U.S. Markets closed

Edited Transcript of NVRO earnings conference call or presentation 21-Feb-19 9:30pm GMT

Q4 2018 Nevro Corp Earnings Call

MENLO PARK Feb 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Nevro Corp earnings conference call or presentation Thursday, February 21, 2019 at 9:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Andrew H. Galligan

Nevro Corp. - CFO

* Juliet Cunningham

Nevro Corp. - VP of IR

* Rami Elghandour

Nevro Corp. - President, CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Danielle Joy Antalffy

SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst

* David Kenneth Rescott

Canaccord Genuity Limited, Research Division - Associate

* David Louis Turkaly

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* David Ryan Lewis

Morgan Stanley, Research Division - MD

* Isaac Ro

Goldman Sachs Group Inc., Research Division - VP

* Joanne Karen Wuensch

BMO Capital Markets Equity Research - MD & Research Analyst

* Lawrence H. Biegelsen

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Malgorzata Maria Kaczor

William Blair & Company L.L.C., Research Division - Research Analyst

* Matthew Charles Taylor

UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices

* Robert Adam Hopkins

BofA Merrill Lynch, Research Division - MD of Equity Research

* Robert Justin Marcus

JP Morgan Chase & Co, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Thank you for joining Nevro's Fourth Quarter and Full Year 2018 Earnings Conference Call. (Operator Instructions) And now, I'll turn the call over to Juliet Cunningham, Vice President of Investor Relations for Nevro.

--------------------------------------------------------------------------------

Juliet Cunningham, Nevro Corp. - VP of IR [2]

--------------------------------------------------------------------------------

Thank you, Jodie, and thanks all for participating in today's call. Joining me are Rami Elghandour, Nevro's President and Chief Executive Officer; and Andrew Galligan, our Chief Financial Officer. Earlier today, Nevro released financial results for the fourth quarter and full year 2018 ended December 31, 2018. A copy of that press release is available on the Investor Relations page of our website. This call is being broadcast live over the Internet to all interested parties and an archived copy of this webcast will be available on our IR page.

Before we begin, I'd like to remind you that management will make forward-looking statements on this call within the meaning of federal securities laws. All forward-looking statements, including our discussion of operating trends and expectations of future financial performance, including full year 2019 guidance, are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to material -- to differ materially. Accordingly, you should not place undue reliance on these statements. Please review our filings with the SEC, including our quarterly report on Form 10-K, which we expect to file today, for a full description of risks and uncertainties. Nevro disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of today, February 21, 2019. And now, I'd like to introduce Rami Elghandour.

--------------------------------------------------------------------------------

Rami Elghandour, Nevro Corp. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thanks, Juliet, and thanks, everyone, for joining us today. I'm going to begin with a review of our fourth quarter and fiscal year 2018 performance and highlight some of our accomplishments during the year. I'll provide our revenue guidance for 2019 and conclude with details on our long-term pipeline and outlook. Then we will follow with a deeper review of the fourth quarter and full year financials for 2018 as well as expectations for 2019. Then we'll open up the call for your questions.

Worldwide revenue for the fourth quarter was $107.9 million, an increase of 10% year-over-year.

(technical difficulty)

$1.6 million, up 13%. Fourth quarter international revenue was $16.3 million, which was a 1% increase on a constant-currency basis. These results were driven by continued adoption and demand for our unique HF10 therapy and execution by our sales teams. We delivered full year revenue of $387.3 million, up 19% year-over-year. In the U.S., full year revenue was $321.8 million, a 22% increase. International revenue was $65.5 million, a 2% increase on a constant-currency basis. Underpinning our success in the last 3.5 years are our people and culture. Our focus on innovation has led to the transformation of the SCS market, and in the process, we've built a substantial business and drove a majority of the market growth during this period. We continue to advance our unique market strategy by strengthening the 4 pillars of our business: our differentiated technology; our track record of execution across the key disciplines of our business: commercial, R&D and operations; our best-in-class clinical evidence; and the platform applicability of our technology.

We continue to maintain exclusivity in delivering our differentiated technologies by leveraging our deep and diversified IP portfolio. In 2018, we had a favorable ruling in our intellectual property lawsuit against Boston Scientific, resulting in Boston Scientific declaring that they have no plans to launch a high-frequency system. Additionally, in 2018, we had a significant litigation victory against Boston Scientific in that the U.S. [PAN] office ruled that 2 key Boston Scientific patents are invalid within our parties review. These patents were the cornerstone of Boston Scientific's action against us in Delaware. In a separate matter, last week, we initiated a lawsuit against Stimwave for patent infringement, reflecting our continued commitment to enforce our IP and maintain our exclusivity in the market.

Our track record of execution has allowed us to touch the lives of over 40,000 patients. To put that into context, 2,500 patients have benefited from HF10 at the time of our IPO, and that number has reached over 40,000 in only 4 short years. To broaden our reach, we also continued our investment in our commercial infrastructure, including substantial advancements in filling in our U.S. sales leadership across the area of leadership and regional director levels as well as some key appointments in our European sales leadership.

