Start Time: 08:30 January 1, 0000 8:57 AM ET
Conformis, Inc. (NASDAQ:CFMS)
Q2 2022 Earnings Conference Call
August 09, 2022, 08:30 AM ET
Company Participants
Mark Augusti – President and CEO
Bob Howe – CFO and Treasurer
Conference Call Participants
Eric Anderson – Cowen
Steven Lichtman – Oppenheimer
Caitlin Cronin – Canaccord Genuity
Operator
Good morning, and welcome to the Second Quarter 2022 Earnings Conference Call for Conformis, Inc. My name is Justin, and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After management’s remarks, there will be a question-and-answer session.
I would like to remind you that this call will include forward-looking statements within the meaning of the federal securities law, which are pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements made during this call that are not statements of historical facts should be considered forward-looking.
These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements, including those discussed in the Risk Factors section of Conformis’ public filings with the U.S. Securities and Exchange Commission.
You should not place undue reliance on forward-looking statements. Conformis disclaims any obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether of new information, future events or otherwise.
This conference call will include time-sensitive information and is accurate only as of the live broadcast as of today, August 9, 2022.
I will now turn the call over to Mark Augusti, President and Chief Executive Officer of Conformis.
Mark Augusti
Thank you, and welcome to our second quarter earnings call. We appreciate you taking the time to hear our business update. With me today is our CFO, Bob Howe.
Let’s begin with several positives from the quarter. First, our revenue came in at the midpoint of our expectations. Second, our international sales grew 6% in constant currency with our continued progress in several key geographies, including Australia.
Third, our Imprint Knee continues to receive positive surgeon feedback, and revenue from ASC customers continues to grow. And then lastly, we recently executed our first major national agreement for our Platinum Services Program.
Next, I would like to offer additional perspective on our updated outlook. As you will have noted in our release, we adjusted our full year product revenue outlook to a range of 57 million to 61 million. The main driver for our adjusted outlook is that we did not exit the second quarter with the accelerated business momentum we thought we’d have back in May.
There are several reasons for this. First, the environment is still challenging. Despite the general recovery in elective procedures, staffing shortages remain at medical facilities and elevated levels of case rescheduling continue.
Second, our portfolio of transitioned Imprint continues to ramp as we shift our focus to the ASC. However, the commencement of the full commercial release of our Imprint Knee System has been impacted due to availability of several key components from our supply chain partners.
To address this challenge, we have pivoted our launch approach to a rolling release schedule, with the goal to be fully launched by late Q3. And then third, supply chain and internal staffing challenges have impacted our just-in-time model. This has led to increased number of cases with type, product deliveries, as well as additional cases being rescheduled.
Moving to an update on our pipeline, we did have some changes this quarter due mainly to delays from various testing firms we use as well as supply chain partners. For Actera, while I’m pleased to report that we received our 510(k) clearance this week, we nevertheless are now planning for a limited market release early in the fourth quarter, about a 90-day delay due to late shipments of instruments from a supplier.
We remain encouraged about the commercial opportunity for Actera given the positive surgeon feedback from our validation labs. Also, due to supplier delays beyond our control, we now anticipate an early April 2023 launch for our porous coated knee. This is particularly frustrating since the segment is one of the faster growing segments in the ortho space and is creating more and more interest from our surgeon customers.
We’re exploring every option possible to expedite the timeline. As I’ve said on past calls, those two products are critical for us to address grafts within our existing product portfolio. Our long-term growth depends on providing a more robust product offering so we can capture greater procedural share from our existing surgeon users and attract new surgeons.
In closing, as I mentioned at the beginning of my comments, we announced last week that we had signed a contract with Vizient, which will allow us to begin contracting at the local level with its members for our Platinum Services Program. We believe this is further validation of the benefits that this program can provide for patients and healthcare facilities alike.
