Zynex, Inc.

Q4 2022 Earnings Conference Call

3/13/2023

spk08: Good morning, ladies and gentlemen, and welcome to the Zynex fourth quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Louisa Smith, from the Gilmartin Group. Please go ahead.
spk04: Thank you, Drew, and good morning, everyone. Earlier today, Zynex released financial results for the fourth quarter and year ending December 31st, 2022. A copy of the press release is available on the company's website. Joining me on today's call are Thomas Zangard, Chairman, President, and Chief Executive Officer, Dan Moorhead, Chief Financial Officer, Anna Loksock, 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 morning, everyone. Thank you for joining us today for the fourth quarter and full year 2022 earnings call. Before we get started, I wanted to touch on the timing of this earnings call. As many of you have noticed, we are announcing full year earnings a little later than usual. We normally announce during the last week of February. However, since we have a new audit firm this year, we decided a while back to give it a week extra to the first week of March. We ended up needing two weeks so we can announce earnings today. I want to thank not only Markham, but also the staff involved here at Sinex for the hard work and long hours to get the year-end close completed, and as usual, we're still able to announce early. I should also point out that there's no change in our preliminary financial results that we reported in January. We are pleased to report another quarter of record results for SINEX. We posted new record highs for both orders and revenue in Q4 and have delivered four straight quarters of revenue and order growth. We ended 2022 with our seventh straight year of profitability. Total revenue for the quarter was 48.8 million, a 21% increase over the same period in 2021. Diluted earnings per share were 20 cents and adjusted EBITDA was 11.4 million for the quarter. We're proud of the top line growth we've seen through increased sales rep productivity, while also maintaining a healthy bottom line to support significant business development in our monitoring division. We received the highest number of prescriptions in the company's history in the fourth quarter, beating a milestone we had previously hit in the preceding second and third quarters of 2022. We are demonstrating robust growth momentum that has not let up a key indication that our sales force is gaining in productivity and gaining more and more active prescribers of our products. Revenue and profitability remain strong and the productivity of our sales force allowed for a 48% order growth over Q4 of 2021 and 11% order growth in our third quarter. As of this point, we are now over 80% into the first quarter, and we can see that our order growth will come in well above 50%, so our order growth is clearly accelerating at the moment. We remain confident in our strong performance and anticipate hitting both top and bottom line guidance for the full year, with 2023 estimates of revenue between $180 and $200 million and earnings per share between $0.40 and $0.50. Earlier this year, we finished our third 10 million stock buyback, and we feel strongly that these buybacks underscore management's confidence in the performance of our team and the growth potential of both the pain management and the monitoring division in years to come. We remain committed to deliver shareholder value and have so far spent $30 million in buying back stock over the past year. CMS, or Sinex Monitoring Solutions, has an incredibly strong team and is working to bring the blood and fluid monitor, early detection of sepsis device, and our laser-based pulse oximeter to market. Earlier this year, we announced the first enrollment in a blood loss detection clinical trial for the CM1600, and pending FDA's clearance of the device, we'll announce our commercialization. As you may recall, our first generation CM1500 is already cleared by the FDA. Please note, despite the progress that the division is making, our revenue guidance and growth rates for 2023, we do not plan on any meaningful revenue coming from the CMS division. Our laser-based pulse oximeter is still in the development stage following the acquisition of Kestrel Labs just over a year ago, but our team is making important strides with prototyping of the second generation of the product. I'd also like to mention some of the recent acknowledgments Cynics has received. Over the last several months, we've been recognized by many organizations, including Forbes and Deloitte for our rapid growth and strong performance. Forbes ranked us as number 11 in a list of America's best small companies. including us taking the honor of number one in the healthcare equipment and services industry. We're extraordinarily proud of these accolades and believe they highlight the dedication and commitment we have to growing the business and providing value to both our patients and our shareholders. Cynics is delivering consistent results with an efficient business model that continues to meet our guidance expectations. We are making considerable progress on key initiatives that will expand our commercial sales organization, as well as diversify our business into compelling market opportunities. Between the game-changing innovation occurring in our monitoring division and the strong team that is executed in pain management, I'm excited to see the realization of our growth plans in the quarters to come. With that, I will now turn the call over to Anna Luxor, our Chief Operating Officer, for a more detailed business update on the paint management division.
spk00: Thank you. As Thomas described, paint management is consistently growing both from a revenue perspective and with order volumes. We're just scratching the surface at growth potential and have the opportunity to expand into a significant number of additional territories. We remain committed to filling all 800 sales territories to achieve optimum market penetration. However, as we've noted previously, we're still able to maintain healthy growth rates and bottom line profitability without the dependence on these additional territories. We ended 2022 with approximately 450 sales reps and our full year annual revenue per rep was approximately $400,000. We have seen a steady increase in the quality of applicants and performance of new hires over the last several months. Productivity remains at an all-time high, and revenue per rep in 2022 grew 31% over 2021, and fourth quarter grew 17% over the prior year. Efficiency is a critical metric in recent improvement to operational performance, so we're closely monitoring mechanisms to optimize it. We continue to expand the regional sales lead layer within our sales force, responsible for training new hires and monitoring performance of their assigned sales reps. Each regional sales currently oversees an average of eight sales reps. Through consistent oversight and targeted performance management, this layer continues to drive increased productivity of new hires and identify underperformers early on. We're still seeing some lingering challenges as it relates to the macro environment, particularly with inflationary pressures. Corporate employee wages and sales rep compensation has increased as a result, but in order to maintain the efficiency I've just described, We're committed to recruiting and retaining a high-quality sales and corporate team. We continue to work with all payer types, and currently, our largest volume of orders come from commercial insurances, followed by workers' compensation, TRICARE, and Medicare. Again, we want to emphasize that Dynex takes all orders, and we work with all patients and their insurance companies to process coverage in all cases. We are accredited through Accreditation Commission for Healthcare, and we go through regular audits to confirm our policies, processes, and care delivery standards meet Centers for Medicare and Medicaid Services and other official regulatory requirements. Zynex prides itself in a commitment to quality and integrity, as well as the value we provide to all of our patients. I'll now ask Don Gregg, Vice President of Zynex Monitoring Solutions, to speak to the business updates related to that division.
spk03: Thank you, Anna. DMS has a strategic product portfolio and development pipeline that includes hemodynamic monitoring, sepsis monitoring, and laser-based pulse oximetry. We believe that the addressable market for these products is approximately $4 billion, and we are working towards regulatory milestones of several products over the next several quarters. Additionally, we recently announced the expansion of DMS into a larger facility needed for our offices, lab, and production space. Our headcount has increased by 94% over the last 12 months, and the division has advanced considerably throughout 2022. I'm excited about what the coming year will bring in terms of progress towards commercialization and future developments. The two product lines within the monitoring division are the NECO co-oxymeter and Hemox pulse oximeters, built on a similar technology, the CM1600 blood and fluid monitor, As a reminder to our audience about the technical and clinical benefits of these products, the NECO, or what's also known as the Non-Invasive Co-Oximeter, is a laser-based pulse oximeter that is on track for 510 submission to the FDA this year. Hemox is a hemoglobin oximeter. Both products utilize laser technology and will be used in hospital systems as an alternative to legacy devices. The laser technology, as opposed to LED systems, has been found to produce more accurate readings across the diverse patient populations as there is not pigmentary bias based on skin tone. We demonstrated the NECO prototype at the American Society of Anesthesiologists in October with excellent feedback and are planning several clinical studies throughout the 2023 year to be led by a new clinical research manager. among other key personnel we are bringing on this year for engineering and software development. Alternatively, the other product within ZMS is the CM1600, our hemodynamic monitor. The CM1600 is a non-invasive wireless blood and fluid monitor, also to be used in a hospital setting. This is the next generation device of the CM1500, which is already cleared. Previously cleared by the FDA, but with added wireless capability. We've submitted the CM1600 to the FDA and are awaiting any further guidance on testing or additional data requirements before we'll begin to commercialize the device. We have a series of completed and ongoing studies as it relates to blood loss detection with approximately 500 participants throughout the United States. Additionally, we recently announced a research collaboration with Vitalant, the nation's largest independent nonprofit blood services provider. We've partnered with them to take part in our IRB-approved blood loss detection clinical trial, measuring the specificity and sensitivity of the CM1600's patented relative index. We are planning to publish results from our five or more clinical trials throughout 2023, a testament to the confidence we have in the relevance of this product. I'm thrilled by the progress we've made in the monitoring division. and am eagerly anticipating the opportunity to capitalize on a unique market opportunity through this new disruptive technology. I will now turn this call over to Dan Moorhead, Chief Financial Officer, for a more in-depth look at financial performance for the fourth quarter and full year 2022.
spk06: 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 of 2022. First I'll review the fourth quarter. Orders grew 48% year-over-year and net revenue grew 21% to $48.8 million from $40.4 million in 2021. Device revenue increased 19% to $15.9 million compared to $13.3 million in the fourth quarter of last year. Supplies revenue increased 22% year-over-year to $32.9 million from $27 million. Gross margins were 81% in the fourth quarter. Sales and marketing expenses were $19.2 million in the fourth quarter of 2022 compared to $13.6 million in the same period in 2021. G&A expenses were $10.1 million in the fourth quarter of 2022 compared to $7.8 million last year. Approximately 25% of the increase in G&A is related to investments in our monitoring solutions division and related headcount to launch our new products. The remainder is primarily for back office headcount and related order growth. Tax expenses of percent was 23% for the quarter. Net income was $7.5 million and produced 20 cents per diluted share in the fourth quarter of 2022. Adjusted EBITDA was $11.4 million. For the full year, orders grew 23% and net revenue grew 21%, to $158.2 million from $130.3 million in 2021. Device revenue increased 19% to $43.5 million compared to $36.6 million last year. Supplies revenue increased 22% year over year to $114.7 million from $93.7 million. Gross margin for the full year was 80% compared to 79% last year. Sales and marketing expenses grew 24% year over year to $67.1 million. G&A expense grew 37% year over year to $36.1 million. 4.6, or almost half that increase, is related to investments in the monitoring solutions division. Tax expense was 23% for the full year. Net income was $17 million and produced $0.44 per diluted share in 2022 compared to net income of $17.1 million and the same $0.44 per diluted share in 2021. Adjusted EBITDA increased 5% to $28.1 million in 2022. And finally, we ended the year with $20.1 million in cash. Cash from operations increased 98% during 2022, which allowed us to initiate our third $10 million stock buyback, pay a cash dividend, and pay down our debt related to the Kester acquisition by $5 million. With that, I'll turn it back over to Thomas.
spk01: Thank you, Dan. As for our 2023 outlook, we expect total revenue to be in the range of 180 to 200 million, representing growth of approximately 21% over 2022, and diluted earnings per share of approximately 40 to 50 cents a share. For the first quarter of 2023, we expect total revenue to be in the range of 39 to 41 million, with adjusted earnings per share of zero to three cents. With that, operator, please open the call up for questions.
spk08: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Jeffrey Cohen with Ladenburg-Dahlman. Please go ahead.
spk02: Hey, good morning. How's everyone doing? Good morning, Jeff. So just to recap, so What was the main issue with the timing and the auditor? Was there one main issue or it was just a timing issue on a number of items?
spk01: No, I would say it was simply a matter of Markham is new. We've worked with Plant Moran for the past six years. They're no longer working with any publicly traded companies. And Markham has done a great job throughout the year We underestimated how long it was going to take to close the full year and very early announced when we expected to have the earnings call. We had to extend that a little bit. That's really all there is to it.
spk02: What about the K, Thomas? When should we expect that to hit?
spk06: It should hit, if not today, in the next day or two.
spk02: Okay, got it. And now that you're through a good portion of Q1, the outlook I heard was sales reps up to 800 aspirationally, but how does that look from your estimation to unfold throughout 2023?
spk06: I think we've talked about sales reps in the kind of mid-500s, so adding approximately 100 during the year net.
spk02: Okay, got it. And some of the Q4 spend that you're showing related to some of the other divisions that are not yet commercial, you expect them to be commercial this year, so we should see some pull-through in spend. I guess I'm referring to the 1600 predominantly, and it sounds like the NECA, which will file a 510K this year.
spk06: There's going to be spend on both. I think you're going to see, you know, a lot of, you know, that's why we give a range. You know, some of the things as we get closer to launch could have some additional expenses. And as the pulse oxide gets, you know, gets submitted to the FDA, we may see some additional expenses there as well. So, you know, I think there's a little bit of a range there of what we spend and just how quickly we get to submission and commercialization.
spk02: Okay, got it. And then... Lastly, as far as FDA inspections related to some of these other divisions, have you had any over the past quarter or so, and what's expected over the coming quarter or so?
spk03: So this is Don from Zynex, from the monitoring division. We've had a previous FDA inspection, certainly not over the last quarter, but it was all part of a ZMI or Xynex Medical and Xynex Monitoring inspection, which we passed without any issues.
spk02: Okay. And you would expect further inspections on some of the newer divisions prior to or related to our commercial launch?
spk01: No, there shouldn't be any. Those inspections are not based on what's happening on the product side. Inspections of the company are... I wouldn't say on a regular basis, but we tend to see those in the intervals of less than five years. And product approvals, it's a whole different scenario through the FDA, so that's independent.
spk02: Okay, got it. And then could you talk about adjusted EBITDA for individuals full year 23, it looks like you're expecting a similar type of growth cadence and trajectory as you had in 22 on an adjustment basis. Dan, do you see that? It looks like you're coming in around where you're over 20% for the fourth quarter, but you averaged about high teens, 17, 18% for the full year. Any thoughts there on 23?
spk06: Yeah, no, I think, you know, we were guiding more towards EPS this year and pushing away from adjusted EBITDA a little bit, but I think, you know, generally when you look at the year, you should see similar growth in 23 to what we saw in 22.
spk02: Got it. Okay, I think that does it for us, but thanks for the call and thanks for the readout.
spk06: Yep, thank you.
spk08: The next question comes from Simon Carr with Piper Sandler, please go ahead.
spk05: Hey, good morning. This is Simran on for Adam. Thank you for taking the questions and congrats on the print. Maybe just starting off on the full year guidance of 180 to 200 mil, can you walk us through key assumptions at the low end and high end of the range? And specifically, what is assumed for the core pain franchise versus ZMS?
spk01: Well, yeah, maybe I'll take that one. We basically, even though there might be a little bit of revenue in CMS this year, in our guidance, we're not accounting for any of that. So that's all the pain management division. And obviously, the order growth we are seeing now is going to result in increased revenue over the next several years, and some of that is obviously going to going to hit here in the next couple of quarters. And the assumptions assume that, as Dan mentioned earlier, that by the end of the year, we can get up to around 550 sales reps. So there will be an increase in sales reps, which in itself is not that productive initially. So that's going to be part of increasing our fixed expenses. Our existing sales reps are experiencing high growth right now. And as they continue to become more and more productive, we expect that to turn into revenue in the 180 to 200 million range. And what would determine if we are in the low end of the range versus in the high end of the range would probably be the productivity of the existing reps more than anything. We have a very stable scenario when it comes to how we collect the cash, which is payments from health insurance companies. And that is obviously based on preset amounts and preset quantities and preset lengths of treatment that is determined by insurance companies. And we don't really foresee any changes there. So productivity in form of better makes up of insurances could also help us a little bit in terms of moving the revenue up. But we're still somewhat dependent on the labor market in terms of new hires for our sales force, as well as employees for our corporate headquarters here in Colorado. I don't know if you have anything to add.
spk00: To the productivity of sales reps? Yeah. We've seen an increase in productivity of our sales reps obviously throughout the end of 2022 and then especially the first two months of 2023. And we are seeing them focus more on payer mix, insurance mix, and Driving that forward.