This week, we added Michael Carter as Global VP of Sales to our strong management team. Michael has a long track record of success at Stryker, and we're confident that his leadership will strengthen our global commercial organization. Beyond our commercial focus, our clinical evidence base continues to be a meaningful differentiator, positioning us to deliver unparalleled value across our stakeholders, including patients, providers and payers.

Recently, a global registry of long-term real-world outcomes in 1,660 patients receiving HF10 therapy was published. The long-term responder rates were 78%, and the overall explant rate in these patients was 3.7% for all pause with only 1.2% due to ineffective pain volume. These results are consistent with the results of our SENZA-RCT in terms of responder rates as well as explant rates. In the Senza-RCT, we demonstrated an explant rate that was less than half that of traditional SCS. This is a distinguishing feature for HF10 therapy that is relevant to all of our stakeholders. We also continued to advance our platform, demonstrating positive results in a number of key feasibility studies. We began enrollment in 2 RCTs in areas of unmet need: painful diabetic neuropathy and nonsurgical refractory back pain, and we're seeing momentum in diabetic neuropathy enrollment. This year at NANS, HF10 was featured in 12 podium presentations and 7 poster abstracts, highlighting data from our emerging clinical pipeline, which reflect the investment and progress we've made. At NANS, we also introduced our freedom to do more marketing campaign, highlighting the ability to do more while programming versatility, more pain types treated and more patient support. This message was received enthusiastically from our customers and underscores the core differentiation of our company to do more to support of our patients. We made a lot of progress in just one year and now let's talk about where we're going, both in the current year and longer term. Beginning with 2019 revenue guidance.

Based on our current business outlook, we're expecting full year 2019 revenue of $400 million to $410 million. I'd like to outline the current assumptions around these estimates. In our international markets, we expect a flat year in constant currency due to the market dynamics in Australia. Specifically, while we continue to expect growth in Europe, offsetting that growth is the impact of the reimbursement changes in Australia that will begin in April of 2019. It's difficult to know at this point what that impact could be, so we're taking a cautious approach at this stage.

In the U.S, we expect to continue to convert competitive business and grow our position in the market. There are a couple of key factors included in our current U.S. expectations. First, we're assuming sales attrition will continue to be in line with net device industry benchmarks. We note that turnover has a higher impact on our business due to Nevro's relatively new entry to the market compared to our peers as well as a higher degree of rep dependence in our space.

Secondly, while our sales hiring and retention improved in the second half of 2018, with 41 net sales rep additions, we expect the cumulative impact of historical attrition, coupled with lower net hiring in the first half of 2018, to constrain our growth in 2019. We're confident that we have continued to bolster our commercial approach and have developed solutions to penetrate a broader segment of the market on our path to market leadership. In late 2019, we expect a new product launch that will allow us to bring to market the most versatile platform in SCS. We've established Nevro as a significant player and HF10 as a superior pain therapy, and we are excited to offer our customers the broader set of solutions to make the biggest difference in the lives of their patients.

As always, we will lead with HF10 first, given its demonstrated superiority. Beyond our new product, we expect our GPO contracts to improve access for our sales team and bring HF10 to more patients in need. We also anticipate DTC programs, coupled with our new indications and products will also drive greater market growth and increase our share in the market. We expect many of these initiatives to take shape in late 2019, positioning us for growth and market share gains in 2020 and beyond.

We have historically shown we can drive market growth, and we expect to grow above market over the long term. Further, our emerging clinical pipeline will allow us to truly expand the market. We believe we can address a $4-plus billion market opportunity by starting with our existing U.S. market, which is approximately $2 billion today and extending our platform to clinical indications that have been historically difficult to treat. Beginning with upper limb and neck pain, painful diabetic neuropathy as well as nonsurgical refractory back pain and building on additional indications such as postsurgical pain and pelvic pain.

Ultimately, we believe other longer-term indications such as abdominal pain and deep brain stimulation could benefit from HF10 therapy as well. These indications are currently in the early stages of development. In closing, while the past few years have brought us unprecedented success, I continue to believe the future is even brighter. We have a great product that truly gives people their lives back. We have an incredible group of people who are passionate and driven to make a difference. One of the things that is [quotable] (inaudible) at Nevro is "Everybody matters". Everyone in our organization has a voice and the ability to make a positive impact on our patients, customers and each other. We've successfully built a substantial business and have the product and indication pipeline to significantly expand the market. We've demonstrated the ability to maintain exclusivity of our product against larger entrenched players. We're finding new applications for HF10 every year and are excited about what our therapy can mean to many more patients in need. We believe we can be a market share leader in a large and growing market over time based on the strength of our people, product and market opportunity. And we're making the necessary investments and building the scale to realize our full potential. And with that, I'd like to turn the call over to Andrew.

--------------------------------------------------------------------------------

Andrew H. Galligan, Nevro Corp. - CFO [4]

--------------------------------------------------------------------------------

Thank you, Rami. Revenue for the 3 months ended December 31, 2018, was $107.9 million, an increase of 10% year-over-year on a reported basis. U.S. revenue in the fourth quarter was $91.6 million, up 13% from $81 million during the same period of the prior year. International revenue was $16.3 million compared to $16.9 million during the same period the prior year. This represents a constant currency growth rate of 1%. European growth in the low double digits was offset by weakness in Australia. Gross profit for the fourth quarter of 2018 was $76.2 million or 70.5% gross margin as compared to $69.5 million or 71% in the same period of the prior year.

