PROCEPT BioRobotics Corp Q2 FY2024 Earnings Call

Good afternoon and welcome to PROCEPT BioRobotics Second Quarter 2024 Earnings Conference Call. 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 of Investor Relations, for a few introductory comments.

Good afternoon, and thank you for joining PROCEPT BioRobotics Second Quarter 2024 Earnings Conference Call. Presenting on today's call are Reza Zadno, Chief Executive Officer; and Kevin Waters, Chief Financial Officer. Also present is Sham Shiblaq, Chief Commercial Officer, who will participate in the Q&A session. 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 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 not to place undue reliance on these forward-looking statements, which speak only as of today's date, August 1, 2024. 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. During the call, we will also reference certain financial measures that are not prepared in accordance with GAAP. More information about how we use these non-GAAP financial measures as well as reconciliations of these measures to their nearest GAAP equivalent are included in our earnings release. With that, I'll turn the call over to Reza.

Good afternoon, and thank you for joining us. For today's call, I will provide opening comments and a general business update, followed by Kevin who will then provide additional detail regarding our financial performance and updated 2024 guidance. Starting with our quarterly revenue results. We are pleased to report another strong quarter with total revenue for the second quarter of 2024 of $53.4 million, representing growth of 61% compared to the second quarter of 2023. Growth in the quarter was driven by strong U.S. system sales, increased utilization from our expanded U.S. installed base, and record international revenues. We exited the second quarter of 2024 with a U.S. install base of 400 systems, representing growth of 72% compared to the prior year period. Despite 42% of our U.S. install base being active for less than 12 months, U.S. monthly utilization increased approximately 15% compared to the prior year period. The significant increase in new accounts in conjunction with our ability to move accounts faster up the utilization curve demonstrates both our team's consistent commercial execution and growing customer and patient demand for Aquablation therapy. Multiple factors continue to trend positively, allowing us to execute against our 2024 revenue objectives. Additionally, we continue to make progress, expanding gross margins and maintaining good operating expense control. We believe these underlying fundamentals reflect the technology that is laying the foundation to become the BPH surgical standard of care and a business that will be a leading global urology company. Regarding the hospital CapEx environment and PROCEPT's capital rep team, we continue to believe the market is stable to improving compared to the previous 12 months. Specifically, we are having more proactive conversations with hospital CFOs, who just a few quarters ago, were exercising more caution in pursuing general CapEx investment given lingering macro headwinds. With a growing and increasingly educated patient population, along with motivated urologists, we are seeing hospitals prioritizing investment in our robotic system to ensure they stay competitive and do not lose patients to other area hospitals. Given the disruptive nature of our technology and that achieving consistent resection outcomes are independent of surgeon skill or experience, we believe every BPH hospital can now build a robust BPH practice with Aquablation therapy and not have to refer patients out to specialists. As we turn to our capital pipeline, we remain excited about the opportunity. The number of robot placement opportunities continued to grow nicely, driven by the addition of new capital reps. We enter 2024 with approximately 40 capital sales reps, of which 10 were added in the fourth quarter of 2023. With a productivity ramp of 6 to 9 months, we expect the capital reps added in the fourth quarter of 2023 to start contributing meaningfully to U.S. system sales in the second half of 2024. Even with our recent success, we are still very early in our adoption curve with a long runway in front of us selling to BPH hospitals. Next, touching on utilization and surgeon activity. U.S. handpiece and other consumables revenues growth increased 101% compared to the second quarter of 2023. When analyzing our accounts, we remain pleased with the overall utilization trend. In the past 12 months, our U.S. install base has grown 72% compared to the second quarter of 2023. These new accounts take time to ramp to the levels of mature accounts. We are encouraged by what we are seeing on account-specific utilization and we believe we have multiple proof points where Aquablation therapy is viewed as the receptive standard of care within a given hospital. In addition to adding new accounts, a primary driver of procedure growth continues to be active surgeon growth, which is a combination of new surgeons performing procedures and active surgeon retention rates exceeding 90%. As a company, we benefit greatly from this high level of surgeon retention as our commercial team can focus on training new surgeons. Regarding surgeon interest, in early May, the 2024 American Urological Association Conference, or AUA, was held in San Antonio. Given our recent growth, AUA 2024 was particularly exciting for PROCEPT as it marked the first year we could clearly see and feel growing market acceptance and awareness of Aquablation therapy. Specifically, there was a BPH session of PROCEPT presentation that was not sponsored by the industry where a significant number of Aquablation therapy papers were presented. The presenters highlighted real-world outcomes that were consistent with the company's clinical