Zynex - Q1 2023

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen, welcome to the Zynex first quarter 2023 earnings conference call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to Louisa Smith from the Gilmartin Group.

Louisa Smith (Principal)

Thank you, Jason. Good afternoon, everyone. Earlier today, Zynex released financial results for the first quarter ending March 31st, 2023. A copy of the press release is available on the company's website. Joining me on today's call are Thomas Sandgaard, Chairman, President, and Chief Executive Officer, Dan Moorhead, Chief Financial Officer, Anna Lucsok, Chief Operating Officer, and Donald Gregg, President of Zynex Monitoring Solutions. Before we begin, I'd like to remind you that during this conference call, the company will make projections and forward-looking statements regarding future events. We encourage you to review the company's past and future filings with the SEC, including, without limitation, the company's 2022 Form 10-K and subsequent Form 10-Qs, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements.

These factors may include, without limitation, statements regarding product development, product potential, the regulatory environment, sales and marketing strategies, capital resources, or operating performance. With that, I'll now turn the call over to Thomas.

Thomas Sandgaard (Chairman, President, and CEO)

Thank you, Louisa. Good afternoon, everyone. Thank you for joining us today for the first quarter of 2023 earnings call. We had another impressive period of growth. We've now been profitable in 26 of the last 27 quarters. We once again hit the highest number of prescriptions in the company's history, beating the records we previously set in the second, third, and fourth quarters of 2022. Additionally, we were able to increase order numbers over Q4 despite the seasonal reset in deductibles that typically limits growth of orders in the beginning of the year. Total revenue for the quarter was $42.2 million, a 36% increase over the same period in 2022. We produced $0.04 per in earnings, $0.04 per share.

Our sales force is maintaining the exceptional trends in productivity and expanding our market share significantly each quarter, a testament to both the efficiency and our product's efficacy. Orders increased 61% year-over-year. We believe that there is considerable runway for us to continue growing orders into the future. In the first quarter, we completed the latest in a series of stock buybacks and repurchased $3.4 million worth of common stock, bringing the total of repurchases in the last year to $30 million. As we've stated before, I believe this to be a signal to our shareholders that we are incredibly confident in our management teams, the growth opportunities in both divisions, and that we remain committed to creating shareholder value in the near and long term.

In addition to the impressive results from our Pain Management division, our Monitoring Solutions division is making excellent strides in the development of our blood and fluid monitor and our laser-based pulse oximeter. Don Gregg will provide further updates in his prepared remarks but I'm pleased with the steps the growing team is taking to bring those game-changing products to market. Monitoring Solutions has grown significantly over the past year, and after having acquired Kestrel Labs in December of 2021, we've been working diligently on clinical data collections and reaching regulatory milestones. Zynex continues to deliver consistent results, and even with investments in the Monitoring division, our Pain Management business has been able to maintain profitability at the bottom line for the combined entity.

Our ability to execute operationally and strategically while diversifying the business into compelling market opportunities is evidenced by the double-digit growth we've seen year after year. I look forward to announcing future catalyst and growth opportunities throughout 2023. I'm thrilled with our performance to date. With that, I will now turn the call over to Anna Lucsok, our Chief Operating Officer, for a more detailed business update on the Pain Management division.

Anna Lucsok (COO)

Thank you, Thomas. Zynex's Pain Management division had another impressive quarter marked by a sequential increase in order volumes over the fourth quarter and a 36% year-over-year increase in revenues. The growth that our sales team is delivering is consistent and profitable, and we believe there's significant room for continued expansion to reach full market penetration. We ended the first quarter with approximately 460 sales reps and revenue per rep on an annualized basis with approximately $380,000, an increase of 24% over the first quarter of 2022. Sales rep productivity remains the primary area of emphasis in our sales organization.

Our new hires are incorporating into the organization more quickly, and the sales management structure we've implemented is optimizing performance across the board. There are some lingering challenges related to the labor market, but we believe these to be improving over time, and we will remain committed to recruiting and retaining a high-quality sales and corporate team. We'll continue to expand into additional sales territories and expect to hit approximately 525-550 sales reps by year-end to capitalize on growing orders. Our collections remained strong throughout the quarter, and we would like to reiterate that we have and we will continue to work with all payer types and insurance providers.

We believe this to be a key differentiator between Zynex and some other competitors in the market, as practitioners are able to prescribe our product to all patients in pain, not just a small cohort under specific insurance plans. We process all orders that we receive and work directly with patients and their insurers to process coverage in each case. I look forward to another profitable year for the Pain Management division and updating you all on our market expansions on future calls. I'll now ask Don Gregg, President of Zynex Monitoring Solutions, to provide updates related to that business division.