We continue to add to the number of facilities under contract for Platinum Services Program. We’ve enrolled 21 healthcare facilities through the end of the second quarter. We anticipate that new facility enrollment in our Platinum Services Program will continue to remain choppy, but we are encouraged by the general interest from the marketplace.
I will now turn the call over to Bob for some more details about our financial performance for the quarter and our outlook.
Bob Howe
Thank you, Mark, and good morning, everyone. Product revenue was in line with our expectations at 15.1 million, which was essentially flat compared to last year. It showed slight sequential growth from the first quarter. Within product revenue, our worldwide new products grew 1% on a reported basis. Our hip product revenue was approximately 744,000, which was down 18% compared to last year second quarter.
As I mentioned last quarter, we had a significant amount of rescheduled activity occur in the second quarter last year, which made for a challenging comp this quarter. We expect hip to return to growth in fourth quarter following the launch of our Actera hip system. Product gross margin for the second quarter was 35.1%, a sequential improvement of 100 basis points as compared to the first quarter.
While we continue to face headwinds from increased material and labor cost as well as inefficiencies as we transition to our new business model, we are focused on making the necessary changes to improve our operations. We expect to sequentially improve this metric again in the third quarter and be back to the low 40% margins in the fourth quarter. As you’ve heard me say before, longer term, we believe that as we ramp Imprint and the Platinum Services Program, both of which produce higher gross margins than our legacy business, we have a meaningful opportunity to further expand our gross margins.
I’ll now move to OpEx. Our total operating expenses for the second quarter were 18.2 million, which was 2.3 million lower than the first quarter. Relative to the first quarter, sales and marketing was down slightly. R&D was down 500,000, partly due to adjustments to the timing of our new product launches. And G&A was down 1.6 million, primarily due to reductions in legal fees incurred to protect our IP and lower product delivery expenses as we continue to improve our delivery performance. For the year, we now expect to be at the lower end of the $75 million to $81 million range we previously communicated.
Moving to our balance sheet. It remained strong with cash and cash equivalents of 72.6 million at the end of the second quarter. As expected, our use of cash was down in the second quarter as compared to the first quarter. Second quarter cash use was 10.2 million, which was 7.6 million lower than the first quarter. Our cash use will continue to fluctuate quarter-to-quarter and near term. And as highlighted last quarter, we expect to increase inventory over the next few quarters to support our product launch cadence which includes the full commercial launch of Imprint and the limited market releases of our Actera hip and porous coated knee.
I will close with some additional details on our outlook. We expect our third quarter product revenue to be between 13 million to 14 million. As Mark mentioned, we did not enter the third quarter with the level of momentum we expected to have back in May. We continue to deal with supply chain issues and the impact from our previous product delivery challenges. In addition, our recent strategy pivot has come and medical facilities are still dealing with staffing issues. This has resulted in more volatility than expected in our near-term order volumes.
Based on these factors, we now expect to see the sequential decline in product revenue from the second quarter to the third quarter that we historically experience, since the third quarter is typically the slowest quarter of the year for us. Based on our updated expectations for the third quarter, factoring in our new timelines for the full market release of Imprint and a limited market release of Actera hip and the ongoing portfolio transition, we expect our full year product revenue to be between $57 million and $61 million.
With that, Mark and I are happy to take your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]. And our first question comes from Josh Jennings from Cowen. Your line is now open.
Eric Anderson
Hi. This is Eric on for Josh. Thanks for taking the question. Was hoping to just hear a little bit more on the recent procedure volume transit you’ve been experiencing? Are you able to share with us the month-over-month trends that you’ve experienced through 2Q and now into early 3Q?
Mark Augusti
Yes. Hi, Eric. This is Mark. Thanks for joining us this morning. Yes, thanks for that question. It’s good too, because I think we experienced what other companies have discussed and that was early 2Q was relatively strong. And then June, there was definitely a market slowdown that continued into July a little bit. So we sort of see that continuation in July, but we are expecting a little bit more strength later in the quarter in Q3. But having said that, looking at — taking everything in context, as Bob pointed out, we are going to see sort of the historic cyclical down for us and I think for the industry for Q3. Not horrible, but just sort of that cyclical kind of summer off vacations and that type of stuff. And again, as we mentioned the staffing challenges. So that’s sort of the trends we saw month-to-month, Eric.
