PROCEPT BioRobotics Corporation

I would now like to turn the call over to Matt Basko, Vice President, Investor Relations, for a few introductory comments.

Good morning, and 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 Barrow about expiring with the Securities 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 27, 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.

Good morning, and 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 aquapolation 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 US 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 surge in 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 saw the 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 the 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 plan 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 continue 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. ten 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. However, we still expect approximately 55% of system sales to be in the second half of 2023. Next, 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. installed base in six months has grown 40% compared to the end of 2022, and these new accounts take time to run 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 aquabulation therapy is viewed as the respective standard of care within a given hospital. The primary drivers of procedure growth continued 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 aquabulation therapy grows. which gives us confidence in achieving our 2023 growth targets. Next, regarding our progress in the quarter with our IDM partners. In the second quarter, we signed a national sales contract with the largest IDM in the U.S. that secures pricing for system placement and hand pieces 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 aqua operation surgeon champions at these hospitals. Even though we saw the 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 United States, with approximately 45 million covered lives, UnitedHealthcare's positive coverage policy will greatly improve accessibility of aquabulation 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 aquabulation 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 aqua ablation has a proposed payment that would provide the hospital $8,847 for each aqua ablation procedure, which is a 3% increase over the 2023 rate. 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 aqua ablation therapy, our pipeline of large NHS hospitals has grown meaningfully. With respect to market development activities in the UK, we are very pleased with the initial momentum we have generated. Given the acceleration interest from UK 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 UK 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 aqua ablation 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 US 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 process 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 strategy 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 aqua ablation therapy will truly revolutionize the treatment of BPH. With that, I will turn the call over to Kevin.

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. US 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 US system revenue of $14.8 million, an increase of 74% compared to the second quarter of 2022. Our US 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 aqua ablation 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 3,900 forehand pieces in the US 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 overachievement. 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 US 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-sixes, 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 implies is to grow by an additional 34% by the end of the year. Additionally, we continue to expect Hanfee's average selling price to be $3,100 and our other consumables revenue to be $5.9 million. Lastly 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%. Additionally, we now forecast full year 2023 operating expenses to be approximately $174 million. This increase in operating expense 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 operating expenses, 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.

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 strategies. Have a great day, and I look forward to seeing many of you at upcoming investor conferences. At this point, we will take questions. Operator.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by when we compile the Q&A roster. Our first question comes in the line of Craig Bijoux from Bank of America Securities.

Good morning, guys. Thanks for taking the questions, and congrats on a strong quarter. So I wanted to start by asking a few on utilization. And you guys talked about a utilization tick down sequentially, but, you know, handpiece growth was very strong on a tougher comp compared to Q1. And, you know, you did highlight that the large number of system placements probably impacted that utilization number. So, I know you guys track this closely. So, can you talk about what you're seeing from cohort utilization? Are you seeing any leveling off of the earlier cohorts? And 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.

Thanks, Greg. So we are very happy with the Q2 results of the utilization and the positive underlying trends that we see. So 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 results 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 So we see sequential growth, the accounts that we have stayed with us. But as we said, we did about 21%. This was a record robot placement with an increase of 21%. That was the headwind. But when we analyze cohorts, they are sequentially increased. I don't know, Kevin, you want to add something to this?

Yeah, yeah, Craig. Good morning, by the way. And this is rather spot on. We do continue to see the earlier cohort 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 north of the six and a half 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 in New York. 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. But the underlying trends with our accounts hasn't changed. We have a very predictable pathway once an account is installed to increase utilization.

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

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. And 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. So we do have internal limits to pricing called floors and parameters, but we're definitely willing to negotiate, especially if we have a surgeon waiting in the wings to do a lot of procedures and happy with ASP's rebounding. But again, I would still expect quarter to quarter variability. And I don't view that variability as any

anything other than that. Got it. Thanks for taking the questions, guys. Thank you.

Thank you. One moment for our next question.

Our next question comes from the line of Joshua Jennings from TD Cowan.

