Venus Concept Inc.
Q4 2020 Earnings Call Transcript

Published: 29 Mar 2021

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Fourth Quarter of 2020 Earnings Conference Call for Venus Concept, Inc. At this time, all participants have been placed in a listen-only mode. Please note that this conference call is being recorded and that the recording will be available on the company's website for replay. Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including those identified in the Risk Factors section of our most recent annual report on Form 10-K and Form 10-Q filed with the Securities and Exchange Commission.

[Domenic Serafino:]

Thank you, operator and welcome everyone to Venus Concept's fourth quarter 2020 earnings conference call. I'm joined on the call today by our Chief Financial Officer, Domenic Della Penna; and Chad Zaring, our Chief Commercial Officer. Let me start with a brief agenda of what we will cover during our prepared remarks. I will start with an overview of our revenue performance in the fourth quarter, including color on how our business trends have continued to significantly improve despite the continued challenges related to COVID-19 pandemic, Chad and I will then provide an update of our progress and key strategic areas, including our targeted commercial strategies. Our initiatives focused on enhancing our competitive positioning, and our continued development work related to robotics. Then Domenic Della Penna will provide you with more in depth review of our quarterly financials, our balance sheet and financial condition and our guidance expectations for full-year 2021. And then we’ll open up the call for your questions. So with that overview in mind, let's get started with the review of our fourth quarter revenue performance and overall business trends. We reported GAAP revenue of $25.8 million for the fourth quarter of 2020, representing a decrease of 19% year-over-year. That said Q4 increased 25% on a quarter-over-quarter basis, reflecting the improving business trends in key markets that we experienced during the quarter. Importantly, the 25% sequential growth in total sales we delivered in Q4 was driven mostly by 50% quarter-over-quarter growth in sales in the U.S. customers -- to U.S. customers and 10% quarter-over-quarter growth in sales to international customers. This strong sequential growth we delivered in the fourth quarter gives us further confidence that we've developed a right to near to intermediate term growth strategy which has us well positioned for improving growth trends, as the global recovery continues to progress.

[Chad Zaring:]

Thanks, Dom. A way of background, we implemented a more targeted near-term commercial strategy during the second quarter of 2020, which is focused on optimizing our pipeline and sales process and opening new strategic sales channels, diversifying and tightening clinician targeting, tailoring our selling strategies depending on the geographic region of the country, and arming our direct sales team with programs and messaging focused on six key product lines. Venus Bliss, ARTAS, NeoGraft, Versa, Viva and Venus Glow, four of which have meaningful recurring revenue streams. The results we delivered in Q4 clearly reflect that we are driving growth in the areas where we’re focused. The largest contributors to our system sales results in Q4 were continued positive market response to our Venus Bliss non-invasive fat and body contouring platform and very strong system adoption of the ARTAS hair restoration business in Q4. On Bliss, we couldn't be happier with the strong market response to our differentiated non-invasive fat and body contouring platform and its first full-year of commercial launch. As expected, sales of Bliss systems were the largest contributor to growth for the company in 2020. And we're particularly pleased with this performance given the backdrop of the global pandemic. Additionally, we launched the Bliss Roadshow in Q4, a multi-city tour aimed at increasing the pipeline for Bliss and driving market development and consumer awareness. The Bliss Roadshow along with increased sales focus on ARTAS and NeoGraft allowed the sales team to call on more core physicians.

[Domenic Della Penna:]

Thanks, Chad. For the avoidance of doubt, unless otherwise noted my prepared remarks this afternoon will focus on the company's reported results on a GAAP basis and all growth related items are on a year-over-year basis. Fourth quarter total GAAP revenue decreased $6 million or 19% to $25.8 million. As reported on our GAAP income statement, leases revenue decreased $6.6 million or 41% to $9.7 million and total products and services revenue increased $0.6 million or 4% to $16.1 million. The decrease in lease revenue in the fourth quarter of 2020 was driven by the business disruption caused by the global pandemic. Total products and services revenue in the fourth quarter of 2020 included $5.4 million from the sale of ARTAS systems, products and services. Sales of ARTAS systems products and services increased 34% on a pro forma basis and increased 94% year-on-year on a reported basis compared to the prior-year period, which only included contributions from the sale of ARTAS systems revenue, following the closing of our merger on November 7 2019.

[Operator:]

And our first question will come from Jeffrey Cohen with Ladenburg Thalmann. Please proceed with your question.

