Earnings Call Transcript - LNSR Q1 2024

Operator, Operator

Good morning, and thank you for joining us. This conference call will be recorded. I would now like to hand the call over to Lee Roth of Burns McClellan. Mr. Roth, please take it from here.

Lee Roth, Investor Relations

Thanks, Gavin. Good morning, everyone, and welcome to the LENSAR First Quarter 2024 Financial Results Conference Call. Earlier today, we issued a press release providing an overview of the company's financial results for the quarter ended March 31, 2024. A copy of this release is available in the Investor Relations section of our website at www.lenzar.com. Joining me on the call today is Nick Curtis, Chief Executive Officer, who will review the company's recent business and operational progress. Following his comments, Tom Staab, Chief Financial Officer of LENSAR, will provide an overview of the company's financial highlights for the first quarter before we turn the call back over to the operator for the Q&A session. Before we begin, I'd like to remind you that today's conference call will contain forward-looking statements, including statements regarding future results, unaudited and forward-looking financial information as well as information on our anticipated performance and/or achievements. These statements are subject to known and unknown risks and uncertainties, which may cause our actual results, performance or achievements to be materially different from any future results or performance expressed or implied during this call. You should not place any undue reliance on these forward-looking statements. For additional information, including a detailed discussion of the company's risk factors, please refer to our documents filed with the Securities and Exchange Commission, which can be accessed on our website. In addition, this call contains time-sensitive information accurate only as of the date of this live broadcast, May 9, 2024. LENSAR undertakes no obligation to revise or otherwise update any forward-looking statements to reflect the events or circumstances after the date of this live call. With that, it's now my pleasure to turn the call over to LENSAR's Chief Executive Officer, Nick Curtis. Nick?

