Paragon 28, Inc. (NYSE:FNA) Q4 2023 Earnings Call Transcript
Paragon 28, Inc. (NYSE:FNA) Q4 2023 Earnings Call Transcript February 29, 2024
Paragon 28, Inc. misses on earnings expectations. Reported EPS is $-0.19 EPS, expectations were $-0.1. Paragon 28, Inc. 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 Paragon 28’s Fourth Quarter 2023 Earnings Conference Call. Currently, participants are in listen-only mode. We’ll be facilitating a question-and-answer session at the end of today’s call. As a reminder, this call is being recorded for replay purposes. I would now like to hand the conference over to your host today, Mr. Matthew Brinckman, SVP of Strategy and Investor Relations. Mr. Brinckman, please go ahead when you’re ready.
Matthew Brinckman: Good afternoon. And thank you for joining Paragon 28’s fourth quarter 2023 financial results and earnings call. Presenting on today’s call are Albert DaCosta, Chairman and Chief Executive Officer; and Steve Deitsch, Chief Financial Officer. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements made as to the company’s or management’s intentions, hopes, beliefs, expectations or predictions of future events, results or performance.
These forward-looking statements are subject to a number of risks, uncertainties, estimates and assumptions that may cause actual results to differ materially from these forward-looking statements. All forward-looking statements are based upon current available information and Paragon 28 assumes no obligation, except as required by law, to update those statements. Additional information concerning certain risks and uncertainties that may impact these forward-looking statements is contained from time-to-time in the company’s SEC filings and in the press release that was issued earlier today. During this presentation, we will refer to the non-GAAP financial measure of adjusted EBITDA and constant currency net revenue growth. A reconciliation to the most comparable GAAP financial measure, net income and reported net revenue growth is contained in our press release issued earlier today.
And with that, I will now turn the call over to Albert.
Albert DaCosta: Thanks, Matt. Good afternoon. And thank you for joining us for our fourth quarter 2023 earnings call. I will start things off with a review of our recent performance, followed by highlights from the quarter and I’ll pass it over to Steve to provide further details on our fourth quarter and full year financial results and an overview of our 2024 revenue guidance. Before diving into the results, I want to acknowledge our team’s amazing work throughout 2023. This was a transformative year for Paragon 28 and we made significant progress in our transition into a more scalable organization for our next phase of growth. I want to thank this team for their unwavering resilience and teamwork to get us where we are today and for advancing our mission to improve foot and ankle patient outcomes.
Now turning to results, global revenue for the full year 2023 was $216.4 million, representing 19.3% reported growth and 19.7% constant currency growth, in line with the top end of our preliminary revenue results provided on January 8th. Once again, we saw balanced growth across all the five foot and ankle sub-segments, growing the entire business at nearly 3 times our overall market growth rate of 7%. Fourth quarter 2023, global revenue was $60.6 million, representing 17.6% reported growth and 17.3% constant currency growth compared to the fourth quarter of 2022. We saw a nice 14.7% step up compared to the third quarter of 2023, reflective of the normalized seasonality we expected this year. This compares favorably to the 11% third quarter to fourth quarter net revenue step up we saw in 2022 and reflects the improving supply chain environment.
Looking at the U.S. business performance, I am pleased to say that our growth accelerated nicely compared to the third quarter. We have a lot to be positive about beyond the fourth quarter topline performance. In the fourth quarter of 2023, we increased our U.S. producing sales roster by almost 14%, 266 reps compared to the fourth quarter of 2022 and grew our surgeon customer base by 9% to a record 2,215 surgeons. Both our rep roster and surgeon base are larger than ever and these metrics are strongly indicative of our future growth potential as we expect to continue driving productivity increases on legacy products and new product launches. We have done a lot to bolster our medical education program including the launch of a second mobile lab late in 2023 specifically designed for more metro markets.
With this new mobile lab, we are able to cover more ground in the U.S. meeting our surgeons and reps at their respective sites of care for highly focused and efficient training. Our international business continues to do very well. We have invested heavily in our core market and have established a direct or directly managed commercial model in 13 of our 22 international markets. We still have positive runway for P28 internationally as we continue to drive regional investments in our teams and infrastructure, as well as regulatory initiatives like EU MDR to clear and launch more new products. In short, we continue to build momentum and I’m excited for what the future holds for FNA and the surgeon community internationally. Now I want to shine a light on our innovation which is critical to our growth and our mission to improve foot and ankle outcomes.
In the fourth quarter of 2023, we launched two new solutions with the JAWS Great White Nitinol Staple System and the BEAST Cortical Fiber Bone Graft which were both great additions to our portfolio. And now we are off to the races to start 2024 with five meaningful product launches and one limited market release announced already in the first quarter. It’s important to note that these products launched so far in 2024 are in high growth foot and ankle segments like bunion, soft tissue, and minimally invasive surgery. In soft tissue, we have launched three solutions with the Grappler Knotless Anchor, Bridgeline Tape and Mister Tendon Harvester, all of which will typically be used in conjunction with other procedures and are highly complementary to our existing plating and screw systems.
Another solution is our FJ2000 Power Console and Burr System designed specifically for the extremities and optimized for MIS surgery. This system features disposable hand pieces and instruments that help streamline workflow and minimize the need for sterilization between cases which allows surgeons to turn more cases in a day. Lastly, we launched the PRECISION MIS Bunion System and have our new Lapidus clamp, the Bun-Yo-Matic, unlimited market release. With these two solutions, P28 boasts a substantial range of offerings for treating bunions. Ultimately, our goal as a leader in foot and ankle and a real partner to our surgeons is to give surgeons multiple options to treat each patient’s unique condition. We expect that these early 2024 product launches will generally start having a nice impact on topline in the second half of the year and substantially contribute in 2025.
