This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk04: Good afternoon, ladies and gentlemen, and welcome to the Zynex second quarter 2022 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, the conference call is being recorded. I would now like to turn the conference over to Ms. Louisa Smith from the Gilmartin Group. Please go ahead.
spk07: Thank you, Chuck, and good afternoon, everyone. Earlier today, Zynex released financial results for the second quarter of 2022. A copy of the press release is available on the company's website. Joining me on today's call are Thomas Sangard, Chairman, President, and Chief Executive Officer, Dan Moorhead, Chief Financial Officer, Anna Lukzak, Chief Operating Officer, and Donald Gregg, Vice 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 2021 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.
spk01: Thank you, Louisa, and good afternoon, everyone. Thank you for joining us today for the second quarter 2022 earnings call. This quarter's revenue and profitability remained exceptionally strong as we continue to execute on our long-term growth plans. Total revenue was 36.8 million for the quarter, an increase of 18% year over year. Both in June and also for the second quarter, we saw the highest number of monthly and quarterly orders in the company's history. Second quarter orders grew 19% sequentially over the first quarter of 2022 and 10% over the second quarter, 2021. Earnings for the quarter were $0.08 per diluted share and adjusted EBITDA was $5.5 million. And we are on track for achieving both top and bottom line full year guidance. Cynics is experiencing consistent growth quarter over quarter and are looking forward to continued demonstration of our strong performance. During the second quarter, we completed a $10 million share buyback program and established yet another buyback program for an additional $10 million. We believe this initiative signals to our shareholders how confident we are in delivering value and executing our strategic growth plans. We ended the second quarter with approximately 400 sales reps. We reiterate the ability of new and existing reps to grow sales more efficiently and strategically as evidenced by consistency in order growth. The current job market makes it difficult to hire a significant amount of new high-quality sales reps. In the second quarter, we achieved record order numbers, demonstrating our ability to continue to grow our top line. Once the job market returns to a more normal cadence, we believe that we will accelerate growth even further and eventually fill all 800 territories across the U.S., of which 400 are still open. In our monitoring products division, we continue to hire for engineering and clinical research positions as we keep making progress on our CM1600 blood and fluid volume monitor, sepsis detection device, and our laser-based pulse oximeter. Pending FDA clearance on our second-generation blood and fluid volume monitor, we are now gearing up to launch the product commercially during the second half of this year. We expect to see prototypes of the laser-based pulse oximeter also here in the second half of this year, and we are targeting a submission to the FDA mid-next year. I will now turn the call over to Anna Luxock, our Chief Operating Officer.
spk00: Thank you, Thomas. As the monitoring division is still in its ramp up to commercialization, the pain management division remains the primary revenue source for Zynex. As Thomas discussed, we've seen a consistent increase in order growth and revenue over the past several quarters, in large part due to productivity of our sales force. Revenue per sales wrap in Q2 grew by 37% compared to Q2 2021 and 23% over last quarter. Salesforce productivity, rather than size, has developed into the primary driver for high-quality top-line revenue growth. We continue to be very selective of new reps to ensure they're a good fit. On the existing Salesforce, we're identifying underperformers earlier in their life cycle with the company and are emphasizing efficiency with new and existing reps. Similarly to other companies facing macroeconomic challenges, we have been impacted by inflation, primarily in corporate employee and sales rep wages and incentive pay. Both have increased more than normal over the last 12 to 18 months, which has impacted our bottom line. Cash collections from payers, both in and out of network, remain strong, and we have not seen any shifts in dynamics throughout the first half of the year. Additionally, we've largely been unaffected by supply chain concerns, impacting many others in the MedTech space. Our access to components and supplies has not significantly changed year over year, and we've built up inventory to account for longer transit times and shipping channels. We have also been able to tap into our secondary manufacturing providers to keep a steady handle on necessary materials. I'll now ask Don Gregg, VP of Zynex Monitoring Solutions, to speak to the business updates related to that division.
