ZYXI - Zynex Inc. (ZYXI) CEO Thomas Sandgard on Q2 2022 Results - Earnings Call Transcript
Zynex, Inc. (ZYXI)
Q2 2022 Results Conference Call
July 28, 2022 04:15 PM ET
Company Participants
Louisa Smith - Investor Relations-Gilmartin Group
Thomas Sandgaard - Chairman, President and Chief Executive Officer
Dan Moorhead - Chief Financial Officer
Anna Lucsok - Chief Operating Officer
Don Gregg - Vice President of Zynex Monitoring Solutions
Conference Call Participants
Simran Kaur - Piper Sandler
Jeffrey Cohen - Ladenburg Thalmann
Marc Wiesenberger - B. Riley Securities
Yi Chen - H.C. Wainwright
Presentation
Operator
Good afternoon, ladies and gentlemen, and welcome to the Zynex Second Quarter 2022 Earnings Conference Call. At this time, all participants are in 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 Ms. Louisa Smith from the Gilmartin Group. Please go ahead.
Louisa Smith
Thank you, Chuck, and good afternoon, everyone. Earlier today, Zynex released financial results for the second quarter of 2022. A copy of the press release is available on the Company's website.
Joining me on today's call are Thomas Sandgaard, Chairman, President and Chief Executive Officer; Dan Moorhead, Chief Financial Officer; Anna Lucsok, 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 will now turn the call over to Thomas.
Thomas Sandgaard
Thank you, Louisa, and good afternoon, everyone. Thank you for joining us today for the second quarter 2022 earnings call.
This quarter's revenue and profitability remain exceptionally strong, as we continue to execute on our long-term growth plans. Total revenue was $36.8 million for the quarter, an increase of 18% year-over-year. Both in June and also for the second quarter, we saw the highest number of monthly and quarterly orders in the Company's history.
Second quarter orders grew 19% sequentially over the first quarter 2022 and 10% over the second quarter 2021. Earnings for the quarter were $0.08 per diluted share, and adjusted EBITDA was 5.5 million. And we are on track to achieving both top and bottom-line full year guidance.
Zynex's experiencing consistent growth quarter-over-quarter, and I'm looking forward to continued demonstration of our strong performance. During the second quarter, we completed a 10 million share buyback program and established yet another buyback program for an additional $10 million. We believe this initiative signals to our shareholders how confident we are in delivering value and executing our strategic growth plans.
We ended the second quarter with approximately 400 sales reps. We reiterate the ability of new and existing reps to pro sales more efficiently and strategically as evidenced by consistency in order growth. The current job market makes it difficult to hire a significant amount of new high quality sales reps. In the second quarter, we achieved record order numbers, demonstrating our ability to continue to grow our top-line.
Once the job market returns to a more normal cadence, we believe that, we will accelerate growth even further and eventually fill all 800 territories across the U.S. are which 400 are still open. In our monitoring products division, we continue to hire for engineering and clinical research positions as we keep making progress on our CM-1600 blood and fluid volume monitor sepsis detection device and our laser based pulse oximeter.
Pending FDA clearance on our second generation blood and fluid volume monitor, we are now gearing up to launch the product commercially during the second half of this year. We expect to see prototypes of the laser based pulse oximeter also here in the second half of this year, and we are targeting a submission to the FDA mid next year.
I will now turn the call over to Anna Lucsok, our Chief Operating Officer.
Anna Lucsok
Thank you, Thomas. At the monitoring division is still in its ramp up to commercialization, the pain management division remains the primary revenue source for Zynex. As Thomas discussed, we've seen a consistent increase in order growth and revenue over the past several quarters in large part due to productivity of our sales force.
Revenue per sales rep in Q2 grew by 37% compared to Q2 2021 and 23% over last quarter. Sales force productivity rather than size has developed into the primary driver for high quality and top-line revenue growth. We continue to be very selective of new reps to ensure they're a good fit. And the existing sales force were identifying underperformers earlier in their lifecycle with the Company and are emphasizing efficiency with new and existing reps.