[Jeffrey Cohen:]

So I'll try to be, I guess I wanted to kind of drill into the commercial organization, generally speaking, described it, and it's looking like and it's becoming I know Chad you mentioned up to going from 50 to 70, I think your case of 140 to a worldwide commercial? And where does that fill out in the U.S. And then also talk to us a little bit about the international markets and where you're seeing some strengths and weaknesses and where you expect to pull back and press forward? Thank you.

[Domenic Serafino:]

Okay, thanks, Jeff for that question. Just to be clear, we talk about the 70 going from 50 to 70, that is a U.S. base number, sorry, North American base number that will be incremental to the 142. So you can assume that we will grow from the 142 in the aggregate. The strengths that we're seeing right now and how we define strength is really by two metric. First one is basically how we use our Internet of Things to determine the uptake of our devices being turned on globally, we see a very, very positive trend in North America in particular. And the second thing quite frankly, is our qualified pipeline. I'll let Chad touch a little bit on that. And perhaps he can give you a little bit more color as to where the focus is there and how we're trending, Chad?

[Chad Zaring:]

Sure, yes. We've seen a growth, we looked at our qualified pipeline 50% to 100% deals, not just tire kickers across products. We’re up from March 2019 like where we are currently. And we had a big increase over 50% increase in the qualified pipeline from the pandemic, when it first hit us last March, and that's globally. So we're looking at the global qualified pipeline. Now we are seeing the U.S. really open up with respects to the products we've talked about in the past Jeff Bliss, ARTAS and NeoGraft, three of the top six focus areas, we're getting a lot of traction with those in the U.S. hence the interest in adding these incremental reps in the U.S. But we're also OUS looking to make really strategic hires. We're having good traction with our ARTAS business in EMEA and so the idea there is to add people that can support the growth of robotics across the region. And then furthermore, we talked about divesting some of our interests moving from less direct international markets to fewer key markets, I would say, setting a baseline like if it's not going to be a $5 million OUS market, we're not going to be there direct. And so we're adding sales personnel in those markets, Australia. Mexico, Germany, U.K., places where we can feel like we can generate significant traction with our hair restoration business with the Venus Bliss and then with our other three core products.

[Jeffrey Cohen:]

Okay that does. Just as a follow-up for me, could you talk a little bit about the muscle stim competition and talk about the form factor that you're thinking about, and perhaps give us a flavor for some of the energies that you'll be able to offer?

[Chad Zaring:]

Yes, I think that for competitive reasons, we want to be careful on how we describe the technology, what I will share with the audience is that, it becomes the third leg, if you will, of the Venus Bliss, it'll be known probably as the Venus Zeus, this will be the only device in the market that will actually be able to have a significant meaningful impact on the fat layer, be able to contour the body simultaneously with the use of RF. So you've done laser for fat, RF for the contouring, and a muscle stimulation vehicle that will allow us to body tone and sculpt all within one session, that'll be the protocol that we'll be using. What I’ll share with you is that we do intend to have a disposable element to the muscle stimulation portion of the device and we do expect that this product will sell in the range of somewhere between $175,000 and $200,000 as an ASP.

[Operator:]

Our next question comes from Suraj Kalia with Oppenheimer. Please proceed with your question.

[Suraj Kalia:]

So Dom, first let me throw out some questions to you and or Chad. Dom at this stage of the launch, can you compare and contrast specifically what Venus Concept is doing on the Bliss product line compared to what Zeltiq did on CoolSculpt?

[Domenic Serafino:]

So first that's a great question, Suraj. What I will tell you is that our market acceptance in this product really does resonate into the CoolSculpting customer base. And I think what we're really encouraged with right now is the quality educated market, the market that's already been in the fat category for a few years, having been there with the Zeltiq technology. So this is an educated market that understands the ROI benefit of the Venus Bliss in terms of the speed of procedure, patient compliance, so the treatments because there the patient tolerates these treatments very, very well. And obviously, the no cost of and this was strategic on our part to no cost of an ongoing disposable cost each time they turn on the device. It could have been easy for us to add that to the device. But we felt for competitive reasons, we wanted to avoid that to create cost certainty for customers. So we think that we're quite frankly, ahead of the curve from where Zeltiq was in its early days of launching fat. And bear in mind that where Zeltiq was five, six, seven years ago. Now, they were the only player in the space. So what we're encouraged by is that not only we believe making very significant impact on customers who are already in the fat category, but we're able to leverage this as part of sort of referral sites that we can convince people that have never been in the fat category, to adopt fat into their practice. And last but not least, one of the things that's really encouraging and compelling to us is that with our real time data, our Internet of Things, consistently, we are seeing a payback period in other words, an ROI to the customer of about a 35, 36 weeks from an ASP in the range of $120,000. So when clinics can show a return on their investment in less than a year, that's quite compelling economics. And I think that a combination of all the things I've just described is really leading to a very nice market acceptance.

