Ekso Bionics Holdings, Inc.
Q1 2019 Earnings Call Transcript

Published: 1 May 2019

[Operator:]

Greetings and welcome to Ekso Bionics First Quarter Financial Results Conference Call. [Operator Instructions]. Please note this conference is being recorded. I will now turn the conference over to your host David Carey with Lazar Partners. Thank you, you may begin.

[David Carey:]

Thank you, operator, and thank you all for participating in today's call. Joining me from Ekso Bionics are Jack Peurach, President and Chief Executive Officer; and Jack Glenn, Chief Financial Officer. Earlier today, Ekso Bionics released financial results for the quarter ended March 31, 2019. A copy of the press release is available on the company's website. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of the federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements, including without limitation or examination of historic operating trends and our future financial or operational expectations, are based upon management's current estimates and various assumptions. 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. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our businesses, please see our filings with the Securities and Exchange Commission. Ekso disclaims any intention or obligation, except as required by law, to update or revise any financial or operational projections or other forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the broadcast today, May 1, 2019. I'll now turn the call over to Jack Peurach.

[Jack Peurach:]

Thanks, David, and thanks, everyone, for joining today's call. We kicked off 2019 with another record revenue quarter of $3.6 million in improving financial results. This demonstrates that our commercial strategy is gaining traction throughout our target markets. Compared with the same period last year, we achieved first quarter revenue growth of 44% and a gross margin improvement of 14 percentage points to 44%. We believe that our value proposition is clearly resonating with our customers and is resulting in greater demand for our innovative products. Additionally, our focus on reducing our cost structure is rapidly narrowing our net losses as we reduced first quarter operating expenses by nearly 31%. We are achieving greater efficiencies in our business through scale and a simplified organization and believe that we can further decrease our 2019 cash needs while maintaining momentum in our recently implemented sales and marketing initiatives. Let me now review our business segments, beginning with EksoHealth. Revenue in the first quarter increased by approximately 33% compared with Q1 2018. This reflects our continued progress advancing the adoption with our target customers in neurosciences and neurological rehabilitation centers. As we've discussed in the past, many of our customers and potential customers operate multiple facilities and serve a larger number of patients across an integrated network. We are pleased to see growing excitement and increasing demand for the EksoGT throughout these centers. To date, one leading provider has adopted the EksoGT throughout its network and we have seen several additional network customers piloting the EksoGT at their facilities. We believe that working with these customers is a great way to accelerate adoption of our technology and that Ekso's products, capabilities and experience uniquely positions us to serve these innovative customers. We continue to see our rental offering as a productive complement of our sales strategy. It provides a bridge to a capital-budgeted purchase for certain customers and helps accommodate our customers' budget cycles and procurement processes. In Q1, we booked 9 new rental customers and 4 of our existing rental customers purchased their units. Of these 4, 3 units were purchased before the rental term ended. This brings our current conversion rate from a rental to a sale to 76% in the United States. Total revenue upside from rentals under contract assuming that all current U.S. rental units convert to sales as well as deferred rental revenue is over $4 million. Building on this momentum, we successfully executed our strategy to increase investments into our sales and marketing initiatives by doubling our U.S. sales team relative to the end of 2018 and by expanding the sales teams in APAC and EMEA. We are excited that these additions to our organization will help us take advantage of growing customer awareness and increasing demand and also addressing our growing pipeline of opportunities. As I discussed in the past, we continue to see challenges in quarter-to-quarter timing. While we are proud of our Q1 performance and the new customers we attracted, there were several orders planned for Q1 that actually executed in the first week of Q2. As we announced in January 2019, we entered into an agreement with Zhejiang Youchuang Venture Capital Investment Company and another partner to establish a joint venture in China. This JV will create a global exoskeleton manufacturing hub and develop and serve the exoskeleton market in China and other Asian countries. We continue to progress the JV and the process of registering it in China. We view this as a tremendous growth opportunity for Ekso Bionics. China has an enormous market potential in which there are currently 12 million unserved stroke patients, a number that is expected to more than double to 30 million by 2030. Once the JV becomes fully operational, we will be positioned to become the leader in both medical and industrial exoskeletons in China. Separate from the JV, our APAC sales team has deployed EksoGT units across Hong Kong, Singapore and Australia, with several flagship customers. Demographic factors across Asia are creating mobility challenges that are driving rehabilitation towards community settings. As part of our strategy, we are working closely with leading health care providers in these markets to drive adoption across inpatient, outpatient and community-based rehabilitation centers. We are very excited about the opportunity and believe these developments will bring our technology and much-needed advanced rehabilitation capability to a large patient population. Turning to our EksoWorks industrial segment. Revenue more than doubled compared with the same period a year ago as more manufacturing companies continued to experience the benefits that our EksoWorks products provide. Our assisted device has been proven to be an effective approach to reducing the physical demands involved in overhead work while increasing worker's endurance and productivity. The strong interest in our EksoWorks products gives us confidence in future growth opportunities. While we have focused on the automotive and aerospace segments, we are seeing increased interest from other segments with more than 50% of our industrial revenues in the quarter being generated outside our primary verticals. We look to build on this broader demand moving forward. That concludes my opening remarks. I will now turn the call over to Jack, to review our 2019 first quarter financial results.