Hi, good morning. Congrats on the strong quarter and appreciate you taking the questions. I'm open 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 occupation treatment, kind of being savvy and doing their own diligence. But I would love to get a broader view from your team, Res and Kevin, just about what your field is reporting back just in terms of patient demand and how that's driving uptick in utilization at your core base.

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. 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.

Just to follow up to Rosa's other, I wanted to submit to your question, Josh, but regarding demand, I think the other side of the coin that we see is urologists' demand and awareness has definitely increased, 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 increase over the last 12 months.

Understood. Thanks for that. I believe you hired a new executive to lead the marketing effort for Medtronic earlier this year. 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 23 and 2024. And then just one, sorry, sneak one more in just on the commercial team, but 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 Salesforce expansion in 2023, where we should think about that number sitting at the end of this year and and any color you can give on clinical specialists and acquisition rep hires would be great as well. Thanks a lot.

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 going to be very complementary to our commercial team, and we're not prepared to go into 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 teams. We're happy to have him on board. It's been a nice addition. Specific to capital reps and the capital team, as I said in the prepared remarks, we did increase the capital team from 20 to 30 just recently, six months ago. And historically, we have hired one or two capital rep classes per year. We do that to make sure they're properly trained and give them the proper support. And regarding the remainder of this year, our guidance, our office guidance, does allow for us to continue to add more reps to ensure continuity and to make sure we really hit the ground running in 2024.

Understood. Thanks again. Thanks, Josh.

Thank you. One moment for our next question. Our next question comes from the line of Matthew Mishan from KeyBank.

Hey, good morning, and 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 level set for next quarter how much you think it may be down?

Yeah, 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.

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

Yeah, so 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 outside revenue growth in 2024 as well. And 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 so the fact that you know we were already there in the second quarter and by raising our guidance to 55 now implies that we're going to be exiting the year closer to 57 as opposed to 55 so really nice progress there on margins and then it's overall on opex when i look at our revenue growth of 75 our revised office guidance is now growing at 48 So while still early in our commercialization of this product, we're starting to see some leverage already in the business. Okay.

Thank you very much.

Thanks, Matt. Take care.

Thank you.

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

Hi. Thanks for taking the question from the quarter.

A couple of questions. Maybe just first on the way you guys size up your capital funnel. You provided some color on kind of what's coming into the funnel relative to what's, you know, going out. Can you comment a little bit on the, you know, the extent to which that's expanding the lead generation there? And 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. So 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.

Thanks, Rich. Definitely, we were very happy with the Q2 capital strong. And 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. And the second in 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 into phase one, there's very high likelihood of that deal to come to fruition. We see that, and we see that expand. I don't know, Kevin, you want to add?

Yeah, just specifically on the pipeline, I mean, our pipeline, when we look at it, we gave this number a few quarters ago, but when we look at our pipeline, which we consider phase one, 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. So we feel good about the increasing funnel to answer that question specifically. And 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. So we're definitely starting to see those folks start to produce in Q3 and Q4. But Q4 for us, given normal seasonality and just the capital environment, is definitely going to 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.

That's helpful. Maybe just turning to the profitability, the OPEX guidance increase. With gross margin increasing, even in a quarter where you have a higher capital overage relative to the consumables, I'm just trying to get a sense for when do you think we would see the profitability start to inflect. It feels like as you increase these investments on the OPEC 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.

Yeah, I think you're thinking about it the right way. And, you know, while we're definitely focused on revenue growth, we do as a management team make sure we're responsible and cognizant of where we're spending office dollars, particularly in today's environment. And 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. And, 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. And I think that the nature of this business is definitely attractive from a profit standpoint.

Okay.

Thank you. Thanks, Reza.

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

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?

Thanks, Chris. So prior to United coverage, if accounts were willing to treat a patient, they had to receive preapproval. And 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 big impact in Q3.

And 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. But at the same time, we do have many different levers to achieve our utilization guidance. And 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, six and a half on utilization.

Makes sense. Thanks. And then 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? And outside of Japan, are there any other new territories that you guys think could be important in 2024?

