Zynex - Q4 2023

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen, and welcome to the Zynex fourth quarter and full year 2023 earnings conference call. At this time, all participants are in a 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 Quinn Callanan from MZ North America. Please go ahead.

Quinn Callanan, CFA (SVP)

Thank you, operator, and good afternoon, everyone. Earlier today, Zynex released financial results for the fourth quarter and year ending December 31, 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 Don 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 regarding, or including, without limitation, the company's 2023 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 (Founder, Chairman, President and CEO)

Thanks, Quinn, and good afternoon, everyone. Thank you for joining us today for the fourth quarter and full year 2023 earnings call. 2023 was highlighted by ongoing revenue momentum, leading to a record revenue of $184 million for the year, up 17% from the prior year. The fourth quarter marked our 11th consecutive quarter of profitability and seventh straight quarter of record-high order numbers. Once again, we've received the highest number of prescriptions in company history, exceeding our previous record. I'm proud to announce that we also produced $17.8 million in positive cash from operations in 2023, another all-time record for the company. With that, we are able to continue to invest in further sales growth, also in our monitoring division, and aggressively be buying back stock on the open market.

During the fourth quarter, we provided an allowance of $6.2 million on accounts receivables, which decreased our net revenue and profitability. We continue to analyze our receivables and collections from payers. This adjustment is an anomaly and a non-recurring adjustment. Net of this adjustment, we'd be close to negative revenue. Revenue increased to $184.3 million while producing $0.17 of earnings per diluted share. Dan Moorhead, our CFO, will expand on this adjustment during his portion of the presentation. Significant credit goes to our team, who were able to drive revenue higher and deliver significant earnings per share and free cash flow as we expand our sales force, invest in our new business, Zynex Monitoring, and combat wage inflation like many others in the business. Our sales force has continued to expand the market each quarter, enabled by a strong team and great products.

Orders increased 43% for the full year compared to the year before and increased 29% year over year in the fourth quarter. We believe there is considerable runway for us to continue growing orders into the future, leveraging our current portfolio and growing pipeline of existing and new and exciting new products. To help drive this order growth, in the fourth quarter, we submitted a 510(k) application to the FDA for our new M-Wave neuromuscular electrical stimulation device. Already in February of this year received the 510(k) clearance. The M-Wave is set to replace its predecessor, the E-Wave, which has been fundamental in NMES treatments across the U.S. since 1998. The E-Wave, which is a product we have been manufacturing for several decades, has helped over 17,500 patients with muscle-related issues such as drop foot, quad rehab, shoulder subluxation, and hand rehabilitation.

The M-Wave is designed to improve the way patients manage their neuromuscular conditions. With advanced features and a user-friendly design, the M-Wave allows patients to be treated in a clinical or home setting with ease. The compact and lightweight design of the M-Wave ensures portability and easy integration into patient recovery routines. The user-friendly interface and ease of use when designing a custom electrotherapy regimen will encourage an even broader adoption of our therapeutic products. As I mentioned, in February of this year, we received the FDA clearance for the product. It paving the way for launching the product. We expect that to be in the next month or two. As you know, we have spent the past many years building nationwide sales coverage with 800 territories. We are just shy of 500 of these being populated by now.

We are focused on filling all 800 territories and making our sales reps fully productive. It takes up to 3 years before a new rep is typically fully productive. At this point, only half of our sales reps has more than 1 year in terms of tenure. Having built this strong pipeline to prescribers that see patients in pain and in need of rehab, we are now putting an extra effort into diversifying our revenue stream. Our best-selling product, the NexWave, was nearly 85% of all orders received a couple of years ago. Only 50% was from all other products such as low back support, bracing products, cervical traction, cold or hot therapy equipment, and compression. It is now up to 25%. We have launched an initiative this month with incentives for our sales force to also promote these products more actively.

We do not expect this to cannibalize our NexWave revenue but rather be an addition to our revenue in the pain management division. In addition to the impressive results from our profitable pain management division, our monitoring, Zynex Monitoring Solutions, the monitoring division, continue to move forward in the fourth quarter with further development of our blood and fluid monitor and our laser-based pulse oximeter. We were excited to announce FDA clearance last year for our second-generation blood and fluid volume monitor, a non-invasive and wireless technology targeted to improve patient outcomes with better fluid management in hospital settings. We continue to collect additional data in clinical trials. And Don Gregg will provide further updates on this product in his prepared remarks.

