Nevro Corp. (NYSE:NVRO) Q4 2023 Earnings Call Transcript
Nevro Corp. (NYSE:NVRO) Q4 2023 Earnings Call Transcript February 21, 2024
Nevro Corp. beats earnings expectations. Reported EPS is $-0.25, expectations were $-0.5. Nevro Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon and welcome to Nevro's Fourth Quarter and Full Year 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Angie McCabe, Vice President Investor Relations and Corporate Communication for Nevro. Please go ahead.
Angie McCabe: Thank you, Regina. Good afternoon and welcome to Nevro's fourth quarter and full year 2023 earnings conference call. With me today are Kevin Thornal, CEO and President; and Rod MacLeod, our Chief Financial Officer. Before we get started, please note that our earnings release and the supplemental presentation accompanying this call are available on the Events and Presentation page of the Investors section of our website at nevro.com. Also, this call is being broadcast live over the Internet to all interested parties, and an archived copy of this webcast will be available in the Investors section of our website shortly after the conclusion of this call. Before we begin, I'd like to remind everyone that comments made on today's call may include forward-looking statements within the meaning of federal securities laws.
Results could differ materially from those expressed or implied as a result of certain risks and uncertainties. Please refer to Nevro's SEC filings, including our Annual Report on Form 10-K for detailed presentations of risks. The forward-looking statements in this call speak only as of today, and the Company undertakes no obligation to update or revise any of these statements. In addition, management will refer to adjusted EBITDA, a non-GAAP measure used to help investors understand Nevro's ongoing business performance. Adjusted EBITDA excludes interest, taxes, non-cash items such as stock-based compensation, depreciation and amortization, litigation related expenses and credits, changes in the fair market value of warrants and other adjustments such as gain from extinguishment of debt and restructuring charges.
Please refer to the financial tables in our earnings press release issued today for reconciliations of GAAP to non-GAAP financial measures. I will now turn the call over to Kevin. Kevin?
Kevin Thornal: Thank you, Angie. Good afternoon, everyone, and thank you for joining us today. We're pleased with our fourth quarter performance and the progress we are making on advancing our core three pillar strategy. For the fourth quarter of 2023 and as compared with the year ago period, today we reported worldwide revenue of $116.2 million an increase of 2% on both a reported and constant currency basis and ahead of the guidance that we provided on our third quarter 2023 earnings call. PDN sales grew 29% to nearly $22.4 million. U.S. trails were down just under 1% and in line with our expectations, a net loss from operations of $11.8 million and adjusted EBITDA of positive $8.4 million also ahead of our expectations. For the full year 2023, worldwide revenue was $425.2 million an increase of 5% on a reported and constant currency basis.
Also in the fourth quarter of 2023, we acquired Vyrsa Technologies, which we are very excited about as it provides us with entry into the very high growth sacroiliac or SI joint fusion market and announced a debt refinancing. Last year, we developed and implemented our strategy to improve our commercial execution and strengthen our foundation, so we can deliver stable, consistent performance, achieve long-term profitable growth, enhance stockholder value and continue to provide best-in-class therapies for patients suffering from chronic pain. On today's call, I'll highlight key items that demonstrate the progress we are making on a number of fronts. Rod will discuss our fourth quarter results and 2024 guidance for both the full year and for first quarter.
Our strategy consists of three pillars. The first is commercial execution. We are laser focused on improving our execution to remove sales barriers, enhance customer experience, and drive long-term profitable growth. To improve sales productivity, we made some changes to the commercial team's compensation structure and completed our commercial realignment. For example, because healthcare is locally delivered and consumed, we implemented a more geographically focused reporting structure. We also rolled out new incentive based compensation plans that include rewarding sales reps who deliver accelerated growth as well as incentivizing sales leaders to focus on delivering profitable growth. In addition, our market development team is now focused on increasing awareness of SCS as a treatment therapy beyond painful diabetic neuropathy.
