PROCEPT BioRobotics - Q2 2023

Transcript

Operator (participant)

Good morning. Welcome to PROCEPT BioRobotics' second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Matt Bacso, Vice President, Investor Relations, for a few introductory comments.

Matt Bacso (VP of Investor Relations)

Good morning, thank you for joining PROCEPT BioRobotics' second quarter 2023 earnings conference call. Presenting on today's call are Reza Zadno, Chief Executive Officer, and Kevin Waters, Chief Financial Officer. Before we begin, I'd like to remind listeners that statements made on this conference call that relate to future plans, events, or performance are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. While these forward-looking statements are based on management's current expectations and beliefs, these statements are subject to several risks, uncertainties, assumptions, and other factors that could cause results to differ materially from the expectations expressed on this conference call. The risks and uncertainties are disclosed in more detail in PROCEPT BioRobotics' filings with the Securities and Exchange Commission, all of which are available online at www.sec.gov.

Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today's date, July 27th, 2023. Except as required by law, PROCEPT BioRobotics undertakes no obligation to update or revise any forward-looking statements to reflect new information, circumstances, or unanticipated events that may arise. During the call, we will also reference certain financial measures that are not prepared in accordance with GAAP. More information about how we use these non-GAAP financial measures, as well as reconciliations of these measures to their nearest GAAP equivalent, are included in our earnings release. With that, I'd like to turn the call over to Reza.

Reza Zadno (CEO)

Good morning, thank you for joining us. For today's call, I will provide opening comments and a business update, followed by Kevin, who will provide additional details regarding our financial performance and updated 2023 guidance before opening the call to Q&A. Starting with our quarterly revenue results. We are pleased to report a record quarter where our customers and patients continue to realize the significant clinical benefits of Aquablation therapy. Total revenue for the second quarter of 2023 was $33.1 million, representing growth of 98% compared to the second quarter of 2022. Growth in the quarter was driven by strong U.S. system sales and increased utilization from our expanded install base.

We believe the combination of positive long-term clinical data, increased private payer coverage, outstanding real-world patient outcomes, and an expanded field-based commercial team continue to drive surgeon interest and adoption of our robotic system. We are also starting to generate stronger international sales momentum, led by the United Kingdom, following the publication of the NICE Medtech Innovation Briefing. In the second quarter, we sold a record 40 robots in the U.S., generating total U.S. system revenue of $14.8 million, representing growth of 74% compared to the prior year. The sequential increase in robotic sales was driven by two key factors. First is the growing and expanded capital sales pipeline.

Given the timing of how deals progress once we partner with a surgeon champion and how deals are unlikely to fall out of the sales funnel, we had good visibility into our pipeline and confidence to meet our second quarter system sales expectations. Second, as we communicated a handful of deals we planned to complete in Q1, ultimately closed in the second quarter. It is an important reminder that the first quarter is typically a seasonally slow period for capital equipment, which can meaningfully impact quarter-to-quarter volatility. In terms of our pipeline, the number of robot placement opportunities continued to grow meaningfully, which has been driven by the addition of new capital reps in greenfield territories. We ended the first quarter of 2023 with approximately 30 capital sales reps, 10 of which were added in the late Q4 2022.

With a productivity ramp of six to nine months, we expect the capital reps added in the fourth quarter of 2022 to start contributing to the U.S. system sales in the back half of 2023. Given our system sales outperformance in the first half of the year, our expectations around full-year U.S. system sales have slightly increased. We still expect approximately 55% of system sales to be in the second half of 2023. Touching on utilization and surgeon activity. U.S. handpiece and consumable revenue increased 138% compared to the second quarter of 2022. When analyzing our accounts, we are extremely pleased with overall utilization trends. Our U.S. install base in six months has grown 40% compared to the end of 2022, and these new accounts take time to ramp to the levels of existing accounts.

We are encouraged by what we are seeing on account-specific utilization and believe we now have multiple proof points where Aquablation therapy is viewed as the resective standard of care within a given hospital. The primary drivers of procedure growth continue to be active surgeon growth, which is a combination of new surgeons performing procedures and active surgeon retention rates of approximately 90% for the first six months of 2023. We define active surgeon retention as any surgeon who performed a case in both the current and previous quarter. As a company, we benefit greatly from this high level of surgeon retention, as our commercial team can focus on training new surgeons.