We have three additional products in the pipeline in our hospital monitoring products division: a laser-based pulse oximeter, NiCO, a monitor for early detection of sepsis, and a non-invasive laser-based monitor of total hemoglobin levels called the HemoOx. The monitoring division is pre-revenue, and we expect to submit an application to the FDA for our laser-based pulse oximeter mid-year 2024. Overall, we're making great progress in the patient monitoring division, which we believe will have a game-changing growth potential for the company. Looking ahead, we're making significant progress building on our holistic, non-invasive approach with at-home pain management devices and diversifying with new products. We are rapidly expanding direct sales distribution channels that are delivering accelerating and high-returning revenue, high-recurring revenue as we continue to execute operationally and strategically. In tandem, we're focused on ramping our hospital monitoring division, which represents a large and growing market opportunity.

We expect consistent growth and strong financial performance in 2024 following the double-digit growth we have produced year after year. We also expect additional catalysts and regulatory milestones during the year as we work to execute on our strong pipeline of new products. We look forward to additional updates in the months to come as we build our sales force and execute on our growth objectives to improve the quality of life of patients suffering from debilitating pain and illnesses and bring long-term value for our shareholders. 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 with 29% order growth and 43% order growth for the full year. As Thomas mentioned, we also received FDA clearance for our next-generation NMES device. NMES treatments have several uses, including aiding recovery from surgery, managing chronic conditions, and even enhancing exercise performance in healthy individuals. The M-Wave replaces its predecessor, the E-Wave, and is the next evolution in NMES devices, allowing for more customizable treatments within clinical and home settings. We continue to target filling 800 sales territories while diligently ensuring the right individual is matched to the right territory. We ended the fourth quarter with approximately 475 sales reps. Year-to-date revenue per rep on an annualized basis, not including the receivable write-off, was approximately $415,000, an increase of 5% over 2022.

We added a net of approximately 60 sales reps during the year, which decreases the growth in revenue per rep in the near term as those new reps ramp up. Our direct sales force is relatively new, with an average tenure of 18 months. As our team continues to mature, we expect to drive sales efficiency higher. I look forward to another profitable year for the pain management division and updating you all on our market expansion and future calls. I'll now ask Don Gregg, President of Zynex Monitoring Solutions, to provide updates related to that business division.

Donald Gregg (President, Zynex Monitoring Solutions)

Thank you, Anna. Our patient monitoring division is truly a ground-up growth effort and a long-term investment for Zynex to diversify our revenues toward becoming one of the largest medical technology companies. We are looking to leverage this management team's past success at building businesses to grow a second line of products with a much larger market opportunity at comparable profitability. Zynex has the technologies and strategies necessary to make a successful entrance into the new product line and market. But the process of acquiring FDA clearance can be somewhat lengthy, with occasional delays. The fluid monitoring product via our CM line of monitors is a precursor technology for sepsis monitoring. Our CM technology is introduced to operating rooms: entirely new capabilities that could alter the standard of care and ultimately improve the welfare of patients.

We continue to consult with experts, key opinion leaders, and thought leaders in the space to refine the capabilities of our products and ensure maximum uptake by potential customers. We expect that building a successful standalone fluid monitoring market will take longer than other new monitoring products. But we believe strongly in the benefits patients will experience and the value proposition provided by the technology. Our non-invasive laser pulse oximetry line, including NiCO and HEMOX, continues progressing positively. We expect to submit NiCO to the FDA in mid-2024. We are working diligently to engage experts, key opinion leaders, and professional societies to raise awareness of the science of laser pulse oximetry. We recently finalized our go-to-market strategy in this space, along with developing marketing execution strategies. Considering the competitive dynamics in this space, we will refrain from detailing our initial go-to-market until closer to product launch.

I will now turn the call over to Dan Moorhead, Chief Financial Officer, for a more in-depth look at 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 fourth quarter and full year 2023. After commenting on our financial results, Thomas will review our guidance for 2024. Before we get into the financial results, I wanted to provide some brief color on the fourth quarter adjustment. During Q4, we placed an allowance on $6.2 million of slow collecting accounts receivables. When our expected collections are adjusted, they are recorded through revenue, not bad debt or G&A expense. As Thomas mentioned, this is a non-recurring adjustment. We continue to have strong relationships with our payers. It's important to consider: our cash from operations increased 29% in 2023 and was a company record despite the adjustment. Our DSOs decreased during 2023 unrelated to this adjustment, both of which are great indicators of how the business is performing.