As a reminder, there are significant growth opportunities in SCS including non-surgical back pain and traditional back and leg pain and we have been at the forefront of driving awareness of new indications and our differentiated technology as demonstrated by our success in PDN. Importantly, we continue to focus on improving physician engagement and education. Last year, we completed several large new hire training sessions, conducted our first SI joint lab with advisors, implemented new professional education programs such as continuum of care courses for pain interventionalists and surgeons and trained over 100 fellows. The second pillar of our strategy is market penetration through expanded indications, HFX iQ line extensions, a robust R&D pipeline, strong clinical evidence and targeted additive acquisitions.
We are seeing increased adoption of HFX iQ since its full market launch last March. HFX iQ represented 53% of our permanent implant procedures in Q4 of 2023 and adoption will continue to grow throughout 2024. Our data proves that with the HFX iQ system combined with the cell phone app, which sends proactive alerts, physicians clinical burden is reduced by 40% and patients get back to pain relief 75% faster than patients who are using a traditional remote. To provide even more patients with access to the benefits of HFX iQ, within the next few months, we expect to launch a solution for roughly half of these patients who do not have an iPhone, including those with an alternative device. In 2023, we also continue to penetrate the SCS market with our expanded indications in the PDN and non-surgical back pain patient populations.
PDN accounted for 24% of our permanent implant procedures in Q4. Even with our success in PDN, the market remains underpenetrated at nearly 1%. We are focused on further developing this market with our best in class technology and superior clinical data showing that patients treated with 10 kilohertz therapy experienced durable pain relief and significant improvements at 24 months. This is one of our key competitive differentiators because competitive devices are purposely designed to cause a tingling sensation to mask pain, which is a common symptom PDN patients already experience. In contrast, our 24-month data shows the PDN patients experience durable pain relief without the use of paresthesia. Notably, we recently announced the publication of a consensus statement summarizing recommendations based on outcomes from a December 2022 Global Interdisciplinary Panel at the Worldwide Diabetes Virtual Global Summit.
The statement, which was published in Diabetes Research and Clinical Practice, recommends SCS therapy and particularly high frequency 10 kilohertz SCS to treat refractory PDN symptoms that aren't adequately addressed by first and second line treatments. Enrollment in our PDN clinical Sensory Study now stands at 98 patients. The study is designed to more objectively prove the sensory improvements that we observed in our initial clinical randomized clinical trial or RCT and to receive an SCS indication beyond pain. We believe that this along with our 24-month data and differentiation of our innovative therapy will help us further penetrate the PDN market and achieve our goal of having 10 kilohertz therapy referenced in additional society guidelines for the treatment of refractory PDN.
Also in January, we announced that Carelon Health will be publishing a new interventional pain management policy that expands SDS coverage for PDN effective April 14, 2024. As a result, PDN patient coverage will expand by nearly 43 million additional lives, bringing total U.S. covered lives to approximately 250 million. We are excited to continue working with physicians to expand awareness and offer this therapy to more patients suffering from PDN. Turning now to our first ever acquisition. We are excited about the Vyrsa transaction for several reasons. First, we now have access to a large and fast growing market. The SI joint market is currently valued at $2 billion in the U.S. alone and we expect the increasing adoption of minimally invasive surgical procedures in this space to be a growth driver.
Second, many physicians who perform SI joint procedures are also performing SCS implant procedures and we are now able to offer them more options to treat patients suffering from chronic pain. This has the added benefit of strengthening our relationship with these physicians as many of them are already our customers. Third, we are leveraging our commercial sales force and their current physician relationships to help drive adoption and growth. It should be noted that when fully trained, we will have the largest SI joint sales force in the market. Finally, it broadens and diversifies our pain portfolio. We estimate that approximately 15% to 30% of patients with chronic lower back pain have pain that originates in the SI joint and we now offer options to treat patients with both mechanical and neuropathic pain.