Our revenue guidance, as Kevin will go through shortly, continues to be informed by what we are seeing in our pipeline, how opportunities progress, what customers are telling us, the productivity ramp of new capital reps, and overall close rates. All these indicators continue to trend positive as awareness around Aquablation therapy grows, which gives us confidence in achieving our 2023 growth targets. Next, regarding our progress in the quarter with our IDN partners. In the second quarter, we signed a national sales contract with the largest IDN in the U.S. that secures pricing for system placement and handpiece of sold to the nationwide hospital network. Partnering with IDNs continues to be an important initiative, as it will allow our sales team to operate in an expedited and more predictable manner as we partner with Aquablation surgeon champions at these hospitals.

Even though we sold a record number of systems in Q2, the results did not include any large multi-system orders from strategic IDNs. We believe there is an opportunity in the future for multi-system orders as our sales team continues to expand the pipeline. While there are many hospital networks in the United States, we categorize strategic IDNs as having greater than or equal to 20 hospitals in network. When analyzing the market, we estimate 17 strategic IDNs account for 26% of the 860 high-volume BPH hospitals and 29% of the total 2,700 BPH hospitals. Thus, the importance of these IDN relationships is meaningful to our ability to penetrate the U.S. market and provide increased visibility and predictability in our pipeline. Turning to recent payer coverage updates. In early April, we announced that UnitedHealthcare updated its policy to include Aquablation.

This updated policy went into effect on June 1st. As the largest commercial payer in the U.S., with approximately 45 million covered lives, UnitedHealthcare's positive coverage policy will greatly improve accessibility of Aquablation therapy for men suffering from BPH. With the addition of UnitedHealthcare, we now estimate roughly 95% of men in the U.S. have access to Aquablation therapy. Regarding UnitedHealthcare coverage, we are not anticipating any short-term benefit in our Q3 utilization rates. However, we do expect to see a modest benefit of UnitedHealthcare's coverage, along with normal seasonality, to be a driver of expanded utilization in the fourth quarter. Additionally, in mid-July, CMS published its 2024 proposed rule for the Hospital Outpatient Prospective Payment System.

The level six APC code for Aquablation has a proposed payment that would provide the hospital $8,847 for each Aquablation procedure, which is a 3% increase over the 2023 rates. The final rule is estimated to be published in November. With respect to international market development activities, we generated $3.2 million of international revenue in the second quarter of 2023, representing growth of 68% compared to the prior year period. This is the second quarter in a row of outperformance by our international business. Growth in the second quarter was driven primarily by strong sales momentum in the United Kingdom. Since the recent positive BPH guidance update earlier this year for Aquablation therapy, our pipeline of large NHS hospitals has grown meaningfully.

With respect to market development activities in the U.K., we are very pleased with the initial momentum we have generated. Given the acceleration interest from U.K. surgeons and strong unit economics on handpiece and system average selling prices, we plan to make further investment over the next 12 months in the U.K. to accelerate growth and expand patient awareness. Additionally, in mid-July, we initiated enrollment of our post-market survey in Japan to treat 100 patients with Aquablation therapy. While we do not expect meaningful revenue contribution from Japan in 2023, we view Japan as a very attractive market long term. Like the U.S. and United Kingdom, our strategy is to lead with clinical data to support a more robust and sustainable commercial launch. In summary, I'm extremely proud of the entire PROCEPT team and our collective ability to deliver record order.

I'm pleased with our year-to-date performance and believe the tailwinds I highlighted will continue to allow us to execute our strategic growth plan of penetrating BPH hospitals and increasing utilization by treating the full range of prostate sizes and shapes. Given this positive momentum, we believe Aquablation therapy will truly revolutionize the treatment of BPH. With that, I will turn the call over to Kevin.

Kevin Waters (CFO)

Thanks, Reza. Total revenue for the second quarter of 2023 was $33.1 million, representing growth of 98% compared to the second quarter of 2022. U.S. revenue for the quarter is $29.9 million, representing growth of 102% compared to the prior year period. In the second quarter, we sold a record 40 robotic systems, generating total U.S. system revenue of $14.8 million, an increase of 74% compared to the second quarter of 2022. Our U.S. installed base at the end of the second quarter is now at 233 systems, which is an increase of 104% compared to the second quarter of 2022.

Second quarter system average selling prices were $370,000, which was up 5% compared to the first quarter of 2023 and in line with our expectations. While system average selling prices met our expectations and were increased from the first quarter, we still expect variability around system pricing on a quarterly basis. U.S. handpiece and consumable revenue for the second quarter was $13.6 million, representing growth of 138% compared to the second quarter of 2022. U.S. handpiece revenue growth was driven by an increase in the installed base of robotic systems. Monthly utilization per account increased approximately 9% compared to the second quarter of 2022.