trials. This rapid increase in real-world Aquablation therapy publications continues to provide more confidence to future adopters of the technology. Throughout the weekend, we also held educational and training sessions where over 100 new surgeons participated. Additionally, our expansion into prostate cancer garnered noticeable attention at the AUA with a growing number of urologists requesting more information on how Aquablation therapy could treat prostate cancer. Since prostate cancer is a very slow-moving disease with a low mortality rate, it is no secret that in many low to intermediate risk cases, legacy treatments cause unnecessary harm at the request of patients who demand the cancer be removed from their body. These decisions can lead to a significant decrease in the patient's quality of life. Given this backdrop, many surgeons at the AUA were very interested in learning more about Aquablation therapy's potential efficacy knowing that the safety profile demonstrated in the BPH is so attractive. Furthering our expansion into prostate cancer, in April, we initiated enrollment of PRCT002, PROCEPT's first IDE study in men with localized prostate cancer. As a reminder, PRCT002 is an FDA-approved single-arm study of 20 patients with grade Group I and II prostate cancer. I'm excited to announce enrollment is progressing nicely and that we expect to complete enrollment in the third quarter. We look forward to tracking these patients in the coming months and plan to provide additional information when it becomes available. Turning to recent reimbursement and payor coverage updates. Between late March and June, we received positive coverage policies from Blue Cross Blue Shield of Arkansas and Blue Cross Blue Shield of Louisiana. Combined, both plans account for roughly 1.5 million covered lives. While relatively given our existing 95% payor coverage, we do believe the addition of these Blue Cross Blue Shield plans will have a positive incremental impact on utilization locally considering we have numerous systems in those states. Additionally, in mid-July, CMS published its 2025 proposed rule for the Hospital Outpatient Prospective Payment System. The Level 6 APC code for Aquablation has a proposed payment that would provide the hospital $9,209 and the ASC setting $6,666 for each Aquablation procedure which is a 5% and 7% increase respectively over the 2024 rates. The final rule is expected to be published in November. Also, as a reminder, in mid-June, we announced that the American Medical Association established a new current procedural terminology or CPT Category I code for Aquablation therapy to treat BPH. The Category I CPT code will replace the existing Category III CPT code starting January 1, 2026. With respect to international market development activities, we generated $5.7 million of international revenue in the second quarter of 2024, representing growth of 79% compared to the prior year period. Growth in the second quarter was once again driven primarily by strong sales momentum in the United Kingdom. Additionally, we sold our first 2 systems to Japanese hospitals in the second quarter. Following the completion of the post-market study earlier this year, our Japanese pipeline has increased nicely. Positive ASPs in the market and historical acceptance of new technology give us confidence in our future investments and our ability to accelerate the penetration of the Japanese market in 2025. Similarly to the excitement we generated at the AUA conference in the United States, we also had a sizable presence at the British Association of Urological Surgeons in Birmingham, England. This was the first conference since NICE granted its standard arrangement recommendation for Aquablation therapy and the interest from surgeons reinforces our confidence in penetrating the U.K. market. Lastly, I want to comment on new changes made to our Board of Directors. In mid-April, we welcomed Larry Wood to our Board of Directors. Larry joins PROCEPT with over 35 years of medical device experience, most notably at Edwards Lifesciences where he is currently Group President of its TAVR and Surgical Structural Heart business. Additionally, in mid-July, we welcomed Tom Prescott as our new Chairman of the Board. Tom joins PROCEPT with decades of medical device experience, most notably as President and CEO of Align Technology from 2002 to 2015. Specifically under Tom's leadership, Align transformed the orthodontic dental market, growing revenue from $75 million to near $1 billion when he retired. We believe Larry and Tom's experience and leadership in strategic areas related to commercialization, operations, clinical and regulatory affairs will help PROCEPT efficiently scale in the coming years. We are also pleased that Dr. Fred Moll, who has served as our Chairman since 2021, will continue to serve on our Board of Directors as well. To conclude my prepared remarks, every key metric we track continues to move in the right direction. In summary, our pipeline and sales funnel continue to grow nicely in what we currently believe is a stable to improving macro environment. On average, the longer an account has been active, the more procedures it performs. We are launching new accounts with more surgeons while sustaining excellent retention rates. Our international business continues to exceed expectations. Our commercial organization is the largest and most pioneering in the company's history, which we believe will lead to increased productivity. And lastly, we have continued to exceed our guidance around profitability metrics primarily with the expansion of gross margins throughout 2024. Given this positive momentum, we believe Aquablation therapy is laying the foundation to become the BPH surgical standard of care and PROCEPT is emerging as a leading global urology company. And with that, I will turn the call over to Kevin.

