Good morning, and welcome to the PROCEPT BioRobotics First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the call today. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Matt Bacso, Vice President, Investor Relations, for a few introductory comments.

Good morning and thank you for joining PROCEPT BioRobotics first quarter 2023 earnings conference call. Presenting on today's call are Reza Zadno, Chief Executive Officer; and Kevin Waters, Chief Financial Officer. Before we begin, I'd like to remind listeners that statements made on this conference call that relate to future plans, events or performance are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. While these forward-looking statements are based on management's current expectations and beliefs, these statements are subject to several risks, uncertainties, assumptions and other factors that could cause results to differ materially from the expectations expressed on this conference call. These risks and uncertainties are disclosed in more detail in PROCEPT BioRobotics filings with the Securities and Exchange Commission, all of which are available online at www.sec.gov. Listeners are cautioned to not place undue reliance on these forward-looking statements, which speak only as of today's date, April 27, 2023. Except as required by law, PROCEPT BioRobotics undertakes no obligation to update or revise any forward-looking statements to reflect new information, circumstances or unanticipated events that may arise. With that, I'll now turn the call over to Reza.

Good morning and thank you for joining us. For today's call, I will provide opening comments and a business update followed by Kevin, who will provide additional details regarding our financial performance and 2023 guidance before opening the call to Q&A. Starting with our quarterly revenue results. We are pleased to report another strong quarter where our customers and patients continue to realize the significant clinical benefits of Aquablation therapy. Total revenue for the first quarter of 2023 was $24.4 million, representing growth of 72% compared to the first quarter of 2022. Growth in the quarter was driven primarily by increased utilization from an expanded install base and strong patient volume. We believe the combination of positive long-term clinical data, increased private payer coverage, outstanding real-world patient outcomes, and an expanded field-based commercial team continued to drive surgeon interest and adoption of our AquaBeam Robotic System. As we move to 2023, we believe there are several positive factors which give us a high degree of confidence to achieve our increased full year financial guidance, and Kevin will touch on later. Longer term, we believe these underlying fundamentals reflect the business that is laying the foundation to become the BPH surgical standard of care. Starting with a recent payer coverage. In early April, we announced that United Healthcare updated its policy for prostate surgery and interventions to include Aquablation as medically necessary. This updated policy will go into effect on June 1, 2023. Being one of the largest commercial payers in the United States, with approximately 45 million covered lives, United's positive coverage policy will greatly improve accessibility of our Aquablation therapy for men suffering from BPH. Additionally, in early March, we also obtained a positive coverage policy from Blue Cross Blue Shield of Michigan, which will be effective May 1. Blue Cross Blue Shield of Michigan is the largest payer in the state of Michigan, and covers approximately 5.7 million lives. With the additions of United Healthcare and Blue Cross Blue Shield of Michigan, we now estimate roughly 95% of men in the U.S. have access to our Aquablation therapy. There is both a long-term and a short-term benefit of increasing commercial payer coverage. The obvious long-term benefit is increased utilization, which will take time as we penetrate the surgical market. The short-term benefit is the increased value proposition of our technology and the lowering of barriers to sell capital equipment to hospitals. Turning to clinical updates. This weekend, at the American Urological Association conference in Chicago, we will be releasing our five-year WATER II study data. As a reminder, WATER II was a prospective FDA study with an objective performance criterion for both efficacy and safety in large prostate ranging in size from 80 to 150 milliliters. The five-year data were consistent with the previously reported primary endpoints, with no change to safety results. The efficacy results as measured by change in IPSS and Qmax also remain consistent at five years. Additionally, the five-year WATER study abstract will be presented at AUA comparing efficacy and safety of Aquablation therapy versus TURP for treatment of 50 to 80 milliliter prostates. As a reminder, our five-year WATER data are the only prospective randomized, double-blind, multicenter FDA pivotal study comparing the safety and efficacy of Aquablation therapy to TURP for prostate ranging from 30 to 80 milliliters. This abstract proves Aquablation therapy's superior safety due to low irreversible complication and superior symptom relief. In this abstract, Aquablation therapy at five years exhibited durability that was twice as good as compared to TURP. This is measured by patients going back to medication or requiring surgical retreatment, which is represented by an approximate 1% annual retreatment rate. As a company, we have developed a significant and growing body of clinical evidence, which now includes two five-year FDA durability studies, seven other clinical studies, and over 150 peer-reviewed publications, all supporting the benefits and clinical advantages of Aquablation therapy. We believe this backdrop will continue to be a significant differentiator for our customers when choosing to replace the historical BPH surgical modalities with Aquablation therapy across all prostate sizes and shapes. Next, I want to touch on our commercial organization. In the first quarter, we saw 25 AquaBeam Robotic Systems generating total U.S. system revenue of $8.8 million, which was at the low end of our Q1 guidance range. During our Q4 earnings call in late February, we provided a range of capital sales in Q1 in order to give investors insight into our sales pipeline and the impact timing can play quarter-to-quarter. Our expectation and guidance around full year 2022 system sales has not changed in the last two months