Eric Anderson
Okay, great. Thank you. And then just on the Vizient deal, could you talk a little bit more about how Vizient is going to be offering Conformis products to their hospital customers? And then just to double check, there’s no contributions from that deal factored into guidance for this year, correct?
Mark Augusti
No, not at this point. And yes, we’re very excited about it, because they reviewed our program, obviously, and they worked out the contracting with us, which we’re excited about. So it provides access and it gives us sort of the opportunity to discuss it and approach the Vizient customers. But there’s no sort of obligated purchases or anything like that. And you understand how these GPOs work. But for us, it was pretty exciting, because it sort of clears the back end, sort of establishes sort of how the program’s rolling out and how it can work. And for the facilities that participate in the Vizient network, that will be a big deal for us to be able to get in there and present the program to them.
Eric Anderson
Great. Thank you for taking the questions.
Mark Augusti
Thanks, Eric.
Operator
Thank you. And our next question comes from Steve Lichtman from Oppenheimer. Your line is now open.
Steven Lichtman
Thank you. Good morning, guys. Wanted to touch base on the supply challenges that you noted, Mark, specifically on Imprint and on hip, it sounds like the impact in terms of launches on those two are relatively small. Can you give us a sense of what you’re doing to get better visibility on that supply? And what gives you the confidence that for those two products that the impact on launches is not going to be longer than anticipated?
Mark Augusti
Yes, I can. It’s a lot of stuff, Steve, but I’m happy — I appreciate the question. Good morning, by the way, and I’m happy to do that. So first off on Imprint, I just want to point out, we are in limited release, we’re continuing to grow volume and roll that out. And we are still planning to transition over our business on September 1.
In advance of that, when we say full launch, what we’re really trying to do is be able to make sure we can deliver the patient specific intraoperative solution and plan that goes within three to four weeks of customer ordering versus the six weeks that it takes us to fully custom thing [ph].
So in limited release, as we’ve been building up inventories, we’ve kept Imprint at sort of the six-week lead time, which is too long for that product. We know that customers want it sooner. And that’s why we’re talking about full market release, getting it down to that three to four weeks. And we were hoping to do that sooner, Steve, as I said in my prepared comments, but now it’s looking like it’s going to be late Q3.
And what we’re doing actually is we’re doing a rolling sort of reduction in the lead time. So the surgeons and their officers, when they go to order from us, we’ll see each week as the lead time it gets pulled in, because we — it’s sort of like a reservation, right? They go on to our Web site and they actually order the product and they can see the surgery date when it’s available.
And the issue first there from a supplier standpoint, a little bit of it has been our own sort of internal challenges dealing with staffing and some of the changes that happened towards the end of last year and beginning of this year with the workforce. But you’re finding that things for Imprint for us that affect the inventory build is little stuff, like packaging, right? Literally, packaging suppliers are late in their deliveries.
For us, a big thing, which you probably heard about, Steve, is Tyvek. And some of the films that we need to make the pouches that stuff gets sterilized in, those products the lead times have gone out. So things that were two to three, maybe four weekly times are now 6, 8, 12 weekly times.
And so that’s very challenging to do this when product you’re expecting to have that goes into your manufacturing process isn’t available. Simple one, the reason why — so I feel comfortable because we’re very close to Imprint, so I feel very comfortable on the rolling dates there; high, high confidence.
And then on the hip, really pleased with the 510(k) approval, really pleased with the surgeon feedback from the validation labs. We have all of the instruments in hand now except for one part from one supplier. And so we’re highly competent based on discussions with that supplier, though it’s late that they will make the new communicated date, and that gives us confidence that we’ll be able to get into limited release on this product sort of late Q3.