Similarly to other companies facing macroeconomic challenges, we have been impacted by inflation primarily incorporated employee and sales rep wages and incentive pay. Both have increased more than normal over the last 12 to 18 months, which has impacted our bottom-line. Cash collections from payers both in and out of network remain strong and we have not seen any shifts in dynamics throughout the first half of the year.
Additionally, we've largely been unaffected by supply chain concerns in fact in many others in the medtech space. Our access to components and supplies has not significantly changed year-over-year and we've built up inventory to account for longer transit times and shipping channels. We have also been able to tap into our secondary manufacturing providers to keep a steady handle on necessary materials.
I'll now ask Don Gregg, VP of Zynex Monitoring Solutions to speak to the business updates related to that division.
Don Gregg
Thank you, Anna. Zynex patient monitoring division, otherwise known as ZMS, comprises a multi product portfolio on development pipeline, including hemodynamic monitoring, substance monitoring, and laser-based pulse oximetry. We estimate that ZMS has a total addressable market of approximately 3.7 billion and we have started to implement an effective growth strategy within the division to capitalize on future market share.
There are two primary programs driving growth of the monitoring division. The first is the development of the NiCO CO-Oximeter and HemeOx products whose technologies Zynex integrated through the Kestrel Labs acquisition. The second is the non-invasive CM-1600 wireless blood and fluid monitor and its associated commercialization and R&D efforts.
The NiCO and HemeOx are laser based products, which will be used in hospital systems as a multiparameter, pulse-oximeter and a hemoglobin oximeter that allows for continuous arterial blood monitoring respectively. The ZMS has been building out the teams and adding critical engineering and clinical personnel, and we remain on track for submission to the FDA in mid 2023.
The non-invasive CM-1600 wireless blood and fluid monitor, we submitted it to the FDA at the end of 2021 and are in discussions with the agency to provide all additional information requested. We are still confident that clearance is progressing as planned.
As it relates to the CM-1600, ZMS is using this opportunity for the creation of clinical evidence to support the commercialization process. Multiple ongoing and new studies are set to launch in addition to recently completed clinical validation trials, which track blood volume, shock response and recovery in the patient population.
Additional enrollments are continuing and we will examine the new CM-1600 in our ongoing apheresis blood donation study. We look forward to presenting the data in the coming quarters and seizing on market opportunity.
I will now turn the call over to Dan Moorhead, Chief Financial Officer.
Dan Moorhead
Thanks, Don. Please refer to our press release issued earlier today for a summary of our financial results for the second quarter and six months of 2022. In the second quarter, orders grew 10% year-over-year, and net revenue grew 18% to $36.8 million from $31 million in 2021. Device revenue increased 21% to $9.5 million, compared to $7.8 million in Q2 last year.
Device revenue increased 18% year-over-year to $27.3 million from $23.2 million. Gross margin was 80% for the second quarter compared to 77% a year ago. Sales and marketing expenses were $16.3 million in the second quarter compared to $13.8 million in the same period in 2021.
G&A expenses were $8.8 million in the second quarter, an increase of 42% or $2.6 million year-over-year. $1.4 million of the increase is related to investments in our monitoring solutions division and related headcount to launch our new products. The increase in monitoring is in line with previously stated estimates of increased spend.
Tax expense as a percentage was lower than normal at 19% for the quarter due to an additional deduction related to stock options which were exercised during the quarter. And finally, net income grew 19% year-over-year to $3.3 million and produced $0.08 per diluted share in the second quarter and adjusted EBITDA grew 16% to $5.5 million.
As far our six months results for the first half of 2022 orders grew 6% year-over-year and net revenue grew 23% to $67.8 million from $55.1 million in 2021. Device revenue increased 14% to $16.2 million, compared to $14.2 million last year. Supplies revenue increased 26% year-over-year to $51.6 million from $41 million. Gross margin was 79% year-to-date, compared to 76% a year ago.