since we issued 2023 guidance, and we still expect approximately 45% of our system sales to be in the first half of 2023. In terms of our pipeline, the number of robot placement opportunities continue to grow meaningfully, which has been driven by the addition of new capital representatives in greenfield territories. Additionally, the more recent positive catalysts associated with the United Healthcare announcement and full extension of the transitional pass-through payment for all of 2023 strengthens our confidence in our full year guidance. Speaking specifically about our capital sales personnel, we entered the first quarter of 2023 with approximately 30 capital sales representatives, 10 of which were added in late Q4 2022. As a reminder, the productivity curve for capital representatives is approximately six months, as they will be responsible for building out their respective pipelines. Thus, we do not expect the capital representatives added in the fourth quarter of 2022 to start meaningfully contributing to U.S. system sales until the second half of 2023. Our 2023 guidance continues to be informed by what we are seeing in our pipeline, how opportunities progress, what customers are telling us, the productivity ramp of new capital representatives, and overall close rates. All of these indicators have maintained positive momentum as awareness around Aquablation therapy continues to grow, which gives us confidence in achieving our 2023 commercial objectives. Next, I want to touch on our progress securing IDN contracts. We recently signed a national sales contract with the largest IDN that secures pricing for system placement and handpieces sold with a nationwide hospital network. This is a significant milestone for us, as it will allow our sales team to operate in an expedited and more predictable manner as we partner with Aquablation surgeon champions at these contracted hospitals. As stated on our Q4 earnings call, we anticipate having the majority of large strategic IDNs in the U.S. under contract by the end of 2023. While there are many hospital networks in the United States, we categorize strategic IDNs as having greater than or equal to 20 hospitals in the network. When analyzing the market, we estimate 17 strategic IDNs account for approximately 26% of the 860 high-volume BPH hospitals and 29% of the total 2,700 BPH hospitals. Thus the importance of these contracts is meaningful to our ability to penetrate the U.S. market and provide increased visibility in our pipeline. Turning to utilization and surgeon activity. We are extremely pleased with Q1 utilization where U.S. handpiece and consumable revenue increased approximately 165% compared to the first quarter of 2022. While the primary driver of monthly utilization continues to be active surgeon growth, there are two key trends that have emerged over the last 12 months that are extremely positive for us. The first is active surgeon retention. We define active surgeon retention as any surgeon who performs a case in both the current and previous quarter. In the first quarter of 2023, surgeon retention rates were greater than 90%. As a company, we benefit greatly from this high level of surgeon retention as our commercial team can focus on training the surgeons. We believe this demonstrates Aquablation therapy's ease of use and ability to treat all prostate sizes and shapes safely and effectively. The second emerging trend is utilization among low-volume BPH hospital accounts. While we are primarily focused on the 860 high-volume BPH hospitals, we are also starting to see nice adoption from low-volume accounts, which account for roughly 30% of our current install base. Many of these hospitals are large surgery centers, however, they have historically not performed many BPH surgeries. While it is likely too early to make definitive points regarding market expansion, we do believe Aquablation therapy has allowed low-volume accounts to treat patients they otherwise would have referred out. Given the expanded awareness of Aquablation therapy, along with positive momentum in peer-to-peer interactions, we believe low-volume hospitals are very valuable targets for our commercial team. Lastly, with respect to international market development activities. In early February, Aquablation therapy received a MedTech Innovation Briefing from the National Institute for Health Care Excellence or NICE for BPH in the United Kingdom. NICE has recognized that Aquablation therapy is effective for the removal of prostate tissue for BPH patients. Clinical experts said the technology is innovative compared to the standard of care and offers additional benefits, such as increased ability to preserve quality of life. Clinical experts associated with the review also stated that the technology has the potential to replace TURP and will challenge holmium laser enucleation of the prostate for larger prostates. While our presence in the UK is currently small, given this updated guidance from NICE and established reimbursement for Aquablation therapy at similar levels to that of the U.S., we believe the UK could be an attractive market for our company in the future. In March, we also attended the European Association of Urology in Milan. At the conference, we received positive feedback from surgeon customers and met with hundreds of European and other international urologists who were enthusiastic about our strong clinical data driving them to learn more about Aquablation therapy. In summary, I feel better about our business today than at any point and have a higher degree of confidence in our ability to achieve our long-term growth plan. Every metric we track is moving in the right direction and to summarize this catalyst, our pipeline and sales funnel continues to grow nicely. We just signed a national contract with the largest IDN and expect to continue to finalize contracts with other large strategic IDNs throughout the year. We received a positive coverage policy from United Healthcare providing approximately 95% patient access to Aquablation therapy in the U.S. and have full transitional pass-through payment through 2023. Utilization continues to exceed our expectations, and we have increased our full-year guidance around this metric. Lastly, our recent sales rep hires are progressing very nicely as they build our respective greenfield territories. Given this positive momentum, we believe Aquablation therapy will truly revolutionize the treatment of BPH. With that, I will turn the call over to Kevin.

