Zynex, Inc. (NASDAQ:ZYXI) Q4 2022 Earnings Call Transcript

Zynex, Inc. (NASDAQ:ZYXI) Q4 2022 Earnings Call Transcript March 13, 2023

Operator: Good morning, ladies and gentlemen and welcome to the Zynex Fourth Quarter 2022 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Louisa Smith from the Gilmartin Group. Please go ahead.

Louisa Smith: Thank you, Drew and good morning everyone. Earlier today, Zynex released financial results for the fourth quarter and year ending December 31, 2022. A copy of the press release is available on the company’s website. Joining me on today’s call are Thomas Sandgaard, Chairman, President and Chief Executive Officer; Dan Moorhead, Chief Financial Officer; Anna Lucsok, Chief Operating Officer; and Donald Gregg, Vice President of Zynex Monitoring Solutions. Before we begin, I’d like to remind you that during this conference call, the company will make projections and forward-looking statements regarding future events. We encourage you to review the company’s past and future filings with the SEC, including without limitation, the company’s 2021 Form 10-K and subsequent Form 10-Q, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements.

These factors may include, without limitation, statements regarding product development, product potential, the regulatory environment, sales and marketing strategies, capital resources or operating performance. With that, I will now turn the call over to Thomas.

Thomas Sandgaard: Thank you, Louisa and good morning everyone. Thank you for joining us today for the fourth quarter and full year 2022 earnings call. Before we get started, I wanted to touch on the timing of this earnings call. As many of you have noticed, we are announcing full year earnings a little later than usual. We normally announce during the last week of February. However, since we have a new audit firm this year, we decided a while back to give it a week extra to the first week of March. We ended up needing 2 weeks, so we can announce earnings today. I want to thank not only Markham , but also the staff involved here at Zynex for the hard work and long hours to get the year end close completed. And as usual, we are still able to announce early.

I should also point out that there is no change to our €“ in our preliminary financial results that we reported in January. So we are pleased to report another quarter of record results for Zynex. We posted new record highs for both orders and revenue in Q4 and have delivered four straight quarters of revenue and order growth. We ended 2022 with our seventh straight year of profitability. Total revenue for the quarter was $48.8 million, a 21% increase over the same period in 2021. Diluted earnings per share were $0.20 and adjusted EBITDA was $11.4 million for the quarter. We are proud of the top line growth we have seen through increased sales rep productivity while also maintaining a healthy bottom line to support significant business development in our monitoring division.

We received the highest number of prescriptions in the company’s history in the fourth quarter, beating a milestone we had previously hit in the preceding second and third quarters of 2022. We are demonstrating robust growth momentum that has not let up, a key indication that our sales force is gaining in productivity and gaining more and more active prescribers of our products. Revenue and profitability remained strong and the productivity of our sales force allowed for a 48% order growth over Q4 of 2021 and 11% order growth in our third quarter. As of this point, we are now over 80% into the first quarter and we can see that our order growth will come in well above 50%. So, our order growth is clearly accelerating at the moment. We remain confident on our strong performance and anticipate hitting both top and bottom line guidance for the full year with 2023 estimates of revenue between $180 million and $200 million and earnings per share between $0.40 and $0.50.

Earlier this year, we finished our third $10 million stock buyback and we feel strongly that these buybacks underscore management’s confidence in the performance and of our team and the growth potential of both the pain management and the monitoring division in years to come. We remain committed to deliver shareholder value and have so far spent $30 million in buying back stock over the past year. ZMS or Zynex Monitoring Solutions has an incredibly strong team and is working to bring the blood and fluid monitor early detection of sepsis device and our laser-based pulse oximeter to market. Earlier this year, we announced the first enrollment in the blood loss detection clinical trial for the CM-1600. And pending FDA’s clearance of the device, we will announce our commercialization.

As you may recall, our first generation CM-1500 is already cleared by the FDA. Please note, despite the progress that the division is making, our revenue guidance and growth rates for 2023, we do not plan on any meaningful revenue coming from the ZMS division. Our laser-based pulse oximetry is still in the development stage following the acquisition of Kestrel Labs just over a year ago. But our team is making important strides with prototyping of the second generation of the product. I’d also like to mention some of the recent acknowledgment Zynex has received. Over the last several months, we have been recognized by many organizations, including Forbes and Deloitte for our rapid growth and strong performance. Forbes ranked us as #11 in the list of America’s Best Small Companies, including us taking the honor of number one in the healthcare equipment and services industry.