We also offer one of the most comprehensive portfolio of products in the SI joint space. We are in the process of transitioning Vyrsa products to Nevro naming and branding. In the interim, the current portfolio is comprised of Nevro V1, Nevro Pro and Nevro Fix. Nevro V1 an integrated SI joint fusion system with transfixing technology will be our flagship product as there is no other device like it on the market. Nevro V1 is proven to immediately transfix the SI joint to allow long-term fusion. Also, our proprietary instrumentation allows for optimal intra articular SI joint preparation, which is critical to achieve joint fusion. Finally, Nevro V1 comes with 3D printed bone growth enhancing technology, which helps promote bone cell growth and as a result fusion.
With this full suite of products, we are able to accommodate the different SI joint approaches, available sites of service and CPT codes to meet the preferences of different physicians and varying patient needs, ultimately helping to improve the quality of life and health outcomes for patients. In early January, we launched training for our sales reps for all three of our SI joint products and we'll continue to train both reps and physicians throughout 2024 as we ramp up this business. In addition, our limited market release started this month and while early, overall physician feedback has been positive so far. Importantly, clinicians and medical societies expect that we will continue to generate the clinical evidence in the SI joint space just as we have done in SCS, which is important in driving physician adoption and payer coverage.
Regarding our R&D pipeline, we continue to work on developing new revenue streams that will leverage our largest asset, our sales force and expanding into new indications for SCS. We won't go into detail here for competitive reasons, but as I previously communicated, one of the reasons why I joined Nevro was because of the impressive pipeline of products. Finally, our third strategic pillar is profit progress. Our goals are to improve efficiencies through streamlined processes, scale our Costa Rica manufacturing facility and have disciplined expense management. While there is more to do, we are making progress on this front with our leaders and teams across the organization. In January, we implemented a restricting which included lane of 5% of employee.
While this was a very difficult decision, it was necessary to position Nevro for long-term growth and profitability. Rod will talk about the expected financial impact of the restructuring in his remarks. As I mentioned, we are leveraging our sales force that already call in physicians that treat pain to drive profitable growth in SI joint. These procedures will require limited postoperative patient follow-up by our commercial team, allowing sales reps to grow revenue without adding patient support team members. We also continue to scale our Costa Rica manufacturing facility, which is supported by world class manufacturing experts in technology. We will leverage it as we expand the business through new products via R&D and tuck-in acquisitions.
Before I hand the call over to Rod, I want to make a couple of final comments. First, I want to thank our Nevro team members for their focus on executing our strategy and steadfast commitment to freeing patients from the burden of chronic pain. Second, we recently held our 2024 National Sales Meeting for our U.S. based commercial team. For many of the participants, this was their first Nevro sales meeting and team members showed great enthusiasm for our core business, new entry into the SI joint space and excitement for our future. We are dedicated to our mission and are building on the progress we made in 2023 to stabilize and strengthen our foundation, which will allow us to transform our business through the opportunities that lie ahead.
10 kilohertz therapy, which is supported by superior clinical data and multiple RCTs across several indications, is enabling us to provide patients greater access to our innovative therapies. Our goals remain the same, to execute our strategy and capitalize on meaningful leverage opportunities to drive profitable long-term growth, positive operating cash flow and increased shareholder value. I'll now turn the call over to Rod for a discussion of our fourth quarter financial results and 2024 guidance.
Rod MacLeod: Thanks, Kevin, and good afternoon, everyone. For the fourth quarter of 2023 as compared with the prior year period, worldwide revenue grew to $116.2 million an increase of 2% as reported and on a constant currency basis. Both the current and prior year periods have the same number of selling days. PDN represented 20% of permanent implant procedures worldwide, resulting in approximately $22.4 million in PDN indication sales and growing 29% over prior year. U.S. revenue grew 2% to $101.5 million. International revenue was $14.7 million increasing 4% as reported and flat on a constant currency basis. Gross profit increased 8.3% to $81.5 million and gross margin increased 400 basis points to 70.1% driven primarily by a shift to higher margin products as well as lower scrap related charges in the current period.
