Zynex Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 26, 2023

There are 9 speakers on the call.

Operator

Afternoon, ladies and gentlemen, and welcome to the Zynex Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to Quinn Callanan from MZ North America.

Speaker 1

Thank you, operator, and good afternoon, everyone. Earlier today, Zynex released financial results for the Q3 ending September 30, 2023. A copy of the press release is available on the company's website. Joining me on today's call are Thomas Sandgaard, Chairman, President and Chief Executive Officer Dan Morehead, Chief Financial Officer Anna Luszok, Chief Operating Officer and Donald Greig, 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.

Speaker 1

We encourage you to review the company's past and future filings with the SEC, including without limitation, the company's 2022 Form 10 ks 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.

Speaker 2

Thanks, Quinn, and good afternoon, everyone. Thank you for joining us today for our Q3 2023 earnings call. The Q3 was highlighted by ongoing revenue momentum, leading us to our 10th consecutive quarter of profitability and 6 quarter record high order numbers. We once again received the highest number of prescriptions in the company's history, beating our previous record and $49,900,000 a 20% increase over the same period in 2022, and we produced $0.10 of earnings per diluted share. Our sales force continues to increase productivity and grow orders significantly each quarter, a testament to a great sales force, leadership and great products.

Speaker 2

Orders increased 39% year over year, and we believe that there is considerable runway for us to continue growing orders into the future. The results we Continue to show and the good work we are doing toward reducing the impact opioids have on communities Beginning to be recognized by the broader community, with the latest example being our ranking as the 23rd amongst the top 100 healthcare companies according to the Healthcare Technology Report. To help drive our growth, We introduced 3 new rehabilitation products in the 3rd quarters, building on our holistic, noninvasive approach to pain management. The new products include SYNNEX Pro, psoriasis, lumbar sacral orthosis, or TLSO, a dual purpose back brace for the mid and lower spine, SYNNEX Pro A risk brace for a broad spectrum of risk related pain management, including carpal tunnel syndrome and The SYNNEX cryoheat, a localized cold or hot fluid therapy system for home or hospital use. We continue to focus on profitable growth by adding products to our portfolio in a complementary way that combined with our industry leading prescription strength pain management device, the Next Wave.

Speaker 2

In addition to the impressive results from our profitable pain management division, CMS or Synex Monitoring Solutions continue to move forward in the 3rd quarter in the development of our blood and fluid monitor and our laser based pulse oximeter or co oximeter. We were excited to announce FDA clearance earlier this year for our 2nd generation blood and fluid volume monitor, an invasive wireless technology targeted And Don Gregg will provide further updates on this product in his prepared remarks. We have 3 additional products in the pipeline in our hospital monitoring The laser based pulse oximeter, neko is the trade name for it, a monitor for early detection of sepsis and a noninvasive laser based monitor of total hemoglobin levels, the HEEMOGS. Overall, We are making great progress in the patient monitoring division, which we believe will have a game changing growth potential for the company. Looking ahead, we are making significant progress building on our holistic noninvasive approach with at home pain management devices and diversifying the new products.

Speaker 2

We're rapidly expanding direct sales that In tandem, we are focused on ramping up our hospital monitoring division, which represents a large and growing market opportunity. We expect consistent growth and strong financial performance for the remainder of 2023, following the double digit growth we have produced year after year. We also expect additional catalyst We look forward to additional updates in the months to come as we build our sales force and execute on growth objectives With that, I'll turn the call over to Anna Luxok, our Chief Operating Officer, for a more detailed business update on the Pain Management division.

Speaker 3

Thank you, Thomas. Dynex's Pain Management division had another impressive quarter marked by a sequential increase in order volumes over the 2nd quarter and a 20% year over year increase in revenues. We were also incredibly proud to have surpassed treating 1,000,000 patients during the quarter. Reaching such a tremendous landmark for the company is a testament of the tireless efforts and teamwork that each of our employee brings to this company. As Thomas mentioned, we also added 3 new products during Quarter, expanding our pain management product line helps us diversify our revenue streams and provides our sales force with more opportunities to break into new prescribers.

Speaker 3

We've seen continuous increase in volumes of our distributed products, including strong initial volumes of TLSO, wrist braces and cryoheat. The key to growth in pain management is the continued build out of our sales force. We ended the Q3 with approximately 480 sales reps. During 2023, we've added a net of approximately 50 sales reps. And as we've mentioned previously, We continue to be aggressive in operating reps who are underperforming, so our overall rep growth has been a little slower than normal.