The adjustment net of taxes affected our diluted earnings per share by $0.13. For the full year 2023, net revenue increased 17% to $184.3 million from $158.2 million in 2022. Orders increased 43% in 2023 compared to 2022. Adjusting for the receivables allowance, net revenue would have been $190.5 million, a 20% increase compared to 2022 and in line with our estimates. Device revenue increased 35% to $58.8 million compared to $43.5 million in the prior year. Supplies revenue increased by 9% year over year to $125.5 million from $114.7 million in the prior year. Gross profit for the full year of 2023 increased to $146 million, or 79% of revenue, as compared to $126.2 million, or 80% of revenue in 2022.

Sales and marketing expenses were $86.7 million in 2023 compared to $67.1 million in 2022, primarily due to increased headcount of our sales force and increased commissions and incentive pay related to improved order volumes and higher-than-normal wage inflation. G&A expenses were $48.5 million in 2023 compared to $36.1 million last year. Approximately 16% 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 due to compensation and benefits expense driven by headcount growth associated with the growth of the company and increased order volumes. Net income was $9.7 million and produced 0.27 cents per basic and diluted share in 2023 compared to $17 million, or 0.44 cents per basic and diluted share in 2022.

Adjusting for the receivables allowance, net income would have been $14.4 million net of tax, or $0.40 per basic and diluted share, which was in line with our estimates. Adjusted EBITDA for the year ended December 31st, 2023, was $22.3 million compared to $28.1 million in the year ended December 31st, 2022. Now I'll look at our fourth quarter results. In the fourth quarter, orders increased 29% year-over-year to the highest number of orders in company history for the seventh consecutive quarter. Net revenue was $47.3 million compared to $48.8 million in the fourth quarter of 2022. Adjusting for the receivables allowance, net revenue would have been $53.5 million, a 10% increase compared to the Q4 of last year. Device revenue was $16.3 million compared to $15.9 million in the fourth quarter of last year.

Supplies revenue was $31 million versus $32.9 million in the fourth quarter last year. Gross profit in the fourth quarter was $37 million, or 78% of revenue, as compared to $39.4 million, or 81% of revenue in 2022. Sales and marketing expenses were $21.7 million in the fourth quarter of 2023 compared to $19.2 million in the same period in 2022. G&A expenses were $13 million in the fourth quarter of 2023 compared to $10.1 million last year. Net income was $1.2 million and producing $0.04 per basic and diluted share in the fourth quarter of 2023 compared to $7.5 million, or $0.20 per basic and diluted share in 2022. Adjusting for the receivables allowance, net income would have been $5.8 million net of tax, or $0.17 per basic and diluted share in the fourth quarter and in line with our estimates.

Adjusted EBITDA for the three months ended December 31st, 2023, was $9.9 million compared to $11.4 million in the quarter ended December 31st, 2022. We ended the year with $44.6 million in cash on the balance sheet and working capital of $69.3 million. Cash flows from operations in 2023 increased 29% year over year to a record $17.8 million. In the fourth quarter, we continued our stock buyback and repurchased 14 million of common stock, bringing the total repurchases in 2023 to $38.4 million. Over the last 24 months, we've purchased $65 million. We continue to balance deploying cash generated between investing in our business and returning cash to shareholders. We believe both offer attractive return profiles. The continuing buyback reflects our belief in management team, the growth opportunities for both divisions. We remain committed to creating shareholder value in the near and long term.

With that, I'll turn the call back over to Thomas.

Thomas Sandgaard (Founder, Chairman, President and CEO)

Thank you, Dan. We've had a strong start to the first quarter. With the continued growth in orders in the first quarter, I can tell you we're off to a good start in that in January, we grew 23% year-over-year. In February, we're looking at 29% year-over-year growth. In terms of revenue for the quarter, we expect revenue to come in at $47.5 million, which is approximately 13% higher than the first quarter of 2023 and diluted earnings per share of $0.03. As for our 2024 outlook, we expect total revenue to be approximately $227 million, representing growth of approximately 23% over 2023 and diluted earnings per share of approximately $0.50. We are incredibly proud of the growth that we have consistently demonstrated in the past several years.

Top-line revenue has produced high levels of profitability and free cash flow, which has allowed us to expand our sales force, launch a new business line to diversify our revenue stream, and continue repurchasing our shares. The business we have created and the profitability we're able to generate allows us a high degree of flexibility to allocate capital in several ways. We have the ability to continue investing in our business and return cash to shareholders simultaneously. We believe both these avenues will produce substantial shareholder value. With that, operator, please open the call up for questions.