Thanks, Reza. Total revenue for the first quarter of 2023 was $24.4 million, representing growth of 73% compared to the first quarter of 2022. U.S. revenue for the quarter was $21.8 million, representing growth of 74% compared to the prior year period. In the first quarter, we sold 25 AquaBeam Robotic Systems, generating total U.S. system revenue of $8.8 million, representing growth of 13% compared to the first quarter of 2022. First quarter system average selling prices were $350,000, which was approximately 5% below our expectations. However, we still expect full-year system average selling prices based on the deals in our pipeline to be in the $370,000 to $375,000 range. U.S. handpiece and consumable revenue for Q1 was $11.8 million, representing growth of approximately 165% compared to the first quarter of 2022. Handpiece revenue growth was driven by an increase in the install base of AquaBeam Robotic Systems, which has grown 106% in the first quarter of 2022. Additionally, we have seen an increase in utilization from our install base. Monthly utilization per count of 6.3 increased approximately 14% compared to the first quarter of 2022. Utilization outperformance in the first quarter was a reflection of strong commercial execution and surgeons taking the next step to Aquablation therapy as their treatment of choice for all resected procedures. We view utilization as a true leading indicator of overall market adoption long term. We shipped approximately 3,400 handpieces in the U.S. in the first quarter, representing a unit growth of 139% compared to the first quarter of 2022, with average selling prices of approximately $3,140. International revenue for the first quarter was $2.6 million, representing growth of approximately 50%. International revenue in the quarter was driven by both increased system sales and improved utilization. Gross margin for the first quarter of 2023 was 51%. Sequential gross margin expansion in Q1 was due to strong execution from our operations team and our ability to absorb overhead expenses. Given our favorable standard margin profile of both our robot and handpiece, we have increased confidence to further absorb overhead expenses and expect to show sequential gross margin expansion throughout 2023. Lastly, on margins, we continue to make nice progress with regard to our move to San Jose, California, which will increase our footprint by 4 times to 160,000 square feet. As stated previously, we expect to move into our new San Jose location by the end of the third quarter of 2023. Moving down the income statement, total operating expenses in the first quarter of 2023 were $40.9 million compared to $23.4 million in the same period of the prior year and $35.7 million in the fourth quarter of 2022. The increase was driven by increased sales and marketing expenses, primarily to expand the commercial organization, increased variable compensation expenses, and increased research and development and general and administrative expenses. Total interest and other expense was $107,000, as quarterly interest expense from our $52 million term loan was offset by favorable interest income. Net loss was $28.5 million for the first quarter of 2023 compared to $17.2 million in the same period of the prior year. Adjusted EBITDA was a loss of $23.9 million compared to a loss of $13.5 million in the first quarter of 2022. Our cash and cash equivalents balance as of March 31 was $181 million. The decrease in cash in the first quarter compared to historical cash burn was impacted by two factors that will not impact future quarters in 2023. First, we had our annual company bonus incentive payment, which used roughly $9 million of cash. Second, due to both our increased revenue ramp coupled with the move to San Jose in Q3, we have substantially built up our inventory balances in Q1 to meet second half 2023 demand and provide safety stock during this transition. Inventory increased by $10.4 million in the first quarter of 2023, and should not increase at these levels in subsequent quarters. Moving to our 2023 financial outlook. We are increasing our full year 2023 total revenue guidance to $128 million, representing growth of approximately 71% compared to 2022. We are increasing our revenue guidance based on the following factors. First are the strong underlying utilization trends in the business. We now expect full year monthly utilization to be approximately 6.5 across our average install base for 2023. Given the strong ramp we are seeing within our accounts, our updated guidance assumes slight sequential improvement in utilization throughout 2023. Second, we have increased confidence and visibility to achieve our implied system sales of 140 units for the full year. We continue to expect approximately 45% of capital sales to occur in the first half of 2023. Additionally, we expect our new capital representatives who were hired in Q4 2022 to become fully productive in the second half of 2023. We also expect U.S. average selling prices to be approximately $370,000 for the full year. Lastly, given the strong first quarter and positive momentum, we now expect full year international revenue to be approximately $9.6 million, representing growth of approximately 33% compared to 2022. Additionally, we expect handpiece average selling prices to be approximately $3,100, and for other consumable revenue to be approximately $5.4 million. Moving down the income statement, we now expect full year 2023 gross margins to be approximately 54%, which is a slight increase from our initial guidance of 53%. Based on my previous comments, and given the current rate of overhead absorption, we expect to exit 2023 with Q4 gross margins in the mid-50% range and should see sequential margin improvement throughout the year. Additionally, we forecast full year 2023 operating expenses to be approximately $167 million. This increase in operating expense is associated with strategic investments in R&D, commercial team expansion, non-cash stock-based compensation and underlying general and administrative costs to support the business and puts us in a favorable position to execute on our long-term growth plan. Therefore, given the increase in revenue and improved margin profile, we continue to expect full year 2023 adjusted EBITDA to be approximately negative $70.5 million. At this point, I'd like to turn the call back to Reza for closing comments.