Speaker 3

Revenue per rep on an annualized basis was approximately $430,000 during Q3, which is up 10% from Q2. As a reminder, it takes approximately 3 years for reps to meet our $1,000,000 target in annual sales. The average tenure across the sales force is currently under 18 months, so we're still on track with that metric. We continue to make improvements in evaluating potential sales reps and evaluating productivity of new reps, which has allowed us to maintain revenue per rep at a high level despite the large numbers perhaps we're adding. We're ultimately working to fill out our 800 sales territories And continue to improve our processes to do so in a profitable manner.

Speaker 3

We expect that by the end of the year, we should reach roughly 500 sales reps. I look forward to another profitable year for the Pain Management division and updating you all on our market expansion in future calls. I'll now ask Don Greig, President of XymaX Monitoring Solutions to provide updates related to that business division.

Speaker 4

Thank you, Anna. Our patient monitoring division is a long term investment for Zynex to diversify our revenues into 1 of the world's largest Our pain management division's tremendous growth and profitability allow us to self fund the build out of a world class patient monitoring business that leverages industry transforming technologies developed through acquisition and organic development. We can build the monitoring division while maintaining profitability and positive cash flow. Xynex participated in the American Society of As we prepare for the launch of our monitoring products, from the ASA conference, we gathered several 100 leads, Met with many key opinion leaders, continued to conduct market research and presented the underlying science and benefits of our laser pulse oximetry technology Attendance at this conference and others have indicated strong demand for our monitoring products and revealed several unforeseen potential sources of demand amongst non core customers. Xynex will continue to be active in similar venues in the future that allow us to present our technologies to key opinion leaders.

Speaker 4

We continue to develop neko, our laser based pulse oximeter For commercialization in 2024. We continue to work toward FDA submission with several clinical trials. The clinical Work has reinforced our confidence in Neko and the benefit it will provide to clinicians and patients. We've continued to prepare patent submissions to the USPTO and have continued revising our commercialization and marketing launch plan accordingly. Our next generation non invasive Centimeters Blood and fluid monitor continues to advance positively.

Speaker 4

Having received FDA clearance for the Quarter sets up our next generation Centimeters device, meeting our R and D and clinical milestones nicely for a smooth entry into the market. The Centimeters monitoring technology is an entirely new addition to operating rooms, so market uptake will likely following elongated trajectory and rely on extensive engagement with medical advisors, key opinion leaders and industry audiences to build momentum. I will now turn the call over to Dan Moorhead, Chief Financial Officer, for a more in-depth look at financial performance for the quarter.

Speaker 5

Thanks, Don. Please refer to our press release issued earlier today for a summary of our financial results

Speaker 2

for the Q3 of 2023.

Speaker 5

After commenting on our financial results, Thomas will review our guidance for the Q4 of 2023. In the Q3, orders grew 39% year over year to the highest number of orders in company history for the 6th consecutive quarter. Net revenue grew 20 percent to $49,900,000 from $41,500,000 in 2022, primarily related to the growth in device orders. Device revenue increased 49% to $16,900,000 compared to $11,300,000 in the Q3 last year. Supplies revenue increased 10% year over year to $33,100,000 from $30,200,000 in the Q3 last year.

Speaker 5

Gross profit in the 3rd quarter increased to $40,400,000 or 81% of revenue as compared to $33,100,000 or 80% of revenue in 2022. Sales and marketing expenses were $22,100,000 in the Q3 of 2023 compared to $17,200,000 in the same period in 2022, primarily due to increased headcount of our sales force and increased incentive compensation related to order growth. G and A expenses were $12,700,000 in the Q3 of 2023 compared to $9,400,000 last year. Approximately 10% of the increase in G and 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 related to order growth.

Speaker 5

Tax expense as a percentage was 27 percent effective rate for the quarter. Net income was $3,600,000 and produced $0.10 per basic and diluted share in the Q3 of 2023 compared to $4,900,000 or $0.13 per Basic and diluted share in 2022. Adjusted EBITDA for the 3 months ended September 30, 2023 was $7,300,000 versus $8,100,000 in the quarter ended September 30, 2022. We ended the quarter with $52,400,000 in cash and cash equivalents and short term investments and working capital of $83,100,000 Cash flows from operations for the 3 months ended September 30, 2023 was a record $8,900,000 and for the 9 months, cash from operations increased 29% year over year to 11,600,000 In the Q3, we continued our stock buyback and repurchased $14,900,000 of common stock, bringing the total repurchases in the past 18 months to $51,000,000 As we've stated before, We believe this to be a signal to our shareholders that we are incredibly confident in our management team, the growth opportunities for both divisions and we remain committed to creating shareholder value in the near and long term. With that, I'll turn the call back over to Thomas.