spk03: Thank you, Anna. The Zynex Patient Monitoring Division, otherwise known as EMS, comprises a multi-product portfolio and development pipeline, including hemodynamic monitoring, sepsis monitoring, and laser-based pulse oximetry. We estimate that ZMS has a total addressable market of approximately $3.7 billion, and we have started to implement an effective growth strategy within the division to capitalize on future market share. There are two primary programs driving the growth of the monitoring division. The first is the development of the NICO co-oximeter, and Hemox products whose technology Xynex integrated through the Kestrel Labs acquisition. The second is the non-invasive CM1600 wireless blood and fluid monitor and its associated commercialization and R&D efforts. The NECO and Hemox are laser-based products which will be used in hospital systems as a multi-parameter pulse oximeter and a hemoglobin oximeter that allows for continuous arterial blood monitoring respectively. ZMS has been building out the teams and adding critical engineering and clinical personnel, and we remain on track for submission to the FDA in mid-2023. The non-invasive CM1600 device is a wireless blood fluid monitor. We submitted it to the FDA at the end of 2021 and are in discussions with the agency to provide all additional information requested. We are still confident that clearance is progressing as planned. As it relates to the CM1600, ZMS is using this opportunity for the creation of clinical evidence to support the commercialization process. Multiple ongoing and new studies are set to launch in addition to recently completed clinical validation trials, which track blood volume, shock response, and recovery in the patient population. Additional enrollments are continuing, and we will examine the new CM1600 in our ongoing apheresis blood donation study. We look forward to presenting the data in the coming quarters and seizing on market opportunity. I will now turn the call over to Dan Moorhead, Chief Financial Officer.
spk05: Thanks, Don. Please refer to our press release issued earlier today for a summary of our financial results for the second quarter and six months of 2022. In the second quarter, orders grew 10% year over year and net revenue grew 18%. to $36.8 million from $31 million in 2021. Device revenue increased 21% to $9.5 million compared to $7.8 million in Q2 last year. Supplies revenue increased 18% year over year to $27.3 million from $23.2 million. Gross margin was 80% for the second quarter compared to 77% a year ago. Sales and marketing expenses were $16.3 million in the second quarter compared to $13.8 million in the same period in 2021. DNA expenses were $8.8 million in the second quarter, an increase of 42% or $2.6 million year-over-year. $1.4 million of the increase is related to investments in our monitoring solutions division and related headcount to launch our new products. The increase in monitoring is in line with previously stated estimates of increased spend. Tax expense as a percentage was lower than normal at 19% for the quarter due to an additional deduction related to stock options which were exercised during the quarter. And finally, net income grew 19% year-over-year to $3.3 million and produced $0.08 per diluted share in the second quarter and adjusted EBITDA grew 16% to $5.5 million. As for our six-month results, for the first half of 2022, orders grew 6% year-over-year and net revenue grew 23% to $67.8 million from $55.1 million in 2021. Device revenue increased 14% to $16.2 million compared to $14.2 million last year. Supplies revenue increased 26% year-over-year to $51.6 million from $41 million. Gross margin was 79% year-to-date compared to 76% a year ago. Sales and marketing expenses were $30.7 million for the first half compared to $27.6 million in the same period in 2021. DNA expenses were $16.6 million, an increase of $4.9 million year-over-year. As mentioned earlier, we continue to invest in the monitoring solutions division, which accounted for $2.7 million of the increase year-to-date. And finally, net income grew 125% year-over-year to $4.7 million and produced 12 cents per diluted share in the first half of 2022, and adjusted EBITDA grew 97% to $8.6 million. Tax expense year-to-date as a percentage was slightly lower than normal at 23% due to additional deductions related to stock options. And as a reminder, we expect tax expense for the remainder of the year to range between 25 and 30% due to changes in the treatment of research and development expenses and other timing differences. We ended the quarter with $26.9 million in cash, down $12.4 million from Q1 due to outflows of $10.7 million related to our buyback programs, income tax payments of $3.9 million, and debt service payments of $1.4 million, including interest. Cash flows from operations for the year increased 137% or $5.9 million to a positive 1.6 million compared to cash used in operating activities of 4.3 million last year. Before I turn it back over to Thomas, I want to inform analysts and investors that as part of our quarterly reporting process, we plan to discontinue the practice of issuing pre-announcement flash reports beginning in Q3. And with that, I'll turn the call back over to Thomas.
spk01: Thank you, Dan. As noted earlier, we are affirming full year guidance with total revenue estimate in the range of 150 to 170 million, representing growth of 15 to 30% over the previous year. Adjusted EBITDA for 2022 is estimated to come in between 25 and 35 million. And for the third quarter of 2022, we estimate revenue between 40 and 43 million, with an adjusted EBITDA between 7 and 9 million. These figures reflect our most recent assessment of the current labor environment and continued uncertainty relating to the evolving impact of the COVID-19 epidemic and how that's felt by the government and other microeconomic factors. With that, operator, please open the call up for questions.
spk04: Thank you. 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. And to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Adam Mader with Piper Sandler. Please go ahead.