U.S. handpiece revenue growth in the second quarter was a reflection of our existing accounts and surgeons taking the next step to adopt Aquablation therapy as their treatment of choice for all resective procedures. We view utilization as a true leading indicator of overall market adoption long term. We shipped 3,904 handpieces in the U.S. in the second quarter, representing unit growth of 124% compared to the second quarter of 2022, with average selling prices of approximately $3,110. International revenue for the second quarter was $3.2 million, representing growth of 68%. As Reza mentioned, international revenue in the quarter was driven primarily by strong performance in the United Kingdom. Gross margin for the second quarter of 2023 was a record 56%, which was ahead of our expectations.

Sequential gross margin expansion in the quarter was due to strong execution from our operations team and our ability to absorb overhead expenses along with revenue over achievement. Given our favorable standard margin profile of both our robot and handpiece, we have increased confidence to further absorb overhead expenses and now expect approximately 55% gross margins for full year 2023. Moving down the income statement. Total operating expenses in the second quarter of 2023 were $44.1 million, compared to $26.4 million in the same period of the prior year, and $40.9 million in the first quarter of 2023. The increase was driven by increased sales and marketing expenses, primarily to expand the commercial organization and variable compensation expense, increased research and development expenses, and increased general and administrative expenses.

Total interest and other income was $340,000, as quarterly interest expense from our $52 million term loan was offset by favorable interest income. Net loss was $25.3 million for the second quarter of 2023, compared to $19.2 million in the same period of the prior year. Adjusted EBITDA was a loss of $19.9 million, compared to a loss of $14.6 million in the second quarter of 2022. Our cash and cash equivalents balance as of June 30th was approximately $150 million. Moving to our 2023 financial outlook. We are increasing our full year 2023 total revenue guidance to $131 million, representing growth of 75% compared to 2022. We are increasing our revenue guidance based on the following factors.

Starting with U.S. systems, we continue to expect approximately 55% of system sales to be in the second half of 2023, which equates to 144 placements for the full year. Given normal seasonality and timing of deals in our pipeline, we expect third quarter system sales to be down relative to the second quarter and for the fourth quarter to be our strongest of the year. Turning to U.S. handpiece revenue, we continue to expect full year utilization to be approximately in the mid-sixties, as measured by handpieces sold per account per month. Given normal seasonality and an expanding install base, we expect third quarter monthly utilization to be roughly flat compared to the second quarter, and for the fourth quarter to be our strongest utilization quarter of the year.

Overall utilization will be impacted by the significant additions to our installed base in the third and fourth quarters, which our guidance applies is to grow by an additional 34% by the end of the year. We continue to expect handpiece average selling price to be $3,100 and our other consumables revenue to be $5.9 million. On revenue, given the strong second quarter and positive momentum, we now expect full year international revenue to be approximately $11.2 million. Moving down the income statement, we now expect full year 2023 gross margins to be approximately 55%, which is a slight increase over our previous guidance of 54%. We now forecast full year 2023 operating expenses to be approximately $174 million.

This increase in OpEx is associated with strategic investments in R&D, commercial team expansion, and to a lesser extent, increased general and administrative costs to support the business, and puts us in a favorable position to execute on our long-term growth plan as we exit 2023. Therefore, given the increase in revenue, improved margin profile, and increased OpEx, we now expect Adjusted EBITDA to be a loss of $74.5 million. At this point, I'd like to turn the call back to Reza for closing comments.

Reza Zadno (CEO)

Thanks, Kevin. In closing, I want to thank our employees, customers, and shareholders for all their support to help us along our journey to becoming the standard of care for BPH. We will continue to leverage our commercial and clinical investments to execute on our long-term strategy. Have a great day, and I look forward to seeing many of you at the upcoming investor conferences. At this point, we will take questions. Operator?

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Craig Bijou from Bank of America Securities.

Craig Bijou (Equity Research Analyst)

Good morning, guys. Thanks for taking the questions, congrats on a strong quarter. I wanted to start by asking a few on utilization. You guys talked about it, utilization ticked down sequentially, but your handpiece growth was very strong on a tougher comp compared to Q1. You know, you did highlight that the large number of system placements probably impacted that utilization number. I know you guys track this closely, so can you talk about, you know, what you're seeing from a cohort utilization? Are you seeing any leveling off of the earlier cohorts? Maybe if you can help us understand how, you know, quantify or just help us understand how we think about the dilutive effect of, you know, a big system placement quarter like what you did.