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the 1 on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the 2. If you are using a speakerphone, please lift the handset without pressing any keys. Your first question is from Jeffrey Cohen from Ladenburg Thalmann. Please ask your question.

Jeffrey Cohen (Managing Director of Equity Research)

Oh, hi, everyone. Good afternoon. Thanks for taking our questions. I've got a few semi-brief ones. So firstly, on the receivable allowance, perhaps a little more commentary. I know that there's been some gnashing in the past about one account specifically called United. And I want to know if this stems from that account or one account, or it stems from multiple accounts. And is the effect both on devices and supplies?

Dan Moorhead (CFO)

Yeah. So the adjustment, Jeff, is related to receivables that we're collecting slowly. We placed an allowance on them. As we said, it was a bit of an anomaly because current accounts receivable have improved with cash flow and DSOs improving both in 2023. Going forward, it's really a non-issue. We're not going to get too detailed on it, but I would say it's not related to a specific account that you're thinking about, I don't believe. It is a payer that we continue to work with.

Jeffrey Cohen (Managing Director of Equity Research)

Okay. Got it. That's super helpful. Maybe, Don, could you comment a little bit? So it seems like ZMS is about $8-ish million of G&A operationally currently. And what's the plan for launching the blood volume monitor? What's the plan for any public readouts as far as some of the data that you've been collecting?

Donald Gregg (President, Zynex Monitoring Solutions)

Yeah, Jeff, this is Don. I just wanted to clarify. We're about $9 million G&A. And the CM platform is a long-term play for us. We're very focused right now on our non-invasive pulse oximeter, essentially our laser pulse oximeter. And we're very focused on the organization completing that and getting that to the FDA and into commercialization. That'll be our first product at this point that we will actually commercialize and take to the market. Our blood volume, fluid volume platform has been in clinical trials, and we continue to run clinical trials on that to refine that technology. That technology is also very important for our sepsis monitoring platform. And so, therefore, some investment goes into that. But largely, we're very focused on the pulse oximeter platform right now. Is that answer your question?

Jeffrey Cohen (Managing Director of Equity Research)

Okay. And yes, that's perfect. Just to reiterate, you're planning on a submittal for the pulse ox mid-2024.

Donald Gregg (President, Zynex Monitoring Solutions)

That's correct. Yep.

I'd just clarify, Jeff. They spent about $9 million in 2023. We're looking at closer to $13 million if you're looking at your forecast for 2024.

Jeffrey Cohen (Managing Director of Equity Research)

Got it. That's super helpful, Don. And then, I guess, lastly, some questions on NexWave. If you could just remind us all as far as the target audience and the payer environment and the channels to market, that would be helpful.

Thomas Sandgaard (Founder, Chairman, President and CEO)

Yeah, maybe I can answer that one. This is Thomas. So neuromuscular electrical stimulation is a market that is used for reeducating muscles. Typically, it can be after surgery or after sports injuries. And in terms of payers, it's the same as we have for all the other products. There's a billing code for NMES that's different than the other billing codes that we often use. Sometimes an E-Wave, actually, is on a patient where it's helping here. But the M-Wave is more versatile. And when it requires specialty settings, for instance, it's much better to put that device on. We'd be billing for that code and all payers, just like with TENS and interferential, pretty much pay for it. It pays pretty well. So, therefore, it makes sense to have a dedicated product for these particular applications.

As always, it depends on what medical conditions, what indications we get on the paperwork from the clinic that then decides, again, what product that goes to the patient and what billing codes we are using.

Jeffrey Cohen (Managing Director of Equity Research)

I got it. And Thomas, does that expand your TAM as far as the target audience, as far as the physicians out there, which the sales force is targeting? Does that tack on additional physicians in additional geographies?

Thomas Sandgaard (Founder, Chairman, President and CEO)

No, because we were selling the E-Wave, a product we also manufactured, an older generation of its—actually one of the very first products I developed a couple of decades ago. So it doesn't expand it, but it gives the sales force a much easier-to-sell and more versatile and easier-to-use product rather than the E-Wave. That'll be phased out here over the next couple of months as production has ramped up and we start supplying the E-Wave.

Jeffrey Cohen (Managing Director of Equity Research)

Got it. Okay. Super. Thanks for taking our questions.

Thomas Sandgaard (Founder, Chairman, President and CEO)

Thank you.

Operator (participant)

Thank you. Your next question is from Shagun Singh from RBC. Please ask your question.