spk08: Hi. Good afternoon, guys. This is Simran on for Adam. Thank you for taking the questions. Maybe starting with a little bit more detail on the procedure environment and the progression that you saw over the course of Q2, it sounds like you've had record order volumes in June. So, I mean, is that Salesforce related in your mind or do you think there was maybe some pent up demand from COVID? And then would be curious if you could just talk about a little bit about how things have trended thus far into July.
spk01: I think we can safely say that this is all sort of an internal issue more than an external. It's better productivity from our sales force as relatively new reps are becoming more productive and the entire sales force overall rather than it's how the entire medical environment is developing. July. is already showing a great growth. And as we have alluded to earlier, we'll continue to see strong order growth compared to the same quarters last year. And we're definitely trending right in that direction here in July already.
spk08: Okay. And then for net sales force ads in the quarter, could you remind me where you finished in Q2?
spk05: We were right around 400.
spk08: Okay. So it sounds like there was about an attrition of 30 reps from the prior quarter. So maybe just talk about the hiring environment in general, given some of these macro pressures. I know you guys touched on kind of the inflationary headwinds on, you know, wages. And just in general, though, about attracting, you know, quality reps as well as your confidence in getting to that 500 rep target by year end?
spk01: Yeah, it's obviously difficult because we can't really lower the bar in terms of the quality of the reps we hire. You can kind of say that we – We did that in 2020 where we had to prune a significant amount of those after having been here a year and maybe didn't produce as well as you would hope. So we keep the bar at the same high level. It really shows in those we do hire continue to have a steady increase in the first 90-day growth. performance, which is always a very strong indication of their long-term performance. So per rep, I would say we are building a stronger and stronger sales force. But the amount of reps we are able to handle or to recruit versus the now fairly small attrition we have is not enough to really significantly change the numbers of Of course, we expect that it'll loosen up a little later in the year, and that's why we're talking about increasing the number of reps towards the end. But the growth is certainly coming from reps becoming more productive, and those we do hire quickly kick in with some significant numbers.
spk08: Okay, perfect. And then if I could just squeeze in one more on the guide. So the full year guide was maintained and you issued a range of 40 to 43 mil for Q3. So now with the Q2 results in hand, this does imply a pretty hefty ramp in Q4 particularly, I think about $10 million at the midpoint. So is the expectation of kind of this continuation of ramp and sales productivity without necessarily you know, necessarily adding more reps? Or is there a full list of reps that you're expecting to kind of come through during Q4 that's giving you the comfort in hitting your full year target?
spk01: And then also there are two very different things. There's two different kinds of seasonalities, one on the order side and then on the revenue side. Throughout the year, we always see an increase of revenue, mostly driven by insurance deductibles that obviously become less towards the end of the year. So we always start revenues at the level that is either at the same or sometimes even a little less than the fourth quarter of the previous year. And then you see the overall growth. And right now, we are looking at a 15 to 30% revenue growth over the year. So the orders are growing more steadily, obviously, when doctors are on vacation. It's a little weaker, but that shows a whole different pattern with doctors typically out in January and July because they don't want to get hit by insurance deductibles. But for us, we see the majority of the revenues throughout the year in the third and especially fourth quarter. So it's perfectly natural that we see that. It's not like we put additional pressure on ourselves to suddenly ramp up revenue. It's just part of the seasonality on the revenue side of our business.
spk05: And if you look at the percentages of the total, if you look at last year and this year, they're mirroring almost exactly the same. The Q2 is a percentage of the total 130 we did last year. Q2 of the kind of the midpoint of the range this year, and then with the guide Q3 as a percentage of total, it's almost exactly the same. So it's nothing that's out of the ordinary.
spk08: Got it. And then just real quick, is there anything contemplated in the guide from the monitoring business?
spk04: No.
spk08: Okay. Got it. Thank you.
spk04: The next question will come from Jeffrey Cohen with Lattenberg Salmon. Please go ahead.
spk02: Hi, Thomas, Dan, Ann, and Donald. How are you?
spk01: I think we're doing pretty good. Did you like the numbers?
spk02: Very much so. It sounded like you had a 10.7 number there on the buyback, so does that mean that you've initiated that second piece?
spk09: Correct, yeah.
spk02: Okay, so the .7 was as of the end of... The quarter or currently?
spk05: That was end of the quarter.
spk02: Got it. Okay. I guess we'll get nothing further yet. So I guess the next question is for Donald. If you could talk about the developments. I'm not going to ask about 1600. I've already done that a gazillion times. But when you talk about the NECO and the HEMOX, you're talking about the platform together. And then maybe talk a little bit about what you're envisioning down the road on the commercial front as far as doing it yourself, do it by territories, by regions, by distributors. Any thoughts there? Any updates for us to think about?