Operating expenses for the fourth quarter of 2018 are $84.8 million, an increase of 18% compared to the fourth quarter of 2017. The increase in operating expense was driven primarily by increased headcount and related personnel costs. Legal expense associated with the Boston Scientific litigation was $1 million for the quarter. Net loss from operations for the period was $8.6 million compared to $2.2 million for the fourth quarter of 2017.

Now turning to the full year of 2018. Revenue was $387.3 million, which represents growth of 19% as reported. U.S. revenue was $321.8 million, up 22% from $263.5 million in the prior year. International revenue was $65.5 million, up 4% from $63.2 million in the prior year. This represents a constant-currency growth rate of 2%, with European growth offset by weakness in the Australian market.

Gross margins were 70.6% for 2018 compared to 69.7% for 2017. Operating expenses for 2018 were $315.1 million or $296.1 million, excluding legal expenses in connection with the Boston Scientific litigation, which represents an increase of 24% from the comparable number in 2017. At the end of the fourth quarter of 2018, we had $264.5 million in cash, cash equivalents and short-term investments. Cash flow from operations, excluding intellectual property litigation, was a positive $8.8 million for the quarter and positive $17.1 million for the year.

Turning to our guidance for 2019. Nevro projects worldwide revenue for 2019 to be in the range of $400 million to $410 million. We note that international revenue for 2018 in constant currency was $63 million, and we expect to be approximately flat year-over-year on this constant-currency base. This is primarily due to European growth being offset by challenges in the Australian market. In the U.S. market, we expect to see a slower first half of 2019 with higher growth in the second half of the year.

As a reminder, our industry typically sees seasonality with higher fourth quarter and lower first quarter sales. In addition, due to the impact of fewer sales rep hires in the first half of 2018, historic attrition and our stronger-than-expected fourth quarter 2018 revenue, we expect revenue to be flat year-over-year in the U.S. market in the first quarter of 2019, contributing to a slower start to the year.

For gross margins in 2019, we expect margins to be in the 70% to 71% range for the year. We expect operating expenses in 2019 of approximately $350 million to $360 million for the year, excluding litigation expense. We have hired and will continue to hire experienced sales reps ahead of the revenue ramp and in support of our expansion of HF10. We also plan to invest in commercial initiatives that we believe will accelerate our growth in the second half of 2019 and into 2020. We plan to continue investing in our clinical trials as well as product and waveform development activities. Accordingly, we expect the current R&D expense rate as a percentage of revenue to continue into 2019.

Finally, in 2018, we managed our business to cash flow breakeven. We expect to use cash in our operations in 2019 as we invest in new initiatives to drive higher growth. I'll now turn the call back to you, Rami.

--------------------------------------------------------------------------------

Rami Elghandour, Nevro Corp. - President, CEO & Director [5]

--------------------------------------------------------------------------------

Thanks, Andrew. That concludes our prepared remarks today.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from the line of Robbie Marcus of JP Morgan.

--------------------------------------------------------------------------------

Robert Justin Marcus, JP Morgan Chase & Co, Research Division - Analyst [2]

--------------------------------------------------------------------------------

Rami, I saw that you hired a new Head of -- VP of Sales. Maybe you can tell us a little bit about him and what he'll bring to Nevro. And then I'll just give you my follow-up question here. We did see in the fourth quarter -- you talked about it in the third quarter probably, we saw it in the fourth quarter that the U.S. spinal cord stim market did slow down to around 8%. Do you think that's more reflective of the underlying volumes in the market, and is that really the right way to think about this market on a go-forward basis still?

--------------------------------------------------------------------------------

Rami Elghandour, Nevro Corp. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thanks, Robbie, for the questions. So the first question with respect to having Michael Carter. We're really excited to have him on board. Obviously, we ran an exhaustive search, and we feel like we landed with the right person. Michael brings a ton to the organization, starting with his background at West Point, he's a great leader. I think he's going to do a phenomenal job of leading our broader sales organization. He spent many years at Stryker and obviously, developed incredible experiences there both in sales, marketing as well as broader experiences. So we feel he brings tremendous experience, and he's going to invest in developing and growing our team, and we're really, really excited to have him on board. As far as your second question around the U.S. market, look, I think I'll start at a high level. We continue to believe this is an attractive market over the long term, in large part due to the innovation we brought and the growth that we believe we can drive, as I outlined at the outset of the call. I think that we provided our perspective, obviously, on the first quarter call and at least in the fourth quarter, that proves to be accurate, and I think time will tell how that plays out longer term. But I think at this juncture, I think we're going to stick to forecasting and talking about our business and focus on that.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

Your next question comes from the line of David Lewis of Morgan Stanley.