[John Glenn:]

Thank you, Jack. In the first quarter of 2019, Ekso generated record revenues of $3.6 million, an increase of $1.1 million or 44% compared to the prior year period of $2.5 million. The growth in revenue reflected continued execution on our commercial growth strategy. The breakdown for Q1 2019 revenue is as follows

[Operator:]

[Operator Instructions]. Our first question comes from Bruce Nudell with SunTrust.

[Tyler Knisley:]

This is Tyler on the line for Bruce. Of the 23 medical units you booked, can you give the geographic breakdown of this?

[Jack Peurach:]

Yes, sure. Let's see, let me just pull that up real quick. Let's see, the 23 booked, Adam, what were they?

[Unidentified Company Representative:]

12 U.S.

[Jack Peurach:]

12, U.S., 9 in Europe and 2 in Asia.

[Tyler Knisley:]

Okay. And then following the three early conversions you had in the quarter, can you talk a little bit more about the sales cycle for the GT units?

[Jack Peurach:]

Yes. Sure. We've really over the last year, 1.5 year, focused on improving our sales process in anticipation of scaling that process. So we today have I think a very deliberate sales process and have been able to focus on customers who we believe will benefit from our products and quickly get done to a decision point to purchase. As you know, if they are unable to purchase, we have offered a rental to help them navigate their interim budgeting challenges around that. We've seen the sales process, today experienced a sales process of a couple of months to about 6 months on the medical side and that's something that we're starting to see that become more consistent and also started to shorten a little bit as we're getting more and more adoption and awareness in the market.

[Tyler Knisley:]

Okay. And then in your plans to expand the size of your sales force, can you tell us how many reps you're planning on hiring? And can you describe the onboarding process and revenue expectations of the new hires?

[Jack Peurach:]

Yes. Sure. Great question. So we ended the year last year with United States 6 RSMs. We have expanded that today to be 12 RSMs. We -- and we have a -- we're fortunate that we've got I think a very mature and experienced sales team with a lot of knowledge and experience around training and ramping first existing experience in the medical, capital equipment industry but also experience in training bringing on new sales people. So we've done I think a really good job of training new sales people with the expectation of getting them up to speed very quickly. And we think we can have productivity out of a new sales person somewhere into the ballpark of the first quarter or two of their time at Ekso.

[Tyler Knisley:]

Okay. That's helpful. And then switching over to the industrial side. Can you tell us how many total units were placed in the quarter?

[John Glenn:]

Yes. We placed that 185 units in the quarter for the industrial side.

[Tyler Knisley:]

Okay. Great. And then in regards to the ongoing pilot programs, can you give us any updates on the feedback you're receiving or the progression of the adoption process among any of the trailing customers?

[Jack Peurach:]

Yes. Sure. All of the customers that are piloting our products are experiencing positive results with our products. The -- ranging from safety and worker health to productivity. So we see continued engagement and success in that program. I think the -- so -- all things have been very positive.

[Tyler Knisley:]

Okay. Great. And then last one for me. Can you tell us what other verticals outside of the auto and aerospace you're seeing interest from?

[Jack Peurach:]

Yes. Sure. We've seen a lot of interest in construction. We've seen a lot of interest in mining. We've seen much broader manufacturing space, not just auto manufacturing, but any large-scale manufacturing area. We've seen it in energy, both wind and solar energy, construction and utilities. We've seen it in rail manufacturing. So I think it's a very -- what I'd say is the -- our product is -- we've focused on a few verticals, but it's got a very general, I'd say, product's very general application and benefits across these industries. So I think it's sort of telling us there's a much broader interest level on application for this technology.

[Operator:]

Our next question comes from Nathan Weinstein with Aegis Capital.