Sales and marketing expenses were $30.7 million for the first half, compared to $27.6 million in the same period in 2021. D&A expenses were $16.6 million, an increase of $4.9 million year over year. As mentioned earlier, we continue to invest in the monitoring solutions division, which accounted for $2.7 million of the increase year-to-date.
And finally net income grew 125% year-over-year to $4.7 million and produced $0.12 per diluted share in the first half of 2022 and adjusted EBITDA grew 97% to $8.6 million. Tax expense year-to-date as a percentage was slightly lower than normal at 23% due to additional deductions related to stock options.
And as a reminder, we expect tax expense for the remainder of the year to range between 25% and 30% due to changes in the treatment of research and development expenses and other timing differences.
We ended the quarter with $26.9 million in cash, down $12.4 million from Q1 due to outflows of $10.7 million related to our buyback programs. Income tax payments of $3.9 million and debt service payments of $1.4 million, including interest.
Cash flows from operations for the year increased 137% or $5.9 million to a positive $1.6 million, compared to cash used in operating activities of $4.3 million last year.
Before I turn it back over to Thomas, I want to inform analysts and investors that as part of our quarterly reporting process, we plan to discontinue the practice of issuing pre-announcement flash reports beginning in Q3.
And with that, I'll turn the call back over to Thomas.
Thomas Sandgaard
Thank you, Dan. As noted earlier, we are affirming full year guidance with total revenue estimate in a range of $150 million to $170 million, representing growth of 15% to 30% over the previous year. Adjusted EBIDA for 2022 is estimated to come in between $25 million and $35 million.
And for the third quarter of 2022, we estimate revenue between $40 million and $43 million, with an adjusted EBIDA between $7 million and $9 million. These figures reflect our most recent assessment of the current labor environment and continued uncertainty relating to the evolving impact of the COVID-19 epidemic and how that's dealt by the government and other microeconomic factors.
With that operator, please open the call up for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And the first question will come from Adam Maeder with Piper Sandler. Please go ahead.
Simran Kaur
This is Simran on for Adam. Thank you for taking the questions. Maybe starting with a little bit more detail on the procedure environment and the progression that you saw over the course of Q2. It sounds like you've had record order volumes in June. So, I mean, is that sales force related in your mind? Or do you think there was maybe some pent up demand from COVID? And then, would be curious, if you could just talk about a little bit about how things have trended thus far into July?
Thomas Sandgaard
I think we can safely say that this is all sort of an internal issue more than an external. It's better productivity from our sales force, as relatively new reps are becoming more productive, and the entire sales force for all rather than its how the entire medical environment is developing. July is already showing a great growth. And as we alluded to earlier, we'll continue to see strong growth compared to the same quarter as last year. And we're definitely trending right in that direction and July already.
Simran Kaur
And then for net sales force ads in the quarter, could you remind me where you finished in Q2?
Thomas Sandgaard
Right around 400.
Simran Kaur
So it sounds like there was about an attrition of 30 reps from the prior quarter. So maybe just talk about the hiring environment in general given some of these macro pressures, I know, you guys touched on kind of the inflationary headwinds on wages. And just in general, though, about attracting quality reps, as well as your confidence and getting to that 500 rep target by your end.
Thomas Sandgaard
It's obviously difficult because we can really lower the bar in terms of the quality of the reps we hire. We can kind of say that we did that in 2020, and where we had to prudent a significant amount of those after having been here a year and maybe didn't produce as well as your approach.
So we keep the bar at the same high level, it really shows in those we do hire, continue to have a steady increase in the first 90-day performance, which is always a very strong indication of their long-term performance. So in per rep, I would say, we are building a stronger and stronger sales force.