Reza Zadno (CEO)

Thanks, Craig. We are very happy with the Q2 results of the utilization and the positive underlying trends that we see. When we analyze every cohort, definitely we see sequential growth. On the surgeon level, we see active surgeon growth, we see increased new surgeon training, and more importantly, high surgeon retention, as I mentioned in the prepared remarks. All of these result in increased utilization, and that is because of the real-world clinical data, standardization of the procedure at the hospital, and more importantly, from the CEO and CFO point of view of the hospital, increased efficiency because they can predict the time. We see sequential growth, the accounts that we have stayed with us. As we said, we did about 21%. This was a record robot placement with an increase of 21%.

That was the headwind, when we analyze cohorts, they are sequentially increased. I don't know, Kevin, you want to add something to this?

Kevin Waters (CFO)

Yeah. Yeah, Craig, good morning, by the way. Reza's spot on. We do continue to see the earlier cohorts continue to generate, sequential increases in utilization. And when you look at those cohorts and think about how that ties into our guide for 2023, you could assume that the accounts that have been with us prior to 2023 are doing well more of the 6.5 per month average that our guide implies, and it allows our guidance for the new accounts in 2023 to be below the average, and that's how it's shaking out.

You are correct in observing that having that 21% increase in our install base, it's just a natural drag on utilization sequentially, which we've been talking about for a few quarters, but this is really the first quarter where we've seen that occur. The underlying trends with our accounts hasn't changed. We have a very predictable pathway once an account is installed to increase utilization.

Craig Bijou (Equity Research Analyst)

Got it. Very helpful, guys. Coming in or after Q1, there were some investor concerns, I would say, on the system pricing given the dip. Kevin, I appreciate your comments on the variability. You'll have variability on pricing. It was good to see it back up to the $370 level this quarter. Maybe if you can expand on, you know, your confidence that you can maintain that pricing. Are you seeing any pricing sensitivity, whether it's, you know, in certain accounts or certain regions? I mean, is there anything that you would call out, where there could be some increasing price sensitivity?

Kevin Waters (CFO)

Yeah. Look, in my prepared remarks, I did talk about quarter-to-quarter variability around system pricing. While $370 is the average we're guiding to, I do expect that variability quarter-to-quarter and account-to-account. We have talked a lot about our number one goal as a company is really to partner with hospitals to drive procedure growth and to grow market share, and you can't do that if you don't have a system. We do have internal limits to pricing, called floors and parameters, we're definitely willing to negotiate, especially if we have a surgeon waiting in the wings to do a lot of procedures. Happy with ASPs rebounding, again, I would still expect quarter-to-quarter variability, I don't view that variability as anything other than that.

Matt Miksic (Equity Research Analyst)

Got it. Thanks for taking the questions, guys.

Kevin Waters (CFO)

Thanks, Kirk.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Joshua Jennings from TD Cowen.

Joshua Jennings (Managing Director and Senior Analyst)

Hi, good morning. Congrats on the strong quarter, and appreciate you taking the questions. I was hoping to just ask about patient demand. I mean, our checks with urologists, although anecdotal, suggest that patient demand is escalating. When I reference patient demand, I mean, patients are seeking out Aquablation treatment, kind of being savvy and doing their own diligence. What we'd love to get a kind of broader view from your team, Raz and Kevin, just about what your field is reporting back, just in terms of patient demand and how that's driving the uptick in utilization at your core base.

Reza Zadno (CEO)

Yes. Thanks, Josh. Yes, definitely, we do see the patient demand by the online activities and the full coverage or about 95% patient access is also very helpful for patients, now they have access. The preservation of sexual function is one of the drivers of that, and the predictability and more awareness among patients, and we see this again, online activity.

Kevin Waters (CFO)

Yeah, just to follow up there, Raz, I wasn't specific to your question, Josh, but just regarding demand, I think the other side of the coin that we see is urologists' demand and awareness has definitely increased. You know, we see that on social media, whether that's LinkedIn or Twitter, with new accounts launching on a daily basis. We see that with our peer-to-peer training, which has been very successful. It's both patient and surgeon awareness and demand that we've definitely seen an increase over the last 12 months.