[Suraj Kalia:]

Got it. Dom, Chad, you guys gave out a lot of metrics on sales reps and the outlook for FY ‘21. Maybe I'll ask it a little differently. Where does sales rep productivity for Venus or rather how does it stack up relative to industry averages?

[Domenic Serafino:]

Right, Chad, you want to cover that one?

[Chad Zaring:]

Sure. I think that the goal we put forward is we're getting traction with ARTAS and NeoGraft and based on higher ASPs, and now the traction we're having with Bliss, our production per rep, the quotas that we distributed to them in 2021 across these buckets, the hair restoration bucket, the Venus Bliss bucket, which has significantly higher ASPs than historical products and then the all other buckets puts them into a comparable range with what other industry representatives we hear market to market anecdotally Suraj.

[Suraj Kalia:]

Got it, yes.

[Domenic Serafino:]

I think just to expand on that, Suraj, the typical rep is between 1.5 and 1.7 million which is pretty consistent with pretty much every other company that's in our category. The group of reps that we do anticipate bringing on to expand our salesforce we have a very strategic plan related to how we’ll deploy those and they will have a smaller quota but will be very strategic in terms of creating additional leads et cetera for the company and higher ASP products.

[Chad Zaring:]

Yes, and one more Suraj, one more point on that, that Robotic specialist team that we deployed that sells specifically the ARTAS and NeoGraft bundle, the national strategic account people that focused on these large dermatology chains, we would obviously expect significantly more revenue from them because they're focused solely on a higher ASP product line. So that's the way we stratify it.

[Suraj Kalia:]

Got it, okay. Domenic, one last question and I'll hop back in queue, lease revenue was down 41% year-over-year. You obviously mentioned about some bad debt expense in the quarter and I was trying to quickly write down some numbers you said 86% of the accounts were still active maybe I'll just kind of frame it within the context of FY ’21, what percent of FY ’21 outlook, are you looking at it from a pro forma bad debt expense, how should we think about that specific line item of your FY ’21 revenue guidance? Gentlemen, thank you for taking my questions.

[Domenic Serafino:]

Suraj, good question. I think under the assumption that the worst is behind us, I think we can look to 2021 as being certainly more normalized and again that's notwithstanding any impact of a third wave et cetera. But our assumption and the guidance that we've given going forward is that we're going to continue to pull out of this and on that basis I think we'll see a bad debt expense which is more in line with sort of normalized reporting in the 4% to 5% of sales range is where I would expect and again what the number I referenced for Q4 was that 75% of the bad debt expense in Q4, we reserved for what I refer to as active accounts therefore not accounts that had fully defaulted. But we're active in the sense that they hadn't made payments in a few months and were problematic but we believe that they'll come back to us based on interactions we've had with them, they're not completely shut down, they're trying to get restarted again and reactivated but we've taken a very conservative approach and fully provided for those accounts. So to the extent that we can resurrect and resuscitate those accounts, that's good news for 2021.

[Operator:]

Our next question comes from Jon Block with Stifel. Please proceed with your question.

[Jonathan Block:]

Good afternoon, maybe a small handful, Dom the muscle stim offering that you talked about, will you be able to decouple that if you would and if your practice just purchased the stimulation component or is that only going to be bundled with Bliss going forward?

[Domenic Serafino:]

Yes, at this point we're bundling with Bliss because we think that the market opportunity is quite compelling given what our competitors are selling one dimensional technologies for, we can always sort of bifurcate it, if you will and make it a standalone unit but we feel that we have a very specific protocol in mind, it will allow for optimal results for patients by taking advantage of all three. Now that said, Jon if the clinic only wants to do a muscle stimulation treatment, body toning treatment they can do that on that platform. So it's not like they got to activate one to activate the other. So it's ala carte if you will within the device and they don't have to add it right away, so if they want to buy the standalone Bliss, they can add the muscle stim after as well. So there is some flexibility there but having said that I think that what we've done is decided to take a very strategic approach here understanding the magnitude of the opportunity with a device that is all encompassing.