Thanks, Kevin. In closing, I want to thank our employees, customers, and shareholders for all their support to help us along our journey to becoming the center of care for BPH. We will continue to leverage our commercial and clinical investments to execute on our long-term strategy. Have a great day, and I look forward to seeing many of you at our AUA investor event tomorrow at 8 AM Central time. At this point, we will take questions.

Thank you. Our first question comes from the line of Craig Bijou of Bank of America. Your line is open.

Good morning, guys. Thanks for taking the questions. So want to start with the system placements in Q1. Kevin, you obviously said you guys still feel comfortable getting to that 140. So maybe, I guess, talk about why the 25 or why the system placements came in at the lower end of the range. And then I guess maybe a little bit more color on your confidence, one, in the strong Q2 sequential uptick in systems implied by your guidance, and then your confidence in getting to that 140 for the full year?

Yes. Thanks, Craig. Good morning. So our thoughts really around the full year capital and even the first half of 2023, that cadence hasn't changed since our call in February. In fact, we do have a greater degree of confidence today to achieve our full year system numbers than we did even two months ago. That's primarily based on the pipeline we're seeing and just the numerous catalysts that Reza mentioned in his prepared remarks. Just specific to Q1, we did have deals that we expected to close in March that we now see a high probability of closing in the second quarter. So there is that timing dynamic, which we've been talking about now over the last few quarters. That is why we gave a range of system sales in the first quarter. Perhaps a point of specificity in the first quarter around system sales and that dynamic around IDNs is we did see IDNs in the first quarter take a very cautious approach to capital purchases, and therefore we didn't see many IDN purchases come through in the first quarter. However, we're already seeing here, being through the month of April, those same IDNs releasing funds that will make up Q2 purchases. So we take all those dynamics together, which still gives us confidence around the first half being about 45% of total system sales, which is consistent with the guidance in February, albeit some of that timing shifted to Q2.

Got it. Thanks. I'll focus on systems and mention two points. First, the average selling price was lower in Q1 than usual and what you anticipated for the year. I’d like to understand what was causing that pressure. Second, regarding the integrated delivery networks, how much of that is included in the 140 systems? How are you viewing the opportunity that the integrated delivery networks present, both from the recent contract signed and any future contracts you expect to sign, in relation to that 140?

