PROCEPT BioRobotics Corporation (PRCT) Earnings Call Transcript & Summary

Good morning. My name is Craig Bijou, one of the Medtech research analyst here at BofA. And I want to introduce, and it's a pleasure to have PROCEPT BioRobotics with us today and from the company, Reza Zadno, CEO; Kevin Waters, CFO; and Matt Bacso, VP of IR and Business Operations. So thanks for coming, guys.

Thanks for having us.

Maybe I want to start, we're not too far removed from Q1 results. You saw obviously a very strong Q1, another revenue beat and raise, as I think you've done, I believe, each quarter since going public, system placements were strong, utilization is expected to increase sequentially. You're taking price on systems and handpieces. So maybe just talk about some of that momentum, what you're hearing from the actual urology community and kind of on your path towards standard of care to resective BPH procedures.

Yes. Thanks, Craig. Thanks for inviting us. It's really a pleasure being here. We are very grateful for the working relations that we have with Bank of America. Again thanks, it's great to be here. It has been a great start to the year with the announcement we had and results we presented in Q1. As you pointed out, we are seeing durable momentum underlying in our business. As for your question about the clinicians, we are very happy, all the indicators point in the right directions. When we look at the Net Promoter Score, we have the world-class Net Promoter Score. When you look at the retention rates are very high with utilization, all of those points in the right direction that the surgeons who buy our technology they like it and all of that is truly because of the clinical outcomes. So all of those point in the right direction. As far as the progress we have made on the, for example, pricing, we saw an increase in Q1 of 2024 on the robot compared to the Q1 of 2023. And we were also able to slightly increase the price of the handpiece in January of 2024. As you mentioned, we have been very clear that our long-term goal is to become the standard of care for the resective treatment of BPH. But as the guidance shows for 2024, we are talking about 33,000 cases in 2024, and that is still very early. So we have a long ways over there. But the momentum we have built, we are very happy about it. And I believe we are on our track to -- on our journey to fulfill our vision.

Great. And I mean maybe talking specifically about utilization. So utilization in the quarter grew 7% year-over-year. I think Kevin, you said utilization is going to go up sequentially throughout the year, which does imply some year-over-year growth, but maybe it's a little bit of a step down when you kind of look at what utilization was the prior year. So maybe starting there, and I'll get into a little bit more detail. But starting from that point, is that just conservatism? Or how should we think about kind of the metrics that you've laid out for guidance and what that means for utilization.

Yes, a fair question. And look, I think our history as Reza alluded to would suggest that we've been able to beat and raise essentially every quarter as a public company. And when you look at our utilization guidance, it is a very sensitive metric as you're aware of. And when we look at the 30,000-foot level around surgeon engagement, surgeon retention, new accounts coming up the utilization curve faster than previous accounts. We feel good directionally about where that is going. With that said, I think you're alluding to kind of the year-over-year utilization growth being lower on a full year basis as compared to Q1 and Q2. And when I -- when we look at that, it's really indicative of Q4 of '23 being so strong. And the fact that, that was the largest utilization quarter in the company's history. I didn't think it was prudent to base kind of guidance off of the highest run rate ever in the company's history, but we feel good about the metrics. We feel good about our ability to get to the 33,000-plus procedures in 2024.

Got it. And I know you track utilization pretty closely. I get a lot of investor questions on what the utilization is in the specific cohorts of when they're placed. So maybe if you can just kind of frame what you're seeing from utilization on some of the older systems where -- how far are they above kind of the average? And then when you think about adding a new system today, what's the utilization uptake? And how does that compare to maybe what you did a couple of years ago?