I am so proud of the design teams and engineers that brought these truly innovative solutions to life and we are excited to see them all hit the market. Of course, it’s only February and we have a lot more to look forward to in 2024 on the product front with over 25 active projects including our first reveal of the Smart28 platform expected mid-year. The Smart28 software has already been incredibly beneficial for our internal development and we are excited to share it once ready. Our balanced and innovative portfolio galvanizes P28 as a strong partner to the surgeon community and an ideal home for the most passionate foot and ankle salespeople. In closing, I am pleased with the progress we made in 2023, but even more excited about 2024 and beyond.
We made significant investments in 2023 to enhance our infrastructure teams and processes to enable P28 to realize its full potential. We also fortified our balance sheet and combined with our focus on profitability and cash flow improvements, we have plenty of liquidity to get us to cash flow break even. Underlying demand in foot and ankle continues to be very strong, and we are in a great position to execute on our mission to improve foot and ankle patient outcomes across the globe. With that, I will now turn it over to Steve.
Steve Deitsch: Thank you, Albert. Paragon 28’s fourth quarter 2023 revenue was $60.6 million, representing 17.6% and 17.3% reported in constant currency year-over-year growth, respectively. Our U.S. revenue was $51.7 million, representing 14.1% growth over the prior year quarter. Our international revenue was $8.9 million, representing 43.1% and 40.7% reported in constant currency year-over-year growth. Importantly, we continue to see solid, balanced growth from each of our foot and ankle segments. Supply chain headwinds continued into the fourth quarter, but were in line with our expectations and were far less significant than the impacts we experienced during the second and third quarters of 2023. Importantly, our supply chain environment continues to improve.
Gross profit margin for the quarter was 74.5%, compared to 81.5% in the fourth quarter of 2022. For the full year 2023, gross profit margin was 79.9%, compared to 82.1% for the full year 2022. Related to the recent inventory stockpiling, the company recorded non-cash inventory write-downs, totaling $4 million during the fourth quarter of 2023, which reduced fourth quarter and full year 2023 gross profit margins by 6.6 percentage points and 1.8 percentage points, respectively. This adjustment had no impact on our operations during the fourth quarter and we expect our annual gross profit margins to continue to be approximately 80% going forward. We’ve also continued to drive significant operating leverage. Fourth quarter 2023 SG&A and R&D expenses combined were $56.4 million, a 10.5% increase compared to the fourth quarter of 2022.
Importantly, the increase from the prior year was driven by increases in R&D and sales and marketing initiatives. Adjusted EBITDA for the fourth quarter of 2023 was a $4.4 million loss, compared to a $1.5 million loss in the prior year period. For the full year 2023, adjusted EBITDA was a $9.7 million loss, an improvement of $1 million compared to the prior year period. Both fourth quarter and full year 2023 adjusted EBITDA included the $4 million inventory write-down. We expect operating leverage to continue to improve in 2024 and we are committed to driving positive adjusted EBITDA on an annual basis beginning this year. Now turning to cash flow and liquidity. Our operating cash use for 2022 and 2023 combined totaled approximately $113 million, compared to approximately break-even operating cash flow in both 2020 and 2021.
On our last earnings call, we noted three specific items contributing to most of the operating cash use during 2022 and 2023, including inventory stockpiling, a non-recurring legal settlement and negative adjusted EBITDA. We believe the cash flow headwinds associated with each of these items will become a tailwind throughout 2024 and beyond. We have approximately $125 million of total liquidity, consisting of $75 million of cash on the balance sheet and $50 million available through our credit facility. As we continue to lever our growth investments made in 2022 and 2023, and continue to execute on our plans to improve inventory efficiency, we expect our liquidity will allow us to reach cash flow break-even. Now, turning to our 2024 revenue guidance.
We feel great about our start to 2024 and the first quarter is developing in line with our expectations. Among other things, our revenue guidance takes into consideration the improving supply chain environment and an expanded sales channel armed with several exciting and high impact new product launches. Further, it assumes the foot-and-ankle market continues to outpace broader orthopedic market growth, which is consistent with the demand we have seen to start the year. And of course, our view is also balanced with respect to what we can’t control, including the macroeconomic environment. For the full year of 2024, we estimate net revenue to be between $249 million and $259 million, representing a range of 15% to 20% growth. P28 grew net revenue 25.8% reported and 27.1% constant currency in the first quarter of 2023, making the first quarter of 2024 our toughest growth comparison of the year.
Additionally, we have one less billing day in the first quarter of 2024, which creates a 100-basis-point to 200-basis-point headwind. Beyond the first quarter, we anticipate seasonality will continue to be more normal. We also expect quarterly growth rates for the rest of the year are likely to be higher than in the first quarter of 2024, given dynamics of the year-over-year growth rate comparison and the timing of our new product launches. Lastly, our net revenue guidance also assumes foreign currency translation rates remain consistent with current translation rates. That is the end of our prepared remarks.
See also 12 Best Remote Jobs That Pay at Least $50 an Hour and 25 Countries with Most Gold Reserves in 2024.
To continue reading the Q&A session, please click here.