So I'll start with the calculated piece, and we are pointing out the fact. Q1 system average selling prices were about $350,000. That's about 5% below the guidance that we put forth in February. But as mentioned in my prepared remarks, we still do expect full-year average selling prices in the $370,000 to $375,000 range based on all the deals we see in the pipeline. Without getting into the specifics of each sale in the deal, the lower ASP in Q1 is not reflective of, first, it's not any large IDN pricing, it's not any other factors that we believe will impact future ASPs. It's really just timing and the high degree of variability that we have around some of our capital sales. We have two levers in the business, one being systems and one being utilization. We are willing as a business to be variable and flexible on capital pricing to ensure that we get that system sold, and then to ensure that we get that utilization. If you look at handpiece average selling prices, those have actually been remarkably consistent quarter-to-quarter and increasing. At the end of the day, we're willing to be slightly flexible on capital. But again, given the visibility we have into the pipeline, we feel very confident about the full year average selling price being in the $370,000 to $375,000 range.

And the second part of your question, this is Reza, related to IDNs. I want to remind that we already have a few robots at the IDN. However, having said that, we have not factored in multi-systems or commitment for qualified trade from these large assets. We are already robust and feel confident.

That's great. Thanks for taking the questions, guys.

Thanks, Craig.

One moment please. Our next question comes from the line of Joshua Jennings of Cowen. Your line is open.

Good morning. Thank you for the questions. I would like to inquire about two topics. Firstly, regarding the low volume accounts that make up 30% of what I believe is the install base you mentioned, Reza. Could you clarify the opportunity in this area and how it might expand the total addressable market? Are these primarily robotic prostatectomy surgeons who are experienced with robotic platforms and have been motivated to adopt the AquaBeam system and the Aquablation treatment? Additionally, how do you anticipate low volume accounts will impact system placements in 2023? I also have a follow-up question.

We are very pleased with the progress we have seen with this account. Just as a reminder, low volume does not necessarily mean low-volume surgeries. These are high-volume surgeries, but historically, they have been performing fewer BPH surgeries. The growth is attributed to better patient outcomes and a standardization of the procedure. They are enhancing their robot BPH practice, which also helps them attract skilled urologists. While these accounts have robots, they have not previously utilized them for many BPH surgeries, but they are high-volume surgery centers. As we noted, there are 2,700 hospitals in the U.S., with 806 classified as high-volume centers. This leaves another 2,000 as a significant opportunity for future growth in our business.

Great, thanks for that. And just a follow-up question. Wanted to better understand how your team is thinking about the replacement cycle as we get into '24 and 2025? I guess maybe the right way to phrase the question would be when should we be thinking about AquaBeam 2.0 being commercialized? Anything you can share about what AquaBeam 2.0 or just the next iteration of AquaBeam for the enhancements that will be incorporated? And what do you think the replacement cycle period will look like as we move into the out years? Thanks for taking the questions.

Yes. Thanks, Josh. This is Kevin. The replacement cycle is many years ahead, north of two, three years. It's not an immediate impact to the business in the near term. With that said, I think you're picking up that we are spending a lot of money in our R&D group. We continue to be focused on our current system, and we feel our current system is more than sufficient to penetrate the majority of the high-volume hospitals in the near term. But at the same time, being a robotic company, being an innovator, we're always going to be working on kind of next generational type of stuff. But at this point in time, it's not necessary for us to meet our near-term targets, and therefore we're not providing a lot of color around future platforms.

Understood, thanks a lot.

Thanks, Joshua.

Thank you. One moment please. Our next question comes from the line of Ryan Zimmerman of BTIG. Your line is open.

Good morning, guys. Thanks for taking the questions. Just want to follow up. I thought it was helpful in terms of the stat you gave on the percentage of low-volume hospitals. And I just want to follow up on kind of Josh's line of questioning there. Are we doing just from the math that you're at about 16% penetration in high-volume accounts, if you just back out the low volume in the U.S. install base? And then kind of help us understand what the expectation is in terms of the rate of penetration you think for that high-volume 860 hospitals? Because I think as we look at kind of consensus estimates a few years out, I think there are some lofty numbers in terms of high-volume penetration. It would be helpful to understand your expectations on the cadence for that high-volume segment.