[Nathan Weinstein:]

So nice job in the quarter. And I was just hoping to ask a couple of questions. Firstly, starting with the conversion rate. I think you said it was 76% rental to purchase conversion. I guess you were on 80%, so pretty consistent with last earnings results. And so what -- from a customer's perspective, what goes into that decision?

[Jack Peurach:]

Yes. That's something we've really focused a lot of time understanding and working on. The -- first of all, I'd say when a customer rents a unit of ours, it's a commitment and so they go into it with a commitment that they're -- they will have that unit and implement it in their program, which makes it -- if successfully implemented, very unlikely that they would not continue forward. Now what happens after they initially commit to the unit, the first unit, is that they then get to evaluate the -- our capabilities, not just the product's capability, but everything about our company during that rental period. So how we service the company -- or the product? How we trained? How we support their clinical team? How they measure and get economic benefit that they were expecting? How we support them from a marketing perspective and in so, it's really -- I take a lot of pride in the fact that we've got this high conversion rate because I think they're making a much more informed decision after renting our product for a year to commit to be our customer. And so I view it as really, a, validation that our product is really working well and delivering value to their patients in their clinical setting and b that our company, as a whole, is able to support them the way they need us to, not just from a product perspective, but across-the-board.

[Nathan Weinstein:]

I understand. And if we just think about the U.S. marketplace in terms of the rehabilitation clinics and what the competitive dynamic is going on there. When your sales team knocks on doors, are they typically finding greenfield or have other competitors approach them? Or have you noticed any delta and what the competitive dynamic looks like?

[Jack Peurach:]

I think most of the time, our -- we're competing against the baseline standard of care, which is fairly a manual heavy PT, physical therapy, standard of care baseline. So that's our primary competitor. What we are -- there certainly are more competitors in the field that are offering solutions. But we, especially in the exoskeleton space, pioneered the rehab side of this and have I think more and more customers are -- understand how we differentiate ourselves from the product side, from the training side, from service, from marketing support. And so I feel very comfortable about where we are competitively in the market, but there are certainly some other people in competing with us. But I feel very good about where we're at.

[Nathan Weinstein:]

And I think last one for me. When you guys think about the international markets and the structure of those markets, do they look like the U.S. in terms of a fragmented rehab center and also the size of them? If you could kind of just compare the EU and Asia to the U.S. maybe from a market side standpoint?

[Jack Peurach:]

Yes. Sure. So Europe is fragmented. Both in -- in different countries, they have different policies and needs. And we also approach Europe in a fragmented way. So we go direct in Germany and indirect there through distributors in -- outside of Germany. So we believe the market there is strong. We have had a lot of success in Europe. Our focus right now has really been in the U.S. principally from a growth perspective, but we think there's also a significant opportunity in Europe and we think the market size is roughly the same size the United States. Asia-Pacific is also a completely different market, particularly, I'll talk about China, I'll talk about Hong Kong and Singapore. China is a very immature market from a rehabilitation perspective. So there's not a really built out infrastructure of rehab, which has a great opportunity really because that means that taking a jump into new technology is really something that could be appealing and we think that that's a great opportunity to be innovative and our partners certainly has the same thing in their mind. The opportunity in China alone is 2.5x the size of the United States, so quite large. And then outside of -- in Asia-Pacific, but outside of China, so Singapore, Hong Kong are areas that we are active in today. It's -- the patterns are different, the payer models are different, but the need is significant and I think the social prioritization of rehabilitation is being prioritized and in a lot of times, decisions are made in kind of centralized ways. So they're all different. I think we've benefited from having local presence with a high degree of knowledge in the market. They're all different, but I think all promising in their own way.

[Nathan Weinstein:]

That's really clear. I guess just one follow-up on that. When you come to a centralized decision maker in terms of a purchase, could that be a positive? In other words if they have a go-forward decision, could it be may be a large step function higher in terms of unit placements?

[Jack Peurach:]

It certainly could. Yes, it certainly could. I think that it would be phased, but it certainly could and it gives us the opportunity to really engage in a level beyond transactional, right? So you can get a lot more in to helping them evolve their services they provide to their patients and communities, yes.

[Operator:]

Ladies and gentlemen, there are no further questions at this time. I'll turn the conference back over to Mr. Jack Peurach, for closing remarks.

[Jack Peurach:]

Thank you. Thank you all for joining us today. We are pleased that the growing level of adoption and awareness of our innovative medical device and industrial exoskeletons and believe that by expanding our sales organization, this momentum will continue going forward. We're focused on building a deeper customer pipeline while delivering the highest levels of customer support and maximizing value to patients, industrial workers and shareholders.

[Operator:]

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.