Nicholas Curtis, CEO

Thank you, Lee, and good morning to everyone. Thank you for joining us on our first quarter 2024 conference call. We've had a great start to the year, having realized 28% revenue growth and 25% procedure growth compared to the first quarter of 2023. This performance was fueled by the continued adoption and increased productivity of ALLY in the U.S. market. Through the first three months of 2024, we placed 10 ALLY systems, increasing the ALLY installed base to approximately 65 with a backlog of 3 systems as of the end of the quarter. Football has been characterized as a game of inches. To emphasize the point and borrowing the analogy to describe our capital equipment with a recurring revenue business model and the criticality of timing, our success has been measured by the number of system placements in a quarter. Given the long sales cycle, the difference a few days can have was never more clear than it is as we moved into Q2. With that in mind, I'm very pleased to report that we have accelerated the positive momentum achieved in the first quarter with a record start to Q2, whereby we signed contracts for an additional 18 ALLY systems. While we do not expect all these systems will be placed in the second quarter, we do expect these installations to be completed by the third quarter and begin to build and compound recurring revenue growth in procedures later this year and beyond. We're extremely proud of what we've accomplished to date, and I believe this is the start of strong quarterly growth in placements and procedure revenue. Previously, ALLY has only been marketed in the U.S. as we await additional regulatory approvals. Despite selling into a single market, LENSAR has been able to achieve strong top-line growth and gain significant market share based on the compelling value proposition of ALLY. U.S. sales pipeline activity and system utilization have steadily increased, and we look forward to offering ALLY in other markets, especially Europe. Although ALLY is not widely available outside the U.S., surgeons in Europe, South Korea, Taiwan, and Hong Kong are awaiting regulatory clearance and commercial availability in their home countries, and our distributors are preparing to make ALLY available quickly after receipt of marketing authorizations. We expect additional regulatory clearances before the end of 2024. At the recent ASCRS annual meeting in Boston, we had our highest level of surgeon engagement in the company's history, completing nearly 100 ALLY demos. In the femtosecond laser counteract session, 8 of 9 presentations were from LENSAR surgeons, including one which was voted the best presentation of the session. Many of the presentations in the session highlighted the clinical outcomes associated with managing astigmatism and the increased efficiency-related benefits of ALLY, and overall enthusiasm towards the technology is continuing to grow. We presented 14 papers in total at the conference as we continue to be recognized as the innovation leader in laser refractive cataract surgery. As we've described in the past, LENSAR is focused on three key aspects in the delivery of ALLY: delivering technology that enables much higher efficiencies, better outcomes, and enhancing the experience for surgeons, staff, and their patients in refractive cataract procedures. By delivering on these objectives, LENSAR is empowering surgeons to either significantly increase their revenue and EBITDA opportunity or decrease their overhead costs while improving staff and patient satisfaction. At the same time, profitability of cataract practices is under pressure, given significant reduction in standard cataract surgery reimbursement and the next CMS reevaluation coming in 2025. With patients paying for a portion of surgery out-of-pocket, they increasingly demand and expect superb service and outcomes. The ability to maximize productivity and increase patient throughput is becoming more important than ever, while also continually producing better outcomes and happier patients. Recently, we published data from several time and motion studies demonstrating the potential for significant ALLY time savings to physicians, staff, and patients, resulting in up to an additional $0.5 million annual revenue opportunity to the ASC, as well as an approximate $350,000 increase in annual revenue to the physician. In addition, the potential to achieve improved surgical outcomes and almost an hour time savings for the patient's total time spent in the ASC for their cataract surgery generates happier patients to accompany the financial benefit realized by the surgeons and facilities. The ALLY value proposition provides a win-win for both the patient and the increasing number of practices that are choosing to integrate ALLY into their surgical armamentarium. For example, one of our practices reported that comparing conversion rates during their first 8 months of using the ALLY System versus the 8 months prior using an older competitive device, femtosecond laser-assisted cataract surgery procedure conversions at their practice increased more than 4x. Based on market scope data around average surgeon charges for femtosecond laser-assisted cataract surgery to the patient, we forecast that ALLY contributed approximately $0.75 million in additional revenue for this practice in just 8 months. Better efficiencies, outcomes, and improving the experience are yielding more satisfied patients and higher revenue for the practice. As we disclosed in this morning's press release, according to MarketScope, ALLY adoption and utilization led to an additional 1.5% gain in LENSAR’s share of the U.S. femtosecond laser-assisted cataract surgery procedure market in the first quarter. We have gained share each quarter since the launch of ALLY, picking up a total of 4.3% in the U.S. procedure market since launching ALLY. Our market share gain in Q1 2024 marked our highest ever single quarter increase. While we have clearly been successful in capturing a larger piece of the femtosecond laser-assisted cataract surgeries performed by taking market share from our competitors and increasing conversion rates, our longer-range objective is to also grow the overall femtosecond laser-assisted cataract surgery market by converting more femto-naive practices and ALLY representing a much larger percentage of the 31 million annual cataract procedures performed. As we continue to replace the older end-of-life competitive laser systems in the market, we expect to see these phenomena continue to grow over time. The cataract surgery market is undeniably large, yet femtosecond laser-assisted cataract surgery continues to account for a small percentage of total procedures. There are several contributing factors, but the inherent limiting inefficiencies and lack of compelling outcomes data in managing astigmatism associated with the legacy technology are the most influential factors. LENSAR is committed to being a surgeon-centric technology company, and ALLY was specifically designed with these factors in mind. As I speak with you today, I have a deep confidence that in discussions with many surgeons, LENSAR is indeed receiving their nod of approval that we are continuing to mitigate previous issues and concerns they've had with other first-generation technologies. LENSAR with our next-generation system ALLY has clearly demonstrated practices increase their utilization of femtosecond laser-assisted cataract surgical procedures as compared to practices previously using first-generation technologies. Our increasing market share is also further validation. We're successfully converting previously loyal competitive system users as well as introducing femto-naive surgeons and bringing back surgeons who had abandoned or lost interest in femtosecond laser-assisted cataract surgery due to limitations in first-generation technology. We believe the conditions in the ever-evolving cataract surgery market are creating a perfect storm for ALLY that will drive growth in femtosecond laser-assisted cataract surgery as a percentage of total procedures, and LENSAR is optimally positioned to accelerate its market share gains in parallel with this anticipated broader market growth. Now let me turn the call over to Tom to cover our financial highlights for the quarter. Tom?