--------------------------------------------------------------------------------

David Ryan Lewis, Morgan Stanley, Research Division - MD [5]

--------------------------------------------------------------------------------

Just 2 quick financial questions and one follow-up here. I'll start, Andrew. Can you give us any sense, Andrew, when you think about your European business, what is the embedded assumption for the Australian market decline here so we can sort of figure out Europe versus Australia, just get a better sense of what your -- what the baseline is? That was for Andrew. And then, Rami, it sounds like maybe [6%-ish-type U.S. growth aim more back to that 5% to 8% historical] trend. Your commentary sort of suggest that this is really just mostly rolling-forward rep disruption. Any other things to think about for '19 in terms of pricing, changes in market growth that you point to other than just that roll-forward effective of rep destruction you've talked about before? And then I had one quick follow-up.

--------------------------------------------------------------------------------

Andrew H. Galligan, Nevro Corp. - CFO [6]

--------------------------------------------------------------------------------

Okay. So we haven't given the breakout between Australia and Europe trends, are disinclined to do it now, except to say that the reductions in built-in for the Australian market are substantial, and there's a lot of uncertainty because nobody actually knows the magnitude of what will happen. But we've built in, I think, a very substantial decrease in the Australian market. As we've said, we try to be cautious here. And over to you, Rami.

--------------------------------------------------------------------------------

Rami Elghandour, Nevro Corp. - President, CEO & Director [7]

--------------------------------------------------------------------------------

Yes, thanks, David for the question. Look, I think you've got that right, David. We're obviously factoring in a variety of factors going to our guidance. But most notably, obviously, our internal dynamics and the trends in the hiring and expectations around growth and so on. So I think that's largely right. That is predominately driven by -- of our internal view. But certainly, we take input in terms of the overall market dynamic as well as one of several inputs but not the primary [input].

--------------------------------------------------------------------------------

David Ryan Lewis, Morgan Stanley, Research Division - MD [8]

--------------------------------------------------------------------------------

Okay. And then Rami, just for me, thinking about NANS, where the big strategic change was moving to a multimodality platform for Senza. Can you give us any sense of sort of the early commercial response? I know you don't have the full program available but the early commercial response to having 1,000-hertz tonic in HF. And what kind of assumptions were built into the guidance for that kind of commercial response?

--------------------------------------------------------------------------------

Rami Elghandour, Nevro Corp. - President, CEO & Director [9]

--------------------------------------------------------------------------------

Sure, thanks, David. Look, I alluded to it on the call, I would say, in addition to our customers, I think our sales organization is responding extremely well to the new messaging. I think we have to separate the new messaging from the new product launch later in the year. And so obviously, as we said earlier this year, we expect a new product launch in late 2019. So that has a little bit more of a weight to it heading into the end of '19 and into 2020 pending regulatory approval [of course]. But overall, I think the fact is that the messaging has been very well received from a customer and a sales organization perspective, and we're excited to build on it both this year from an execution perspective and as well as when we get our new product launch, certainly continue that -- to get that leverage.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Your next question comes from the line of Larry Biegelsen of Wells Fargo.

--------------------------------------------------------------------------------

Lawrence H. Biegelsen, Wells Fargo Securities, LLC, Research Division - Senior Analyst [11]

--------------------------------------------------------------------------------

I think it would be helpful, Rami, to say a little bit more about the cadence of growth in the U.S. in 2019 and more specifically, the flat year-over-year growth in the first quarter but down about 23%, if my math is correct, sequentially. So a little bit more color on why flat. And what lifts the growth as we go through the year? And then I had a follow-up.

--------------------------------------------------------------------------------

Rami Elghandour, Nevro Corp. - President, CEO & Director [12]

--------------------------------------------------------------------------------

I'll take the high-level response here, Larry, and then I'll ask Andrew to weigh in more. And I think, obviously, again, a lot goes into our perspective on the quarter and the 2 components at a high level are seasonality, I think, which we historically have experienced as well as some of the dynamics we talked about in terms of rep hiring and sales turnover. But high level, that would be the response, and I'll ask Andrew to weigh in.

--------------------------------------------------------------------------------

Andrew H. Galligan, Nevro Corp. - CFO [13]

--------------------------------------------------------------------------------

I think that's appropriate, yes.

--------------------------------------------------------------------------------

Lawrence H. Biegelsen, Wells Fargo Securities, LLC, Research Division - Senior Analyst [14]

--------------------------------------------------------------------------------

All right. And then, Rami, I heard your comment on the enrollment in the PDN trial. Any update there on when you think you can complete enrollment?

--------------------------------------------------------------------------------

Rami Elghandour, Nevro Corp. - President, CEO & Director [15]

--------------------------------------------------------------------------------

Thanks, Larry. Not much of an update since last month. Obviously, we continue to be excited about the trend in enrollment. I think the thing that I would say that is a little bit more broad, when we look at indications like PDN, not only are we excited about the pain relief we're able to offer these patients who historically have been untreated by our limited options. We're also really excited to see the impact of the therapy. So in addition to pain relief, we're seeing things like sensory restoration in these patients, which really speaks to our differentiated mechanism of action and the differentiation of the therapy overall. So we continue to be excited. Enrollment continues to go well, and I think, certainly, we'll plan on having an update later this year on that indication and others.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

Your next question comes from the line of Joanne Wuensch of BMO Capital Markets.