[Jonathan Block:]

Okay, got it. And just want to think about timelines. And I apologize if I'm incorrect, but it seems like muscle stim was pushed from ‘21, maybe to ‘22. And maybe RoboCore was pulled forward, or can you talk to Dom the timeline? Are they unchanged? Or did muscle stim experience maybe a slight delay, as you strategically thought about the plan, and is RoboCore actually pulled forward somewhat, if you could elaborate?

[Domenic Serafino:]

Yes, RoboCore is still on target exactly, as we had originally discussed it back in December, the muscle stim, the only reason that we've actually talked about contributions in 2022 at this point, is because of our FDA strategy, and we think that we can get the product to market sooner than that. But we don't want to promise that at this point. And we haven't factored in any muscle stim revenues into our 2021 plan, just to be clear. So anything that we would be able to do by pulling that up even a few months in the busiest quarter of the year, which is Q4, we feel will have some certainly some positive impact on helping us continue to increase or improve our performance quarter-over-quarter. So there's no real delay in that product, we're moving forward according to our original plan. We just want to make sure that we have very clear understanding as to where we'll be with the FDA process.

[Jonathan Block:]

Got it. And actually, that was one of my follow-up. So just to be clear that the 2021 guidance assumes no muscle stim, no no contribution from either of those products in 2021?

[Domenic Serafino:]

That's correct.

[Jonathan Block:]

Okay, got it. Last one or two for me, Chad or Domenic, the ARTAS implantation feature, I didn't hear a lot about that. Can you just provide us with an update there? How's that going, maybe the receptivity out in the field and then I've got one small follow-up.

[Domenic Serafino:]

Chad, go ahead.

[Chad Zaring:]

Yes, sure. Thanks for the question, Jon, we've made some substantial improvements to the mechanism, the speed, the efficiency, the cartridge loading process, we're in a commercial relaunch with a few sites in the U.S. that seems to be going well. The next plan is to identify and activate more commercial sites in the U.S., for each of our regions, so that they can become quote the teacher, so that we can bring on more sites, current customers that have harvest only to implant. But most of the new sites going out most of the new sales, we're starting to transition to selling the implant feature, which obviously improves our ASP, and doesn't significantly affect our margin profile. So it's going pretty well, we're cautiously optimistic that we're going to have good uptake of the implant technology, the implant feature.

[Jonathan Block:]

Got it, perfect. And last one for me if we can take this offline, it's one of those accounting questions, but I'm just trying to think about the moving parts. So when you place the system, you book it as revenue, if you don't collect, you have the bad debt expense, which you guys exclude from your EBITDA calculation, but the account might still be active, if you were to go ahead and collect from that account in a subsequent quarter, does it come back in as revenue maybe, let me know if that makes sense if you can clarify that?

[Chad Zaring:]

No, Jon it wouldn't come back as revenue, but it would come back as a credit to bad debt expense. So, let's just say in Q1, I record a million dollars of bad debt expense. But I get an account that comes back and they're back online, and they're paying again, then I could credit that million dollars of expense by the amount that they're contributing back against that. So let's say $50,000, I'd reduce my bad debt expense by that amount of recovery.

[Jonathan Block:]

Okay, got it. In either way, it's excluded from the EBITDA calculation to your guide?

[Chad Zaring:]

Correct.

[Operator:]

Our next question comes from Anthony Vendetti with Maxim Group. Please proceed with your question.

[Anthony Vendetti:]

Thanks. Just a couple of questions. On the revenue guidance for the first quarter of 44% to 50% year-over-year growth, should we or how could we think about ARTAS in relation to that, is ARTAS a significant part of that growth, is ARTAS growing faster than that in line with that?

[Domenic Serafino:]

I think the way you should look at it Anthony is that the trends that we've experienced in Q2 or Q3, Q4 with the ARTAS is continuing in Q1.

[Anthony Vendetti:]

Okay, great.

[Domenic Serafino:]

If you look at year-over-year percentages that we've disclosed in the past in Q3 and Q4 as we did in Q4, I think it's safe for you as your model this to do that in Q1.

[Anthony Vendetti:]

Okay. And then just in terms of a different product to switch gears before I just ask one question on the muscle stim one, so Venus Glow, I know competes with HydraFacial, and HydraFacial just went public through a spec, I was just wondering if you could talk about the market opportunity for Venus Glow?