Photo by National Cancer Institute on Unsplash

We are extraordinarily proud of these accolades and believe they highlight the dedication and commitment we have to growing the business and providing value to both our patients and our shareholders. Zynex is delivering consistent results with an efficient business model that continues to meet our guidance expectations. We are making considerable progress on key initiatives that will expand our commercial sales organization as well as diverse power business into compelling market opportunities. Between the game-changing innovation occurring in our monitoring division and the strong team that is executed in pain management, I am excited to see the realization of our growth plans in the quarters to come. With that, I will now turn the call over to Anna Lucsok, our Chief Operating Officer, for a more detailed business update on the pain management division.

Anna Lucsok: Thank you. As Thomas described, pain management is consistently growing both from a revenue perspective and with order volumes. We are just scratching the surface as growth potential and have the opportunity to expand into a significant number of additional territories. We remain committed to filling all 800 sales territories to achieve optimum market penetration. However, as we have noted previously, we are still able to maintain healthy growth rates and bottom line profitability without the dependence on these additional territories. We ended 2022 with approximately 450 sales reps and our full year annual revenue per rep was approximately $400,000. We have seen a steady increase in the quality of applicants and performance of new hires over the last several months.

Productivity remains at an all-time high. And revenue per rep in 2022 grew 31% over 2021 and fourth quarter grew 17% over the prior year. Efficiency is a critical metric and recent improvement to operational performance. So we are closely monitoring mechanisms to optimize it. We continue to expand the regional sales lead layer within our sales force responsible for training new hires and monitoring performance of their sales reps. Each regional sales lead currently oversees an average of 8 sales reps. Through consistent oversight and targeted performance management, this layer continues to drive increased productivity of new hires and identify underperformers early on. We are still seeing some lingering challenges as it relates to the macro environment, particularly with inflationary pressures.

Corporate employee wages and sales rep compensation has increased as a result. But in order to maintain the efficiency I have just described, we are committed to recruiting and retaining a high-quality sales and corporate team. We continue to work with all payer types. And currently, our largest volume of orders comes from commercial insurances followed by workers’ compensation, Tricare and Medicare. Again, we want to emphasize that Zynex takes all orders. And we work with all patients and their insurance companies to process coverage in all cases. We are accredited through Accreditation Commission for Healthcare. And we go through regular audits to confirm our policies, processes and care delivery standards meet Centers for Medicare and Medicaid Services and other official regulatory requirements.

Zynex prides itself in the commitment to quality and integrity as well as the value we provide to all of our patients. I will now ask Don Gregg, Vice President of Zynex Monitoring Solutions, to speak to the business updates related to that division.

Donald Gregg: Thank you, Anna. ZMS has a strategic product portfolio and development pipeline that includes hemodynamic monitoring, sepsis monitoring and laser-based pulse oximetry. We believe that the addressable market for these products is approximately $4 billion and we are working towards regulatory milestones of several products over the next several quarters. Additionally, we recently announced the expansion of ZMS into a larger facility needed for our offices, lab and production space. Our headcount has increased by 94% over the last 12 months and the division has advanced considerably throughout 2022. I am excited about what the coming year will bring in terms of progress towards commercialization and future developments.

The two product lines within the monitoring division are the NiCO CO-Oximeter and HemeOx pulse oximeters built on a similar technology, the CM-1600 blood and fluid monitor. As a reminder to our audience about the technical and clinical benefits of these products, the NiCO or what’s also known as the non-invasive co-oximeter is a laser-based pulse oximeter that is on track for 510(k) submission to the FDA this year. HemeOx is a hemoglobin oximeter. Both products utilize laser technology and will be used in hospital systems as an alternative to legacy devices. The laser technology as opposed to LED systems has been found to produce more accurate readings across the diverse patient populations as there is not pigmentary bias based on skin tone.

We demonstrated the NiCO prototype at the American Society of Anesthesiologists in October with excellent feedback and are planning several clinical studies throughout the 2023 year to be led by a new clinical research manager, among other key personnel we are bringing on this year for engineering and software development. Alternatively, the other product within ZMS is the CM-1600, our hemodynamic monitor. The CM-1600 is a non-invasive wireless blood and fluid monitor also to be used in a hospital setting. This is the next-generation device of the CM-1500, which is already cleared previously €“ previously cleared by the FDA but with added wireless capability. We’ve submitted the CM-1600 to the FDA and are awaiting any further guidance on testing or additional data requirements before we will begin to commercialize the device.

