Conformis, Inc. (NASDAQ:CFMS) Q1 2023 Earnings Call Transcript

Conformis, Inc. (NASDAQ:CFMS) Q1 2023 Earnings Call Transcript May 8, 2023

Conformis, Inc. beats earnings expectations. Reported EPS is $-1.32, expectations were $-1.39.

Operator: Good morning, and welcome to the First Quarter 2023 Earnings Conference Call for Conformis, Incorporated. My name is Tanya, and I will be your conference operator today. All lines have been placed on listen-only mode to prevent any background noise. After management’s remarks, there will be a question-and-answer session. I would like to remind you that this call will include forward-looking statements within the meaning of federal securities law, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements made during this call are not statements of historical facts should be considered forward-looking. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements, including those discussed in the Risk Factors section of Conformis’ public filings with the U.S. Securities and Exchange Commission.

You should not place undue reliance on these forward-looking statements. Conformis disclaims any obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call will include time-sensitive information and is accurate only as of the live broadcast today, May 8, 2023. I will now turn the call over to Mark Augusti, President and Chief Executive Officer of Conformis.

Mark Augusti: Thank you, and good morning. With me this morning is our CFO, Bob Howe. We had a mixed quarter of performance with many positive results, offset by lagging revenue growth. From a positive perspective, we saw improving revenue performance within our hip franchise and international markets, increasing demand from patients for our Platinum Services offering and improved gross margin results. And operationally, we reduced OpEx and delivered a higher-than-planned cash balance. However, our U.S. knee revenue has not yet returned to growth. The lingering effects from our shift to the new business model and our operational challenges have kept pressure on this important part of our business. Nevertheless, we believe we have the right business model, and we will endeavor to reengage surgeons and drive patient awareness of our Platinum Services Program.

With our Platinum Services Program, we now have over 225 facilities that have access to our new service. This represents approximately 70% of our U.S. business now being under contract or having access to PSP. Change is hard. And while we are disappointed that not all of our customers have elected to enroll in the Platinum Services Program, our Platinum Services orders continue to move in the right direction. In Q1, we had around 500 PSP orders, which is 32% growth from the 380 orders in Q4 and up from the 110 orders in Q3. We like the trend and believe it continues to reflect the strong value proposition of our PSP offering. Our commercial team continues to seek creative and effective ways to drive interest and engagement to sell our program to ASC and hospital system in today’s challenging economic climate and a competitive environment that is increasingly focused on robotics.

One recent action that is showing positive signs is the launch of our TV advertising campaign. We launched this campaign back in February, where we targeted surgery-ready patients to explore the benefits of a truly personalized Conformis knee. The first two markets yielded 2.2 million households in TV and social media reach and 10.6 million impressions, as most households saw the TV commercial around 7x. This results in a lift in patient leads for many surgeons in those markets. The challenge now is converting the patient leads into surgical orders. We will continue to monitor the overall performance of this advertising campaign as we move forward with it. Our hip business had a nice quarter. Although it is still working off a smaller base, we did see growth which was driven by the recent launch of our newest STEM product, Actera.

Surgeon feedback has been favorable and the commercial opportunity is there. We need to address some outstanding supply chain constraints and execute better across the organization to take advantage of the general surgeon interest in this new hip stem. Before I turn the call over to Bob, I would like to briefly cover a few other important updates. We are pleased to announce, on April 27, we received FDA clearance for our new cruciate stabilizing or CS poly insert for Imprint total knee system. Cruciate stabilizing is a growing segment in knee arthroplasty, and we are pleased we will be able to provide this option to our surgeons in the near future. Over the past two quarters, we have implemented many cost-reduction measures to improve our cash position and extend our operating runway.

We will continue to manage this extremely closely and will further align our cost structure with our current revenue and gross margin performance as needed. We are making strides with our operations. On-time delivery is improving, order lead times are becoming more predictable and the plant is performing better. However, the transition to the new business model introduced new processes and new workflows, which remain inefficient. Although we plan for many of these, the changes and additions from our historical ways of doing things has taken longer than anticipated. We are actively managing these activities and expect to realize improvement in the future. Our company has always been focused on looking at every way possible to deliver a return for our shareholders, and that continues today.

As we have done with our past licensing deals, our recent business model change and the new product introductions, we will explore all options available to us to create incremental value. Finally, I’d like to extend my appreciation to the entire organization. We have been going through a complex transformation over the past 18 months. The energy our team shows on a daily basis is incredible. We feel we have the leading hip-and-knee solution on the market, and we will keep pushing forward to help patients with better lives through Conformis. I will now turn the call over to Bob to provide more details about our financial performance for the quarter as well as share thoughts on our outlook.

Bob Howe: Thank you, Mark, and good morning, everyone. As I usually do, I will start with product revenue, which was $12.7 million for the quarter and down 15% on a reported basis and 14% on a constant currency basis as compared to the first quarter of last year. Although this fell at the high end of our guidance range, it still reflected headwinds from our business model transition and our operational challenges. Our hip business was up 3% in the first quarter, which reverses the declines we had seen in the past few quarters. We believe Actera, which only just recently launched in November of 2022, will be a growth catalyst for our hip business. We are continuing to build inventory to support our existing surgeons and look to expand our surgeon base once our inventory levels improve.

Product gross margin was 39.1% in the first quarter, a sequential improvement from the fourth quarter and above our mid-30s guidance. We are working hard to keep our product gross margin moving in the right direction, but it’s important to note that we continue to face headwinds due to increased labor and material costs, operational inefficiencies and lower unit volume as we transition to our new business model. Total operating expenses for the first quarter were $14.5 million, a decline of $5.9 million or 29% reduction from the first quarter of last year. The cost reductions impacted all functions and were in line with our previously communicated plan. This is the second consecutive quarter with a significant expense reduction relative to prior year.

As Mark mentioned, we will continue to actively manage our expenses as we work through our top line challenges. Moving to our balance sheet. We have cash and cash equivalents of $37.8 million at the end of the first quarter. We continue to prudently manage our cash, and our recent cost reductions have certainly helped in this regard. And finally, I’d like to outline our current outlook. We expect our second quarter product revenue to be between $11 million to $13 million. This expanded range reflects the reduced predictability due to our business model transformation, greater uncertainty given our operational challenges and the fact that adoption of Imprint and Platinum Services is taking longer than expected. With that, Mark and I are happy to take your questions.

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Q&A Session

Operator: [Operator Instructions] And our first question will come from Eric Anderson of TD Cowen. Your line is open.

Operator: And one moment for our next question. And our next question will come from Steve Lichtman of Oppenheimer. Your line is open.

Operator: One moment for our next question. And our next question is going to come from Joshua Jennings of TD Cowen. Your line is open.

Operator: And I’m showing no further questions. This concludes today’s conference call. Thank you for participating. You may now disconnect.

Mark Augusti: Thank you, operator.

Bob Howe: Take care.