Thanks, Reza. Total revenue for the second quarter of 2024 was $53.4 million, representing growth of 61% compared to the second quarter of 2023. U.S. revenue for the quarter was $47.7 million, representing growth of 59% compared to the prior year period. In the second quarter, we sold 47 AquaBeam Robotic Systems with average selling prices of $378,000, generating total U.S. system revenue of $17.8 million, representing system revenue growth of 20% compared to the second quarter of 2023. Also, we did not place any units at an ASC in the U.S. in the second quarter. U.S. handpiece and consumable revenue for the second quarter of 2024 was $27.3 million, representing growth of approximately 101% compared to the second quarter of 2023. Handpiece growth was driven by an increase in the install base of AquaBeam Robotic Systems. Additionally, monthly utilization of 7.1 handpieces per account increased approximately 15% compared to the second quarter of 2023. Utilization in the second quarter exceeded our expectations and represents a 4% sequential increase from the first quarter. Overall, we continue to see increased utilization across cohorts, which is a direct reflection of strong commercial execution, which includes training new surgeons, high surgeon retention, and opening new accounts in a timely manner. We shipped approximately 8,000 handpieces in the U.S. in the second quarter, representing unit growth of 105% compared to the second quarter of 2023. Second quarter handpiece average selling prices were approximately $3,200. We also recorded $1.7 million of other consumable revenue in the second quarter of 2024. International revenue for the second quarter was $5.7 million, representing growth of approximately 79%. Gross margin for the second quarter of 2024 was 59%, representing an all-time high and 200 basis points above our second quarter guidance we provided in May. Gross margin expansion in the second quarter was once again due to strong execution from our operations team and our ability to absorb overhead expenses along with revenue overachievement. Moving down the income statement, total operating expenses in the second quarter of 2024 were $58.3 million compared to $44.1 million in the same period of the prior year and $52.7 million in the first quarter of 2024. The increase was driven primarily by increased sales and marketing expenses, mostly to expand the commercial organization and increased research and development expenses. We are very pleased with the operating expense leverage we have demonstrated in the first half of 2024. When comparing revenue growth to operating expense growth, revenues increased 70% in the first six months of 2024 on 31% operating expense growth. Total interest and other income were $1.2 million as quarterly interest expense from our $52 million term loan plus $300,000 of foreign currency losses was offset by favorable interest income from our cash balances. Net loss was $25.6 million for the second quarter of 2024 compared to $25.3 million in the same period of the prior year. Adjusted EBITDA was a loss of $18 million compared to a loss of $19.9 million in the second quarter of 2023. Our cash and cash equivalents balance as of June 30 was $217 million. We reported cash usage in the quarter of $11.5 million, which is a significant improvement from the $31.6 million usage in the first quarter of 2024. Most of this progress was driven by improvements in working capital. We believe our strong balance sheet will provide the liquidity and capital resources needed to support and grow our current business. Moving to our 2024 financial guidance. We now expect full year 2024 total revenue to be approximately $217 million, representing growth of approximately 59% compared to 2023. Starting with U.S. systems, we continue to expect to sell approximately 185 systems in 2024. In terms of cadence, we expect third quarter system sales to be in the low 40s with fourth quarter system sales being our strongest quarter of the year. We also anticipate system average selling prices in the second half of 2024 to be approximately $380,000. Turning to U.S. handpieces, we expect to sell approximately 33,350 handpieces for the full year with average selling prices of approximately $3,200. We also expect other consumables revenue to be approximately $7.8 million for the full year. Regarding quarterly cadence and given the strength we saw in the second quarter, we expect third quarter utilization to be down slightly compared to the second quarter, with fourth quarter utilization increasing sequentially due to normal seasonal strength in an aging install base. Additionally, we now expect U.S. service revenue to be approximately $11.7 million. Lastly, on international revenue, given another strong quarter and positive momentum in the United Kingdom, we now expect full year international revenue to be approximately $20.5 million, representing annual growth of approximately 73%. Moving down the income statement, we now expect full year 2024 gross margins to be approximately 59%, an increase from our previously issued guidance of 58% to 59%. Regarding quarterly cadence, we continue to expect gross margins to modestly increase sequentially in the second half of the year. Turning to operating expenses, we continue to expect full year 2024 operating expenses to be approximately $231.5 million, representing growth of 29%. In terms of quarterly cadence, we expect the third quarter operating expense to be approximately $59 million. Given current interest rates, we expect to generate net interest income of approximately $6.1 million in 2024. Given the increase in revenue and gross margin, along with our continued view on operating expenses, we now expect full year 2024 adjusted EBITDA loss to be approximately $67.5 million, an improvement from a loss of $70 million from our previous guidance and up almost $6 million from our initial guidance provided in February. 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 standard 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 upcoming investor conferences. At this point, we will take questions. Operator?