And from our standpoint have most of the fourth quarter to have this very exciting new hip product in with limited release with our surgeons that have been involved in designing this. So that is sort of the detail there. But again, the delay there is just in this case, there’s a few other instrument suppliers but they’ve all been delivered now except for one. So we’re only managing one supplier, so high confidence on Actera.
And then you didn’t ask it, but I’ll talk about it. We all know cementless porous coating is important. Again, we’ve had validation labs, been able to continue all the testing and work we need to do for our 510(k) submittals. So that’s not the concern to us right now. The real issue is just supplier lead times, frankly, on some of the casting components we need for both the femoral and tibia trays, some of the components there to be able to build up inventory stock of the cementless components.
And that’s important, because you need to have all the sizes and all the inventory available. And again, it’s just one or two suppliers. We’ve got detailed plans with them. And as I mentioned, we’re looking at every opportunity. We see some potential to pull things up. But we just want to sort of be sort of balanced in the approach.
And so right now, it’s looking like it’s going to be sort of late Q1, early Q2, which is certainly disappointing. Because things that we expected to get in hand just all of a sudden, they’re not available for another 60 or 90 days. But that’s the nature of the supply chain challenges we’re dealing with in medtech these days. Okay?
Steven Lichtman
Yes, that’s helpful color. Thanks, Mark. The other consideration you mentioned, the updated guidance was your change in the business model. Just wondering if you’d talk a little bit more what you’re referring to in terms of that having an impact? Obviously, we know what the business model changes. But is it the shift from fully custom to Platinum Services? And what did that comment mean relative to sort of the impact on new guidance?
Mark Augusti
Well, anytime you make a change, right, and you worry just the rhythm and how customers react, we’ve done a lot of market research. We’ve had tons of calls in preparation with our customers. But at the end of the day, the ordering site and the webpage and all the other stuff is going to change on September 1. And I’m not suggesting it’s not going to be live or accurate, because all that stuff is and we’re ordering Imprint as you know today.
But the real question is when we basically flip people over, we’re going to get Imprint versus fully custom product, how will customers behave on balance? I have every reason to believe it’s fine, because we still have a lot of value and actually are giving more flexibility with Imprint. But it is a change, Steve. So that’s really the question. We’re managing through that. We feel like all the signs are positive and everything’s fine. But it’s like everything else. Until you take that first step, you’re never sure.
So we’re just trying to be balanced in the approach given what we’re seeing in the market, both from scans and surgical trends, and I talked a little about that in the first question with what we saw in the month-to-month, but then also this is all going on while we’re doing this business challenge. Fundamentally, we’re doing it because it’s going to be more growth opportunities.
And I want to reiterate that we are seeing really good competitive uptake in our Imprint. We are seeing really good growth in the ASC segment, which is really the fundamental rationale for the strategy. There’s a lot of value there with being able to provide the Imprint system with the business efficient model, with the patient’s specific surgical plan, the flexible polys which we don’t have on our — poly flexibility which we don’t have on our poly customer, and do all that as I said in that three to four-week timeframe.
That’s what’s exciting to our customers and what we’re moving towards. And we’re seeing it in the numbers and what we’re seeing in our ASC trends. So we feel very bullish about things. And we’ve got the time here to execute this and do this, and we’re going to get it right. It’s just a choppy Q3 for us.
Steven Lichtman
Just lastly, international, good to see that that is in the positive zone after obviously having some reimbursement challenges there historically. What’s your outlook for international over the next couple of years? And what are some specific targets and what’s the opportunity for you?
Mark Augusti
Yes. Thanks, Steven. And it has been a really tough ride over there. And I don’t want to get over our ski tips [ph], because Germany is still a challenge for us, because of the really just sort of harsh reimbursement environment and whatnot. And then you’ve got MDR stuff you’re dealing with. But what we’ve seen is, the gentleman that’s leading our business there has made some really good moves with some of the other countries with our agents. And we’ve seen growth in some of the other countries, small growth but now growth. That wasn’t there before.