--------------------------------------------------------------------------------

Joanne Karen Wuensch, BMO Capital Markets Equity Research - MD & Research Analyst [17]

--------------------------------------------------------------------------------

I just want to go back to the quarterly gate. I recognized you don't give quarterly guidance, but this seems an important year to understand how you start in the U.S. flat in the first quarter and then, given what you're talking about, you're sort of 3% to 6% for the full year. And how do I think about you gaining share in a mid-teens market based on your verbiage, given those kind of growth rates?

--------------------------------------------------------------------------------

Rami Elghandour, Nevro Corp. - President, CEO & Director [18]

--------------------------------------------------------------------------------

So I think the first part is -- you kind of nailed it, Joanne. We don't provide quarterly guidance. We obviously are sensitive for the same reason you outlined. We want to make sure that these folks have a near-term visibility into how the business is going to progress. Obviously, following the first quarter, we expect to build from there throughout the year. As far as the share gains, I mean, look, I think when you look at 2018 as an example, there was a lot of questions throughout the year, if we're going to be a share gainer or not. And when you look at it retrospectively in the year, obviously, that was the case. And so I think we'll see how the Europe plays out from the other players in the market and then we can assess whether we are in that share gainer or not. I think that's going to be best to analyze depending on how things play out. I think we're seeing a pretty dynamic market at the moment, I think we're seeing [platform applications] that haven't necessarily panned out from others in a short period of time. So it's hard to call at this juncture, we don't want to be in a position where we're forecasting other people's businesses, so we'll see how things play on, and we can more readily answer that question and asses it later this year.

--------------------------------------------------------------------------------

Joanne Karen Wuensch, BMO Capital Markets Equity Research - MD & Research Analyst [19]

--------------------------------------------------------------------------------

May I ask a follow-up, please? The new Head of Sales, Michael Carter, what is he going to do or bring to the table that the -- that you're looking for?

--------------------------------------------------------------------------------

Rami Elghandour, Nevro Corp. - President, CEO & Director [20]

--------------------------------------------------------------------------------

Thank you, Joanne. Look, I think, from a prioritization perspective if you will, we expect Michael to help progress to market leadership at the highest level, more specifically, obviously, he'll start by getting to know our sales team and our customers, and he's a lead-from-the-front sort of person. So he's going to be -- he's going to appeal a ton. We expect him to help ensure that we execute on all the initiatives that we highlighted here. We feel like we have an incredible pipeline, both from a product and a clinical pipeline perspective that we need to execute on. And then certainly, he's going to scale our organization, again, in concert and with our expectations are in -- and our ambition. And again, I -- from a leadership perspective and an experiential perspective, he just brings a ton that we're really excited about. And I can't stress enough that we have a really strong group of sales leaders across this organization, and I expect Michael to continue to invest in them and develop and grow them as well.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Your next question comes from the line of Bob Hopkins of Bank of America.

--------------------------------------------------------------------------------

Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [22]

--------------------------------------------------------------------------------

Can you hear me okay?

--------------------------------------------------------------------------------

Rami Elghandour, Nevro Corp. - President, CEO & Director [23]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [24]

--------------------------------------------------------------------------------

Great. So I really just have one question, and I wanted to ask sort of a big-picture question on the growth outlook for your company and your messaging, and I'll keep it to the full year. So just to go back, like the messaging on the Q3 call was that you had some data points that suggested the market was growing in that 5% to 8% range. But you clearly said you thought never could take share. And then sort of after that, you said that maybe that 5% to 8% wasn't quite a representative data point, maybe a little too bearish. But now you're guiding to 3% to 6% for the whole company for this year. So I'm just trying to understand what's changed. Because your commentary on rep turnover, I hear you, but you're basically saying it's not different than it's been and not different than the industry. So from a -- I'm just trying to understand, from a full year perspective, what's changed in your thinking? Is it more market growth or market share?

--------------------------------------------------------------------------------

Rami Elghandour, Nevro Corp. - President, CEO & Director [25]

--------------------------------------------------------------------------------

Thanks, Bob, for the question. Obviously, we -- you take every data point you can when you're forming your view of the year. As we talked about, there's a lot that you tick in, right? You have to factor in kind of what your position from boots on the ground and where that is and any -- and sort of the impact of that, you have to factor in your incoming pipeline if you will and when that's going to play out, and you factor in kind of the macro environment. And all of those factors are the reason we wanted to guide at this point in time, is to have all the information available to give us the best position we got for the year. So I don't know if I would describe it in -- from a change perspective and as much as we put a lot of thought into it, we [found --] looked at all the various inputs and factors that we feel like will have an influence on our perspective and guidance for the year, and this is our best perspective at this time. And I think -- as I answered the previous question: how that plays relative to the rest of the market? I think, as 2018 was a good example, will be best, I think, assessed. [So once] we have fuller information as the year plays out.

--------------------------------------------------------------------------------

Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [26]

--------------------------------------------------------------------------------

I mean, it -- maybe it's just that there's some conservatism built in here, but I realize it's a dynamic market, and there's a lot of moving pieces here as we've discussed. But I just -- it maybe -- and maybe it's a little bit of both, but I don't know, I'm just trying to get a better understanding of how your thinking has changed about market and share. Because it definitely sounds like something has changed, like 3% to 6%, relative to the way you used to talk about the market, is obviously quite different. So I'm just trying to wrap my arms around the moving pieces here.