Speaker 2

Thank you, Dan. It is becoming increasingly evident that we still have a long runway in our pain management division, growing revenues from just below $200,000,000 to $800,000,000 over the next few years with a strong bottom line. We have the monitoring division on the brink of launching not just 1, but 4 game changing product lines. And Siamese continues to operate on the backdrop of a strong balance sheet. We've had a strong start Q4 in terms of orders and expect to post our 7th consecutive record quarter.

Speaker 2

With the continued growth in orders in the Q4 of 2023, We expect total revenue of $52,500,000 to $57,500,000 which is approximately 13% greater than the Q4 of 2022 and diluted earnings per share of $0.17 to $0.22 As for our full 2023 outlook, We are reiterating our initial guidance and expect total revenue to be $189,500,000 to $194,500,000 representing growth With that, operator, please open up the call for questions.

Operator

We will now begin the question and The first question comes from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.

Speaker 6

Good afternoon. How is everyone?

Speaker 2

Great. We're doing pretty good. How are you?

Speaker 6

Pretty good. Thanks for taking the questions. So just a few. So I wondered if you could drill a little bit on the devices versus Supplies, have you seen a lag effect, if you will, on supplies behind devices historically? And should we assume that the stronger side of devices gets further pull through on the supply side?

Speaker 2

I think Dan can obviously give you a little more technical detail. But overall, when we're here for several months, have had Very strong growth in orders. A lot of the revenue on the initial claims that is paid by And the supplies is revenue that typically sits on the tail end Of those orders, so with the current uptick in orders, we typically see a lot of device revenue. And as a percentage, not in absolute But as a percentage, we see a little less on supplies. But I don't know if you have anything more technical to say there than Ben?

Speaker 5

Yes. No, I agree with you. I think if you do look, the device usually gets a little stronger as compared to supplies as the year goes on. And so that's just kind of a general trend we have and I would agree with Thomas the strong order growth is driving that number. So maybe 25.75 going forward, it's more of a 30.70, just because the order growth has been so strong.

Speaker 5

But, again, both are growing well.

Speaker 2

Yes. Long term, you'll see that percentage for supply, for supplies creep up again.

Speaker 6

Okay. Got it. And then, nextly, could you talk a little bit about Some of the distribution channels that the physical therapy offerings are going through and how those channels may Have changed over the past few quarters and what they may look like going forward?

Speaker 3

There is no significant changes that we've seen over the last few quarters. It's still the same channels that are producing our

Speaker 6

Got it. And then lastly for us on the buyback front, I think you talked about $51,000,000 over 18 months. So Was the last piece of $10,000,000 included and now you're on to the 6th one Versus the 5th one?

Speaker 2

Not yet. It's obviously something considering how well we are doing organically, how strong our balance sheet is. We have recently have primarily been investing in 2 areas, the monitoring division and also because of How inexpensive the stock is right now. We find good use of the capital by buying back stock. And considering how it sits right now, we are actively debating to deploy More of our cash to buy back stock.

Speaker 5

So the 5th there's been 5 recently, Jeff. 5. That's just This one finished in October. So it wasn't quite done at September 30 when you look at it, but that last $10,000,000 finished up in October.

Speaker 6

Okay, perfect. That does it for us. Thanks for taking the questions and congrats on the strong readout.

Speaker 5

Thank you. Thank you.

Operator

The next question comes from Shagun Singh with RBC. Please go ahead.

Speaker 7

Great. Thank you so much for taking the question. So I was hoping you could elaborate a little bit more on the revenue momentum you're seeing. You indicated the highest level of orders In the company's history, can you provide some color on what is driving that? Is it new?

Speaker 7

Was it existing accounts? Is it adding more sales reps in regions? And then on the order growth, it grew about 39% year over year, which was below the which was higher than the sales growth of 20%. So just what are the implications of that? And how should we think about it as a predictor of future sales?

Speaker 2

Net net, our sales force is becoming more productive. We keep adding more sales reps. However, we are also proactively not letting sales reps that May not produce as much as we'd like to see long term and doesn't seem to have a potential to get there. So overall, we continue to see a higher productivity in our sales force as we get better and better at hiring new talent. So the order growth comes from that.