Thomas Staab, CFO

Thank you, Nick. Our first quarter 2024 financial results are included in our press release issued earlier this morning, but I'd like to make some brief remarks on certain items to provide additional detail and clarity. Revenue was $10.6 million in the first quarter of 2024 compared to $8.3 million in the first quarter of 2023, reflecting a 28% increase and strong growth. This growth was generated off a solid foundation of ALLY system placements and strong procedure growth of greater than 20% in all three of our operating regions. ALLY Systems sales and worldwide procedure volume were the largest contributors to our revenue increase, but we saw increases in all revenue lines. I do want to remind you that we are only marketing ALLY in the United States until we are granted EU clearance. While our growth trajectory since the ALLY launch has been impressive, we expect placement numbers to increase rapidly and significantly once we receive marketing authorization in Europe. Though any regulatory process is inherently uncertain, we continue to believe we will receive approval this year. Gross margin for the quarter was $5.7 million, representing a gross margin of 53% compared to $4.3 million and 52% gross margin realized in the first quarter of 2023. Our gross margin was strong this quarter; however, we expect a higher concentration of ALLY sales in product mix to decrease our gross margin percentage in future quarters. For the year, we continue to expect a gross margin percentage of approximately 50%. Total operating expenses for the first quarter of 2024 were $8.5 million compared to $8.7 million in the first quarter of 2023. The decrease in operating expenses was primarily attributable to lower R&D and administrative costs, partially offset by higher expenses associated with the expansion of our commercial team. We will continue to expand our commercial team to accelerate our recent market share gains and ALLY placement successes. Net loss for the quarter was $2.2 million or $0.19 loss per share, reflecting a significant improvement over a $4.3 million loss and a $0.40 loss per share in the first quarter of 2023. Our net loss in both dollars and per share decreased by 50% from the first quarter of 2023. We expect this trend to continue and anticipate operating breakeven quarters late this year and into 2025. As of March 31, 2024, we had cash and cash equivalents of $19.1 million as compared to $24.6 million at December 31, 2023. Cash used in the first quarter was $5.4 million. As a reminder, we are a seasonal business and the first quarter usually represents a lower level of revenue and a higher use of cash than other quarters of the year. Now I'd like to turn the call over to the operator, and we look forward to answering your questions.

Operator, Operator

We will take our first question today from Frank Takkinen with Lake Street Capital Markets.

Frank Takkinen, Analyst

Great. Congrats on the solid start to the year. I wanted to start with the commentary around the new orders you called out in Q2 already. Maybe anything you can touch on related to any change in strategy? 18 just seems like, obviously, a significant jump up. Are these competitive wins? Are they femto-naive wins? Just any additional color you can give us about these 18 orders already in Q2?

Nicholas Curtis, CEO

Thank you for the question, Frank. This is a great inquiry because among the 18 systems, 13 are replacements for competitive systems. The remaining 5 include a few that will be used in in-office surgery suites, meaning all 18 represent a new business for LENSAR. None of these customers are ones we have worked with before. As I mentioned, 13 of these systems are replacing competitive devices, with several going into in-office surgery suites. Additionally, the 14th system will also be replacing a competitive device. We are also entering regions where we had not previously penetrated much, leading us to see opportunities in areas we had not covered before.

Thomas Staab, CFO

Not only is it a big number, but competitive systems, it's all new business for us on the recurring revenue. So we're really excited about where we are right now.

Frank Takkinen, Analyst

Got it. That's helpful. And then maybe kind of transitioning over to utilization. Your systems are typically being used quite a bit more than competitive systems. But maybe talk through the process to scale up these new sites, how that has gone with the placements from 2023 and when we could really start to see the new placements kick in from a recurring revenue standpoint?

Nicholas Curtis, CEO

Yes. So another good question because typically, depending on the account and how many physicians are really going to be using the system and how familiar the staff is with providing whatever current technology they're offering or whether they're femto-naive. Typically, it would take between 30 and 90 days before the account starts actually purchasing procedures. And again, depending on the surgeons. If you have more surgeons, it takes longer to get folks trained; if you have fewer surgeons or it's a 1 or 2 surgeon facility, you can get people up trained, and that's the difference between the 30 and, let's say, 90 days before they start producing procedures. But after that 90-day period, we generally see people ramp up. And depending on if they've been using the competitive device, then we usually start to see growth. Like I talked about with one example, the doctor was able to convert a lot more patients. They had a lot of confidence because they started seeing the results come back very quickly regarding the outcomes of the patients. So it gives the staff a lot more confidence in presenting, and a lot of the increased utilization that we see comes from the way that we manage the astigmatism. And we do that in not only a unique fashion but in a much more efficient way than any of the competitive devices. Therefore, people get confidence quickly that they're getting great results. As you may be aware, astigmatism represents 70% to 90% of all cataract surgeries that are out there; it is visually significant in 70% to 90% of all patients, and yet only a small percentage is being treated on a global basis.

Frank Takkinen, Analyst

Got it. That's helpful. And maybe just the last one. From a manufacturing capacity standpoint, obviously inflecting U.S. systems this year, potential second half European clearance, talk to us about what kind of manufacturing capacity you have right now?