--------------------------------------------------------------------------------

Andrew H. Galligan, Nevro Corp. - CFO [27]

--------------------------------------------------------------------------------

Yes, Bob, it's Andrew. I think we're -- you're putting 2 things together that are subject to very different influences. One is the international market, and the other is the U.S. market. And in the third quarter, the number 5% to 8% we gave was for the U.S. market, and the number for the U.S. market turned out to be in that range, and our guidance for next year is 5% to 8%. So I think there's some consistency there. International has its own dynamic going on where we're, as compared to our competitors, probably overindexed in Australia, and the issues there are causing it to counterbalance growth in Europe. But there's 2 very, very distinct trends of influencers going on in those markets.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Your next question comes from the line of Danielle Antalffy of SVB Leerink.

--------------------------------------------------------------------------------

Danielle Joy Antalffy, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst [29]

--------------------------------------------------------------------------------

Rami and team, I just had a quick question on the Next-Gen platform. Just want to get a sense of how the product is different. So is it a completely -- is it just a software update? Is the IPG completely different? And where you are in the development process. Like, has it been submitted to FDA already? What are the next steps for getting this product to market? That's my first question. My follow-up is, I assume, and tell me if this assumption is correct, that your 2019 guidance reflects pretty much no contribution from the flexible platform product. Is that correct?

--------------------------------------------------------------------------------

Rami Elghandour, Nevro Corp. - President, CEO & Director [30]

--------------------------------------------------------------------------------

Thanks, Danielle. So in terms of the product or what's different, pretty much the main thing that's the same is the physical if you will, the outside or the shape or the look of it. Most everything else changes in a product like that, so it may look similar, but the fundamentals are changing. So that is -- that answers your first question. The second question is, we don't generally comment on when things are submitted or not submitted, we'll provide an update once we have regulatory approval as appropriate. And then in terms of contribution, obviously, we said late 2019. So there's -- you can sort of figure out from there, that's not a meaningful part of what we expect for the year.

--------------------------------------------------------------------------------

Danielle Joy Antalffy, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst [31]

--------------------------------------------------------------------------------

Okay, so just -- sorry, one more follow-up. So is -- the IPG is different, but it looks -- it's the same type of footprint, is what you're...

--------------------------------------------------------------------------------

Rami Elghandour, Nevro Corp. - President, CEO & Director [32]

--------------------------------------------------------------------------------

[Not] the same form factors, the better way to put it, Danielle so same form factor, most everything else change.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

Your next question comes from the line of Isaac Ro of Goldman Sachs.

--------------------------------------------------------------------------------

Isaac Ro, Goldman Sachs Group Inc., Research Division - VP [34]

--------------------------------------------------------------------------------

So Rami, just wanted to ask about the Next-Gen multimodal device. Would that product design to be gross margin-accretive to the core business, kind of curious how we should think about ramping that product line from a profitability standpoint.

--------------------------------------------------------------------------------

Andrew H. Galligan, Nevro Corp. - CFO [35]

--------------------------------------------------------------------------------

The new product probably is going to be neutral, yes. And generally (inaudible) done that.

--------------------------------------------------------------------------------

Isaac Ro, Goldman Sachs Group Inc., Research Division - VP [36]

--------------------------------------------------------------------------------

Okay. And just a follow-up on the expense side, Andrew. Can you help us think through some of the investments that your new Head of Sales may need to make? I'm curious, I'm sure it's not just one person doing the job there. If there might be an incremental spend there to think about. And then concurrent with that on the R&D side. How do you -- how should we think about the spend for the Next-Gen product? Is that a -- kind of already -- is the spend there kind of already baking into the current run rate for R&D, could taper or pick up as the year progresses? Just looking for a little bit of sequential guidance on the R&D line.

--------------------------------------------------------------------------------

Andrew H. Galligan, Nevro Corp. - CFO [37]

--------------------------------------------------------------------------------

R&D line, yes, the programs that we've been talking about in the prepared remarks are in that number. Then going back to the things that Mike want to do. I think we've probably done a reasonable job of contemplating that in the commercial budget for '19.

--------------------------------------------------------------------------------

Rami Elghandour, Nevro Corp. - President, CEO & Director [38]

--------------------------------------------------------------------------------

Right. And I think, obviously, he'll have [-- (inaudible)] how to direct it. But from a budgeting perspective, we feel like we're in a good position to allow him the flexibility to do it.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

Your next question comes from the line of Margaret Kaczor of William Blair.

--------------------------------------------------------------------------------

Malgorzata Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [40]

--------------------------------------------------------------------------------

First one for me, and maybe it's just more operational, just to get a better sense of the accounts -- the new accounts that you're [targeting], the new accounts that you're adding. And I think at NANS, you had provided at least some color of the accounts you added in 2018, excuse me. But as you guys continue to push into getting into areas maybe that you're not in right now in the U.S., can you give us a little bit of a sense of the profile of those folks? Is it more difficult to get them to try your products? Do they have longer sales cycles? Do they do as many cases maybe as the top guys as you initially targeted? And then kind of a similar question along the lines of the new GPO contracts that you referenced to JP Morgan, I think, at the beginning of this call. What are you guys assuming in terms of the impact of that, whether on price reutilization?

