2023-05-16 05:42:55 ET
Summary
- RxSight beat Q1 2023 revenue and EPS estimate and modestly increased the full-year revenue guidance range.
- However, the improved margin outlook was the most surprising part and the likely reason the stock surged to new highs last week.
- With Q1 being the weakest quarter of the year, I believe revenues are on track to meet or exceed the high end of the new guidance range.
RxSight ( RXST ) beat Q1 2023 revenue and EPS estimates and the company slightly increased the full-year revenue guidance range. But the significantly improved gross margin is likely the main reason for the very positive post-earnings share price reaction.
Investors are accustomed to the strong quarterly performance since that is what the company has historically been doing since going public in the summer of 2021. Even so, I think that RxSight’s first quarter was very strong considering the seasonal dynamics – it is the slowest quarter of the year for the business.
Management seemed quite pleased to report that monthly utilization was maintained sequentially despite the seasonal drop-off and the transition from the strongest quarter of the year to the weakest one. According to my calculations, it has slightly increased from 7.6 LALs per device per month in Q4 2022 to 7.7 in Q1. The installed base grew by 56 devices sequentially (or 14%) to 456 and that drove the 153% Y/Y and the 16% sequential increase in LAL revenues to $10.4 million.
The number of LDDs sold is down from 57 in the fourth quarter, but considering the seasonal dynamics, a decent achievement since sales dropped 11% sequentially in the same quarter last year. However, I should note that the company sold one LDD in Canada in the fourth quarter and another five in the first quarter. The sequential increase in devices sold in Canada has helped smooth out the seasonal decline from the fourth quarter, but even if Canada is excluded, the sequential decline is still below last year’s 11% decline.
As mentioned, the gross margin improved considerably in the first quarter, from the low to mid-40s during 2022 to 59% in the first quarter of 2023. Improvements were expected as the company guided for a 52-54% gross margin for 2023, but 59% was well above expectations and greater improvements were expected in the back half of the year, not as soon as the first quarter. The significant improvement was driven by the increased revenue contribution from LALs as they carry much higher margins than the devices which was expected, but also due to decreased material costs and improved manufacturing processes.
Due to the strong margin performance in the first quarter, management has increased the full-year gross margin guidance range to 56-58%. This is below the Q1 levels and probably reflects some management conservatism, but also the overall inflation risks on the materials side. However, it is reasonable to expect margins to improve based on LAL revenues growing much faster and based on the planned introduction of a lower cost to manufacture LDD in the second half of the year.
The full-year revenue guidance was increased by $1 million at mid-point, from $78-83 million to $79-84 million. Based on the Q1 trends, I believe revenues are tracking toward the high end of the new range or slightly above it. This assumption is based on modest sequential improvements in the number of LDDs sold, with Q3 potentially being a softer quarter due to summer vacations, and on sequential increases in monthly LAL utilization. A modest contribution from Canada is also included in my estimate and it is a potential source of incremental outperformance.
Improved margin outlook and continued strong growth to drive continued upside for the stock
Shares of RxSight finally broke the $20 level for the first time last week and the stock now looks well positioned for continued upside based on the improved gross margin outlook and the continued expected strong revenue growth.
The company’s product offering is obviously gaining traction thanks to the value proposition I outlined in my previous article . And there is quite a bit more room for growth as RxSight’s market penetration of the premium IOL market in the U.S. is only at around 5-6%. And longer-term, the company will expand internationally beyond the U.S. and Canada.
RxSight is well capitalized with $159 million in cash and equivalents at the end of the first quarter and the quarterly cash burn should be no more than $15 million on average this year and should decline as revenue growth should significantly outpace the growth in expenses.
For further details see:
RxSight: Improved Margin Outlook