So one of the drivers for the international was UK, as we had mentioned previously with the report that came with NICE and the Kaveh Khoshnood, The coverage and those are you UK was the one of the biggest drivers, the reason, Japan, we don't. Kaveh Khoshnood, assume that contribution is because we received approval regulatory effort well into one of 2022 we have to do 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. So internationally, as we had previously said, we are very selective and we go region by region on large markets and start with market development. And similar to US, once we enter, UK was the same. We obtained the reimbursement and received support from the Nice. In Japan, the same. We're going to do again with clinical. So we will go very, we will have a very targeted approach by various regions. So our initially started with Western Europe and then Japan.

And we had approval in South Korea. Thank you.

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

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, and how should we think about leasing going forward?

Thank you. 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. So no leasing arrangements there. I will point out, though, in the second quarter, we did place a system that we expect to recognize revenue for in the fourth quarter. This system was installed as a customer in the second quarter and hence is doing procedures. If you look at our installed base exiting Q3, excuse me, exiting Q1 of 192, if you add 40 systems, that would suggest our installed base should be 232, but as noted in my prepared remarks, our installed 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.

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

Yeah, so 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 IDNs. But what we don't have are these multi-system orders from corporate IDNs. as these purchases are really the most difficult to predict. And 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.

Thank you.

Thank you. One moment for our next question.

Our next question goes to the line of Neil Chatterjee from B Reilly.

Yeah, good morning and thanks for taking our questions. Just curious on the, I think last quarter you talked about the low volume centers make up about kind of 30% of the mix for the install. 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.

Yeah, thanks Neil. The mix hasn't changed. It's in the 20 to 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 have said, are not small hospitals. It's just historically they have not been doing many BPH. So the utilization and the ramp were similar, and the mix is

Yeah, I want to 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. Great. Thanks for that, Collar.

Maybe just turning to R&D, you know, continue to spend there. So just kind of curious if you can update us there in terms of efforts on the R&D pipeline, you know, any plan enhancements on kind of the delivery or speed or imaging perhaps, you know, anything that you could share there.

Yeah, so we are highly focused, obviously, on innovation, being a robotic company. And the investments in Q1 and Q2, they're across the board. People, it's products, it's processes. And not talking specific about future R&D, but you can be assured we're always working to maintain our clinical advantage, kind of the bedrock of this company from a technology standpoint. And without getting 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 that we're talking about today, but we're definitely thinking longer term, but not going to provide any details at this time.

Thanks. That's it for us.

Thank you. One moment for our next question.

Our next question comes from the line of Nathan Trebek from Wells Fargo.

Hi. Congrats on the great quarter. Just can we go back just to the capital environment? You obviously caught up 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.

Yes, so thanks for the question. Definitely, as we have mentioned in Q1 also, yes, hospital P&L 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. But in this case, this fits in their strategy of good ROA and allowing bring more patients because BPH is number one reason patients go see a urologist. And so from that point of view, we believe this fits in the model and

It allows them to treat more patients and also attract surgeons in their hospitals. So that hasn't changed.

Okay.

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

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

Yeah.

Patients are half and half roughly between the, when they're under medication, under the care of urologist and a generalist. So 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.

It's difficult to tell on the numbers, to be honest. I mean, the reality is we're having a lot of traction, 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 green light cases, but you can definitely talk to some of our customers who are treating patients that otherwise would have foregone treatment if aqua ablation wasn't an option. So we are seeing that, but it's difficult to parse out at our volumes exactly what percent of those patients are foregoing drugs or drug dropouts versus were candidates for other respective technologies.

Okay, thanks.

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

Good morning, everyone. Thanks for taking the question. First, I just wanted to go back to kind of the utilization. And I want to ask 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? So maybe we can tease out what is, what kind of trends we're seeing in the quote unquote legacy install base versus new systems.

Yeah, so again, without getting into specific numbers, I'll try and help you and provide some color, right? And 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. But 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. And 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. So that dilutive effect is fairly pronounced. And 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.

Got it.

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. And 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.

Yeah, so I'll ask you the 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, it is because timing is somewhat unpredictable with these deals. But on average, it's anywhere from three to nine months. I think we've had an account 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 go through all the benefits of the system. And that's been consistent in that range, but inconsistent in terms of giving any further specificity within that range.

Thank you.

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

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

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