Joshua Jennings (Managing Director and Senior Analyst)

Understood. Thanks for that. Just, I believe you hired a new executive to lead the marketing effort for Medtronic earlier this year. I mean, any plans, anything you can share just in terms of marketing to both urologists and patients and how that could pick up as we move through 2023 and 2024? Then just one, sorry, sneak one more in, just on the commercial team, though I'm sorry if I missed this in the prepared remarks, but just can you give us an update on, I guess, plans for capital rep, sales force expansion, in 2023, where we should think about that number sitting at the end of this year? And any color you can give on clinical specialists and acquisition rep hires would be great as well.

Thanks a lot.

Kevin Waters (CFO)

Yeah. Thanks, Josh. You're correct. Now, we have recently hired a marketing executive in our commercial team. He's responsible for both upstream and downstream, and he's focused on the whole gamut. I think he's gonna, you know, be very complementary to our commercial team, and we're not prepared to go into, like, specific initiatives, but it's definitely a bolster to our team to increase awareness and look at broader strategic items that surround the marketing and commercial team. We're happy to have him on board. It's been a nice addition. Specific to capital reps and the capital team, just as I said in the prepared remarks, we did increase that capital team from 20 to 30 just recently, six months ago. Historically, we have hired one or two capital rep classes per year.

We do that to make sure they're properly trained and to give them the proper support. Regarding the remainder of this year, our guidance, our OpEx guidance, does allow for us to continue to add more reps, to ensure continuity, to make sure we really hit the ground running in 2024.

Joshua Jennings (Managing Director and Senior Analyst)

Understood. Thanks again.

Kevin Waters (CFO)

Thanks, Josh.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Matt Miksic from Barclays.

Matt Miksic (Equity Research Analyst)

Hey, good morning. Thanks for taking the questions. Hey, I don't believe you actually gave a 3Q placement number. I think you just said you expect it to be down versus 2Q and then the highest level in 4Q. Could you help us, like, level set, for next quarter and kind of, like, how much you think it may be down?

Kevin Waters (CFO)

Yeah, I, you know, I'd say down modestly, to be fair with that. You know, we really look at our forecast as kind of first half, second half, as we've been consistent, but modest sequential decrease, from Q3 to Q2.

Matt Miksic (Equity Research Analyst)

Excellent. Just on the profitability, I know it's not really central at this point, but the gross margin's moving higher, the sales number is moving higher. You know, just curious why the EBITDA loss was moving down a little bit and not a little up?

Kevin Waters (CFO)

We have increased our OpEx guide from 167 up to 174, given where we ended Q2, which this would allow for slight sequential increases in OpEx in Q3 and Q4, which is the reason, even with increased margins, the EBITDA guide went down slightly. With that said, we do believe these OpEx investments we're making in the second half, they're primarily in R&D and sales and marketing. We view these as these are high return investments that we believe will allow this business to continue to experience the outsized revenue growth in 2024 as well. At the same time, even with the increase in OpEx, you pointed out the margin expansion, which we're really happy with. We really weren't anticipating mid-50s until exiting 2023.

The fact that, you know, we're already there in the second quarter, and by raising our guidance to 55% now implies that we're gonna be exiting the year closer to 57% as opposed to 55. Really nice progress there on margins. Just overall on OpEx, when I look at our revenue growth of 75%, our revised OpEx guidance is now growing at 48%. While it's still early in our commercialization of this project, product, excuse me, we're starting to see some leverage already in the business.

Matt Miksic (Equity Research Analyst)

Okay, thank you very much.

Kevin Waters (CFO)

Thanks, Matthew.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Richard Newitter from Truist Securities.

Richard Newitter (Managing Director)

Hi, thanks for taking the question on the quarter. A couple of questions, maybe just first on the way you guys size up your capital funnel. You've provided some color on kinda what's coming into the funnel relative to what's, you know, going out. Can you, can you comment a little bit on the, you know, the extent to which that's expanding the lead generation? Also within the context of, you know, a bolus of rep hires that you had at the end of last year. I know you said that you expect them to really be hitting their stride as we move into 3Q and 4Q.

If you could talk about, you know, whether they've started to contribute faster than expected, you know, in the first half, or that's still out in front, and how that kind of fits in with the capital funnel changes.

Reza Zadno (CEO)

Yeah, thanks, Rich. Definitely, we were very happy with the Q2 capital, strong. Two factors, as I mentioned in the prepared remark, led to that outcome. We have great visibility on the pipeline, and we have seen growing sales in the pipeline. Secondly, the Q2 was some of the capital went from Q1 to Q2, but we continue seeing that. As we had mentioned previously, there are different phases. Once that enters in the phase 1, there is very high likelihood of that deal to come to fruition. We see that, and we see that expand. I know, Kevin, you wanna add to it?