And our first question comes from Craig Bijou from Bank of America Securities.

Good afternoon, guys. Thanks for taking questions and congrats on another strong quarter. So I want to start or I want to ask about 2 things. But firstly, on the expense side. Obviously, you really stood out. Your cash burn getting lower was clearly impressive and the gross margin coming in better than what you guys had said it was going to be last quarter. So maybe just big picture, Kevin, if you can just kind of talk about your ability to leverage the business on the gross margin line and the OpEx line. And then how we should think about kind of the cadence not just this year, but kind of looking ahead and where can those margins go and how to think about your cash burn moving forward too?

Thank you, Craig, for your question. To begin with, regarding this quarter and the gross margins for 2024, we have consistently stated that our ability to utilize the fixed costs we've integrated into the business is the primary driver for gross margin expansion. This capability has contributed to the results we achieved in our second quarter and is expected to continue in our future guidance. Additionally, at the end of 2023, we discussed various operational improvements related to our new facility, first pass yield, scrap, and warranty, which we have focused on during the first half of 2024. This focus has significantly helped increase gross margins to 59% in the second quarter. Looking ahead for the rest of the year, we anticipate further expansion in the third quarter, possibly reaching between 59.5% and 60%, and we expect to finish the year above 60%, which aligns with our full-year guidance of 59%. This marks a substantial improvement from last year when we ended with a full-year margin of 52%. This improvement leads into your question about the long-term potential of the business. While we aren't ready to discuss 2025 during this call, I believe our current trajectory with margins, especially as we conclude the year in the low 40s, bolstered by our operating expense leverage ratio, gives us greater confidence in achieving a highly profitable business in the long run, which we are pleased to see materialize in the first half of 2024.

Following up on the comments about the international business and the impressive quarter you experienced, I believe we don't discuss the international expansion opportunities enough. Could you share what you’ve observed so far in the U.K.? Additionally, Japan is an exciting prospect that will be ramping up soon, so please discuss the size of those opportunities compared to your current U.S. market.

Thank you, Craig. We are very pleased with the strong performance in the second quarter, particularly due to our success in the U.K. As we have mentioned before, a positive endorsement significantly contributed to this, similar to the data we have seen from the U.S. We are now establishing a solid install base in the U.K., allowing for more predictable usage. I’m also glad to share that we have placed two robots in Japan. However, investors should anticipate that we will adopt a cautious approach regarding our pace. The international team was established about 18 months ago, meaning that 2024 will be our first full year focusing on this market. Despite this, we remain just as enthusiastic about the clinical advancements that are improving efficiency for practices internationally. I’ll ask if Sham would like to add anything to my remarks.

Sure. I would just add that the process we are using to commercialize in the U.K. and Japan is very similar to what we have used in the U.S. When considering the structure of the team, onboarding, and building the sales funnel, we have accumulated valuable data in the U.S. over the years that helps us build our business, provide predictability, and improve forecasting. We feel similarly about our U.K. operations now that we have a solid start there. As you mentioned, we are also very excited about Japan, and we view 2025 as a promising year for that market. This will be our first full year operating in the U.K., and our teams are gearing up. We are looking forward to finishing the year strong and giving great insight into our future in the U.K. as well.

And our next question comes from Matthew O'Brien from Piper Sandler.

Thanks for taking the question. Maybe just starting with the back-half guide, what's implied anyway. If I look at the last couple of years, you generated 58% and 59% of sales in the back half of the year. And this time, you're guiding to more like 54%. So it kind of implies a little bit of a slowdown and given what we've seen on the handpiece side, especially. And then with all those reps on the commercial side, I'm just not sure why there's that disconnect. So just anything we should be mindful of in terms of why there might be a slight acceleration in the back half versus what you've done here in the first half.