spk03: Yeah. First, I'll say that we're on track with our internal development timelines for the laser-based products. The commercialization, we try to think about that up front as we're designing the product because We want to put things in the devices and in the platform and think about how we actually commercialize and go to market. These devices are planned to be wireless in nature, so they can have connectivity in the hospital and will allow us to collect data and things like that. With that said, commercialization is a combination of both a direct sales force and an indirect sales force. And I probably can't speak too much more about that, except that this is a system sale, and it takes some individuals that understand both the technology and the clinical therapy to sell this device. And so it's a very important way that you will go to market and how we will focused primarily in the hospital market in the beginning. Does that answer your question?
spk02: Yes, thanks. Dan, how does that look on the back half? You mentioned 2.7 for the front half on the GNA for ZMS. Back half, around the same?
spk05: I know it's a little more than that just because we've been ramping. You know, we spent about two and a half last year. We said we were going to spend about five more this year, so somewhere in that seven and a half to eight range for the full year is about where we'll end up, I think.
spk02: Okay, that's helpful. And then lastly, I guess maybe a question for you, Thomas. When we think about, you know, the past number of months and quarters and years of awareness growing out there, how is that reflected currently both on the patient side and both on the physician side when you think about and talk to folks out there about awareness and trends and utilization and prescribers and number of practices that are expanding internally and number of practices which are being added.
spk01: Well, I assume you're talking about the pain management division here.
spk02: Yes.
spk01: Okay. So our business model I would say has very little to do with sort of the general awareness. Also because we're talking about a more than 25 to 30 billion dollar pain management market and we're still just a drop in the bucket when it comes to that. Everything is driven by the face to face interaction between our sales force, and the prescribing positions. So, yeah, there's awareness where we have a rep in front of the prescriber. And other than that, yeah, occasionally I hear someone here in Colorado that's seen the Cynex name before, but that's probably more because we're here. It's obviously something that over the past 26 years when I've been in in this industry, in this country. We have tested a lot of different things and also seen other companies pretty much break their neck on trying other things, trying to do more of a pull approach instead of a push approach, which you can call having a direct sales force. And you end up losing a ton of money on any other approach than that. it's not really something we measure and pay attention to. We measure productivity in our sales force, and that's going to drive us to obviously the end goal of what I believe will be above $800 million in annual revenue on these products.
spk02: Super. Thanks for taking the questions.
spk04: The next question will come from Mark Weisenberger with B. Reilly Securities. Please go ahead.
spk06: Thanks. Good afternoon. I appreciate you taking the questions. Of the more than 45,000 orders in the second quarter, I'm wondering if you could give us a rough breakdown of how much of that was NextWave versus other products, and how has that breakdown been trending recently?
spk01: I believe in terms of orders that came out, 82 to 83% of the orders are next waves and actually subsequent supplies that are being sent out or several years after when we received the prescription. That's obviously part of why when we see significant order growth, why it takes a while before the actual revenue kicks in. So it's gonna, you could call the diversification has improved a little bit, but not substantially.
spk06: Understood. And then if you could update us maybe on how many active patients do you currently have and how that maybe trended relative to the prior quarter and last year?
spk05: You know, I think we're somewhere approaching 100K in active patients. You know, we don't, that's not a metric we're tracking on a day-to-day basis, but I do get information on that here and there. And, you know, that's people that are still known to be treating with the device obviously you know we don't always know when somebody is treating and not treating so it's a little bit of a round number but we think it's somewhere in that area got it okay great and then um if you could talk about the percentage of the sales and marketing expense that's maybe related to to fuel for your reps
spk06: And then kind of what percentage maybe is kind of the marketing materials for in-clinic kind of the food and kind of the advertising stuff. And with respect to those kind of costs, I think a lot of them have probably experienced some inflationary dynamics. Wondering if you have taken any actions around that or you're potentially going to take some actions around that stuff to mitigate some of those rising costs.
spk05: So it's... With respect to fuel and kind of those in-service or meals that they're providing to clinics at times, those are capped on a per rep basis. So, you know, I can't say that that has really affected us because the rep can only spend so much per month and so they have to allocate their dollars effectively. We haven't increased that since, you know, gas has gone up significantly in the last, you know, six months. And so, you know, we haven't seen an increase there. I would say TAB, Mark McIntyre, As far as REP materials, obviously as we've continued to grow. TAB, Mark McIntyre, That piece has grown significantly as well and we've been able to be more efficient on some of those and. TAB, Mark McIntyre, and bring down the price versus you know in you know producing them here or outsourcing and we kind of do a mix of both to to make that efficient, but I would say again that's a pretty small piece of the budget. TAB, Mark McIntyre, Most of the budget is obviously going to you know salaries and the related commissions and. That T&E number that I spoke of that's capped is a percentage of that as well, but we haven't seen any increases due to the factors you mentioned.