Kevin Waters (CFO)

Yeah, thanks, Reza. Specifically on the pipeline, I mean, our pipeline, when we look at it, and we gave this number a few quarters ago, but when we look at our pipeline, which we consider phase I, which we have identified a surgeon champion and has a high degree of certainty to close, that pipeline as of June 30th, is up about 19% from the end of Q1. We feel good about the increasing funnel, to answer that question specifically. Around our rep productivity, if you look at our second half guide, it essentially assumes a very comparable level of productivity, giving 30 capital reps as we had in the back half of 2022 with 20 capital reps. We're definitely starting to see those folks start to produce in Q3 and Q4.

Q4 for us, given normal seasonality and just the capital environment, is definitely gonna be our strongest quarter, and I think will really be the quarter where we have a proof point of these new reps really producing at a meaningful level.

Richard Newitter (Managing Director)

That's, that's helpful. maybe just turning to, you know, the profitability, the OpEx guidance increase. You know, with gross margin increasing, even in a quarter where you have a higher, you have a higher capital overage relative to the consumables, I'm just trying to get a sense for whether when do you think we would see the profitability start to inflect? It feels like as you increase these investments on the OpEx side, you know, 2024 could be a year where we really start to see consumables as a bigger mix relative to capital.

Should we be expecting kind of, you know, steady kind of profit losses, and then all of a sudden, you know, it's going to flip hard to profitability? I'm just trying to think of how we think about when you turn profitable and how fast that can happen when it does.

Kevin Waters (CFO)

Yeah, I think you're thinking about it the right way. You know, while we're definitely focused on revenue growth, you know, we do, as a management team, make sure we're responsible and cognizant of where we're spending OpEx dollars, particularly in today's environment. We do believe when you look at our longer-term model, without talking about specific numbers, Rich, that when you do turn to profitability with this recurring revenue model, with margins we've talked about, we think longer term can get to 70%. It does flip hard, to use your terminology, in terms of profitability. You know, we're formulating going through 2024 objectives and plans now, but the management team here is definitely focused on a pathway to profitability and making sure that we can show investors that this business can get there.

I think that the nature of this business is definitely attractive from a profit standpoint.

Richard Newitter (Managing Director)

Okay. Thank you.

Kevin Waters (CFO)

Thanks, Rich.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Chris Pasquale from Nephron Research.

Chris Pasquale (Partner and Senior Research Analyst)

Thanks, and congrats on the quarter, guys. Reza, I wanted to circle back to the United coverage expansion. Curious why you don't expect the impact there to show up until the fourth quarter. Could you just remind us what was happening with those patients previously? Was the lack of coverage there a real obstacle, or were they able to get treated, they just had to jump through a bunch of hoops?

Reza Zadno (CEO)

Thanks, Chris. Prior to United coverage, if accounts were willing to treat a patient, they had to receive pre-approval. The cases that we're doing, the United still would pay about 20% of those cases. The reason, and as you know, this only became effective June 1, it takes some time for that to become fully functional. That's why Q3, we are not mentioning that a big impact in Q2.

Kevin Waters (CFO)

If you look at our guide, you know, one of the factors in Q4, along with normal seasonality for the expansion and utilization, is, we do start to see a very modest, I suggest, benefit in Q4 from United. At the same time, we do have many different levers to achieve our utilization guidance. Therefore, I wouldn't take these comments as we're relying on a large United bump to achieve guidance, but we are expecting some benefit, and that's why you see expanded utilization in the fourth quarter, in particular, to get to the full year 6.5 on utilization.

Chris Pasquale (Partner and Senior Research Analyst)

Makes sense. Thanks.

Kevin Waters (CFO)

Thank you.

Chris Pasquale (Partner and Senior Research Analyst)

International has been a nice surprise relative to how we were thinking about it at the start of the year. You talked about Japan not really being a 2023 story. Which countries have driven the upside so far this year? Outside of Japan, are there any other new territories that you guys think could be important in 2024?

Reza Zadno (CEO)

Yeah. The one of the drivers for the international was U.K., as we had mentioned previously, with the report that came with NICE and the coverage. U.K. was one of the biggest drivers. The reason Japan, we don't assume that contribution is because we received approval, regulatory approval in Q1 of 2022. We had to do a 100-patient post-market study, and that enrollment started in July. We are happy with that, and that's why we don't anticipate near-term contribution. Internationally, as we had previously said, we are very selective and we go region by region on large markets and start with market development.