Thanks. This is Kevin. We had a very strong second quarter in handpieces utilization, increasing 15% sequentially, which was stronger than we expected internally. Compared to Q2 of 2023, utilization was actually down. I would argue that our first half is much stronger than our historical trends, and I wouldn’t draw any conclusions about the second half based on that. We still think it’s wise to manage expectations for the back half, considering how sensitive monthly utilization can be from quarter to quarter. To give some context, we plan to launch nearly 100 new accounts in the back half of the year, which is about 25% of our total install base. It typically takes 6 to 9 months for an account to ramp up, but we have been successful in launching accounts with multiple surgeons, which has allowed us to grow utilization faster than we have historically. Therefore, I think it’s important to manage expectations for the second half, but I wouldn't suggest there's a slowdown in utilization. Regarding capital, our guidance assumes numbers in the low 40s for the third quarter, positioning the fourth quarter in the high 50s, likely in the range of 57 to 59. Looking at our sales force productivity, this guidance reflects the same productivity per rep for the fourth quarter of 2024 as we had in the fourth quarter of 2023. So we don’t anticipate a slowdown and there’s been no significant change in how deals are progressing through the pipeline.

I apologize for excluding you, Reza, but I have a question for Sham. I'm interested in understanding how the commercial team, particularly on the capital side, is performing. I know that expanding the sales force can be challenging with smaller numbers, and a 30% increase might be a bit overwhelming and not as productive as expected. Can you share your thoughts on how this is developing? Additionally, any updates on the IDNs and how that team is doing would be appreciated.

Thanks, Matt. The one thing I would say on the capital team is we do continue to expand. But when you look at the numbers, they're not drastically different than prior years. And so the team has gotten bigger, the processes are well in place now to onboard new employees, going through training and going to be more productive. As we've talked about before, we are thrilled with the level of talent we bring in at the rep level. At the management level, we're bringing in some really experienced managers from the capital environment, many of them robotic capital managers that helps to onboard and helps to get up to speed quickly. And we fully expect that team will be very productive in the back half of this year, as Kevin mentioned, large strategic accounts. So the big difference for us in 2024 versus 2023 and we specifically hired a strategic account team and also added a junior capital rep team with the intent to help not only build our pipeline to be able to bring these deals to fruition. What we see in strategic accounts that have been slightly different than a stand-alone hospital is when you start to have multiple systems start to bubble up to the purchase phase, the corporate accounts team will work with the IDNs to ensure that they acquire the technology in the best way possible for them. When the numbers were smaller, it wasn't as important because you do a local or regional funding. The numbers get larger, the national accounts team. It becomes very, very important to us. So we're very happy with the progress so far this year. And I think they'll just be better as time goes on.

And our next question comes from Richard Newitter from Truist Securities.

Hi, thanks for taking the questions. Congrats on the strong quarter. First question, just on the system ASP, $380,000, definitely above trend, what we modeled and where you've been, and that's what you're trying to do for the rest of the year. Maybe just comment on that and just the capital outlook in the funnel broadly. And I have a follow-up.

Yes, thanks, Rich. This is Kevin. And our guide is based on what we see in the funnel. And we have very good line of sight of the deals that are in the pipeline today. And given this, we felt comfortable kind of raising that ASP for the back half of the year to $380,000 coming off of a $378,000 ASP in the second quarter. We continue to have very productive conversations with hospital CFOs and administrators about the ROI on our system, the ability for them to retain patients that they may otherwise have had to refer out, the ability to standardize kind of the treatment algorithm. And all of those things are leading ASPs to creep higher on systems, which is good to see.

There has been a lot of discussion over the past year regarding Medicare's RAC audits related to prostate size and the need for pre-authorization for surgery. I'm curious if this has affected your utilization or numbers in any way. Additionally, I would like to know how you are managing this in the field and if there are any other relevant details regarding insurance that you can share.