But the amount of reps we are able to handle or to recruit versus is now fairly small attrition we have is not enough to really significantly change the number so. Of course, we expect that it'll loosen up a little later in the year, and that's why we're talking about increasing the number of reps towards the end. But the gross is certainly coming from reps becoming more productive and those who do hire quickly kick in with some significant numbers.
Simran Kaur
And then if I could just squeeze in one more on good guide. So, the full year guide was maintained and you issued a range of 40 to 43 mil for Q3. So now with the Q2 results in hand, this does imply a pretty hefty ramp in Q4, particularly, I think about $10 million at the midpoint. So, is the expectation of kind of this like continuation of ramp and sales rep productivity without necessarily adding more reps? Or is there a bolus of reps that you're expecting to kind of come through during Q4, that's giving you the comfort and hitting your full year target?
Thomas Sandgaard
Thos are two very different things, there's two different kinds of sets seasonality is one on the auto side and then on the revenue. Throughout the year, we always see an increase of revenue of mostly driven by insurance deductibles that obviously become less towards the end of the year. So, we always start revenues at a level that is either at the same or sometimes even a little less than the fourth quarter of the previous year, and then you see the overall growth. And right now we are looking at the 15% to 30% revenue growth over the year.
So, the orders are growing more steadily. Obviously, when doctors on vacation that it's a little bit weaker, but that shows a whole different pattern, where doctors typically out in January and July, because they don't want to get hit by insurance deductibles. But for us, we see the majority of the revenues throughout the year in the third and especially fourth quarter. So, it's perfectly natural that we see that, it's not like we've we put additional pressure on ourselves to suddenly ramp up revenue, it's just part of the seasonality on the revenue side of our business.
Dan Moorhead
And if you look at the percentages of the total, if you look at last year, and this year, they're mirroring almost exactly the same. The Q2 as a percentage of the total 130, we did last year, Q2 of the kind of the midpoint of the range this year. And then with the guide, Q3 as a percentage of total, it's almost exactly the same. So, it's nothing that's out of the ordinary.
Simran Kaur
And then just real quick, is there anything contemplated in the guide for from the monitoring business?
Dan Moorhead
No.
Operator
The next question will come from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.
Jeffrey Cohen
It sounded like you had a 10.7 number there on the buyback. So does that mean that you've initiated that second piece?
Thomas Sandgaard
Correct. Yes.
Jeffrey Cohen
Okay. So the 0.7 was as of the end of the quarter or currently?
Thomas Sandgaard
That was the end of the quarter.
Jeffrey Cohen
Got it. Okay. I guess we'll get nothing further yet. So I guess the next question is for Don, if you could talk about the development I'm not going to ask about 61, I've already done that. Because only times but when you talk about the NiCO and the HemeOx, you're talking about the platform together and then maybe talk a little bit about what you're envisioning down the road on the commercial front as far as doing yourself through it by territories by regions by distributors. Any thoughts there any updates for us to think about?
Don Gregg
Yes. First of all, say that we're on track with our internal development timeline for the laser-based products. The commercialization, we try to think about that upfront as we're designing the product, because we want to put things in the devices and then the platform and think about how we actually commercialize and go-to-market. These devices are planned to be wireless in nature, so they can have connectivity in the hospital and will allow us to collect data and things like that.
With that said, commercialization is a combination of both a direct sales force and an indirect sales force. And I probably can't speak too much more about that, except that this is a system sale and it takes some individuals that understand both the technology and the clinical therapy to sell this device. And so, it's a very important way that you will go-to-market and how we will focus primarily in the hospital market, in the beginning. Does that answer your question?
Jeffrey Cohen
Yes. Thanks. And Dan, how's that look on the back half? You mentioned 2.7 for the fun half on the G&A for ZMS back half around the same?
Don Gregg
No, it's a little more than that, just because we've been ramping. So, we spent about 2.5 last year. We said we were going to spend about 5 more this year, so somewhere in that 7.5 to 8 range for the full year is about where we will wind up, I think.