Yes. Thanks, Ryan. So we pointed out a few stats that Reza mentioned in his prepared remarks. The current install base is about 30% in low-volume centers, low-volume BPH centers. To your comment, that would assume that for the high-volume, we're about 15% penetrated in the 860 high-volume hospitals in the U.S. Over the next few years, we think we're a great option for the majority, if not all, of those high-volume 860 BPH centers, so we don't feel that there's anything with our technology or outcomes that would limit us from being fully penetrated in the 860. I appreciate you're never going to get to 100%. But we don't see a reason why every high-volume BPH hospital over time wouldn't want to have an AquaBeam system. We feel there's a long ramp there. To Reza's comments about the low-volume hospitals, it's great to see so early in our commercialization that we're seeing these low-volume centers that previously had to refer out patients, perhaps losing physicians to other hospitals to do BPH, start to adopt the technology and have good utilization count as well.

Got it. It's very helpful, Kevin. I have a couple of questions. First, can you share the percentage of the IDNs? I think you mentioned 17 strategic IDNs that currently have more than one system or are expected to. Understanding that would be helpful. My last question, which Craig also asked but I'm still unclear about, is why pricing will return in the second quarter and for the rest of the year if it were at $350. Can you generate more demand at that lower price point compared to what you had before?

Yes, the first question about the 17 strategic IDNs refers to over 200 hospitals in the U.S. You should expect that as we sign these IDNs, we will implement systems across their various hospital networks. If your inquiry pertains to having multiple systems within the same hospital, that is not part of our immediate growth objectives, and based on current volumes, we believe that most hospitals do not require a second system. Did I answer your question, Ryan? I just want to ensure I addressed that.

Yes, I think I'll take that discussion later. I was trying to understand the potential regarding the 17 strategic IDNs, but I can follow up on that.

I'll say we have very low penetration in those 17 strategic IDNs. So there's a lot of room for us to sell systems in the future there. And then on pricing, again, one of the nice aspects of our business is we have a high degree of visibility into the funnel, so we can actually see the deals in the pipeline in the next three to nine months. That is why we feel comfortable talking about full-year average selling prices in that $370,000 to $375,000 range, based on deals we see in the pipeline. Really, we view Q1 as just an anomaly in terms of the variability around pricing and settling at $350. We don't think this is reflective of any future ASP decreases on the capital side of the business.

Okay. Thanks for taking my questions.

Thanks, Ryan.

Thank you. One moment please. Our next question comes from the line of Chris Pasquale of Nephron Research. Your line is open.

Thanks. Kevin, I want to circle back to that last point. I was hoping you could spell out a little bit more clearly what the typical sales cycle for AquaBeam looks like in terms of the time it takes for contracts to be finalized? You talk about visibility into the pipeline. What pieces need to be in place for you to consider a system placement likely within a certain timeframe?

So when we talk about pipeline, we are identifying for our investors that means the surgeon champion has been identified and supports the technology. We have a funnel that's much larger than our pipeline. Once a deal gets into our pipeline, we have a high degree of certainty of that deal to close. We don't see a lot of deals fall out once a surgeon champion has been identified and wants to go to administration to purchase a system. Given that dynamic, we can look forward to six to nine months for the timing from identifying a champion to selling the system. That's the funnel and pipeline that we talked about that is growing and we feel has a high certainty to close.

Okay. And then can you talk about the competitive landscape within BPH? The new DaVinci ASP approval for the procedure, how do you expect that to impact demand for Aquablation and just anything else you guys are highlighting at the meeting this week with surgeons?

Thanks. We definitely see that as an endorsement and confirmation of this large BPH market. We remain very excited about what we do and do not see that competitor as an obstacle to our growth. As a reminder, robotic prostatectomy is considered acceptable for large prostates and for medium or small prostates. It's not used due to its invasive nature. I want to mention that we have already placed more than 90% of our systems at centers where there's already a DaVinci system. I think the best is I highly recommend that you speak with surgeons we have at AUA or come to our investor meeting tomorrow where you will see the benefits of our technology in terms of the shortest surgery time, shorter recovery time, and of course, the price of the robot. As far as the utilization and competition is concerned in our utilization, as we have said, the majority of the cases that are done between 60 and 80, although more than 70% are below 100% are the TURP and various laser conversion. We are very happy with our progress. So I hope this answers your question.

Appreciate it.

Thank you. One moment please. Our next question comes from the line of Neil Chatterji of B. Riley. Your line is open.

Hi, guys. Good morning. Thanks for taking our questions. Maybe just on the international growth, pretty strong in the quarter. Just curious if you can just talk about what key markets are driving that and just kind of your expectations for international over time, including both potential in China and then also with the NICE MIB in the UK, what that UK opportunity could look like?