We have a series of completed and ongoing studies as it relates to blood loss detection with approximately 500 participants throughout the United States. Additionally, we recently announced a research collaboration with Vitalant, the nation’s largest independent non-profit blood services provider. We’ve partnered with them to take part in our IRB-approved blood loss detection clinical trial measuring the specificity and sensitivity of the CM-1600’s patented relative index. We are planning to publish results from our five or more clinical trials throughout 2023, a testament to the confidence we have in the relevance of this product. I’m thrilled by the progress we’ve made in the monitoring division and am eagerly anticipating the opportunity to capitalize on the unique market opportunity through this new disruptive technology.

I will now turn this call over to Dan Moorhead, Chief Financial Officer, for a more in-depth look at financial performance for the fourth quarter and full year 2022.

Dan Moorhead: Thanks, Don. Please refer to our press release issued earlier today for a summary of our financial results for the fourth quarter and full year of 2022. First, I’ll review the fourth quarter. Orders grew 48% year-over-year, and net revenue grew 21% to $48.8 million from $40.4 million in 2021. Device revenue increased 19% to $15.9 million compared to $13.3 million in the fourth quarter of last year. Supplies revenue increased 22% year-over-year to $32.9 million from $27 million. Gross margins were 81% in the fourth quarter. Sales and marketing expenses were $19.2 million in the fourth quarter of 2022 compared to $13.6 million in the same period in 2021. G&A expenses were $10.1 million in the fourth quarter compared to $7.8 million last year.

Approximately 25% of the increase in G&A is related to investments in our Monitoring Solutions division and related headcount to launch our new products. The reminder or the remainder is primarily for back-office headcount and related order growth. Tax expense as a percent was 23% for the quarter. Net income was $7.5 million and produced $0.20 per diluted share in the fourth quarter of 2022. Adjusted EBITDA was $11.4 million. For the full year, orders grew 23%, and net revenue grew 21% to $158.2 million from $130.3 million in 2021. Device revenue increased 19% to $43.5 million compared to $36.6 million last year. Supplies revenue increased 22% year-over-year to $114.7 million from $93.7 million. Gross margin for the full year was 80% compared to 79% last year.

Sales and marketing expenses grew 24% year-over-year to $67.1 million. G&A expense grew 37% year-over-year to $36.1 million. 4.6 or almost half of that increase is related to investments in the Monitoring Solutions division. Tax expense was 23% for the full year. Net income was $17 million and produced $0.44 per diluted share in 2022 compared to net income of $17.1 million and the same $0.44 per diluted share in 2021. Adjusted EBITDA increased 5% to $28.1 million in 2022. And finally, we ended the year with $20.1 million in cash. Cash from operations increased 98% during 2022, which allowed us to initiate our third $10 million stock buyback, pay a cash dividend and pay down our debt related to the Kestrel acquisition by $5 million. With that, I’ll turn it back over to Thomas.

Thomas Sandgaard: Thank you, Dan. As for our 2023 outlook, we expect total revenue to be in the range of $180 million to $200 million, representing growth approximately 21% over 2022 and diluted earnings per share of approximately $0.40 to $0.50 a share. For the first quarter of 2023, we expect total revenue to be in the range of $39 million to $41 million with adjusted earnings per share of $0 to $0.03. With that, operator, please open the call up for questions.

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Q&A Session

Operator: The first question comes from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.

Jeffrey Cohen: Hey, good morning. How is everyone doing?

Thomas Sandgaard: Good morning, Jeff.

Jeffrey Cohen: So just to recap, so what was the main issue with the timing and the auditor? Was there one main issue or was it just a timing issue on a number of items?

Thomas Sandgaard: No, I would say it was simply a matter of the Markham is new, we have worked with for the past 6 years. They are no longer working with any publicly traded companies and Markham has done a great job throughout the year. We underestimated how long it’s going to take to close the full year and very, very early announced when we expected to have the earnings call. We had to extend that a little bit. That’s really all there is to it.

Jeffrey Cohen: Okay. And what about the K, Thomas, when should we expect that to hit?

Dan Moorhead: Should hit if not today, in the next day or 2.