Jeffrey Cohen
Okay. That's helpful. Then lastly, I guess maybe a question for you Thomas, when we think about, the past number of months and quarters and years of awareness growing out there. How is that reflected currently both on the patient side and both on the physician side, when you think about and talk to folks out there about awareness and trends and utilization and prescribers and number of practices that are expanding internally and number of practices, which are being added?
Thomas Sandgaard
I assume you are talking about the pain management division here.
Jeffrey Cohen
Yes.
Thomas Sandgaard
Okay. So, our business model, I would say, has very little to do with sort of the general awareness, also because we are talking about a more than $25 million to $30 billion pain management market. And we are still just a drop in the bucket, when it comes to that. Everything is driven by the face-to-face interaction between our sales force and the prescribing physicians.
So, yes, there is awareness where we have a rep in front of the prescriber. And other than that, yes occasionally, I hear someone here in Colorado that's seen the next name before, but that's probably more because we are here. It's obviously something that our, the past 26 years when I've been in this industry in this country. We have tested a lot of different things, and also seen other companies pretty much break their neck on trying other things trying to do more of a pull approach instead of a push approach.
We see you can call having a direct sales force and you end up losing a ton of money on any other approach than that. So, it's not really something we measure and pay attention to. We measure our productivity and our sales force. And that's going to drive us to obviously the end goal of what I believe will be above 800 million in annual revenue on these products.
Operator
The next question will come from Marc Wiesenberger with B. Riley Securities. Please go ahead.
Marc Wiesenberger
Of the more than 45,000 orders in the second quarter, I'm wondering if you could give us a rough breakdown of how much of that was NexWave versus other products? And how is that breakdown been trending recently?
Thomas Sandgaard
I believe in terms of orders that out 82% to 83% of the orders NexWave and obviously subsequent supplies that are being sent out, or several years after when we received the prescription. That's obviously part of why when we see significant articles by takes a while before the actual revenue kicks in. So, it's gone up. We call the diversification has improved a little bit, but not substantially.
Marc Wiesenberger
And then if you could update us maybe on how many active patients do you currently have? And how that maybe trended relative to the prior quarter and last year?
Thomas Sandgaard
I think we're somewhere approaching 100,000 in active patients. We don't, that's not a metric we're tracking on a day-to-day basis, but I do get information on that, here and there. And that's people that are still known to be treating with the device. Obviously, we don't always know when somebody is treating and not treating. So, it's a little bit of round number, but we think it's somewhere in that area.
Marc Wiesenberger
And then if you could talk about the percentage of the sales and marketing expense that's maybe related to fuel for your reps. And then kind of what percentage maybe is kind of the marketing materials for in-clinic kind of the foods and kind of the advertising stuff. And with respect to those kinds of costs, I think a lot of them have probably experienced some inflationary dynamics, wondering if you have taken any actions around that, or you're potentially going to take some actions around that stuff to mitigate some of those rising costs?
Thomas Sandgaard
With respect to fuel, and kind of those in service or meals, that they're providing the clinics at times, those are capped on a per rep basis. So, I can't say that that has really affected us because the rep can only spend so much per month and so they have to allocate their dollars effectively. We haven't increased that since gas has gone up significantly in the last six months.
And so, we haven't seen an increase there, I would say, as far as rent materials, obviously, as we've continued to grow, that piece has grown significantly as well. And we've been able to be more efficient on some of those and bring down the price versus, in producing them here or outsourcing and we kind of do a mix of both to make that efficient.
But I would say again, that's a pretty small piece of the budget. Most of the budget is obviously going to salaries and the related commissions and the T&E number that I spoke of that's capped is a percentage of that as well. But we haven't seen any increases due to the factors you mentioned.
Dan Moorhead
And obviously, we have a relatively large sales force and with 400 sales reps. So, we have a lot of efficiencies and also flexibility in all the printed material we supply to them, that's generated internally, we literally have our own, you call it a very large scale version of a kinkos here. That is able to customize prescription pads for your individual physician, for instance, and marketing materials, and individualized for sales reps names on it, and how to send in prescriptions, et cetera. All that is customized and we can switch gears very quickly here by doing all that internal instead of having it done outside. Because of that, that's fairly inflation proof I'd say.