[Domenic Serafino:]

Yes, look I think that this is one of the sort of I hate to call it the best kept secret within the company, I think that one of the challenges that we've had in the past was because this is typically a $20,000 to $25,000 ASP, people that are used to selling $65,000 to $250,000 platforms may ignore. So one of the strategies and one of the reasons why we intend to significantly add to the sales organization for the balance of this year is exactly that Anthony is that the opportunity is quite large, for HydraFacial it's a $200 million business and most importantly in that number, 50% of it is in the recurring utilization of the serums for which we have with ours which is very comparable in terms of pricing and certainly clinical efficacy. So the incremental growth that we will bring into the sales organization in North America will be dedicated not exclusively but virtually exclusively to the Glow and to the Venus Viva product because we think that these price points are perfectly set up for an audience that can go out and specifically sales organization that can specifically target customers in this category because in the Venus Glow as an example, the primary goal of our business as we move forward has been dermatology and plastic surgery that has a much broader appeal across all channels including med spas and so we think that we'll be able to take advantage of that in a meaningful way for the balance of 2021. That said, the Venus Glow, there's approximately 300 systems in play globally and we’re just starting now to have a meaningful impact leveraging that customer base with the various serums that we introduced late in 2020.

[Anthony Vendetti:]

Okay, great. That's definitely helpful color. Just in terms of what you need to do from an FDA standpoint for the muscle stim, is there a trial you're doing before you submit for that or what needs to happen to move forward with the muscle stim and potentially commercialize that before?

[Domenic Serafino:]

Right, sorry. Ironically enough Venus was the first company to bring muscle stim to the market in 2010, 2011 with one of our smaller devices so we feel that and this is one of the reasons why we sort of been somewhat cautious about the FDA, we think that there's a significant number of predicates out there that will allow us to bring the product forward in terms of releasing to the market. Having said that, obviously predicate devices are predicate devices and we want to make sure that we're properly aligned, that doesn't mean that we won't continue to do and will do clinical trials sort of in parallel to ensure that either way with the FDA we'll be able to meet whatever their requirements are. But this is typically a 30 to 40 patient study to be able to demonstrate safety profile as well as obviously efficacy. But we think that we may be able to predicate not only our own device but other devices as well.

[Anthony Vendetti:]

Okay, great. And then last on ARTAS, just one last thing on ARTAS, so I know that when you first basically purchase through their reverse merger into Restoration Robotics, the ARTAS system. That typical procedure would still take seven, eight hours or so I believe you've brought that down to five, can you talk about where you're at exactly with that. And do you believe you can get one of these procedures down to four hours at some point mid-‘21?

[Domenic Serafino:]

Yes, that's a really good question. So you're absolutely right that a typical 2000 follicle transplant like under a manual system, you're typically talking about eight hours. What Restoration Robotics did even prior to our acquiring the company did a really great job of being able to harvest hairs at a rate of somewhere around 1,000 an hour. So for argument sake, they could harvest 2,000 follicles in, the problem that ARTAS or the Restoration team had before when they prematurely launched the implantation features every minute that they saved on the harvesting, they reinvested in the implantation. So it frustrated many clinics, and ultimately, that led to a lot of clinics being dark, because they were oversold on the technology. When we acquired the company, we strategically took that implantation feature off the market. So behind the scenes, we continue to improve it. And what that's led to now is a typical 2000 follicle procedure from start to finish is just around five hours, we think that we can get the procedure down to four and that's a very critical number, because at four hours, a typical clinic, especially a busy hair restoration clinic, can do two patients a day. And that's quite important at the clinic level. So that's kind of our target. We're not there yet. But we believe we can get there, but it's going to take us a bit of time.

[Anthony Vendetti:]

Okay, very helpful. Thanks very much. I appreciate it. I'll hop back in the queue.

[Domenic Serafino:]

No problem, Anthony.

[Domenic Della Penna:]

Dom, I would just like to clarify on Jon's point around the bad debt expense. So there's two components, the bad debt expense, that would be normalized, that is not an EBITDA addback, but it's only the COVID-19 portion that is an EBITDA exclusion or an add back. So I hope that's clear. So on a normal basis, it is excluded from that, that formulation but where we have identified COVID as an impact that has been isolated in the EBITDA calculation.

[Operator:]

Thank you. It looks like, we’re currently showing no additional participants in the queue. That does conclude our conference for today. Thank you for your participation.

[Domenic Serafino:]

Thanks everybody.