--------------------------------------------------------------------------------

Rami Elghandour, Nevro Corp. - President, CEO & Director [41]

--------------------------------------------------------------------------------

Thanks, Margaret. There was a lot in there, [quite a lot], we'll do our best to capture it. So I think you're thinking about it the right way. As we kind of -- and we alluded to this, as you kind of get into a broader segment of the market, given size of the business that we've built, there are a variety of different factors that you have to work through. So examples, there's been a fair amount of consolidation and main practices around the U.S. Those larger practices can sometimes require more effort, longer sales cycle, et cetera, to kind of more fully penetrate. But the same can be said for some of these accounts that are under these GPO umbrella, that's why we felt it was a good move to enter into those contracts because there are a number of accounts that are fairly substantial around the U.S. where we just haven't had the same opportunity for access or had access challenges as we refer to in the past. So think there's a combination of those things depending on the customer, sometimes longer sales cycles, sometimes it's pure access challenges, and we feel like we're doing a lot of different things, whether it's from a contracting perspective, new products, different angles, growing the sales force to address those obstacles and challenges. As far as the GPO contracts themselves, maybe, Andrew, you can walk in on that from a broader perspective of what we expect the impact might be.

--------------------------------------------------------------------------------

Andrew H. Galligan, Nevro Corp. - CFO [42]

--------------------------------------------------------------------------------

I think the best lesson people can take from GPO contracts is what happens in other industries when they roll out there, but I think they're designed to put long-term pressure on pricing in the industry as against that for an industry with very robust reimbursement. And I think that will just roll out over the next few years as we -- this industry becomes fully incorporated into GPO-type contracting.

--------------------------------------------------------------------------------

Malgorzata Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [43]

--------------------------------------------------------------------------------

Okay so maybe just to follow up and kind of tag it back into the guidance that you guys have. With that said, it sounds like maybe you are assuming a little bit of pricing headwind, unclear to me whether or not you're assuming utilization improvement from getting better access maybe but sounds like maybe at least a little bit within that, and correct me if I'm wrong. And then as we kind of think about those sales cycle within these contracts, can you give us a sense of how big of a percentage of the market that is in the U.S. today, i.e. how much access you didn't have? And then as they roll out throughout the rest of the year, does that mean that we should see accelerating growth as utilization [rates]?

--------------------------------------------------------------------------------

Andrew H. Galligan, Nevro Corp. - CFO [44]

--------------------------------------------------------------------------------

Yes. So I mean, from our viewpoint, GPO contracts also provide us the opportunity to differentiate ourselves because we have a superior technology. So that's something that we will, obviously, try and bring to play when we're entering into these contracts. Rami?

--------------------------------------------------------------------------------

Rami Elghandour, Nevro Corp. - President, CEO & Director [45]

--------------------------------------------------------------------------------

Yes. I mean, I think, just to reinforce what Andrew said, we -- there might be some impact, but over longer periods of time, I think there might be some short-term impact, but (inaudible) to maybe slight. And yes, I think the way you're thinking about it is right, Margaret. I mean, there's a lot, and I would say, it's not insignificant, the areas where we haven't necessarily had access, and we're excited about the opportunity to at least get over that hurdle and have the opportunity to showcase our therapy and our differentiation. So we haven't quantified it, but it's meaningful, and well, we feel like this hopefully will be a good step in terms of allowing us to achieve our goal of market leadership.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

Your next question comes from the line of Dave Turkaly of JMP Securities.

--------------------------------------------------------------------------------

David Louis Turkaly, JMP Securities LLC, Research Division - MD and Senior Research Analyst [47]

--------------------------------------------------------------------------------

Just one for me at this point. You mentioned that global registry, 1,700 patients and the explant rate that you saw, and from time to time over the last 4 years, we've had some noise about explant rates for HF10 versus other competitive technologies. I'd just like to get your thought on how low those rates are? And then how that -- how you think that compares to the competition. And what do you think explains that?

--------------------------------------------------------------------------------

Rami Elghandour, Nevro Corp. - President, CEO & Director [48]

--------------------------------------------------------------------------------

David, I appreciate the question. But our therapy, as we've said in the past, and as our studies have demonstrated, it's nearly flex of application is the alternative, so I think, naturally, it's not a logical surprise that our explant rates are also less than half up -- alternatives as well. I think we have -- obviously, we've had this data, and we want to make sure that the combination of both the real-world outcomes and the RCT data together provide our compelling picture, which, obviously, you picked up on. I think the best reference, if you're asking specifically about how it compares. The only real reference you can compare to is in an RCT like ours, where, again, we have less than half of the explant rate of traditional SCS. So I think comparing outside of control stuff like that is more difficult. In other words, I can't comment on what their competitive (inaudible) are. All I can do is reference very highly controlled (inaudible) RCT in the history of the space, and I think that's fairly (inaudible).

--------------------------------------------------------------------------------

Operator [49]

--------------------------------------------------------------------------------

Your next question comes from the line of Matt Taylor of UBS.