Donald Gregg (President of Zynex Monitoring Solutions)

Thank you, Anna Lucsok. Zynex Monitoring Solutions is developing a strategic product portfolio and pipeline to address a nearly $4 billion market in the patient monitoring space. Our initial products will cover hemodynamic monitoring, sepsis monitoring, and laser-based pulse oximetry. As Thomas mentioned previously, our team has grown significantly in the last year, and we're invested substantially in the division as we make progress towards clinical and regulatory milestones. Of the two product lines we are actively developing, the CM-1600 Blood and Fluid Monitor is going to be the first in our go-to-market strategy, as it's the furthest along in its regulatory pathway. The Hemodynamic Monitor is a non-invasive wireless blood and fluid monitor to be used in a hospital setting. The previous generation device, the CM-1500, has already received clearance from the FDA, and we've added wireless capability to the CM-1600.

The CM-1600 was submitted to the FDA. We are anticipating further details from the agency as we are currently engaged in an interactive review with them. As a reminder, Zynex is not contemplating any revenue from the monitoring division in its guidance for 2023. Additionally, in development are the NiCO, or also known as the Noninvasive CO-Oximeter, and the HemeOx pulse oximeter, both non-invasive laser technologies. We believe that this innovative technology will replace the less accurate LED-based legacy devices that are currently used today. We are on track for a NiCO submission to the FDA in Q4 2023 and actively running clinical trials. In addition to engineering and development advancements within the division, we're also involved in planning, enrolling, publishing numerous clinical trials to include hundreds of subjects across the country.

We've seen encouraging results on product efficacy thus far and remain confident with the market opportunity for the disruptive technology. As we publish further data, we will advise the investment community via press releases and on future quarterly calls. I'm excited to be a part of what should be a notable inflection point in the monitoring division over the next 18 to 24 months and look forward to leveraging our innovative technology in the market. I will now turn the call over to Dan Moorhead, Chief Financial Officer, for a more in-depth look at the financial performance for the quarter.

Dan Moorhead (CFO)

Thanks, Don. Please refer to our press release issued earlier today for a summary of our financial results for the first quarter of 2023. After commenting on the financial results, Thomas will review our guidance for 2023. Orders grew 61% year-over-year, net revenue grew 36% to $42.2 million from $31.1 million in 2022. Device revenue increased 78% to $11.9 million compared to $6.7 million in the first quarter last year. Supplies revenue increased 24% year-over-year to $30.2 million from $24.4 million, gross margin was 78% in the first quarter. Sales and marketing expenses were $21.2 million in the first quarter of 2023 compared to $14.4 million in the same period in 2022.

G&A expenses were $11.4 million in the first quarter of 2023 compared to $7.8 million last year. Approximately 20% of the increase in G&A is related to investments in our Monitoring Solutions division and related headcount to launch our new products. The remainder is primarily for back office headcount related to order growth. Tax expense as a percentage was a 2% effective rate for the quarter due to other income of $1.4 million. Net income grew 14% year-over-year to $1.6 million and produced $0.04 per diluted share in the first quarter of 2023. We ended the quarter with $16.8 million in cash. Cash flow from operations in the quarter increased 10% year-over-year to $1.9 million. I'll now turn the call back over to Thomas.

Thomas Sandgaard (Chairman, President, and CEO)

Thank you, Dan. We grew orders in the fourth quarter of last year by 48% year-over-year. It increased to 61% in the first quarter of the year, and here in the beginning of the second quarter, we've already had a strong start in terms of orders and expect to post our fifth consecutive record quarter. With the continued growth in orders in the second quarter of 2023, we expect total revenue

Between $43.5 million and $45.5 million, which is approximately 21% greater than the second quarter of 2022. We expect to see earnings per share between $0.03 and $0.07. As for our 2023 outlook, we are reiterating our initial guidance and expect total revenue to be in the range of $180 million-$200 million, representing growth of approximately 21% over 2022, and earnings per share of approximately $0.40-$0.50. With that, operator, please open the call up for questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press Star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Star then 2. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Jeffrey Cohen from Ladenburg Thalmann. Please go ahead.

Jeffrey Cohen (Managing Director in Equity Research)

Oh, hi, Thomas, Dan, Anna, and Donald. How are you?

Thomas Sandgaard (Chairman, President, and CEO)

We're all great.

Jeffrey Cohen (Managing Director in Equity Research)

Awesome. A few questions...

Thomas Sandgaard (Chairman, President, and CEO)

Can't go wrong with numbers like that, right?