Speaker 8

Great. Thank you so much. And I apologize for any background noise at the airport. So I guess two sets of questions from me. Firstly, with respect to strategic alternatives, can you just provide us with an update on where you are with that review process and if we should expect any news on that front in 2024? And then just with respect to your guidance, can you help us with the cadence to the year on revenue as well as margins? And then I'm just trying to figure out how should we think about your adjusted revenue guidance of 19% for 2024 in the context of the 43% order growth that you saw in 2023 and 29% exiting 2024? Thank you so much for taking the question.

Thomas Sandgaard (Founder, Chairman, President and CEO)

Strategic alternatives. What? Strategic alternatives?Oh, sorry. I didn't hear it. But so you were asking about the strategic alternatives, which to a large degree is us focusing on a going private transaction. And that is still continuing. We are talking to a couple of potential private equity firms that are pretty deep in the weeds and have done, I would say, probably most of their due diligence. Whether we get to conclude a transaction with any of those or if we decide to go in a different direction is obviously still to be seen. Some of that will depend on valuation and negotiating in regards to that and if we have the right partner to move forward with. So it's looking very positive. However, we have nothing affirmative to report for probably another couple of months. And then there was questions.

Speaker 8

Great. And then just on 2024?

Dan Moorhead (CFO)

Yeah. I would say, again, when you're looking at revenue growth versus order growth, you're always going to have some differences there. I would say we did 43% for the year, but a lot of the larger numbers were in the first half. I would just say the comps were a little easier. And as the sales force got more effective in the back half of 2022, those got a little tougher. So the 20% revenue growth kind of is showing that and that continued growth. I would say margins, we expect to stay constant or slightly expand a little bit. Our production group has done a really good job with pricing here. So we would expect to continue to see those strong margins into 2024 and beyond.

Speaker 8

Great. Any color on cadence through the year on sales and margins? Thanks.

Dan Moorhead (CFO)

I would expect it obviously; we had a little higher comps this year as, again, the sales force continues to do better. But as far as order growth, I think we're looking at mid-20% growth. And I think we see that across most of the quarters. I don't think it's going to jump around too much. So it should be a little steadier this year than it was in the prior year. And that, again, should drive that approximately 20% revenue growth. And don't forget, right now, the forecast is EPS going from what would have been $0.40 this year to $0.50, so over a 25% increase in kind of pro forma EPS year to year.

Speaker 8

Thank you.

Operator (participant)

Thank you. Your next question is from Yi Chen from H.C. Wainwright. Please ask your question.

Yi Chen (Managing Director of Equity Research)

Thank you for taking my questions. Regarding the 23% expected growth in 2024, out of that, how much will be primarily driven by NexWave? Can you comment on that?

Thomas Sandgaard (Founder, Chairman, President and CEO)

Go ahead. You can go ahead, Don.

Donald Gregg (President, Zynex Monitoring Solutions)

Yeah. I would say that we don't expect the growth to slow down on the next wave. So let's assume that is in the 20% range. We are pushing hard to see revenue growth from all the other products that we are selling through our sales force. And that's probably where the majority of this is going to come from. So all those other products will hopefully double in terms of orders and, therefore, get us up to more than, yeah, 25% order growth and, again, spilling over to what we expect to be a 23% growth in revenue.

Yi Chen (Managing Director of Equity Research)

NexWave will still be the main growth driver within 2024, correct?

Donald Gregg (President, Zynex Monitoring Solutions)

Well, ideally, we'll get that one below 50% while we really grow the orders. Chances are that it'll still be a little over 50% as we exit the year. Long term, we are hoping to have a much more diversified product portfolio also in the pain management division.

Yi Chen (Managing Director of Equity Research)

Got it. Got it. I'm also curious, are there any attractive opportunities out there that the company could look at that may involve fast-growing products on the market that Zynex could potentially acquire versus using the existing cash to buy back more shares?

Donald Gregg (President, Zynex Monitoring Solutions)

We are evaluating about a handful of those that are exactly making products that we either sell right, or similar to what we sell right now would be a great complement and also in a price range where we could afford it. We have not initiated any negotiating, but we are getting pretty deep in our research there.

Yi Chen (Managing Director of Equity Research)

Got it. Thank you.

Operator (participant)

Thank you. There are no further questions at this time. I will now hand the call back to Thomas and now for the closing remarks.

Thomas Sandgaard (Founder, Chairman, President and CEO)

Well, thank you for joining us today. We're 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 speaking to you in upcoming investor events. We appreciate your time and interest in Zynex and have a great day.

Operator (participant)

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may always connect.