Operating expenses decreased 1.4% to $93.3 million primarily due to reduced spend across the business offset by $3 million of onetime Vyrsa related spend. Excluding the Vyrsa related expenses, operating expenses finished down 5% versus prior year. Litigation related legal expenses were $2.9 million compared with $1.2 million in the fourth quarter of 2022. Cash, cash equivalents and short-term investments increased $2.5 million from September 30, 2023 to $322.7 million as of December 31, 2023. Cash activities include $47 million in net funds received from our November 2023 debt restructuring offset by $40 million in cash paid for our acquisition of Vyrsa. As we previously announced, we acquired Vyrsa for $40 million in cash at closing on November 30, 2023 and agreed to pay up to an additional $35 million in cash or stock tied to the achievement of certain development and sales milestones.
The transaction was immaterial to our Q4 revenue results. As Kevin commented in his remarks, we believe that physicians will begin treating patients in need as we train them on the procedure over the next few months. We continue to expect the transaction to be accretive to both revenue and adjusted EBITDA this year. The first half of the year will focus on training physicians and Nevro commercial field personnel, while the second half of the year will begin to reflect increasing revenue traction. As a reminder, for 2024, we expect revenue contribution from SI joint to be immaterial to the overall year. Also on November 30, 2023, we announced the restructuring of a majority of our debt, pushing the maturity out to 2029 through a six-year $200 million term loan credit facility.
The proceeds were used to repurchase the majority of our 2025 convertible notes as well as for working capital and other general corporate purposes. Turning now to a discussion of our 2024 full year and first quarter guidance. For the full year 2024, we expect worldwide revenue of approximately $435 million to $445 million, representing an increase of 2% to 5% over full year 2023 on a reported and constant currency basis. As a reminder, our major competitors have all reported their most recent quarterly results and appears that the SCS market grew in the low to mid single digit range excluding what we believe is primarily replacement activity by one of our competitors. We expect gross margin to be approximately flat with 2023 gross margin of 68%.
Our Costa Rica manufacturing facility continues to produce excellent results on low labor and material costs for manufactured products; however, higher than initially projected inventory levels and higher Omnia mix will delay the full margin expansion impact a few quarters. We're excited about the cost improvements Costa Rica can deliver and we continue to project longer term gross margins in the mid-70s assuming pricing holds at current levels. We expect operating expenses to be in the range of $390 million to $392 million and largely flat compared with 2023. Our 2024 operating expense guidance includes ongoing litigation expenses and investments to drive growth in our PDN and our SI joint fusion product portfolios. We expect adjusted EBITDA to be negative $8 million to negative $14 million.
This includes the $14 million to $15 million benefit from our restructuring, which we announced and implemented in January 2024, which we expect will be largely offset by normal operating expenses including inflation, merit increases and other acquisition related expenses. To help with your modeling, we expect normal seasonality with Q1 sales to be our lowest quarter, down approximately 16% from Q4 2023. We are projecting remainder of the year to play out in historical fashion where Q2 demonstrates a pickup from Q1, Q3 is flat to down-ish sequentially from Q2 and then we finished with a strong Q4. These revenue results with slightly stronger second half growth also reflect what Kevin mentioned earlier regarding our efforts to improve our commercial execution.
Similarly, operating expenses will follow our typical seasonality where Q1 is our largest spend quarter due to events such as our National Sales Meeting, the NAND conference and SI joint training for customers and our field team. For the first quarter of 2024, we expect the following: worldwide revenue of approximately $97 million to $99 million representing an increase of 1% to 3% over the Q1 of 2023 on a reported and constant currency basis. Operating expenses of approximately $105 million, which include higher than normal spend related to restructuring costs and SI joint training and adjusted EBITDA to be approximately negative $15 million to negative $16 million. Adjusted EBITDA will exclude a $5 million to $6 million restructuring charge related to the January layoffs.
As we previously communicated, beginning in the first quarter of 2024, we will no longer provide a breakout of our PVN indication sales. In closing, we made significant changes in 2023 to strengthen our foundation and further position our business for long-term profitable growth, and we know that we have more work to do. We're excited about the opportunities ahead of us and remain committed to executing our strategy to deliver enhanced stockholder value. Regina, we'll now open the call for questions.
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