Jeffrey Cohen (Managing Director in Equity Research)

Yeah, that's right. Congrats on the quarter. Looks very strong. Just a couple questions from Aaron. I guess, firstly, you're still feeling pretty optimistic on 1600 and timeline to approval. We're still hopeful about back half of the year or closer?

Donald Gregg (President of Zynex Monitoring Solutions)

Yes. This is Don. We are definitely feeling confident. As I mentioned, we're in the interactive review with the FDA, it's been a bit of a back and forth. We in those discussions have had an opportunity to ensure that the FDA feels comfortable with the device and the technology. I'll reiterate our plans at this point are the same.

Jeffrey Cohen (Managing Director in Equity Research)

Got it. Okay, that's helpful. Maybe hypothesize with us how you're thinking about commercial strategies and direct, non-direct from a commercial standpoint into next year?

Donald Gregg (President of Zynex Monitoring Solutions)

Yeah. I think we mentioned before that we would have a direct and an indirect sales team. We will grow that slowly as we enter the market. This is a brand-new market, essentially, and which requires some market development. We have some placement of devices that we will need to do and certainly prove out the technology to clinicians, et cetera. As we get closer to our products on the NiCO Noninvasive CO-Oximeter, that's a fairly defined market. Our strategy there is slightly different. As I had mentioned previously, we will be submitting to the FDA later in the year on that device. We're actively in running clinical trials here between now and the back half of the year.

Jeffrey Cohen (Managing Director in Equity Research)

Okay. HemeOx, will that also get filed, submitted later this year?

Donald Gregg (President of Zynex Monitoring Solutions)

Yeah. That will not be submitted later this year, but we are working on the technology. The laser technology applies to both the pulse or the CO-Oximeter and to HemeOx. HemeOx will bring different technology and parameters to the market, meaning that you'll have total hemoglobin and other parameters like that with HemeOx.

Jeffrey Cohen (Managing Director in Equity Research)

Okay, got it. I guess question for Anna as far as the sales force and growth. It sounds like it will be linear throughout the year, kind of on par with Q1, or is there a bolus coming through earlier or later?

Anna Lucsok (COO)

The growth will be in line with Q1. We'll continue to grow our orders throughout the year.

Thomas Sandgaard (Chairman, President, and CEO)

Yeah. The number of sales reps.

Anna Lucsok (COO)

Yeah.

Donald Gregg (President of Zynex Monitoring Solutions)

Sales reps will be fairly linear, Jeff. Yeah.

Jeffrey Cohen (Managing Director in Equity Research)

Okay. Got it. Lastly, congrats on the buybacks at $8.82 on average. What's the share count now? I see 37.44. Is that diluted currently? The buybacks have concluded with none open today.

Donald Gregg (President of Zynex Monitoring Solutions)

We are, yeah, Well, diluted outstanding was 37.4. The other figure will be in the press release as well, the actual number of shares and in the Q. Yeah, we do not currently have a buyback that is open right now.

Jeffrey Cohen (Managing Director in Equity Research)

Okay. Got it. I think that's us for us. Thanks for taking the questions.

Operator (participant)

The next question comes from Adam Maeder from Piper Sandler. Please go ahead.

Adam Maeder (Managing Director and Senior Research Analyst)

Hi. Good afternoon. Thank you for taking the questions. Congrats on the nice start to the year. wanted to start with the sales force update. you know, if I heard correctly, the new target is 525-550 by year-end. I think before you were, you know, aiming closer to 550. you know, I think you're at 460 exiting Q1. Just curious, you know, are you seeing... Is something kind of, you know, change from a hiring environment standpoint? Did you see any attrition in the quarter? Then maybe just also talk about level of confidence in delivering against the top line outlook and any dependence there kind of hitting the headcount target. Thanks.

Anna Lucsok (COO)

There are not a lot of changes in the hiring market. The hiring market is improving as we're seeing it, but obviously we can't speak with confidence on how the remainder of the year is gonna go. We are a lot quicker with exiting underperformers out of the organization, and we'll continue focusing on that throughout the year.

Adam Maeder (Managing Director and Senior Research Analyst)

Okay. Nothing, I guess, as it relates to Q1, there's no issue with attrition of reps. It was maybe you just hired a little bit more slowly than expected. Is that a fair conclusion?

Dan Moorhead (CFO)

It's all timing a little bit too, Adam. Some people start right after the end of the quarter and, you know, throughout the year, obviously at quarter cutoffs, it can be a little misleading at times. We've seen a pretty good hiring cadence and had a pretty good group come in in April as well. I think we're pretty comfortable with the numbers. We gave a range, you know, the 525-550, but, you know, we think that's very achievable.