Jeffrey Cohen: Okay, got it. And now that you’re through a good portion of Q1, the outlook I heard was sales reps up to 800 aspirationally, but how does that look from your estimation to unfold throughout 2023?

Dan Moorhead: I think we’ve talked about sales reps in the kind of mid-500s. So adding approximately 100 during the year net.

Jeffrey Cohen: Okay. Got it. Some of the Q4 spend that you’re showing related to some of the other divisions that are not yet commercial, you expect them to be commercial this year. So we should see some pull-through in spend. I guess I’m referring to the 1600 predominantly, and it sounds like the NiCO, which will file a 510(k) this year.

Dan Moorhead: There is going to be spend on both. I think you’re going to see a lot of €“ that’s why we give a range. Some of the things as we get closer to launch could have some additional expenses. And as the pulse ox side gets submitted to the FDA, we may see some additional expenses there as well. So I think there is a little bit of a range there of what we spend and just how quickly we get to submission and commercialization.

Jeffrey Cohen: Okay. Got it. And then lastly, as far as FDA inspections related to some of these other divisions, do you have €“ have you had any over the past quarter or so? And what’s expected over the coming quarter or so?

Donald Gregg: So this is Don from Zynex from the Monitoring division. We’ve had a previous FDA inspection, certainly not over the last quarter. But it was all part of a ZMI or Zynex Medical and Zynex Monitoring inspection, which we passed without any issues.

Jeffrey Cohen: Okay. And you would expect further inspections on some of the newer divisions prior to or related to our commercial launch?

Thomas Sandgaard: No, as I have said, there shouldn’t be any €“ so, those inspections are not based on what’s happening on the product side. Inspections of the company on a €“ I wouldn’t say on a regular basis, but we tend to see those in €“ with intervals of less than 5 years. And the product approvals, it’s a whole different scenario through the FDA. So, that’s independent.

Jeffrey Cohen: Okay. Got it. And then could you talk about adjusted EBITDA for full year €˜23? It looks like you are expecting a similar type of growth cadence and trajectory as you had in €˜22. On an adjustment basis, Dan, do you see that €“ it looks like you are coming in around where you are over 20% for the fourth quarter, but you averaged about high teens, 17%, 18% for the full year. Any thoughts there on €˜23?

Dan Moorhead: Yes. No, I think we were guiding more towards EPS this year and pushing away from adjusted EBITDA a little bit. But I think, generally, when you look at the year, you should see similar growth in €˜23 to what we saw in €˜22.

Jeffrey Cohen: Got it. Okay. Thanks for the call and thanks for readout.

Dan Moorhead: Yes. Thank you.

Operator: The next question comes from Simran Kaur with Piper Sandler. Please go ahead.

Simran Kaur: Hey. Good morning. This is Simran on for Adam. Thank you for taking the questions and congrats on the print. Maybe just starting off on the full year guidance of $180 million to $200 million, can you walk us through key assumptions at the low end and the high end of the range? And specifically, what is assumed for the core pain franchise versus ZMS?

Thomas Sandgaard: Yes. Maybe I will take that one. We basically €“ even though there might be a little bit of revenue in ZMS this year, in our guidance, we are not accounting for any of that. So, that’s all the pain management division. And obviously, the order growth we are seeing now is going to result in increased revenue over the next several years. And some of that is obviously going to hit here in the next couple of quarters. And the assumptions assume that as Dan mentioned earlier that by the end of the year, we can get up to around 550 sales reps. So, there will be an increase in sales reps in itself is not that productive initially. So, that’s going to be part of increasing our fixed expenses. But our existing sales reps are experiencing high growth right now.

And as they continue to become more and more productive, we expect that to turn into revenue in the $180 million to $200 million range. And what would determine if we are in the low end of the range versus in the high end of the range would probably be the productivity of the existing reps more than anything. We have a very stable scenario when it comes to how do we collect the cash, which is payments from health insurance companies. And that is obviously based on preset amounts and preset quantities and preset length of treatment that is determined by insurance companies. And we don’t really foresee any changes. So, productivity and from a better mix of insurances could also help us a little bit in terms of moving the revenue up. But we are still somewhat dependent on the labor market in terms of new hires for our sales force as well as employees for our corporate headquarters here in Colorado.

I don’t know if you have anything to add, Anna?

Anna Lucsok: To the productivity of sales reps?

Thomas Sandgaard: Yes.