Speaker 2

It's also, relatively speaking, Been very strong here for a number of months compared to last year. 1.5 years, 2 years ago, Our order growth was not were in the were more in the single digits. And therefore, When we get some momentum in terms of the order growth, it turns into some very high percentages. And obviously, The average order growth, if you look at the last 2 to 3 years, is more in the Just over 25%, a little less than 30%, if you look at that On an annual basis, which correlate pretty well with our revenue growth. There's still a little bit to come there.

Speaker 2

We expect the full year to come in at 20% revenue growth. And we expect with the orders we're getting now and the revenue that will generate for many quarters to come that we have Strong revenue growth still in the pipeline that's already landed on the books in terms of prescriptions that now needs to get billed and battling with insurance companies to get paid, etcetera. Those six things will be executed here over the next many quarters for the orders that we recently received. So there's always a lag there between When we have a growth spurt in orders and when revenue catch up to that.

Speaker 7

Got it. That's really helpful. And then I was wondering if you could Maybe share some directional outlook for 2024 as it relates to your pain management business is plus 20% growth achievable next year. It seems like that's somewhat of a base case given how you're tracking this year. And then on the patient monitoring side, just contribution from the CM1600 and anything we should factor in for Neko?

Speaker 7

And any color on the OpEx side would be great too. Thank you for taking the questions.

Speaker 2

Yes. I think In terms of the pain management business, we are tentatively looking at growth a little 20%. So somewhere in the range of 20% to 25% is probably a good guess for how we're going to fare in terms of order and Revenue growth next year in that division will probably be because we expect a lot of the activity in terms of Additional data collecting and also be dealing with the FDA to take place in the first half of 2024 for the NICO and CIM-sixteen hundred and Further generations of that, we expect that. So we will be lucky to see some revenue in in the second half of next year.

Speaker 5

And then Shagun, as far as on the profitability side, I think This year, we're kind of in the flattish range. I think next year, we would expect to be up at least 10%, somewhere in that range on the EPS side, as we leverage some of the investments we've made. But right now, I think the DMS contribution on the revenue side is probably immaterial.

Speaker 7

Got it. Thank you for taking the questions.

Speaker 5

Thank you.

Operator

The next question comes from Yi Chen with H. C. Wainwright. Please go ahead.

Speaker 8

Thank you for taking my questions. Could you comment on the 3 new products for pain management in terms of the origin of the products, Whether they are prescription products and how these products are used in connection with Next Wave? Thank you.

Speaker 3

Yes, absolutely. So the 3 new products that we added, the TLSO, cryoheat, Hot and cold therapy and the wrist brace are Xyonext private labeled devices. They are all prescription only and they fall within our pain management line and complement our flagship Next Wave device And they're frequently prescribed together. So they fall within we essentially what we're trying to accomplish is become a one stop shop For non invasive, non addictive pain management solutions for prescribers looking for that.

Speaker 8

Okay. So the reported 39 percent order growth for the Q3, does that include those 3 products as well?

Speaker 3

Yes.

Speaker 8

So going forward, you reported auto growth will include those 3 products, correct?

Speaker 5

Correct. Correct. But they've always included we distribute a number of products. These are 3 new products and those distributed products have always been included in order growth. So it's pretty consistent

Speaker 2

A prescription is a prescription and whether it's low back support or in some cases, same patient gets 2 prescriptions And they get paid independently by insurance companies. Good example is the cryoheat, which The cold portion of that is really fantastic to use along with the next wave right after and immediately after our strategic surgery. So that would be an example. We get 2 prescriptions, same patient, and it will be 2 billing lines that insurance companies pay separately for.

Speaker 8

Could you give us a rough estimate as to the percentage of revenue represented by these 3 new products as a percentage of the total revenue in the Q3?

Speaker 5

The distributed products are about 15% of our device revenue.

Speaker 8

Okay. And they have a similar gross margin compared to the next wave?

Speaker 2

Yes. It's similar. Pretty much the same. We wouldn't take them on. Got it.

Speaker 8

Okay. Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Thomas Sandgaard for any closing remarks.

Speaker 2

Yes. Thank you for joining us today. We are pleased with our performance this quarter and the consistent growth Our team is delivering. We look forward to leveraging that momentum throughout the rest of the year and speaking to you at

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Zynex Q3 2023
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