--------------------------------------------------------------------------------

Matthew Charles Taylor, UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices [50]

--------------------------------------------------------------------------------

So first, I just wanted to ask about international guidance. I know that you had said, basically, it's composed of European growth, really. You haven't given those splits in a while. Can you give us the rough sense of how big those respective markets are? And just, I guess, how strong the growth could be in Europe, how it could be in Australia?

--------------------------------------------------------------------------------

Andrew H. Galligan, Nevro Corp. - CFO [51]

--------------------------------------------------------------------------------

So I think we've said in the past that the big markets are Germany, the United Kingdom and Australia. We're in other countries, but the -- those are the big international markets that we participate in, so we don't actually participate across the board internationally. We have more limited roll out there. And also that we are -- the international market is primarily a primary-sell market, especially in Europe. So we continue to expect modest growth in our European markets. And for that to be offset by a cautious -- very cautious outlook on what could happen in Australia with [fair] pretty dramatic reimbursement changes.

--------------------------------------------------------------------------------

Matthew Charles Taylor, UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices [52]

--------------------------------------------------------------------------------

And then -- a number of people have asked about this, but I wanted to ask more explicitly on the U.S., when you're talking about the flat start and then the growth inside by your guidance. Is the primary variable there just the fact that you had the net attrition and then now you've had a couple of quarters of net higher, you need to wait for those hiring trends to hopefully continue and for those net hires to kind of catch up to your prior attrition? Is that the right way to think about it, or are there other big pieces that are going in that ramp?

--------------------------------------------------------------------------------

Rami Elghandour, Nevro Corp. - President, CEO & Director [53]

--------------------------------------------------------------------------------

Obviously, that's the primary driver of the engine. As we said, there are a number of other things that we consider, [but that's it] the primary driver.

--------------------------------------------------------------------------------

Andrew H. Galligan, Nevro Corp. - CFO [54]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Rami Elghandour, Nevro Corp. - President, CEO & Director [55]

--------------------------------------------------------------------------------

So you're thinking about the right way now.

--------------------------------------------------------------------------------

Operator [56]

--------------------------------------------------------------------------------

And your next question comes from the line of Suraj Kalia of Northland Securities.

And we will move on. Your next question comes from the line of Jason Mills of Canaccord.

--------------------------------------------------------------------------------

David Kenneth Rescott, Canaccord Genuity Limited, Research Division - Associate [57]

--------------------------------------------------------------------------------

This is David on for Jason. Can you guys hear me all right?

--------------------------------------------------------------------------------

Andrew H. Galligan, Nevro Corp. - CFO [58]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

David Kenneth Rescott, Canaccord Genuity Limited, Research Division - Associate [59]

--------------------------------------------------------------------------------

First on the Next-Gen product launch kind of coming out toward the end of the year. Could you guys provide some color on kind of how you expect the marketing message around that to change going into the market? And whether or not you see kind of the introduction of the device leading more toward reacceleration of growth? Or is it more kind of guided towards filling in specific patient populations or physicians who previously been kind of unwelcoming to that single modality and/or HF10 therapy?

--------------------------------------------------------------------------------

Rami Elghandour, Nevro Corp. - President, CEO & Director [60]

--------------------------------------------------------------------------------

It's a great question. I think it's helpful to clarify that we're establishing effectively the marketing message now, it's that freedom to do more marketing campaigns, and there is some degree of that, that we can do with the existing product. But obviously, the new product will be able to do a lot more in that regard. So the marketing message itself will not shift with a new product, it's kind of shifting now. And the new product will, if you will, kind of build off of that when it launches. And we do expect that we'll have an impact on our growth profile, and that as we -- as, again, you kind of get into a broader segment of the market, you face a different mentality of conservatism, different sort of [deals]. And we believe that this product [will build] well and be a driver of our growth when it launches.

--------------------------------------------------------------------------------

David Kenneth Rescott, Canaccord Genuity Limited, Research Division - Associate [61]

--------------------------------------------------------------------------------

All right. And then kind of regarding the P&L. You mentioned on the call that increasing spend this year is -- [you're going to be spending] here for the company. So would you kind of -- how does it, I guess, affect, over the long term or the midterm, how you think about the profitability of the company? And whether you see that the PDN launch, you're coming in to boost any type of leverage and the model there and kind of how you think about lease profitability this year, next year and the PDN launch?

--------------------------------------------------------------------------------

Andrew H. Galligan, Nevro Corp. - CFO [62]

--------------------------------------------------------------------------------

Yes. I think, given that we're going after a market that, today, we see approaching $4 billion. It drives us to increase investment so that we can actually take on that size market and develop it. And what we've essentially done is we've taken the positive cash, really generated cash from operations in '18, and that's roughly the amount that we're going to invest in '19, so the 2 will balance each other out. But at this point, we don't see any need to change any long-term goals that we have on the P&L.

--------------------------------------------------------------------------------

Rami Elghandour, Nevro Corp. - President, CEO & Director [63]

--------------------------------------------------------------------------------

All right. Thanks, everyone, once again for joining the call today. We appreciate your continued interest in Nevro and look forward to our next progressed update.

--------------------------------------------------------------------------------

Operator [64]

--------------------------------------------------------------------------------

This concludes today's conference call. You may now disconnect.