Obviously, as I mentioned in the remarks, Australia, which is a really good market for our model, it just took longer to get there through a regulatory process than we would have liked. But it was worth the pain and toil, because now it’s delivering really good for us. And I think Australia has a chance to be our second largest market after Germany. So really, what you see happening is Germany sort of flattened out. There’s still demand for our products, because if you really dig into it, we’ve got great clinical results and a lot of work that’s been done in Germany.
And so people really like the product and they want the product. It’s just the reimbursement challenge. And what’s happened is that growth is sort of declined, if you will, right, has bottomed out, Steve. All the other countries have come back into slight growth for the most part, maybe not every single one. And that’s delivered finally for us in the quarter nice growth. And I think we have a chance to continue sort of on that track here with reasonable expectations internationally.
Steven Lichtman
Great. Thanks, Mark.
Mark Augusti
Thanks, Steve.
Operator
Thank you. And our next question comes from Caitlin Cronin from Canaccord. Your line is now open.
Caitlin Cronin
Hi. This is Caitlin on for Kyle Rose. Just on Platinum Services —
Mark Augusti
Good morning, Caitlin.
Caitlin Cronin
Hi. How’s it going? Just on Platinum Services, how’s the rollout going? And have you had any challenges similar to the charges you’ve noted for the other products? And how many more facilities do you expect to add this year on contract? And then just on Vizient, how do you expect the Vizient partnership to really drive uptake of Platinum Services as well as Identity and Cordera this year and into next year in the future? Thank you.
Mark Augusti
Yes. So they’re really are good questions, Caitlin. So the discussions on Platinum Services are going really, really well. I’d mentioned that it’s sort of like a capital sale. So it’s a bit choppy and it’s sort of early days. So I would like it back to — I know we probably can’t all remember that far away, but the early days of robot were sort of very slow initially.
And then obviously there was general acceptance as the market starts to integrate it, bring it online, and I think that will be the case with Platinum Services. And obviously, as a smaller market share player, we don’t quite have the reach the big guys have. So our adoption curve is probably going to be even flatter than robot. But the business model is just too compelling.
And we’re sort of very much skating to where the puck is going in the industry as far as patients wanting personalization, as far as Premium Services being offered to patients, patients willing to pay for cash pay services, though all of that in line with where the market is going. We added more facilities under contract in Q2. Clearly, we have a number of discussions. We’re very excited about the number of discussions we have. So we’re not going to give a specific number, but we absolutely expect to add more facilities in the second half.
And Vizient is going to be a really nice kind of tailwind in that as well, because it really gives us something to go and talk to and market and chat about. And I see that tailwind sort of keeping us going into 2023 as we looked at more Platinum Services account. So this is early days. It’s very exciting.
Surgeons are interested — very much interested just talking about it. You can see a lot of surgeon peer-to-peer discussion about patient education and the model and how to implement it. And as I said, it’s just very compelling and this is where the market is going. So we’re excited about it. But it’s going to be sort of a flat but upward adoption curve certainly over the next two to four quarters. Okay?
Operator
Thank you. I am showing no further questions. I will now like to turn the call back over to Mark Augusti for closing remarks.
Mark Augusti
Thank you, Justin. Once again, everyone thanks for joining us this morning. Thank you again for your interest and investment and performance. The team’s working hard to realize the growth option we have, the strategy is strong and remains intact.
And we’re extremely confident that we have a great Implant portfolio that delivers great clinical results and the most unique service program in the industry with our new Platinum Services Program. They will gain traction over the coming quarters, as I talked about. So look forward to providing further updates later in November.
With that, we’ll end the call and wish you all a great rest of the day. Thank you.
Operator
This concludes today’s conference call. Thank you for participating. You may now disconnect.
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