Nicholas Curtis, CEO

So we're running a single shift right now, and we have capacity. We've been anticipating that we would start to get to; again, I always say it's not an if, it's a when. Things start happening. We've bought some inventory, we've been ordering parts, and we're forecasting our builds. Right now, we've got enough capacity. I don't anticipate any issues or backorders. There are some delays between receiving all of the parts associated with this. We assemble; we don't 'manufacture' machine parts per se. So we've got our suppliers with the parts. There is some lag, but we can build systems. We can build systems; we've got staff to do so. We've got state-of-the-art manufacturing capability in terms of putting our systems together, and we're prepared for what's coming here.

Operator, Operator

Our next question comes from Ryan Zimmerman with BTIG.

Ryan Zimmerman, Analyst

Can you guys hear me okay?

Nicholas Curtis, CEO

Yes.

Ryan Zimmerman, Analyst

Congrats on the progress. I want to talk a little bit about Nick, you made some comments about kind of the state of the older laser system install base that's out in the market. I'm curious if you could put in more color around that. I mean, kind of how you view that opportunity? Any quantitative metrics there that you think are worth noting or just kind of how quickly those can turn over, over the coming years and presenting opportunities for you guys to bring in ALLY?

Nicholas Curtis, CEO

Yes, that's a great question. There are approximately 1,200 systems installed in the United States and nearly 2,000 systems installed globally. This figure includes all systems, with over 300 of them being current LENSAR systems. Thus, there are around 1,700 to 1,800 competitive devices in use. The first of these devices were introduced in late 2010, and other competing companies entered the market around 2011. These systems are now about 12 to 13 years old, with many having been in use for that long. Even those systems that are newer are based on technology that is 14 to 15 years old, as developing our lasers takes several years. Most of them have not undergone significant upgrades; they aren't software-based systems that can be enhanced with additional capabilities like LENSAR's updates with our first-generation LLS and now ALLY. We believe we are in a strong position because there's not much that generates revenue for doctors that is as old as 12 to 14 years. Transitioning to fully sterile procedures with devices that are highly ergonomic, smaller, and faster allows doctors to operate more efficiently. We view this as a matter of when, not if.

Ryan Zimmerman, Analyst

Yes. No, that's great color, Nick. And certainly, a good perspective on the opportunity before you. I'm curious, the 18 units that are coming in the second quarter, those are all in the U.S. I might have missed this.

Nicholas Curtis, CEO

That's correct.

Ryan Zimmerman, Analyst

Yes. Okay. All right. So this is not accounting for anything that could potentially come in with CE Mark later this year. Okay. That's ready. That's there. And then as you think about the procedure environment, I mean, you're taking share in the FLACS market. You put up 25% growth on a fairly negative comp just because of the Korean headwinds. How do you think about kind of the health of the procedure market as we look out for the remainder of the year?

Nicholas Curtis, CEO

We are optimistic about the procedure market because we see a significant opportunity with 70% to 90% of patients experiencing visually significant astigmatism. For instance, in LASIK, PRK, or SMILE procedures, it is unacceptable for doctors to allow a patient to leave with even a minor level of astigmatism remaining, as this would lead to dissatisfaction. Our increased utilization often stems from better management of astigmatism, presenting a great opportunity for doctors to enhance vision for patients regardless of their lens choice. We believe this represents potential for growth. Additionally, in designing ALLY, we took into account the reasons why 45% of doctors have been hesitant to adopt femtosecond laser technology. We made sure to incorporate features appealing to both current femtosecond laser users and those who have not previously engaged with it. As a result, we are confident that we can not only replace existing older devices in the market but also engage surgeons who have not previously adopted this technology or have stopped using it.

Ryan Zimmerman, Analyst

Got it. And then just we've talked in the past. I know you're still not putting guidance out, but any commentary about kind of where to think about your ability to sustain 20% plus growth on the top line and if you're still comfortable with that expectation?

Nicholas Curtis, CEO

We're comfortable with that expectation.

Operator, Operator

We have no further questions at this time. I will now turn the floor back over to Nick Curtis for any closing remarks.

Nicholas Curtis, CEO

So I appreciate everybody joining our call today, and thank you for your continued interest in LENSAR. We look forward to updating you as we continue to make further progress. We're really looking forward to an exciting remainder of 2024. Please stay tuned.

Operator, Operator

Thank you, everyone. This concludes today's teleconference. We appreciate your participation. You may disconnect at any time.