Yes. So let's just think of the cohorts, and we look at the same way when we forecast internally because the longer you've been an account, the more procedures you do. So without getting into specifics of each quarterly cohort, maybe in general, what I'll say is at the end of 2022, we added approximately 170 systems in the U.S. To put that in perspective, we plan to exit this year north of 500. And when we look at those 167 accounts that were installed at the end of '22, their utilization is significantly above the corporate average of kind of 6 to 7, right? So that's a proof point where we're growing utilization over time, both on the surgeon level and then still adding new surgeons to that account at the account level to drive utilization. So we definitely see that trend being up into the right. When we look at new accounts those new accounts today are following a very similar pattern, but we'd suggest it's somewhat accelerated compared to accounts that we installed earlier in our commercial adoption. A lot of that is just due to general awareness, surgeon awareness. Typically, when we first launched this product, we would be happy to have one surgeon perform Aquablation when we launch an account. Now we will not even launch an account typically with only one surgeon. So there's interest from multiple surgeons within a hospital, and we are still seeing that it takes about 3 to 4 quarters for a new account to get up the utilization curve and get to that corporate average. Keeping in mind that, that first quarter, we sell a system they may do 0 procedures because it does take 30 to 60 days to launch an account as well.

Got it. And then maybe last one on utilization. What's the ceiling for you? You guys talked about the high-volume hospitals, they do about 18 procedures per month. I know you're going into the high volume, but you're also going into the lower-volume BPH centers. But -- and it's a question investors have, what is that if you want to be standard of care, can you get to that 18? Is that too much to expect? And where should we think about what portion of that you can get?

Yes. So 18 is the national average. Some accounts are higher than 18. Some accounts are lower. So we have granular data on hospital by hospital, what those numbers are. As you mentioned, low-volume hospital historically we're not doing that 18 per month. But what we have seen, although about 30% roughly of our accounts are low and mid-volume, their ramp is similar to high-volume centers. So we see their utilization is increasing beyond what they were doing in the past. When hospitals purchase our robot, their goal is to increase the number of patients they bring to their account. We partnered with them. We don't do direct-to-consumer ourselves, but we partner with our hospitals so that they can increase the patient flow. Ultimately, in 2019, there were 300,000 resective procedures done. Ultimately, our goal is to bring those 1.1 million patients who have failed to medication or 6-plus million patients who are on medication. That is our ultimate goal to expand beyond these 18.

And then we're not prepared to give any guidance past '24 today. But just on utilization, what I do want to point to is where consensus is in 2026, it assumes roughly 8 procedures per month. And I think what's nice for us is that we already have multiple proof points in multiple accounts of physicians and accounts doing well north of expectations. So we're at a point now where we feel with our commercial team, we can go replicate the success we've had in the hospitals. And theoretically, it's hard to predict what that ceiling could be, but I think our ability to continue to have this outsized growth isn't dependent on us doing 17 a month in each account with having, again, multiple proof points of where folks expect us to be in 2 years.

Got it. And I will get to capital, but maybe jumping around a little bit, but I want to talk about profitability and what you guys saw in the quarter because it was pretty impressive. So let's just start with the gross margin improvement in the quarter. It was 56%, 500 basis points above last year. You raised guidance by a point on the low end. So obviously, came in, it sounds like it was better than your expectations. So maybe just talk about some of the efficiencies that you saw on the gross margin line in the quarter.

Yes. So for us, our primary efficiency is absorbing our fixed costs. So one of the things we're very proud of at PROCEPT is, we've built this business to become the standard of care. And to do that, you make investments, particularly around operations. You think of the last few years, with supply chain challenges. Many companies were disrupted by that. We were fortunate to bring in kind of a great leader in our operations team from a large robotic company who is spearheading our efforts there. And we built a base to support not just 30,000 procedures, but 100,000-plus procedures. And to do that it cost money, and I think what we're seeing in the first quarter now for the first time is us really leveraging those fixed costs over a much larger revenue base. And the fact that, that is the primary driver for us to improve margins makes that journey more predictable because it's solely based on the volume we produce. We're not reliant on cost reductions, we're not relying on outsourcing manufacturing to get to longer-term margin expansion. That's point one. And then point two, if I look back at 2023, in addition to kind of building that infrastructure, we also moved facilities. So we moved facility that was 4x larger than our current facility. And while there was disruption there, it's a very hard thing to do to move facilities. And I think we managed it very well, but there was some disruption. You saw that in the fourth quarter. We told investors that, that was going to be onetime. I think Q1, again, is a proof point that, that was onetime, and we feel good now moving forward.