Similar to U.S., once we enter, U.K. was the same, we obtained the reimbursement and received support from the NICE. In Japan, the same, we're gonna do again with clinical. We will have a very targeted approach by various regions. Our initially started with Western Europe, and then Japan, and we had the approval in South Korea.

Chris Pasquale (Partner and Senior Research Analyst)

Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Ryan Zimmerman from BTIG.

Sam Eiber (VP of Equity Research)

Hi, this is Sam on for Ryan, and thank you for taking our questions. The first one is on system placement. How many systems placed were leased versus sold outright in the quarter? How should we think about leasing going forward? Thank you.

Kevin Waters (CFO)

Yes, so we don't have an internal leasing program that represents a significant portion of our business. All 40 systems that we sold in the quarter were sales to our customers, no leasing arrangements there. I will point out, though, in the second quarter, we did place a system that we expect to recognize the revenue for in the fourth quarter. The system was installed at the customer in the second quarter and hence is doing the procedure. If you look at our install base exiting Q3, that's or excuse me, exiting Q1 of 192, if you add 40 systems, that would suggest our install base should be 232.

As noted in my prepared remarks, our install base is actually 233, and that's just due to the timing of when we'll recognize revenue on a system, but we don't do leasing.

Sam Eiber (VP of Equity Research)

Thank you. That's helpful. You indicated there's 17 IDNs you're targeting. What % of systems are placed at IDNs, and how should we think about that going forward for the remainder of the year? Thank you again.

Kevin Waters (CFO)

Yeah, we haven't disclosed the exact number of IDNs. What we have said is, to date, we have many, I suggest orders, single orders from IDN. What we don't have are these multi-system orders from corporate IDN, as these purchases are really the most difficult to predict. We haven't had those to date, but we do have numerous single orders with these IDN partners, and we continue to view that as a nice opportunity moving forward in 2023.

Sam Eiber (VP of Equity Research)

Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question goes to the line of Neil Chatterjee from B. Riley.

Neil Chatterjee (Analyst)

Yeah, good morning, and thanks for taking our questions. Just curious on the, I think last quarter you talked about the low volume centers making up about kind of 30% of the mix for the installs. Just curious, you know, what you saw this quarter in the installs for low volume centers, and then, you know, how that might be impacting utilization?

Reza Zadno (CEO)

Yeah, thanks, Neil. The mix hasn't changed. It's in the 20%-30%, as we had mentioned in the last earnings call. What we are seeing, the utilization and the ramp, low volume and high volume are similar. Again, low volume, as we had said, are not small hospitals. It's just historically they have not been doing many BPH. The utilization and the ramp were similar, and the mix is the same at this point.

Kevin Waters (CFO)

Yeah, I wanna be clear on the sequential utilization. The dynamic of low volume versus high volume hospitals had no bearing on our Q2 utilization. It was really the 40 systems that were placed, as opposed to any dynamic between low and high volume hospitals.

Neil Chatterjee (Analyst)

Great. Thanks for that color. Maybe just turning to the R&D, you know, continued to spend there. Just kind of curious if you can update us there in terms of efforts on the R&D pipeline, you know, any planned enhancements on kind of the delivery or speed or imaging perhaps, you know, anything that you could share there?

Kevin Waters (CFO)

Yeah. We are highly focused, obviously, on innovation, being a robotic company, and the investments in Q1 and Q2, they're across the board. It's people, it's product, it's processes. Not talking specific about future R&D, but you can be assured we're always working to maintain our clinical advantage. It's kind of the bedrock of this company from a technology standpoint. Without getting into too much detail, in the near term, you can think of things like making our robotic system simpler to use. This is improving workflow, improving overall design, and it's things like that we're talking about today, but we're definitely thinking longer term, but not gonna provide any details at this time.

Neil Chatterjee (Analyst)

Thanks. That's it for us.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Nathan Treybeck from Wells Fargo.

Nathan Treybeck (VP of Equity Research)

Hi, congrats on the great quarter. just, can we go back just to the capital environment? You obviously called out the placement shortfall from Q1, but at that time, you mentioned IDNs were taking a cautious approach on spending. How has this kind of played out in Q2, and what are you seeing so far in Q3 in terms of the capital environment? Thanks.