Adam Maeder (Managing Director and Senior Research Analyst)

Okay. Okay, perfect. No, that's helpful color. I appreciate that, Anna and Dan. Then I guess for the follow-ups, I wanted to ask about NiCO and, if I heard correctly, Q4 2023, FDA submission? You know, anything you guys can share at this point, in terms of the clinical performance or learnings from the clinical studies that you've run, you know, how do we think about likelihood of approval or any potential clinical risk? And then I had one follow-up. Thanks.

Donald Gregg (President of Zynex Monitoring Solutions)

Sure. This is Don. I will take that question. We have been running bench studies, and those are internal studies at this point in time. We have a clinical study that's starting here in May at a clinical trial site. In the pulse oximetry market, there's an FDA guidance document that pretty clearly outlines that you gotta run certain human studies on your hypoxia and calibration and verification. We're starting all of those. The performance of the device is significantly more accurate at this point than what we were expecting. We're seeing ranges of accuracy higher than legacy devices that you see on the market today, based on LED technology. We believe that our submission is definitely on track for Q4.

We're trying to hit the earlier part of Q4 at this point in time, but certainly given guidance that it's gonna be submitted to the FDA in the Q4 timeframe.

Adam Maeder (Managing Director and Senior Research Analyst)

That's great color, Don. Thank you for that. Then maybe just one last one from me, and I'll jump back in queue. You know, it relates to just the guidance range, the full year EPS guidance. Was hoping you could just bridge us a little bit, you know, to that range. It looks like it implies a little bit of a healthy ramp in the back half of the year to kinda get to the bottom or the midpoint. Just broad strokes, Dan, can you just talk through kind of the cadence of spend and I guess, you know, any color on the top line cadence as well. Thanks so much for taking the questions and congrats again on the start to the year.

Dan Moorhead (CFO)

Yeah, no, I think again, top line we're tracking. You know, orders have been strong, 61%. We expect that to continue. On the spend, you know, I think, you know, it'll continue to grow obviously on the sales and marketing line as we grow the sales rep, territory managers and other pieces there, you know, commissions and other things that are variable based on number of orders. On the G&A side, most of that's gonna be around the ZMS side. The ramp's gonna be similar to what it was last year. You know, last year, the majority, well over the majority was in the second half of the year, and that'll continue this year.

I think, you know, the $0.04 we did in Q1, I think consensus for Q2, Q3 and Q4 are similar with your, with the numbers you guys have out there. That gets us right there.

Adam Maeder (Managing Director and Senior Research Analyst)

Thanks so much for the color.

Anna Lucsok (COO)

Our next question comes from Yi Chen from H.C. Wainwright. Please go ahead.

Yi Chen (Managing Director and Senior Healthcare Analyst)

Thank you for taking my questions. Hi. Could you comment on whether you observed that the productivity of the sales team increased proportionally to the increase in orders?

Dan Moorhead (CFO)

We said, you know, the increase in sales rep productivity was up about 24%, and orders were up 61%. You just gotta remember, orders will recognize revenue over a period of, you know, we generally say 6-9 months, so there's always gonna be a lag there. We were pleased with, you know, the revenue increase obviously and the order increase, but the revenue obviously means we're turning that into cash and growing the top line.

Yi Chen (Managing Director and Senior Healthcare Analyst)

Okay. Could you discuss, in your opinion, what are the key factors that would ensure a successful launch trajectory for the fluid monitor?

Donald Gregg (President of Zynex Monitoring Solutions)

Yes, this is Don again. I think that for us, adoption in the market by key clinical opinion leaders is very important. The way that our technology works is quite different than other monitors in that space at this point in time. Significantly, Pro-Products in that area are somewhat, I would call in more invasive or minimally invasive, and ours is certainly based on non-invasive technology. We will ensure that we communicate effectively to key opinion leaders. We've been doing that throughout the development and have many of them on board with us to understand the technology. We've also run a number of clinical trials in several different ways to demonstrate and exercise the effectiveness of the device. That is a key entry.

As I mentioned previously on the call, that this is a new market that requires a lot of market development, and adoption of this technology is very important from a clinical standpoint.

Yi Chen (Managing Director and Senior Healthcare Analyst)

Okay, thank you.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Thomas Sandgaard for any closing remarks.

Thomas Sandgaard (Chairman, President, and CEO)

Yeah, thank you for joining us today. We are pleased with our performance this quarter and the consistent growth our team is delivering. We look forward to leveraging that momentum throughout the rest of the year and to speaking to you at our upcoming investor events. We appreciate your time and interest in Zynex. Have a great day.

Operator (participant)

Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.