Yes, so we're really pleased with international performance this quarter. It's exceeded our expectations. I feel international, historically, there was much more of an impact, whether it's around staffing levels or COVID, than we saw in the U.S., and it feels like we've really turned the corner in our key markets in Western Europe. The outperformance really starts with the UK. The recent decision around reimbursement from NICE has been a nice tailwind for the business there. We're already seeing robot purchases in that country at, frankly, pricing levels that are higher than they've been historically, which is really good to see. We're also in Germany, Italy, and Spain, although that's a much less contributor. We believe moving in the near-term, that's in the UK. Longer term, you mentioned a few territories. We are excited about the Asia Pacific opportunity. We submitted for regulatory approval in China. We have regulatory approval now in Japan. We're actively selling in Korea. While this revenue impact in 2023 is not terribly material, I do think looking in the outer years, '24, '25, we can see some nice contributions from international, but we'll provide more color on it as we get closer to those timelines.

Great. I have one follow-up. I noticed that you had a Midwest site with UroPartners press release. I'm curious about the potential impact this could have across that network and on the affiliated hospitals for those groups, as well as your thoughts on the influence from possibly large urology groups.

Yes. So Midwest urology in the quarter did purchase various robots. I'm not going into specifics of how many, but it is good to see a group like that make a commitment to Aquablation. When we start looking at these large IDN networks, we had an account in Atlanta last year that we talked about. We've obviously talked about signing the largest strategic IDN now in the U.S. We do think this can be a nice driver of the business. It's just reflective of everything we've talked about that Aquablation offers these centers the ability to retain patients that otherwise would have had to refer out. They make their procedure load much more predictable, and they're having great clinical outcomes. So it was a nice vote of support for the business that we saw in the first quarter.

Great, thanks. I'll hop back in the queue.

Thank you. One moment please. Our next question comes from the line of Richard Newitter of Truist. Your line is open.

Hi. Thank you for taking my questions. I have a couple to ask. To start, you seem quite confident about the expected increase in second quarter placements based on your guidance for the first half, and I understand that capital can be unpredictable. Can you explain what risks you see regarding the possibility of some of the second quarter expectations spilling over into the latter half of the year, as it happened in the first quarter when you came in at the low end of your range and some activity carried into the second quarter? I would like to gauge your confidence level at this stage in the quarter. Do you believe that the second quarter projections are primarily based on the spillover from the first quarter, assuming that your conversion rates remain consistent? Is your visibility into this situation stronger now compared to what you had before the first quarter?

Yes, I wouldn't characterize it as stronger visibility because I feel like we had strong visibility in February into our funnel in the first half. What you are seeing is some spillover into the second quarter, just primarily due to timing. Again, I'll go back to just our comments around our pipeline that once a deal enters the pipeline, it has a high degree of probability of closing. Could we have one or two or three Q2 deals still into Q3? That can happen from quarter-to-quarter. Timing could be variable. But we remain focused on kind of the full-year number, achieving the guidance that we put out there on system sales. We have a greater degree of confidence in that number today than we did when we released earnings two months ago, even though Q1 came in at the low end of the range.

There are factors that we mentioned. The United covering their transitional pass-through going for another one year, the recent rep hires that we have made, they're making great progress. On the surgeon front, we are seeing increased retention, and these are all contributing factors that give us more confidence.

Okay, thanks. Well, actually on that point, Reza, and it segues into a question I have on reimbursement broadly, but just you mentioned transitional pass-through extension as maybe being an incremental good guy in your discussions and getting capital over the finish line. That's transient. So does that mean that when that goes away in January '24, that flips to an incremental headwind? And then just secondly, when you answer that question, I'm just curious, we get questions from investors just on the overall reimbursement outlook. To the extent that you have discussions with the industry participants, do you have any sense as to how confident you are that reimbursement stays at the levels that it is, which is right now pretty profitable? Thanks.

Yes. So transitional pass-through was supposed to go away at the end of 2023. We had stopped talking about it a few months around the second half of 2022. So that wasn't an obstacle. Just the extension of that is a plus. We do not see that when it goes away, it will create any significant headwind because we have stopped discussing it since the end of 2022. The reason for that when it was extended was because 2020 was a COVID year and many companies could not benefit from transitional pass-through for three years. So that was extended for one year. As far as investment is concerned, as you know, we are at APC Level 6, and for the last two to three years have stayed there. If anything, around the last year for 2022 was a slight uptick in that payment. So we don't anticipate APC Level 6 to change because it's based on the cost of the system.