Anna Lucsok: We have seen an increase in productivity of our sales reps, obviously, throughout the end of 2022 and then especially the first two months of 2023. And we are seeing them focus more on payer mix, insurance mix and driving that forward.

Simran Kaur: Great. No, that was perfect. I guess for my follow-up here, I just wanted to circle back on the P&L and specifically how we should think about the cadence of OpEx spend through the year. And really, I am trying to kind of hone in on what is assumed when you layer the impact of the ZMS build.

Dan Moorhead: Last year, we have talked about kind of what we do with ZMS, and ZMS increased about $5 million in €˜22. I think we spent about $7.5 million. We see a similar increase in 2023, so about another $5 million. Some of that is new hires, and some of it is just exit rate versus what we started the year at. So, you will see that layered into G&A over the course of the year. This year, we ended G&A at 23% of revenue. I think with the investments in ZMS and generally just inflation that continues to hit us pretty good, I think that stays pretty constant in 2023. Same on the sales side, this year, we were at about 42%. I think it’s fairly similar next year. Obviously, it depends how many people we hire and then where we end up on the top line. But with inflation and the number of people we expect to add this year, I think those percents of revenue are going to stay fairly constant.

Simran Kaur: Okay. Perfect. No, that was great, Dan. And maybe a quick one on capital deployment. So, you guys completed about $30 million in stock buybacks last year. So, how should we think about capital allocation this year and specifically stock buyback?

Dan Moorhead: I think it’s still on the table. We will still continue to do that. We are still generating cash from operations. So, we do still have excess cash in the business, and so that’s still something that we will consider. We are always going to look at what provides shareholder value and for us, and we believe for all of our shareholders, that provides pretty good value.

Simran Kaur: Okay. Perfect. I think that’s it for me. Thank you, guys.

Operator: The next question comes from Yi Chen with H.C. Wainwright. Please go ahead.

Yi Chen: Thank you for taking my questions. Just to clarify, does the FDA need to inspect the manufacturing facility of CM-1600 before guaranteeing the 510(k) clearance?

Thomas Sandgaard: Not specifically. As I mentioned before, it’s just a matter of when they routinely come to audit and inspect our facilities as part of €“ and taking on cGMP, etcetera. So, it’s €“ they don’t come out. They will look at the thing to look at last time. They always have some comments to various areas and suggesting the things we can improve. They will come out, the first thing to do is to check on that. It could be that there was a paragraph missing in a quality manual or something like that. They will check on all those things. And then they will just randomly inspect various areas. And as we keep adding more products as for instance, the CM-1600, there will be more parts of the company for them to look at.

So, in recent audits with them, it has taken a lot less time than they have planned, and they are only out here for a few days. And as we continue to grow our business, the time it takes them to complete an audit will most likely increase. But again, it’s not specifically tied to when we get the clearance for a specific device.

Yi Chen: Okay. And has recent communication with the FDA indicate that clearance could occur in first half of this year or second half of this year?

Donald Gregg: Yes. This is Don. We have been in contact with the FDA on a continuous basis. They have requested information at various times. We are still in that communication. I am expecting that we may have this in the first half of this year, but it might be early of the second half. It just depends on the type of information that the FDA continues to ask for.

Yi Chen: Got it. Lastly, given the growth momentum of orders you have seen so far in the first quarter and also the status of the labor market, are you likely to speed up hiring new reps, or do you think you will likely maintain the current pace of hiring? Thank you.

Thomas Sandgaard: I would say we are €“ we continue to be more and more critical in terms of the quality of the talent we hire. We have increased our efforts because it is a difficult market. So, we have increased the funnel, if you want to put it that way, but also increased how critical we are in terms of who we hire. That is a significant part of how we have seen productivity per sales rep increased here in the past many months is that we continue to be more and more critical. So, I think we will net-net €“ unless something changes in the labor market, we will continue to hire at about the same pace. So, adding a net of approximately up to 10 reps every month throughout the year. And of course, we are hoping that €“ we are still hopeful that the labor market will look better going forward. It’s still very tight, but…

Yi Chen: Okay. Thank you.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Thomas Sandgaard for any closing remarks.

Thomas Sandgaard: Well, thank you for joining us today. We are encouraged by the momentum we have coming out of yet another record year for Zynex. And we are excited about several upcoming regulatory submissions and operational milestones. We expect 2023 to be another transformational year for the company, and I appreciate your interest in Zynex. Have a great day.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.