter.
And therefore, our average costs were marginally higher. But now that we’re fully into our new facility, we do expect production volumes to return to more historical levels. And this won’t negatively impact margins in the future. But we feel good, although I appreciate there’s quarter to quarter variability, that the trend over time is up and to the right with gross margins. Your second question, I’m glad you asked, on cash. This was as you pointed out from an operating cash flow point, significantly improved over the previous two quarters. We were in the $35 million in Q1, $28 million in Q2. And you saw that number drop below $20 million in the third quarter. And this is purposeful by the company, particularly given our recent equity rate.
We feel that, as a business, we’re definitely investing in the long-term. We’re investing in our commercial team. But at the same time, we’re being prudent with our cash. And we understand in this environment that a pathway to profitability and having OpEx discipline is important. It’s always important. But particularly in this environment, we believe that we need to show investors that we can grow the top line and demonstrate leverage on the bottom line. And that’s what we feel we did in the third quarter. And our guidance suggests on OpEx that that’s going to continue in the fourth quarter with relatively flat operating expense.
Matthew O’Brien: Very helpful. Thank you.
Operator: Thank you. One moment please for our next question. Our next question will come from Richard Newitter of Truist Securities. Your line is open.
Richard Newitter: Hi, thanks for taking the questions. Congrats on the quarter. Just a couple for me. You mentioned, I think, Kevin, productivity for your capital reps. In the past, I think you said you target that getting north of four to five systems per rep if you’re heading into next year with 35 to 40. I mean, is that the right kind of rule of thumb to just be thinking about broad strokes?
Kevin Waters: Yes, broad strokes is a good rule of thumb. I would remind you that you said to get to that productivity, it does take a rep on average six to nine months, but we believe that productivity is in the ballpark, correct?
Richard Newitter: Okay. And then can you comment at all on the percent of IDN either orders or I know you said that you’re at the highest level of IDN contracting exiting 2Q or entering 2023 maybe. That was the comment. Can you just talk about those percentages and one, what percent are you at and where do you expect to be as you exit the year in terms of IDN as percentage of total orders? And then two, how, if at all, does that impact pricing? Do those reflect multi-system orders and or is there anything you can give us in terms of IDN orders and where they fall on the kind of the range of ASPs that you’ve delineated in the past between 350 and 400,000? Thank you.
Kevin Waters: Yes, thanks, Rich. Let me start with pricing. So our IDN relationships do not impact our system ASPs negatively. So I’ll just start with that. That’s the quarter-to-quarter variability around system pricing is not a reflection of IDN deals. So I’ll just start with that one. To your broader question on IDN, we do continue to partner with IDN affiliated hospitals. As we’ve mentioned, we do believe we’re on track to have the majority of all large IDNs under contract by the end of 2023, which for a business at our stage of commercialization is something, we’re really frankly proud of as a management team here. And I just think it’s a great testament to the technology. With that said, I think you’re hearing from other companies that sell capital, and we’re not any different.
We are not seeing large bulk buys from our IDN partners in 2023. And our guidance is not dependent on any improvement in this environment in Q4. I think when we entered the year, while we said we weren’t dependent on large bulk buys, I think we were thinking, we had the possibility to get a few this year, but those just are going to be pushed into 2024. And if anything, I think we view our IDN relationship as a future tailwind for us, because we’re able to meet our 2023 capital expectations really without any bulk buys. It’s been kind of onesies and twosies negotiating with individual hospitals under their RFP process as opposed to any type of large bulk buys. So none in our current sales in the first half or in the first nine months of 2023, but something we continue to work on and are working on deepening those relationships daily.
