Conformis, Inc. (CFMS) Q1 2023 Earnings Call Transcript
Good morning, and welcome to the First Quarter 2023 Earnings Conference Call for Conformis, Incorporated. My name is Tanya, and I will be your conference operator today. All lines have been placed on listen-only mode 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 federal securities law, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements made during this call 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 these forward-looking statements. Conformis disclaims any obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call will include time-sensitive information and is accurate only as of the live broadcast today, May 8, 2023.
I will now turn the call over to Mark Augusti, President and Chief Executive Officer of Conformis.
Thank you, and good morning. With me this morning is our CFO, Bob Howe.
We had a mixed quarter of performance with many positive results, offset by lagging revenue growth. From a positive perspective, we saw improving revenue performance within our hip franchise and international markets, increasing demand from patients for our Platinum Services offering and improved gross margin results. And operationally, we reduced OpEx and delivered a higher-than-planned cash balance.
However, our U.S. knee revenue has not yet returned to growth. The lingering effects from our shift to the new business model and our operational challenges have kept pressure on this important part of our business. Nevertheless, we believe we have the right business model, and we will endeavor to reengage surgeons and drive patient awareness of our Platinum Services Program.
With our Platinum Services Program, we now have over 225 facilities that have access to our new service. This represents approximately 70% of our U.S. business now being under contract or having access to PSP. Change is hard. And while we are disappointed that not all of our customers have elected to enroll in the Platinum Services Program, our Platinum Services orders continue to move in the right direction.
In Q1, we had around 500 PSP orders, which is 32% growth from the 380 orders in Q4 and up from the 110 orders in Q3. We like the trend and believe it continues to reflect the strong value proposition of our PSP offering. Our commercial team continues to seek creative and effective ways to drive interest and engagement to sell our program to ASC and hospital system in today’s challenging economic climate and a competitive environment that is increasingly focused on robotics.
One recent action that is showing positive signs is the launch of our TV advertising campaign. We launched this campaign back in February, where we targeted surgery-ready patients to explore the benefits of a truly personalized Conformis knee. The first two markets yielded 2.2 million households in TV and social media reach and 10.6 million impressions, as most households saw the TV commercial around 7x. This results in a lift in patient leads for many surgeons in those markets. The challenge now is converting the patient leads into surgical orders. We will continue to monitor the overall performance of this advertising campaign as we move forward with it.
Our hip business had a nice quarter. Although it is still working off a smaller base, we did see growth which was driven by the recent launch of our newest STEM product, Actera. Surgeon feedback has been favorable and the commercial opportunity is there. We need to address some outstanding supply chain constraints and execute better across the organization to take advantage of the general surgeon interest in this new hip stem.
Before I turn the call over to Bob, I would like to briefly cover a few other important updates. We are pleased to announce, on April 27, we received FDA clearance for our new cruciate stabilizing or CS poly insert for Imprint total knee system. Cruciate stabilizing is a growing segment in knee arthroplasty, and we are pleased we will be able to provide this option to our surgeons in the near future.
Over the past two quarters, we have implemented many cost-reduction measures to improve our cash position and extend our operating runway. We will continue to manage this extremely closely and will further align our cost structure with our current revenue and gross margin performance as needed.
We are making strides with our operations. On-time delivery is improving, order lead times are becoming more predictable and the plant is performing better. However, the transition to the new business model introduced new processes and new workflows, which remain inefficient. Although we plan for many of these, the changes and additions from our historical ways of doing things has taken longer than anticipated. We are actively managing these activities and expect to realize improvement in the future.
Our company has always been focused on looking at every way possible to deliver a return for our shareholders, and that continues today. As we have done with our past licensing deals, our recent business model change and the new product introductions, we will explore all options available to us to create incremental value.
Finally, I’d like to extend my appreciation to the entire organization. We have been going through a complex transformation over the past 18 months. The energy our team shows on a daily basis is incredible. We feel we have the leading hip-and-knee solution on the market, and we will keep pushing forward to help patients with better lives through Conformis.
I will now turn the call over to Bob to provide more details about our financial performance for the quarter as well as share thoughts on our outlook.
Thank you, Mark, and good morning, everyone.
As I usually do, I will start with product revenue, which was $12.7 million for the quarter and down 15% on a reported basis and 14% on a constant currency basis as compared to the first quarter of last year. Although this fell at the high end of our guidance range, it still reflected headwinds from our business model transition and our operational challenges. Our hip business was up 3% in the first quarter, which reverses the declines we had seen in the past few quarters. We believe Actera, which only just recently launched in November of 2022, will be a growth catalyst for our hip business. We are continuing to build inventory to support our existing surgeons and look to expand our surgeon base once our inventory levels improve.
Product gross margin was 39.1% in the first quarter, a sequential improvement from the fourth quarter and above our mid-30s guidance. We are working hard to keep our product gross margin moving in the right direction, but it’s important to note that we continue to face headwinds due to increased labor and material costs, operational inefficiencies and lower unit volume as we transition to our new business model.