This is Kevin. That's why from a pricing standpoint, we're very disciplined about our handpiece pricing. You can see over the last eight quarters, if anything, handpieces are trending upward, not downward. Based on that data, we have a strong confidence level of staying at APC Level 6.

Thanks. If I could just squeeze one more in just on the mix towards lower volume or low to mid-volume utilization accounts increasing as a percent of the install base. Just curious, should we be thinking about that ratio going up? If so, or even if not, what kind of impact will this have on the utilization growth rate? Does it drag it down?

Yes, I believe 30% is the appropriate figure to consider moving forward. I realize I'm not being very specific, but I don't anticipate any changes from our historical norms in the near term that would negatively affect utilization. In fact, we are observing many of these low-volume accounts beginning to utilize at levels that are comparable. It's important to note, as Reza mentioned, that a low-volume account does not equate to a low-volume surgery hospital. These hospitals are accustomed to managing a high turnover of patients and have many surgeons. They simply haven't been performing many BPH procedures because they previously lacked a viable alternative, which they now possess. It’s not about converting these hospitals to perform more surgeries; they are already conducting various surgical procedures.

We remain focused on high-volume accounts, and the low-volume accounts will happen opportunistically. We will look at them on a case-by-case basis.

Thank you. One moment please. Our next question comes from the line of Nathan Treybeck of Wells Fargo. Your line is open.

Hi, thanks for taking the question. I just want to circle back to the capital placements in Q1. You mentioned IDNs were taking a cautious approach. Now you're seeing improvement in Q2. Can you give color on why they're being more cautious as their macro outlook out there that people were focused on and what has changed now that they are opening up budgets?

Yes, look, it's hard to tell if it's macro-related or IDN-specific related. But what we did see are many of our large IDNs just not allocating capital funds in the first quarter. Whether that's macro or specific to budget allocations to that IDN, I'm sure it's a mixed bag. However, we are seeing those funds now being released for Aquablation in the second quarter, and that is a primary reason for the ramp from Q1 to Q2.

Okay, kind of sticking to that. Last quarter you gave a metric around the number of opportunities that you had a high level of confidence will close, that increased 30%. Can you provide an update on where the funnel is now relative to the end of '22? Thanks.

Yes, we didn't pin down a percent. What we will say is it continues to grow. We are saying that the new reps that we've hired are having meaningful additions to the funnel, which continues to increase. We continue to monitor it, and it continues to grow.

Great, thanks.

Thank you. One moment please. Our next question comes from the line of Matthew Mishan of KeyBanc. Your line is open.

Thank you for taking the questions. I'll address the other side of the capital question. If you were to see an opportunity as capital budgets are released and the procedural environment looks favorable, do you think you could exceed the 140 capital placements for 2023, or do you believe that number is solid and likely to remain?

It's a number we have a high conviction of achieving, the 140. Given the opportunities and how lowly penetrated we are in the current market and what's in front of us, I think we have a long runway ahead of us of capital sales. It's not as if we are looking to sell 140 systems, and we don't have a future market to go attack. There’s much more upside to the 140 in the future, given the current opportunities out there. But we feel very good about the 140 and have high conviction around that.

Okay. Regarding the accounts where you've implemented the system, we've observed an increase in utilization, which is encouraging. How sticky are the procedures once a doctor starts using it? Have you noticed any procedures that someone initially adopts but later decides to reduce their usage, or is it generally proving to be quite consistent?

So it is, as you mentioned, sticky in the sense that we have more than 90% surgeon retention. That's mainly because of the clinical outcomes, and they standardize. I should mention we have a highly trained commercial organization, both on the capital web that work very collaboratively with their hospital administration, and the clinical support staff that's present to support. In fact, we also had mentioned in our last quarter meeting that we had a Net Promoter Score of 92%. All of these come together as customer satisfaction. They are using it both because of clinical outcomes and the support we are giving.

Thank you.

We have seen a sequential utilization growth, and these are all the indicators.

Thank you. One moment please. I'm showing no further questions at this time. I'll turn the call back over to Reza Zadno, CEO, for any closing remarks.

Thanks, everyone, for attending this meeting. We look forward to seeing you in future meetings, and tomorrow we have an Investor Day. Have a nice day.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.