Reza Zadno (CEO)

Yes. Thanks for the question. Definitely as we have mentioned in the Q1 also, yes, hospital PNL pressure, but we are seeing improvement in staffing, and hospitals definitely are prioritizing spend and invest in innovative treatments and those treatments that allow to treat many patients. In this case, this fits in their strategy of good ROI and allowing to bring more patients, because BPH is number one reason patients go see a urologist. From that point of view, we believe this fits in their model, and it allows them to be treat more patient and also attract surgeons to in their hospital. That hasn't changed.

Nathan Treybeck (VP of Equity Research)

To my second question: at AUA, your urologist panel noted that they've seen a trend of surgeons bypassing drugs and offering Aquablation earlier. Are you seeing significant penetration into the watchful waiters, considering that, you know, 20%-25% of them are under the care of a urologist? Thanks.

Reza Zadno (CEO)

The data... I'm sorry, you mentioned 25% of the patients are under the care of a urologist?

Nathan Treybeck (VP of Equity Research)

Yeah.

Reza Zadno (CEO)

Patients are half and half, roughly, between when they are under medication, under the care of urologist and a generalist. In long term, that may be a driver, but at this point, still there is a large demand. Patients are already coming to the hospital to get treatment.

Kevin Waters (CFO)

It's difficult to tell on the numbers, to be honest. I mean, the reality is we're having a lot of traction and a lot of success, but the numbers compared to the overall market are still fairly low in terms of who we're penetrating. We still believe the majority of our patients are converted TURP and GreenLight cases, but you can definitely talk to some of our customers who are treating patients that otherwise would have foregone treatment if Aquablation wasn't an option. We are seeing that, but it's difficult to parse out at our volumes exactly how many what percent of those patients are foregoing drugs or are drug dropouts versus were candidates for other respective technologies.

Nathan Treybeck (VP of Equity Research)

Okay, thanks.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Brandon Vazquez from William Blair.

Brandon Vazquez (Research Analyst)

Good morning, everyone. Thanks for taking the question. First, I just wanted to go back to kind of the utilization, I want to ask this kind of the same question, but slightly different. Is there any color you can give us on how dilutive a new system placement can technically be? Maybe what can help there is what does a ramp typically look like in an account? Do they, you know, like, what does the procedure ramp look like? Maybe we can tease out what is what kind of trends we're seeing in the, quote, unquote, "legacy install base versus new systems.

Kevin Waters (CFO)

Again, without getting into specific numbers, I'll try and help you provide some color, right? If you look at the accounts that have been with us pre-2023, they are north of our full year guide of six and a half and continue to trend up every quarter modestly, and we are seeing sequential increases in that group. The dilutive effect of new accounts in any given quarter, in their first quarter, excuse me, they're significantly less than that corporate average. One of the primary reasons being, just in capital equipment, it tends to be more heavily weighted towards the second and third month of any quarter. Therefore, we have some accounts where we install a robot, for example, in the second quarter, that don't do any procedures, and they don't even launch their account until the subsequent quarter.

That dilutive effect is fairly pronounced. To model it forward, I would just suggest that you take an average of maybe half of what our normal utilization is for a new account, to account for the fact that they're placed mid-quarter.

Brandon Vazquez (Research Analyst)

Got it. Then, in terms of the system pipeline, you guys gave some nice, incremental numbers there. I think it was a 19% sequential increase in the pipeline, which is great. Can you remind us again, what's the typical timeframe to close on one of these? I imagine that there's kind of a large window, but even kind of knowing that window might be helpful. The follow-up to that would be: Has that timeframe changed at all, maybe compared to the start of this year, whether it be macro or, you know, macro concerns lengthening that or just going deeper into the adoption curve? Thanks.

Kevin Waters (CFO)

Yeah. I'll answer your last question first. We haven't seen any lengthening of the pipeline with any type of macro concerns. With that said, I mean, the reason why we think about the capital business first half, second half, is because timing is somewhat unpredictable with these deals, but on average, it could be anywhere from three to nine months. I think we've had accounts shorter than three months, but that's definitely not the norm. The norm falls in that three to nine month range. That gives us an opportunity to identify the surgeon champion, work with administration, and, you know, go through all the benefits of the system. That's been consistent in that range, but inconsistent in terms of giving any further specificity within that range.

Operator (participant)

Thank you. I would now like to turn the conference back over to Reza Zadno for closing remarks.

Reza Zadno (CEO)

Thank you for attending this earnings call. We are very pleased with our results in Q2. We hope to see many of you in the upcoming conferences. Have a nice day.

Operator (participant)

This concludes today's conference call. Thank you for participating.

Kevin Waters (CFO)

Goodbye.

Operator (participant)

You may now disconnect.