Total operating expenses for the first quarter were $14.5 million, a decline of $5.9 million or 29% reduction from the first quarter of last year. The cost reductions impacted all functions and were in line with our previously communicated plan. This is the second consecutive quarter with a significant expense reduction relative to prior year. As Mark mentioned, we will continue to actively manage our expenses as we work through our top line challenges.
Moving to our balance sheet. We have cash and cash equivalents of $37.8 million at the end of the first quarter. We continue to prudently manage our cash, and our recent cost reductions have certainly helped in this regard. And finally, I’d like to outline our current outlook. We expect our second quarter product revenue to be between $11 million to $13 million. This expanded range reflects the reduced predictability due to our business model transformation, greater uncertainty given our operational challenges and the fact that adoption of Imprint and Platinum Services is taking longer than expected.
With that, Mark and I are happy to take your questions.
[Operator Instructions] And our first question will come from Eric Anderson of TD Cowen. Your line is open.
Hi guys. How’re you doing? Thanks for taking the question. I wanted to get your thoughts on revenue growth for the remainder of 2023. Do you think that is going to be coming mostly from reaching new customers within with your portfolio? Or is that going to be from increased utilization within the existing surgeon base?
Well, good morning, this is Mark. I think there’ll be a combination of both. We have plans to do both. Obviously, we want to reengage with existing customers. We definitely have continued interest in our Platinum Services Program and how to support that and launch that and the efforts around that. With the CS launch, we think we’ll get a little bit of incremental growth from that. And clearly, that will come from some new customers. But to get back to real growth and reinvigorate the business, we’re going to have to get new customers. Our agents have to do that. So we’re going to continue to support them.
I would hope that with the Imprint model that we have, where it reduced lead times, we’ve got a nice price point, we’ve got searching a box. Again, taking advantage of the shift to ASCs, we should be able to engage new customers that way. I think the deal has been a little distracted trying to implement PSP to existing customers. So now we have to sort of reengage new customers. And then really, Actera is going to get us some new customers as well. We’re bringing and investing in some new sets. So they’ll come in here later in the second quarter, and we’ll definitely add new hip customers with Actera. So that will be — that should be fine. Do you…
Yes, I agree with that.
Okay. Thanks for the question, Eric.
Of course. And if I could squeeze one more in. I was just curious how you’re thinking about the potential opportunity to establish partnerships going forward? You signed the Stryker partnership a year or two ago. Are partnership something that intrigue you guys going forward?
Yes. As I stated in my prepared remarks, I mean, we’re always looking for at all options and are open to considering things that make sense for shareholders. Our track record is, as you mentioned, with the Stryker one, we’ve done that. We will look to do that in other areas, hip, knee and shoulder. We’re actively pursuing and discussing continued licensing deals, which are royalty deals. So we’ll do that. I mean, I think it’s a little tougher now with some of the other things, but our IP portfolio remains strong, and there’s the opportunity to license those there. And if other, as you say, partnership opportunities present themselves, we’ll certainly explore those.
Understood. Thank you.
Thank you, Eric.
And one moment for our next question. And our next question will come from Steve Lichtman of Oppenheimer. Your line is open.
Thank you. Good morning, guys. I was wondering if you could provide some color on just how some of the customers who have been on Platinum Services for a quarter plus, what sort of quarter-to-quarter trends you’re seeing in terms of patient interest? And what you’re hearing from them in terms of the positives and challenges in terms of getting patients to go through that model?
Well, interesting, the — personally, when I talk to physicians, I talk to some of our agents, it’s not really a challenge with the patients. The bigger challenges are just the bureaucracies and the flow through the existing workflow of the customers because they have to add this a little bit. So they struggle with it, frankly, a little more than the patients do.
The market research has been pretty clear, and our real-world experience is pretty clear. The patients understand the story. Steve, they understand like, hey, insurance pays for a standard implant. And if I want to, I can upgrade to a custom. And they see the marketing messages that we’ve got. And about 30% of the patients, pretty routinely. It’s pretty strong. 30% of the patients choose to upgrade. And that’s not a problem. We’ve actually made it easy for patients to do that in how they pay. And that has been hard. The real challenge is getting customers over the hump that this is something they want to do and adding to their workflow, because it’s a new step in the process, so to speak.
Are you — I’m wondering if you could provide an update on the cementless knee. Is that something that you’re targeting a limited launch deal around the end of the year?
Yes, we are. I mean, we’re struggling mightily to make sure it stays in the year window. With any project, Steve, there’s good days and bad days. As far as you know, it’s the schedule we’re going to be able to pull in or push out. But recently, it’s been sort of generally positive. So we still think we have the ability to do that. We had some — so anyway, I won’t get into the sausage because we actually — we’re working hard on that just last week, and team was meeting to make sure that we could still keep that project on track.
So that is the plan today. We’ll keep you updated, but that is the plan today. And rest assured, the team knows it’s a critical product to launch given the growth and interest in cementless.