spk01: Obviously, we have a relatively large sales force with 400 sales reps, so we have a lot of efficiencies and also flexibility in all the printed material we supply to them. That's generated internally. We literally have our own We call it a very large-scale version of a Kinko's here. That is able to customize prescription pads for individual physicians, for instance, and marketing material individualized with sales reps' names on it and how to send in prescriptions, et cetera. All that is customized, and we can switch gears very quickly here by doing all that internally instead of having having it done outside. Because of that, that's fairly inflation-proof.
spk06: Understood. Very helpful. And then just two more from me, and these are going to switch to ZMS. I think I heard you talk about your gearing up for a commercial launch in the second half of this year for potentially the CM1600 after clearance. Does that mean that you've really kind of finalized a go-it-alone strategy and you will be building up the sales rep base within that segment, which is obviously going after a completely different market? And if you could remind us how many sales reps you have there now and what's kind of the medium-term goal for the ZMS sales reps?
spk03: The current sales commercialization team is, we're scheduled to respond to the FDA. Let me just back up and say we're scheduled to return or respond to the FDA. And we will consider building the commercialization team to sell the device. We have a plan in place. to bring on a limited number of reps that are direct that will also help manage a indirect channel. And that's a fairly small number in the beginning because we will be ramping over a few quarters of next year.
spk06: Understood. Got it. And then just a final one for me. I think recently I've heard discussions about a creating a connected platform for the monitoring solutions division. I'm wondering if you could just talk more about that and what kind of capabilities you're envisioning there and maybe would that kind of provide recurring revenue in terms of software and any kind of additional details would be helpful. Thank you very much.
spk03: Yeah, so the business model around that is if you look at devices in the medical device industry today, most everything is connected via wireless, Bluetooth, or some type of communication, whether it be near field, et cetera. There's on-prem solutions in a hospital, and then there's typically a cloud behind that that provides data, collects data, downloads updates to devices, things like that. We are building a connected platform to communicate with all of our devices wherever they are in the world. That platform can download updates. It can collect data. It can do some vision to do reporting. It's envisioned to have a SAS business model behind it. So that way there are revenues from the capital, from the disposables, and from the software.
spk06: Great. Very helpful.
spk03: Thank you very much.
spk04: Yep. You're welcome. The next question will come from Yi Chen with H.C. Wainwright. Please go ahead.
spk09: Thank you for taking my questions. My first question is could you give us some general comments regarding whether a recession in the U.S. economy could negatively impact your business going forward? Thank you.
spk05: It's a medical service and a lot of these are paid by insurance and other types of things, so I don't know that we feel there's going to be a direct impact on this. Obviously, with people's discretionary income, you never know with co-pays and those types of things, but so far what we've seen or what we expect to see is fairly minimal.
spk09: And given the current environment for hiring new sales reps, how quickly could you achieve the target number once you get the clearance for the blood monitor to get to the sufficient reps for your team to launch the product?
spk03: Reps that sell capital equipment you know, system level type equipment will take probably 60 to 90 days to bring on. We've outlined a plan that will bring on, as I mentioned, a limited number of those because we have a strategic approach to what geographies and territories within that geography we want to go after. and the types of hospitals, whether they be academic or other types of institutions. There's a ramp to those, and it's also based on the success and the need in the marketplace. And so I think that that will be spread over a number of quarters based on kind of how we see our launch.
spk09: Thank you. And lastly, can you remind us how long a period did it take to complete the initial 10 million share buyback? And do you expect a similar timeframe to complete the additional program of 10 million?
spk05: The original one we did in about 60 to 75 days. We would expect this one to go quite a bit slower. So it's out there and it may change, but right now it's executed at a much slower pace.
spk09: Got it. Thank you.
spk04: This concludes our question and answer session. I would like to turn the conference back over to Mr. Thomas Sangard for any closing remarks. Please go ahead.
spk01: Yeah, thank you for joining us today. We look forward to maintaining our financial health going forward and anticipate high growth from Salesforce productivity in the upcoming quarters. Enjoy your evening and thanks for your interest in this call and in signings. Thank you. Bye.
spk04: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer