Nevro Corp.

Good afternoon and welcome to Nevro's fourth quarter and full year 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. I would now like to turn the call over to Angie McCabe, Vice President, Investor Relations, and Corporate Communications for Nevro. Please go ahead.

Thank you, Regina. Good afternoon, and welcome to Nevro's fourth quarter and full year 2023 earnings conference call. With me today are Kevin Thornell, our CEO and President, and Rod McLeod, our Chief Financial Officer. Before we get started, please note that our earnings release and the supplemental presentation accompanying this call are available on the events and presentation page of the investor section of our website at nevros.com. Also, this call is being broadcast live over the internet to all interested parties, and an archived copy of this webcast will be available in the investor section of our website shortly after the conclusion of this call. Before we begin, I'd like to remind everyone that comments made on today's call may include forward-looking statements within the meaning of federal securities laws. Results could differ materially from those expressed or implied as a result of certain risks and uncertainties. Please refer to NEVRO's SEC filings, including our annual report on Form 10-K, for detailed presentations of risks. The forward-looking statements in this call speak only as of today, and the company undertakes no obligation to update or revise any of these statements. In addition, management will refer to adjusted EBITDA, a non-GAAP measure used to help investors understand Nevera's ongoing business performance. Adjusted EBITDA excludes interest, taxes, non-cash items such as stock-based compensation, depreciation and amortization, litigation-related expenses and credits, changes in the fair market value of warrants, and other adjustments such as gain from extinguishment of debt and restructuring charges. Please refer to the financial tables in our earnings press release issued today for reconciliations of GAAP to non-GAAP financial measures. I will now turn the call over to Kevin. Kevin?

Thank you, Angie. Good afternoon, everyone, and thank you for joining us today. We're pleased with our fourth quarter performance and the progress we are making on advancing our core three pillar strategy. For the fourth quarter of 2023, and as compared with the year ago period, today we reported Worldwide revenue of $116.2 million, an increase of 2% on both a reported and constant currency basis, and ahead of the guidance that we provided on our third quarter 2023 earnings call. PDN sales grew 29% to nearly $22.4 million. U.S. trials were down just under 1% and in line with our expectations. a net loss from operations of $11.8 million and adjusted EBITDA of positive $8.4 million, also ahead of our expectations. For the full year of 2023, worldwide revenue was $425.2 million, an increase of 5% on a reported and constant currency basis. Also in the fourth quarter of 2023, we acquired Versa Technologies, which we are very excited about as it provides us with entry into the very high growth Sacro Iliac or SI joint fusion market and announced a debt refinancing. Last year, we developed and implemented our strategy to improve our commercial execution and strengthen our foundation so we can deliver stable, consistent performance, achieve long-term profitable growth, enhance stockholder value, and continue to provide best-in-class therapies for patients suffering from chronic pain. On today's call, I'll highlight key items that demonstrate the progress we are making on a number of fronts. Rod will discuss our fourth quarter results and 2024 guidance for both the full year and for first quarter. Our strategy consists of three pillars. The first is commercial execution. We are laser focused on improving our execution to remove sales barriers, enhance customer experience, and drive long-term profitable growth. To improve sales productivity, we made some changes to the commercial team's compensation structure and completed our commercial realignment. For example, because healthcare is locally delivered and consumed, we implemented a more geographically focused reporting structure. We also rolled out new incentive-based compensation plans that include rewarding sales reps who deliver accelerated growth, as well as incentivizing sales leaders to focus on delivering profitable growth. In addition, our market development team is now focused on increasing awareness of SCS as a treatment therapy beyond painful diabetic neuropathy. As a reminder, there are significant growth opportunities in SCS, including non-surgical back pain and traditional back and leg pain, and we have been at the forefront of driving awareness of new indications, and our differentiated technology is demonstrated by our success in PDN. Importantly, we continue to focus on improving physician engagement and education. Last year we completed several large new hire training sessions, conducted our first SI joint lab with advisors, implemented new professional education programs such as continuum of care courses for pain interventionalists and surgeons, and trained over 100 fellows. The second pillar of our strategy is market penetration through expanded indications HFX IQ line extensions, a robust R&D pipeline, strong clinical evidence, and targeted additive acquisitions. We are seeing increased adoption of HFX IQ since its full market launch last March. HFX IQ represented 53% of our permanent implant procedures in Q4 of 2023, and adoption will continue to grow throughout 2024. Our data proves that with the HFX IQ system combined with the cell phone app, which sends proactive alerts, physicians' clinical burden is reduced by 40% and patients get back to pain relief 75% faster than patients who are using a traditional remote. To provide even more patients with access to the benefits of HFXIQ, within the next few months, we expect to launch a solution for roughly half of these patients who do not have an iPhone, including those with an alternative device. In 2023, we also continue to penetrate the SES market with our expanded indications in the PDN and non-surgical back pain patient populations. PDN accounted for 24% of our permanent implant procedures in Q4. Even with our success in PDN, the market remains under-penetrated at nearly 1%. We are focused on further developing this market with our best-in-class technology and superior clinical data, showing that patients treated with 10 kHz therapy experienced durable pain relief and significant improvements at 24 months. This is one of our key competitive differentiators because competitive devices are purposely designed to cause a tingling sensation to mask pain, which is a common symptom PDN patients already experience. In contrast, our 24-month data shows that PDN patients experience durable pain relief without the use of paresthesia. Notably, we recently announced the publication of a consensus statement summarizing recommendations based on outcomes from a December 2022 global interdisciplinary panel at the Worldwide Diabetes Virtual Global Summit. The statement, which was published in Diabetes Research and Clinical Practice, recommends SES therapy and particularly high-frequency 10 kilohertz SES to treat refractory PDN symptoms that aren't adequately addressed by first and second line treatments. Enrollment in our PDN clinical sensory study now stands at 98 patients. The study is designed to more objectively prove the sensory improvements that we observed in our initial clinical randomized clinical trial, or RCT, and to receive an SES indication beyond pain. We believe that this, along with our 24-month data and differentiation of our innovative therapy, will help us further penetrate the PDN market and achieve our goal of having 10 kilohertz therapy reference and additional society guidelines for the treatment of refractory PDN. Also in January, we announced that Carolin Health will be publishing a new interventional pain management policy that expands SDS coverage for PDN effective April 14, 2024. As a result, PDN patient coverage will expand by nearly 43 million additional lives, bringing total U.S. covered lives to approximately 250 million. We are excited to continue working with physicians to expand awareness and offer this therapy to more patients suffering from PDN. Turning now to our first-ever acquisition, we are excited about the Versa transaction for several reasons. First, we now have access to a large and fast-growing market. The SI joint market is currently valued at $2 billion in the U.S. alone, and we expect the increasing adoption of minimally invasive surgical procedures in this space to be a growth driver. Second, many physicians who perform SI joint procedures are also performing SCS implant procedures, and we are now able to offer them more options to treat patients suffering from chronic pain. This has the added benefit of strengthening our relationship with these physicians, as many of them are already our customers. Third, we are leveraging our commercial sales force and their current position relationships to help drive adoption and growth. It should be noted that when fully trained, we will have the largest SI joint sales force in the market. Finally, it broadens and diversifies our pain portfolio. We estimate that approximately 15% to 30% of patients with chronic lower back pain have pain that originates in the SI joint, and we now offer options to treat patients with both mechanical and neuropathic pain. We also offer one of the most comprehensive portfolio of products in the SI joint space. We are in the process of transitioning Versa products to Nevronaming and Branding. In the interim, the current portfolio is comprised of Nevro V1, Nevro Pro, and Nevro Fix. Nevro V1, an integrated SI joint fusion system with transfixing technology, will be our flagship product as there is no other device like it on the market. Nevro V1 is proven to immediately transfix the SI joint to allow long-term fusion. Also, our proprietary instrumentation allows for optimal intraarticular SI joint preparation, which is critical to achieve joint fusion. Finally, Nevro V1 comes with 3D printed bone growth enhancing technology, which helps promote bone cell growth and, as a result, fusion. With this full suite of products, we are able to accommodate the different SI joint approaches, available sites of service, and CPT codes to meet the preferences of different physicians, and varying patient needs, ultimately helping to improve the quality of life and health outcomes for patients. In early January, we launched training for our sales reps for all three of our SI joint products, and we'll continue to train both reps and physicians throughout 2024 as we ramp up this business. In addition, our limited market release started this month, and while early, overall physician feedback has been positive so far. Importantly, clinicians and medical societies expect that we will continue to generate the clinical evidence in the SI joint space, just as we have done in SES, which is important in driving physician adoption and payer coverage. Regarding our R&D pipeline, we continue to work on developing new revenue streams that will leverage our largest asset, our sales force, and expanding into new indications for SES. We won't go into detail here for competitive reasons, but as I previously communicated, one of the reasons why I joined Nevro was because of the impressive pipeline of products. Finally, our third strategic pillar is profit progress. Our goals are to improve efficiencies through streamlined processes, scale our Costa Rica manufacturing facility, and have disciplined expense management. While there is more to do, we are making progress on this front with our leaders and teams across the organization. In January, we implemented a restructuring, which included laying off 5% of our employees. While this was a very difficult decision, it was necessary to position Nevro for long-term growth and profitability. Rod will talk about the expected financial impact of the restructuring in his remarks. As I mentioned, we are leveraging our self-force that already call in physicians that treat pain to drive profitable growth in SI joint. These procedures will require limited post-operative patient follow-up by our commercial team, allowing sales reps to grow revenue without adding patient support team members. We also continue to scale our Costa Rica manufacturing facility, which is supported by world-class manufacturing experts in technology. We will leverage it as we expand the business through new products via R&D and tuck-in acquisitions. Before I hand the call over to Rod, I want to make a couple of final comments. First, I want to thank our Nevro team members for their focus on executing our strategy and steadfast commitment to freeing patients from the burden of chronic pain. Second, we recently held our 2024 national sales meeting for our U.S.-based commercial team. For many of the participants, this was their first Nevro sales meeting, and team members showed great enthusiasm for our core business, new entry into the SI joint space, and excitement for our future. We are dedicated to our mission and are building on the progress we made in 2023 to stabilize and strengthen our foundation, which will allow us to transform our business through the opportunities that lie ahead. 10 kilohertz therapy, which is supported by superior clinical data and multiple RCTs across several indications, is enabling us to provide patients greater access to our innovative therapies. Our goals remain the same. to execute our strategy and capitalize on meaningful leverage opportunities to drive profitable long-term growth, positive operating cash flow, and increase shareholder value. I'll now turn the call over to Rod for a discussion of our fourth quarter financial results in 2024 guidance.

Thanks, Kevin, and good afternoon, everyone. For the fourth quarter of 2023, as compared with the prior year period, Worldwide revenue grew to $116.2 million, an increase of 2% as reported and on a constant currency basis. Both the current and prior year periods had the same number of selling days. PDN represented 20% of permanent implant procedures worldwide, resulting in approximately $22.4 million in PDN indication sales and growing 29% over prior year. U.S. revenue grew 2% to $101.5 million. International revenue was $14.7 million, increasing 4% as reported and flat on a constant currency basis. Gross profit increased 8.3% to $81.5 million, and gross margin increased 400 basis points to 70.1%, driven primarily by a shift to higher margin products, as well as lower scrap-related charges in the current period. Operating expenses decreased 1.4% to 93.3 million, primarily due to reduced spend across the business, offset by 3 million of one-time Versa-related spend. Excluding the Versa-related expenses, operating expenses finished down 5% versus prior year. Litigation-related legal expenses were $2.9 million compared with $1.2 million in the fourth quarter of 2022. Cash, cash equivalents, and short-term investments increased $2.5 million from September 30, 2023 to $322.7 million as of December 31, 2023. Cash activities include $47 million in net funds received from our november 2023 debt restructuring offset by 40 million in cash paid for our acquisition of versa as we previously announced we acquired versa for 40 million in cash at closing on november 30th 2023 and agreed to pay up to an additional 35 million in cash or stock tied to the achievement of certain development and sales milestones the transaction was immaterial to our fourth quarter revenue results. As Kevin commented in his remarks, we believe that physicians will begin treating patients in need as we train them on the procedure over the next few months. We continue to expect the transaction to be accretive to both revenue and adjusted EBITDA this year. The first half of the year will focus on training physicians and NEVRO commercial field personnel, while the second half of the year will begin to reflect increasing revenue traction. As a reminder, for 2024, we expect revenue contribution from SI joint to be immaterial to the overall year. Also, on November 30, 2023, we announced the restructuring of a majority of our debt, pushing the maturity out to 2029 through a six-year, $200 million term loan credit facility. The proceeds were used to repurchase the majority of our 2025 convertible notes, as well as for working capital and other general corporate purposes. Turning now to a discussion of our 2024 full year and first quarter guidance. For the full year 2024, we expect worldwide revenue of approximately $435 to $445 million, representing an increase of 2 to 5% over full year 2023 on a reported and constant currency basis. As a reminder, our major competitors have all reported their most recent quarterly results and it appears that the SES market grew in the low to mid single digit range, excluding what we believe is primarily replacement activity by one of our competitors. We expect gross margin to be approximately flat with 2023 gross margin of 68%. Our Costa Rica manufacturing facility continues to produce excellent results on low labor and material costs for manufactured products. However, higher than initially projected inventory levels and higher omnium mix will delay the full margin expansion impact a few quarters. We're excited about the cost improvements Costa Rica can deliver, and we continue to project longer-term gross margins in the mid-70s, assuming pricing holds at current levels. We expect operating expenses to be in the range of 390 million to 392 million and largely flat compared with 2023. Our 2024 operating expense guidance includes ongoing litigation expenses and investments to drive growth in our PDN and our SI joint fusion product portfolios. We expect adjusted EBITDA to be negative 8 million to negative 14 million. This includes the 14 to 15 million dollar benefit from our restructuring which we announced and implemented in January 2024, which we expect will be largely offset by normal operating expenses, including inflation, merit increases, and other acquisition-related expenses. To help with your modeling, we expect normal seasonality with Q1 sales to be our lowest quarter, down approximately 16% from Q4 2023. We are projecting the remainder of the year to play out in historical fashion where Q2 demonstrates a pickup from Q1, Q3 is flat to downish sequentially from Q2, and then we finish with a strong Q4. These revenue results with slightly stronger second half growth also reflect what Kevin mentioned earlier regarding our efforts to improve our commercial execution. Similarly, operating expenses will follow our typical seasonality where Q1 is our largest spend quarter due to events such as our national sales meeting, the NANS conference, and SI joint training for customers and our field team. For the first quarter of 2024, we expect the following. Worldwide revenue of approximately 97 to 99 million, representing an increase of 1 to 3% over the first quarter of 23 on a reported and constant currency basis. operating expenses of approximately $105 million, which include higher than normal spend related to restructuring costs and SI joint training, and adjusted EBITDA to be approximately negative $15 million to negative $16 million. Adjusted EBITDA will exclude a $5 to $6 million restructuring charge related to the January layoffs. As we previously communicated, beginning in the first quarter of 2024, we will no longer provide a breakout of our PDN indication sales. In closing, we made significant changes in 2023 to strengthen our foundation and further position our business for long-term profitable growth, and we know that we have more work to do. We are excited about the opportunities ahead of us and remain committed to executing our strategy to deliver enhanced stockholder value. Regina will now open the call for questions.

At this time, if you'd like to ask a question, press star one on your telephone keypad. We ask that you please limit your question from two. Our first question will come from the line of Calum Titchmarsh with Morgan Stanley. Please go ahead.

Thank you very much for taking the question. I just wanted to dig into the 2024 guidance a bit more if possible. The guidance for between two to five percent top line growth I know you've historically called out the SES market growing around 6% to 9% historically. You've obviously got some softer comps from 23. The Salesforce restructuring is now in place to just be helpful if you could help us to reconcile that guidance in relation to the broader market. Is this just being conservative or is there something else we should be considering here? Thanks a lot.

Yeah, thanks for the question, Kellum. You know, really, if you look at the last few quarters of our competitors, and now this is a quarter where we already have all of our three competitors, public company, make their announcements, you know, they are flat to down in maybe some of the U.S. markets there. We believe we'll outperform some of our competitors in the space, given our ramp up a new sales force, as well as, you know, the excitement around new products and the indication growth with PDN. and non-surgical back pain. So that gives us a little bit of a pause as we're looking for the year and don't want to get out in front of our skis and think that the market's going to be already overnight back to that 6% to 9%. So right now with the market looking to be low to mid single digits growth, we felt this was a good guidance for us to start off the year.

Gotcha. And just one more follow-up, if that's okay. On PDN, obviously no indication-specific guidance as expected, but just eyeballing the street, I think the estimate here is just under 30% growth year over year. How do you feel about that number, you know, given the tougher comps that will come into play? I think we saw kind of around that level in 2023, 2024. Just curious how we should be thinking about a setup here for the rest of the year in absence of the guide. Thanks a lot.

Yeah, Calamer, we're not, as we said, we're not going to be providing guidance or breaking out PDN going forward. You know, as we've said in the past, the right, we really think the right way to look at the market is from an overall SCS perspective. And all of our competitors are in PDN now. They've posted, they've been in it for a couple of quarters. The last couple of quarters have been in that kind of flattish to maybe, you know, low single digit growth. And And, you know, the way Kevin just outlined our overall FCS growth for this year, I think is the right way to think about it.

Your next question comes from the line of Larry Beagleson with Wells Fargo. Please go ahead.

Hi. This is Nathan Trabeck. I'm calling for Larry. Just a question on Versa. So the market for iFusion devices seems to be crowded. How do you plan to differentiate Versa You know, Navarro built its reputation on clinical data. I guess, what's the plan to develop data from Versa? Thanks.

Yeah, you know, obviously it's a crowded space, but also it's a fast-growing space. And, you know, we looked at a lot of different companies as we were evaluating getting into the space. And almost all of them, you know, some of the small little private companies were growing double digits. That's what gave us confidence that this was a fast-moving space and addressing a clinical need for patients. The reason why we acquired Versys, they had all the products that you could utilize for this category, all three, an allograft, a screw, as well as a transfixion device. And so that gave us confidence that it was the right company to go after. Additionally, as I mentioned, we have by far the largest SI joint Salesforce now in the market, especially once we get them all trained, which will take some time. So we feel that, you know, in combination with the relationships we have with the SCS implanting physicians and our reps' relationships with those physicians, that we'll be able to utilize those relationships to be able to get off to a fast start once they're trained.

Okay. Thanks for that. And for my follow up, what are your expectations for a new SES competition in 24? And I guess, how does that influence your ability to take share in the year? Thanks.

Yeah, as a reminder, we're the only high frequency 10 kilohertz therapy out there. And everybody else that's coming into the market, they're all low frequency with a few different bells and whistles competing against each other. And just listening from commentary from those other companies, You know, we believe that the target that they're going after is physicians that are still believers in the low frequency technology. So we'll continue steadfast in following our clinical superiority and our clinical studies that we have out there to differentiate us from the competition. And so while we never want to look away from any competitor, we believe that our guidance incorporates having those two new players in the market.

Your next question comes from the line of Shagan Singh with RBC Capital. Please go ahead.

Great. Thank you so much. Kevin, I was wondering if you could talk a little bit about your key priorities and goals for 2024, you know, when we can expect Nevro to kind of get back into the sharetake position because, you know, it seems like your 24 outlook doesn't reflect that. And then lastly, I was just wondering if there are any updates on acquisitions and how you're thinking about further filling the bag. Thank you for taking the question.

Of course, of course. Yeah, you know, as we said last year, you know, I came on board end of April and Greg Siller, our chief commercial officer, came on in the summer and we looked at the, you know, realignment of the sales force and the talent that we had in certain positions. and really started to make some of those changes. And as a result, as you know, it takes six to nine months for some of these reps to get up to speed. We had some of the largest sales training classes in the history of the company in the third and fourth quarter. So yeah, we expect that now they're starting to hit their stride a little bit as we get into probably Q2 and Q3 this year. And then obviously we threw in a new acquisition to them to learn all at the same time. While we know that longer term, this is going to be a great market. We'll take us some time to get them up to speed. But we do like our chances in competing head-to-head with our competitors with the new sales reps we have out in the field. And the second question, as far as how long it may take them to get up to speed, like we said, nine months would be hitting most of those at the Q2 mark.

Rod, I think you also asked about what other acquisitions we might be thinking about to fill the bag. Yeah. And Kevin can comment on this as well. But, you know, I think with everything Kevin just outlined, we got a lot of effort and energy going to training our sales force on Versa, getting the physicians in the field trained. And, you know, maybe let us get a couple of quarters under our belt and we can talk a little more about what some other future opportunities might be.

Your next question comes from the line of Adam Mader with Piper Sandler. Please go ahead.

Hi, good afternoon. Thank you for taking the questions. Two quick ones from me. I wanted to ask about pricing in 2024 and how we should think about that with the continued launch of IQ and maybe just flesh out what's assumed in the guidance for price. And then the second question, I feel like I have to ask about the new revenue streams comment, Kevin, and new indications for SCS. And I know you're not going to say a ton here, but is it fair to assume that this is still in some way, shape, or form, you know, still pain-related, or is it something else? And how do we think about timing there? Is this potentially a 24 event or 2025? Thank you.

Yeah, I'll take the second one first and then turn it over to Rod. Yeah, on the new product development, you caught that right. We are working with our R&D teams. When I joined the company, I saw some of the places that they were going. And as we've talked about, we said we want to leverage our largest asset that we have in the organization, which is our over 500-person sales organization. And we will stay really close to home and make sure that they are products that can leverage those call points and those sort of education and what our reps do extremely well, which is sell on clinical superiority and great customer-centric sort of products. you know mindset and the dna that we have where those nevro loyalists who love working with us like what we bring to the table there so we'll stay close close to home and won't do anything crazy that would dilute um our our sales channel and then rob take the first one yeah hi adam on on pricing the way to think about it is if you think about the average selling price of one of our implantable devices

As that mix continues to shift towards IQ, we should overall see that average price go up a little bit. So, you know, from a modeling perspective, flat to slightly up is probably a pretty reasonable assumption.

Your next question comes from the line of Joanne Winch with Citi. Please go ahead.

Good afternoon. This is actually Anthony on for Joanne. Thanks for taking our questions. First on the sensor study, I know it's pretty early, but I guess just thinking broadly, is this opportunity more about getting additional patients in terms of, you know, an indication maybe patients aren't experiencing chronic pain but have, you know, neurologically related sensory issues, or is it more about just bolstering the evidence that you do have so you can maybe get some more payers under your belt and get into guidelines? Then I just had a follow-up.

Yeah, it's both, Anthony. So number one is this will be the first indication that's outside of pain. So having that sensory indication will be new and will be first to market and likely more difficult for others to sort of tag onto that one because there's a lot of things that we're looking into. that will come out of that clinical study. So it's more than just a typical, did you feel better and what was your responder rate? We're gonna actually be showing biopsies and other clinical benefits of the technology. and then the second is for sure you know right now as you know we have just a plethora of information and clinical study evidence for 10 kilohertz on on pain but we've only had one for specifically on pdn that's a large rct study and this will allow us to have a second really large study showing significant differences between us and low frequency And we believe that gives us an opportunity to be into additional guidelines and maybe strengthening the guidelines in which we're in. You know, we look at most of the societies, they typically require more than just one RCT prior to them really recommending strongly in their guidelines. And so this will give us a better chance of doing that in addition with payers as well.

And you had a follow-up? Yeah, just sort of in the same vein, I know you just announced Carillon, I think it was in January, 43 million lives. Are there any other really big or substantial wins left on the payer side, either for PDN or NSRBP, or is it just more sort of smaller insurance carriers at this point?

Yeah, you know, it's so diluted there, right? There's a lot of different local payer decisions. There's, you know, obviously the Medicare decisions and all that as well. I'm really proud of our team. Our team is the one that put together the clinical evidence that got the PDN indication in the first place, and it was our clinical evidence that was utilized to be able to gain those, all of the Medicare reimbursement for PDN, which we're now fully covered on. so we still have a few that we'd like to take down but don't forget you know we have a team of people that are here to help our customers through the price the process of prior authorization and also how you look at denials and getting those overturned we have a really high success rate and so what that does once we gain that those new coverages it just allows us to go through the process much quicker and with a lot less friction in the system so we're going to continue all of our clinical evidence. So, there'll be a few more to come here in the future as well.

Your next question comes from the line of Anthony Patron with Mizuho Group. Please go ahead.

Anthony, you might be on mute.

Our next question will come from the line of Richard Newiter with Truist. Please go ahead.

Hi. Thanks for taking the questions. Maybe just to start on Versa, I'm curious, as you begin the commercialization here, do you expect your initial users to be physicians that are already performing SI joint fusion, or are you planning on focusing initially on building practices kind of from the ground up?

Yeah, obviously, you know, patients are at all of those different locations. But I think, you know, the smart play here is to leverage the relationships that we have that are already Nevro loyalists that are also interested in or already doing the procedure. And so, you know, as we look at the limited scale up of what we're doing with trays and all of the manufacturing and training and everything else, the first place we're starting are with those people that are the closest to us and our team. uh also those that have maybe been involved in clinical studies with nevro in the past people that that we have a good relationship with uh we'll start there but then continue to expand uh because you know this is we believe a really good device for for patients to to experience and so we we don't want to hold back and just go to one area of the market but we have to make sure that we do it in a cadence that was safe and effective for the physicians to learn not only the procedure but also some of them will need to learn our all of our different tools and things that need to go through and also our sales reps to feel confident standing in the operating theater and helping those physicians through their first three or four or five cases to get them comfortable got it thanks and you know kevin you've obviously been very thoughtful so far uh as you've been guiding and execution is clearly incredibly important so

Congratulations so far on the success on that. I'm just curious, as we think of your first kind of full year outlook, I think, if we think about the different buckets of market growth, share gain potential, EDN differentiation, and maybe even overage reversal, you tell me what the buckets are. But where do you feel most confident that you've baked in conservatism? Or where would you expect to see

know uh potential you know overage relative to the guide if if it were to come where are you most confident in that yeah and thanks for the question there and then for the kudos is also we still have a long way to go you know what i'm most confident in is is our team um we've spent six months of the last year both of people that have been here for many many years including decades on some as well as new people coming on board I feel really good about the energy and passion and what we've done to realign our sales force and adding the new talent there. That's what I'm probably the most proud about. However, obviously, you know, there's headwinds and tailwinds that come and go. And I always like to have more opportunities in different revenue streams to do that. And I feel that, you know, the Versa acquisition with three different products, the three indications that we now have on SCS gives us a chance to maybe counteracting any of those headwinds with some good tailwinds as well. So right now it's too early to tell, but I really like where our team is sort of coming out of the national sales meeting. We've got our global sales meeting coming up here next week, and I think we'll exit that one also feeling good about heading into the year with our team.

Our next question comes from the line of Brandon Vasquez with William Blair. Please go ahead.

Hi, everyone. Thanks for taking the questions. Maybe first one on the PDN side. Are there any metrics that you can give us on PDN, maybe like number of referring physicians or same store growth kind of figures? We're just trying to understand like where you are in the terms of the adoption curve and especially how durable this can be with the physicians today.

Yeah, you know, the stat we're showing right now is that we're still under 1% penetration. I mean, we are in the missionary selling phase, and I describe that as, you know, we're building believers that they didn't learn this in their schooling, right? And so this is something new for those endocrinologists or the podiatrists or any of the other referring physicians. And so in some of those territories, there may be one or two big endocrinologist groups that's providing a lot of that growth in a city. And then there's another city where there's 10 different podiatrists that are referring one patient each month to the surrounding physician. So it's kind of hard to do a blanket statement. But we do feel that we're going to continue the efforts of missionary selling and going out there and showing the clinical superiority of our technology versus any of the others that had the indication, but none of the clinical evidence to prove that. I'd say we're so early into this that right now we're taking anybody that's those first movers that say, you know what, I have put my first three or four patients through. They've come back with unbelievable results. And so now I'm highly confident in referring these patients. You know, again, go back to the comments and the prepared remarks. We've had not only great clinical evidence, but also now consensus statements and people coming out showing the great results from PDN. So, I think we still have a long way to go, and we're excited about helping that patient population.

Okay. And maybe one last one for me. Kevin, you've been in the seat coming up in a year soon. You know, you've been looking at this core SES market. What do you think needs to happen here now that you've had a little more experience with it to get it from this flat to down to that maybe closer to the high single digit range? It seems to be one of the markets that still hasn't seemed to have recovered post-COVID. So curious what your thoughts are as you gain more experience. Thanks.

Yeah, look, we have to control what we can control. And the one thing that we know we can do is increase our effectiveness in the sales force. That's why it's one of the top three pillars. And we feel great about the teams that we have coming into this year where they are. And regardless of what the market growth is, it's our job to go out and take share. And I always say, we have a moral obligation to do so because of our superior clinical evidence. It's our job to win, to get patients that we believe implanted with the product that is better for them. Now, it's obviously a doctor's opinion on what they want to put through, but we obviously are confident in our technology. From a market growth standpoint, don't forget the core SES market also includes non-surgical back pain, and we believe PDN, and also new indications that we're continuing to work on from our clinical evidence standpoint. So we believe that the entire SES market has opportunity to not only recover, but also to experience growth in the future. To predict that would be impossible, but I like our chances now with a diversified product portfolio, including the, and now we're entering into SI joint. Regardless of what the core back and leg market does, we have a lot of other growth drivers that have led us to the two to 5% guidance growth for 2024.

Your next question comes from the line of Bill Pildonic with Kennecourt Genuity.

Please go ahead. Bill, you might be on mute.

Good evening. Thanks for taking my question. The first question is, and maybe I heard this wrong, did you say you think that Versa will contribute $2 million in 2024? And then, uh, what, what do you think just total growth? Like, as we think of the U S O U S split for the global business, like how are you thinking about that? And then I have a. Expense question.

Okay. Good job getting in three, as always, Bill. On the first one, no, I did not say 2 million in 2024. I just commented that for our overall guidance for all in, NEVRO, we said 2 to 5% is our guidance range that we put out there, which includes everything. As far as the global breakout, we think that, you know, we have some opportunities. We really feel good about our leadership and our international teams and our opportunities. Now that, you know, in international markets, there was still a lot of pent up demand and a lot of hospital staffing shortages that still were going on, believe it or not, in 2023 and likely a little bit into 2024. But we believe our international team has a good opportunity next year. In so doing, we also believe that our U.S. team is much better off now than we were back in the summer or back when I joined. And so we feel confident that our teams are ready for 2024 and probably equal growth spread globally.

Okay. And then on, um, expense management, I mean, listen, the fourth quarter was excluding that one time, um, charge for the deal is $90 million, right? You're annualizing at 360. You're taking a 5% headcount reduction, uh, but you're guiding OPEX much higher. I'm just trying to kind of understand what the puts and takes are, you know, especially the commentary also on the gross margin at 68, when you just put up a 71, I mean, it's, uh, it seems like from an expense standpoint, I mean, that's a real low bar unless I'm missing something.

Yeah. So a couple of things. Good question, Bill. First of all, margins were 70.1, not 71 for Q4. Also remember the seasonality of our spend. So Q4 is actually one of our lower operating expense quarters. So that's not necessarily the best one to take for to annualize. For Q1, we're anticipating it'll be close to $105 million. There are some restructuring charges in there that are running through operating expenses that are driving that up a little bit. But if you remember last year, we did a little bit over $100 million in operating expenses in Q1 as well. So yeah, we do. And we do have the impact of the 5% layoff that will be will be benefiting from throughout the year in our P&L. But there's also the traditional merit increases, inflationary pressures. We do have to invest in Versa this year to train reps and physicians. So all of those kind of, as we said, will largely offset the layoffs, the benefits that we received from that, and will basically lead us to a roughly flattish operating expense on what's a 2% to 5% guided top line growth.

Your next question comes from the line of Anthony Petrone with Mizuho Group. Please go ahead.

Thanks, and apologies. I popped in between calls, so sorry about that. I actually want to go to just looking at broader market conditions. as an ancillary to spinal cord stim, meaning spine procedures look like they've actually rebounded here based on some of the competitor results. And you have in the past seen pull through from failed back and leg surgeries. You know, we're seeing spine come back. Should we still be thinking about that? Let's say as, you know, nine to 12 months out, that could be a driver. Is that the right way to think about that? And a quick follow-up, Maybe for Kevin would be, it looks like after the close here, you have a new board member. So maybe talk about just high-level strategy as the board shifts here a little bit. Do you think we have a strategy that's largely intact with tuck-in acquisitions and a refocus on the core, or could we expect a slight deviation? Thanks again.

Yeah, thanks, Anthony, and no problem. So yeah, on market conditions, you know, spine sometimes can be a good analog and then sometimes it's not, right? We do know that there are a lot of different procedures that patients need to go through before they can get to a spinal cord stimulation approval for implementation. And as a reminder, if you jump off that journey, you don't get to start where you left off. You have to go back to go and sort of go through that conservative care before you get there. So that says a lot about that lagging. I don't know if nine to 12 months is the right number there. but we are um you know we do like some of the trends that we're seeing in other procedural growth and rebound that we're hearing from sort of markets that are sort of peripheral peripherally close to us but it will take the time for those patients to sort of go through that continuum of care before they get to spinal cord stimulation implant one of those is obviously mechanical back pain as well before you treat neuropathic back pain which is what led us to to get into the si joint procedure market that's Like I said, 15% to 30% of patients will experience both mechanical as well as neuropathic pain. So that gives us a chance to maybe grab some of these patients a little bit earlier in their continuum of care. And as far as far as the close as well with the board, yeah, you know, we routinely work with our shareholders. It's something that we do. We talk to them after all of our calls. We're excited to have Kurt on our board, as we mentioned in the announcement, you know, he's local down the street here for us and he's got extensive experience and acquisitions, financial acumen, and he's also worked on the other side as an investor as well. So we believe he's going to be helpful for us. And so right now we believe we have good alignment and a good cooperative agreement with our shareholder and the change in our board. I do want to make sure that through this, it gives us opportunity to say thank you to one of our board members that will be outgoing towards the opening period this summer with Frank. He will be leaving our board in the summertime, and he has been instrumental to our growth and instrumental for taking us public, for taking us through a lot of variations that we've had through the business. and we wanted to thank him for his time and it's been a long-standing he's been a long-standing board member and he's been with the company for a really long time so we do not believe that our strategy will change and we have good supported board members with a plethora of experience both in medical devices and financial acumen so we believe we will stay the course here move forward

Your next question comes from the line of Suraj Kalia with Oppenheimer. Please go ahead.

Good afternoon, Kevin. Rod, can you hear me all right?

Yeah.

Perfect. Hey, Kevin, I know your one-year anniversary is coming up, and I was curious if you could just frame a couple of things for us. So, Kevin, as you've looked at the business, our recollection is roughly about a third of the traditional SES for Nevro was from NSRBP. Has that changed? Because I sense the shift in the tone on the call more so towards traditional opportunities versus PDN. So if we could just characterize where NSRBP is today, that would be great. And the second question, Kevin, if I could, our field checks have told us that Verso did roughly around $7.8 million in 2023 and was on track for doing $15 million in 2024. Correct me if I'm wrong so that we can slice or dice it in terms of FY24 guide. Thanks for taking my questions.

Yeah, the first one, no, I think we have a lot of opportunities for, you know, the core markets, which we say back and leg, as well as non-surgical back pain and PDN. And so, you know, we take all comers. There are patients that probably experience both of those at the same time. For instance, you might have back and leg pain and also be suffering from painful diabetic neuropathy at the same time. So, no, we believe that, you know, the market still has a big opportunity Non-surgical back pain is still the largest opportunity that we have. And then felled back surgery would be second. And then PDN, just because it's still early in the game, would be the third. So not really a lot of change there other than the fact of you're seeing a really tremendous growth in the PDN space because we're coming from, you know, the brand new start of that. As far as the field checks, you know, we're not commenting anything on there. You know, one thing I will add is just, you know, we are moving from a primarily distributor model to a direct model. And so, you know, it will take us time to make sure that we have our direct sales force trained and up to speed, as well as scale that organization from, you know, an operational perspective from both manufacturing and for some of the trades that are needed to perform the procedure.

Your next question comes from the line of Mike with Wolf Research. Please go ahead.

Good afternoon. Thank you. I'll just ask again on Versa. So look, it sounds like you don't want to say a number about what's built into the 24 guide. I can appreciate that. I suspect on calls like this moving forward, we'll be asking what the number is, at least to get a level set. So maybe I'll ask it for a third time here at the end of the queue. Can you comment about what's considered in the 2024 guidance for versa revenue? And if not, just, I guess, formally making it known, we'll probably be asking every quarter on calls like this until you give it to us or at least frame it. So thanks for taking the question.

Yeah, I completely appreciate the desire to want to know where we are right now. Don't forget, we're still early, and this was a really small company with some really great technology that we're excited about, and our market checks and due diligence showed that we think we have a differentiated device in the V1. device, which is the flagship one. So we did that, and I just mentioned we're going from distributor to direct, and so that takes some time. We have to ramp up the organization. It's so non-material right now that it's just not the right time to start breaking that out, but we can appreciate that that'll be something that will be desired into the future.

Our next question will come from the line of Robbie Marcus with JP Morgan. Please go ahead.

Oh, great. Thanks for taking the question. Congrats on a good quarter. Maybe, you know, I won't ask for versa, but maybe as you help us understand the assumed ramp in sales growth in the second half of the year, you know, Nevros had several guides that were back and loaded, some like in 2022 worked out, others didn't. you know, so I think investors want to help understand the drivers there. You talked about the Salesforce restructuring, you know, we were under the impression Versa was also about 7 million on track to do about 15, 16 this year. Is that really where it's coming from? Is it Salesforce revamp and, you know, selling more SCS? I think it, you know, organic and inorganic, and I understand immaterial, but the guide's a few percentage points. So even $4 million is, you know, it's a percent. So maybe help us understand exactly where it's coming from and get confidence in the back half ramp. Thanks.

Yeah, it's really all the above. I mean, as we mentioned, I think in the past, you know, the hard part was we did have PDN as a new indication and non-surgical back pain, but it was a prediction of a little bit more of a market recovery that all boats would rise with the rising tide a little bit there on top of, you know, the foundation that Keith prior to me that had set up to professionalize the organization and we have the opportunity to jump off all the hard work that he's done and that had been done here by the Nevro team prior. But at the same time, we did have some, we didn't call it restructuring, realignment of the sales force and also some, turnover that we caused by upping some sort of the sales talent in a couple of spots across the organization, which does take them time to get up to speed, right? So that's a little bit of why it's back-end loaded. The other part is just seasonality. I mean, you look at all four of us in this space, Q4 is always much bigger than a Q1 or a Q2, and it's just seasonality with people's co-pays and everything else that happened. So that's just natural seasonality that's been there for decades in this space. And then lastly, yeah, I mean, it's non-material right now in our business going from really small to, well, yeah, we're expected that to do better every single quarter as we move forward. And so, you know, we have a new device, a new market that we're in, three new devices and new markets that we're in. And so I think that helps justify a little bit of the back end of the year. specifically since we need to train so many of our our reps out there you know training 20 reps is a lot different than training over you know four or five hundred to be experts in this device so it'll take us some time to do that ladies and gentlemen that does conclude today's call we thank you all for joining