Got it. And Bob, wondering if you can give us a little bit of color on gross margin sort of, I guess, sequentially here in this quarter and then exiting the year? And then also same on OpEx, I mean, is this a level — from this level, how much further do you think we can see you guys go over the next few quarters?
Yes. So let me just start with OpEx. I think the OpEx results that you’ve seen will probably be similar quarterly. Obviously, there’s — as you know, there’s a variable dynamic that will change with revenue. So that’s a little bit of a wild card. But as far as the stuff that we can manage, I think the rate that we have seen should be relatively stable to what you saw in Q1, potentially down a little bit, but nothing dramatic.
As far as margin, again, margin obviously has a huge impact on revenue and where we go. So it’s a little tricky to say how we’re going to exit at this point. Really, a lot of that depends on revenue trajectory. But if you look at Q2 and the range there, I would say I’d be expecting something similar, right? I mean if we’re at the higher end of the range, I could see some improvement. If we’re at the low end of the range, I could see it being down a touch, but I would expect similar in Q2, and then I think Q3 and Q4 are very dependent on how we’re progressing on the top line.
Understood. Thanks guys.
One moment for our next question. And our next question is going to come from Joshua Jennings of TD Cowen. Your line is open.
Hi, good morning, gentlemen. Wanted to just ask a couple of follow-ups. First on PSP or Platinum Services Program. I think we’ve gone over this before, but just to be clear, if you work through your historical surgeon base now, and I think you called out 225 accounts that are kind of adopted the PSP. But are they more historical customers to work through work — has that process has been completed?
Well, I would say, there’s probably more, Josh, but you have to understand, it’s — to give details to your question, we have a lot of historical customers, right? The nature of our business being a little different. We’ve got customers that have ordered from us in the past, but maybe haven’t ordered from us recently. So if you use the word historical, I differentiate that from like what we call sort of like active. So there’s certainly still room to go back with the story in PSP and do contracting with the [co-pay], customer database that we have an historical customers. And so we’re working through that. I forgot the exact number. I think Bob may know. But we’ve got — of our sort of overall customer list, and certainly that includes all historical customers, I think we’ve got over 70% or so signed out right to the PSP.
So I think we’ve been pretty successful there. Now the key is, as I think was mentioned earlier by Eric, we got to get — we got to — just because they have access, we’ve now got to get them being active with PSP. That’s the next thing. It’s the next step, Josh, as well as new customers to where I think you’re going. And we’ll continue to do that. I mean the reality is PSP is letting us engage with new customers that we otherwise wouldn’t be engaging with. But as I think I’ve indicated to you before, it is a little bit like a capital sale. Like it’s got — it’s a little bit of a longer process. I mean, any time you’re trying to transition account to you is a long lead time in orthopedics, and it’s even a little bit longer as they get through this. But the interest is there, and we’ll keep pushing.
Understood. Thanks for that Mark. Wanted to just ask also about the ASC opportunity with Imprint. And I know your sales force is focused on converting your customer base to this PSP model. How should we be thinking about, I guess, the engagement with Imprint and trying to drive growth with that product line? And just, I guess, the follow-up to that is just maybe an update on where your self-worth stands. Is it seamless much attrition rate or it probably felt like you’ve been adding more than and subtracting so far in the early days of 2023.
Yes, I think taking over the reverse order, the early days of 2023, and I don’t know, Bob, if you have any color, my sense is there’s been less activity than the past, I haven’t seen as much as exits and starts. We — I would say, we probably been relatively flat, maybe growth slightly. And we’ve certainly added as much as has taken away, right? And I’m actually — seeing actually in a couple of the new agents that we’ve added, some experience and actually doing well.
Then going to your next question, we are seeing a shift in our business, and we’re actually the — at least as far as we can tell, right, this is not perfect. But as far as we can tell, the percentage of business coming from the ASC is growing, right, versus hospital base. So obviously, with our sales numbers, you can deduct from that. That, that means we’re getting hurt in the hospital more than we are in the ASCs, and I think that makes sense because of the robotic trend, right, Josh.
So the opportunity in the ASCs is there. What I said in one of the answers to questions before, I believe it’s real. I think that we have not fully realized or really pushed the Imprint opportunity to ASCs because the field has been very inward looking and busy transition our current customers to imprint as well as the PSP model. And so that’s taken away time and frankly, confidence going after getting new customers. And some of that rightly so because we had the operational challenges behind that, right. With only so much Imprint available, I’m not getting the right lead time we wanted.
So we’ve worked through most of those. So I’d like to think as we head into the second half of the year, we’re building back some confidence in our agent sales force. And we’ll go after those new ASC customers because we really do have a good solution for them, especially now with the CS launching and then the Porous opportunity for Imprint down the road. It’s just — it’s a really good product. And the business model we have for the ASC in the delivery model, all that stuff really makes sense. So hopefully, we’ll get some more engagement with new opportunities here in the second half.
Great. Thanks so much Mark.
Thank you, Jeff.
And I’m showing no further questions. This concludes today’s conference call. Thank you for participating. You may now disconnect.
Thank you, operator.