spk05: Okay, great. No, that was perfect. I guess for my follow-up here, I just wanted to circle back on the P&L and specifically how we should think about the cadence of OPEX spend through the year. And really, I'm trying to kind of hone in on what is assumed when you layer the impact of the ZMS build.
spk06: You know, last year we've talked about kind of what we do with ZMS, and ZMS increased about $5 million in 22 to I think we spent about $7.5 million. We see a similar increase in 2023, so about another $5 million. Some of that is new hires and some of it's just exit rate versus, you know, what we started the year at. So you'll see that layered into G&A over the course of the year. This year we ended G&A at 23% of revenue. I think with the investments in ZMS and generally just inflation that continues to hit us pretty good, I think that stays pretty constant. In 2023, same on the sales side. This year we were at about 42%. I think it's fairly similar next year. Obviously, it depends how many people we hire and then where we end up on the top line, but You know, with inflation and the number of people we expect to add this year, I think those percents of revenue are going to stay fairly constant.
spk05: Okay, perfect. No, that was great, Dan. And maybe a quick one on capital deployment. So, you know, you guys completed about $30 million in stock buybacks last year. So how should we think about capital allocation this year and specifically stock buybacks?
spk06: Okay. I think it's still on the table. We'll still continue to do that. We're still generating cash from operations, so we do still have excess cash in the business, and so that's still something that we'll consider. We're always going to look at what provides shareholder value, and for us, and we believe for all of our shareholders, that provides pretty good value.
spk05: Okay, perfect. I think that was it for me. Thank you, guys.
spk08: The next question comes from Yi Chen with HC Wainwright. Please go ahead.
spk07: Thank you for taking my questions. Just to clarify, does the FDA need to inspect the manufacturing facility of CM1600 before granting the 510 clearance?
spk01: Not specifically, as I mentioned before. It's just a matter of when they routinely come to audit and inspect our facilities and checking on CGMP, et cetera. So they'll come out. They'll look at the things they looked at last time. They always have some comments to various areas and suggestions to things we can improve. They'll come out. The first thing they do is to check on that. It could be that there was a paragraph missing in a quality manual or something like that. They'll check on all those things. And then they'll just randomly inspect various areas. And as we keep adding more products, as, for instance, the CM1600, there will be more parts of the company for them to look at. In recent audits with them, it has taken a lot less time than they had planned, and they're only out here for a few days. And as we continue to grow our business, the time it takes them to complete an audit will most likely increase. But again, it's not specifically tied to when we get the clearance for a specific device.
spk07: Okay. And has recent communication with the FDA indicated that clearance could occur in first half of this year or second half of this year?
spk03: Yeah, this is Don. We've been in contact with the FDA on a continuous basis. They've requested information at various times. We're still in that communication. I'm expecting that we may have this in the first half of this year, but it might be early of the second half. It just depends on the type of information that the FDA continues to ask for.
spk07: Got it. Lastly, given the gross momentum of orders you've seen so far in the first quarter and also the status of the labor market, are you likely to speed up hiring new reps or do you think you will likely maintain the current pace of hiring? Thank you.
spk01: I would say we continue to be more and more critical in terms of the quality of the talent we offer. we hire. We have increased our efforts because it is a difficult job market. So we've increased the funnel, if you want to put it that way, but also increased how critical we are in terms of who we hire. That is a significant part of how we've seen productivity per sales rep increase here in the past many months is that we continue to be more and more critical. So I think we'll net-net, unless something changes in the labor market, we'll continue to hire at about the same pace. So adding a net of approximately up to 10 reps every month throughout the year. And of course, we're still hopeful that the labor market will look better going forward. It's still very tight, but... Got it.
spk07: All right. Thank you.
spk08: This concludes our question and answer session. I would like to turn the conference back over to Thomas Sandgaard for any closing remarks.
spk01: Well, thank you for joining us today. We're encouraged by the momentum we have coming out of yet another record year for SINEX, and we are excited about several upcoming regulatory submissions and operational milestones. We expect 2023 to be another transformational year for the company and appreciate your interest in SYNIX. Have a great day.
spk08: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer

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.

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