Marc Wiesenberger
And then just two more from me and these are going to switch to ZMS. I think I heard you talk about you're gearing up for a commercial launch in the second half of this year for potentially the CM-1600 after clearance. Does that mean that you really kind of finalized a go it alone strategy and you will be building up the sales rep base within that segment, which is obviously going after a completely different market. And if you can remind us how many sales reps you have there now and what's kind of the medium term goal for the ZMS sales reps?
Thomas Sandgaard
So, the current sales commercialization team is, we're scheduled to respond to the FDA. Let me just back up and say, we're scheduled to return or respond to the FDA. And we will consider building the commercialization team to sell the device. We have a plan in place to bring on a limited number of reps that are direct that will also help manage an indirect channel. And that's a fairly small number in the beginning because we will be ramping over a few quarters of next year.
Marc Wiesenberger
And then just the final one for me, I think recently, I've heard discussions about a creating a connected platform for the monitoring solutions division. I'm wondering, if you could just talk more about that and what kind of capabilities you're envisioning there? And maybe would that kind of provide recurring revenue in terms of software and any kind of additional details would be helpful? Thank you very much.
Thomas Sandgaard
Yes, so the business model around that is the look at devices in the medical device industry today. Most everything is connected via wireless, Bluetooth or some type of communication, whether it'd be near field, et cetera. There's on-prem solutions in a hospital and then there's typically a cloud behind that, that provides data, collects data, downloads, updates to devices, things like that.
We are building a connected platform to communicate with all of our devices wherever they are in the world. And that platform can download updates, it can collect data, it can do some vision to do reporting, it's envision to have a SaaS business model behind it. So that way there are revenues from the capital from the disposables and from the software.
Operator
The next question will come from Yi Chen with H.C. Wainwright. Please go ahead.
Yi Chen
Thank you for taking my questions. My first question is. Could you give us some general comments regarding whether a recession in the U.S. economy could negatively impact your business going forward?
Dan Moorhead
It's a medical service and a lot of these are paid by insurance and other types of things. So I don't know that we feel there is going to be a direct impact on this. Obviously with people's discretionary income, you never know with co-pays and those types of things. But, so far what we have seen or what we expect to see is fairly minimal.
Yi Chen
Got it. And given the current environment for hiring new sales reps, how quickly could you achieve the target number, once you get the clearance for the blood monitor to get to the sufficient reps for your team to launch the product?
Thomas Sandgaard
Reps that sell capital equipment, system level-type equipment will take probably 60 to 90 days to bring on. We have outlined a plan that will bring on, as I mentioned a limited number of those because we have a strategic approach to what geographies and territories within that geography we want to go after, and the types of hospitals, whether they be academic or other types of institutions, there is a ramp to those. And it's also based on the success and the need in the marketplace. And so, I think that, that will be spread over a number of quarters based on kind of how we see our launch.
Yi Chen
Thank you. And lastly, can you remind us how long a period did it take to complete the initial $10 million share buyback? And do you expect a similar timeframe to complete the additional program of $10 million?
Dan Moorhead
The original one we did in about 60 to 75 days. We would expect this one to go quite a bit slower. So, it's out there and it may change. But right now, it's executing at a much slower pace.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Thomas Sandgaard for any closing remarks. Please go ahead.
Thomas Sandgaard
Thank you for joining us today. We look forward to maintaining our financial health going forward and anticipate high growth from sales rep productivity in the upcoming quarters. Enjoy your evening and thanks for your interest in this call and in Zynex.
Thank you. Bye.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
For further details see:
Zynex, Inc. (ZYXI) CEO Thomas Sandgard on Q2 2022 Results - Earnings Call Transcript