Got it. And maybe on gross margin. Maybe just think about -- or help us think about what the ultimate gross margin is for the company? What's peak margin or peak gross margin?

Yes. So we've talked about this business, we think, can get to 70-plus percent margins. We haven't given a time frame around that. But again, if you look kind of what our guidance implies for 2024, it does imply to be in the high 50s. It implies that you need to be exiting the year north of 60%. So I think exiting this year, is going to be a critical moment for the company to show that very clear pathway to profitability. And while 70% margins is the goal, I actually don't think that's necessary to get to profitability. I think this business at 65-plus percent, you could support a business that could be profitable. And again, for us, it's all about our revenue expansion as opposed to any type of specific cost reduction initiatives.

And just remind us, the systems versus handpiece gross margin. How do we think about the differences.

Yes. So for us, handpiece margins, they're modestly higher relative to systems, but in longer term, handpiece margins will be much higher at scale, but kind of 5 to 10 percentage points higher. We actually have some very nice margins on our capital. And our capital is not a significant drag on margins. And at the same time, our disposable is a fairly complex disposable. This isn't a disposable that's 95-plus percent margins. There's some complexity there just in terms of manufacturing and what we're providing to the customer. So for us, the biggest driver of margins, again, is overhead absorption as opposed to shifting to more consumables [indiscernible]. That helps, but I would say that's a secondary lever, not primary.

Got it. And I wanted to quickly ask on operating margin. Just you -- I think you made a commitment to keep operating expenses relatively in line. You raised revenue guidance but operating expenses stayed the same this year. So maybe just talk about your path of -- you did mention profitability, but talk about path from operating expense and where you can see some leverage.

Yes. So we feel really good. I'll say today, growing revenue at 2x the rate we're growing operating expenses. So I actually feel if we kept that leverage in perpetuity, we'd have a very successful profitable company. With that said, longer term, I actually see additional leverage points in the business. It's around two areas primarily. So first is R&D. R&D today as a percent of sales is somewhere in the 28% to 30% range. That's high. We recognize that, but we also recognize that we want to continue to innovate. We're a robotic company. And therefore, we're comfortable with those investments in 2024. But over time, R&D should settle into the low to mid-teens. We're never going to be kind of 5% to 10% R&D of sales, but think of us more in the 12% to 15%. And that's a huge leverage point as we move forward. The other leverage point is our sales and marketing team as utilization increases as our case coverage diminishes you're going to see the investments that we need to make in sales and marketing to drive incremental revenue, particularly around procedures, that will be another leverage point for the business. With all of that said, if 2024 was the worst leverage ratio, I still think carrying that forward gets us business to profitability.

Got it. And just on the R&D pipeline, can I get you to tell us anything on what you're doing? I mean is it software, hardware?

No is the short answer, right? I mean we do spend quite a bit of money on R&D. We've been very intentional not discussing plans for obvious reasons related to the commercial disruption. I'll say this, 99% of our R&D spend is focused on our current system in BPH improving that system around workflow, improving that system around assisted planning. We're very much aware that our system today is a first generation system. With that said, if we made 0 improvements to the clinical outcome of our system, I still think we have a very clear pathway to become the standard of care. So this is all about workflow improvements and platform improvements to allow us to continue to innovate. Think of Tesla, where we can push updates to the customer routinely, so they feel like they're continually getting value. I think a next type of system would focus on those types of improvements.

Got it. I want to shift to capital. And I thought it was interesting on your call, you talked about an improving hospital CapEx market, which obviously is a -- I read as a bullish sign. But what specifically have you seen within the market that gives you that confidence that, one, that you're going to see an improving hospital capital environment?