Sure. Yes, happy to take the question. So we're very aware of the RAC audits. Maybe I'll do a slight small background on RAC audits and then talk about PROCEPT and our customers and how we're assisting them as they go through that process. RAC audits have been around for a long time. They're very common across healthcare. Medicare started doing them about 15 years ago. Regarding our customers, we started to see this late summer of '23. Now you also shouldn't be able to know that during the COVID years, Medicare was not doing audits for years. They started to do them again last year. And despite the last 9 to 12 months, as you mentioned, we've been able to execute and increase utilization nicely. To provide some more context, this is Medicare-specific and Medicare currently does have a prostate size limitation of 150 grams, as you mentioned. So our FDA labeling doesn't match that. Just to be clear, FDA labeling does not have a size limitation. So we've begun working with our surgeons in Medicare to have this restriction removed. I would also point out that we recently have been successful with 5 of the 7 Medicare contractors in removing the age restriction. So when we first received our Medicare coverage, there was a restriction of 80 years and that's been removed now at 5 out of 7 contractors. So we feel confident over time we'll be able to get the size restriction removed as well. Regarding the numbers, you can think about how this impacts the business. We estimate half of our patients in BPH are comprised of traditional Medicare and Medicare Advantage. But it's also important to note that RAC audits are only focused on traditional Medicare. So that means about a quarter of the BPH market will be traditional Medicare. And then you think about the size, less than 10% of our procedures are over 150 grams. So this limitation does have a minimal impact on our ability to expand and achieve our utilization targets. So we continue to work closely with our accounts to ensure they are compliant and we've even been more proactive in recent quarters helping them out. That's worked out well and our accounts appreciate the partnership.

And our next question comes from Brandon Vazquez from William Blair.

Hi, everyone. Thanks for taking the questions. Reza, you had made a comment that about 42% of your active install base in the U.S. is less than 12 months at this point. Despite that, obviously you guys had a nice utilization quarter. Can you talk a little bit about the difference in utilization from maybe those 42% of accounts that are, call them, less than 12 months and then those that are longer than 12 months? Anything you can tell us, like are those under 12 months on average accretive to the total utilization you guys are seeing? Or is that still to come? So any commentary around there?

Yes, thanks. As we have said in the past, it takes about three to four quarters for that account to get to above seven accounts per month. So the longer the accounts stay with us, the higher is their utilization. So we continue seeing that in our accounts. And for the reasons that we mentioned, standardizing the procedure allows attracting surgeons to that hospital. And I don't know, Kevin, do you want to add anything about the back half of the year?

Yes. I can provide some specific details about how we see that cohort developing over time, which addresses your question. It's important to note that in the first quarter, even when we sell a robot, most of those accounts are not performing procedures during that quarter. We may sell a few handpieces, typically around five. However, the procedures usually don't happen until the next quarter. As a result, utilization in the first quarter is quite low, less than two. In the second quarter, utilization begins to increase, but it remains below the corporate average, which was seven this quarter. By the third quarter, they reach about the corporate average, and then they really start to excel in the fourth, fifth, and sixth quarters, generally performing above the corporate average. This trend has been quite consistent. A promising observation is that the ramp-up seems to be accelerating with newer cohorts because we focus on launching accounts with multiple cases and multiple surgeons.

And then there was also a comment in the prepared remarks about how surgeons are already coming to you guys and asking about how to treat prostate cancer with Aquablation. Just kind of curious if you guys are seeing that interest kind of creep into some early treatment of prostate cancer already of patients today? Or are they just kind of inquiring information, but you're not really seeing the patients treated yet?

Thanks. We observed a lot of enthusiasm at AUA, highlighting the increasing market acceptance and awareness of Aquablation. On the first day of AUA, we had a surgeon panel discussion focused on both BPH and cancer. There is definitely growing interest among surgeons regarding the future potential of our cancer technology. They were asking about the progressional study. As mentioned in our prepared remarks, we anticipate completing the PRCT002 study this quarter.

And our next question comes from Josh Jennings from TD Cowen.

Hi, good evening. Thanks for taking the question. It's great to see such a strong first half of the year. I wanted to just ask, I know we've talked about this in the past, but just the replacement cycle and just an update on your thoughts there and I may have even asked this on the last call, I can't remember, but just any plans for the next-generation AquaBeam system and if not divulging anything, when could we hear about the enhancements that are being developed today.

Thanks, Josh. This is Kevin. And look, I think if you look at our R&D spend sequentially, it's fair to say that we are working on some of the exciting projects internally that we do believe will be transformative for PROCEPT to continue to allow us to maintain the significant clinical and technological advantage that we've been able to establish in the market. We're not prepared today to talk about timing, but our spend has crept up recently, which would suggest that we're accelerating things internally. We talked around things like ease of use, workflow, artificial intelligence, assisted planning, given all the data we have. And those are things we continue to work on. And Reza and I, Sham, we all feel very good about that progress. Hopefully, there will be some time in the not-too-distant future we'll be able to talk more specifically about timing.

I'm sorry to repeat Brandon's question, but we've heard since AUA that physicians are currently more willing to treat patients with common BPH and localized prostate cancer. The utilization rate appears to be strong, and there might be some contribution from that. I'm not sure if we can quantify it. Additionally, we've spoken with some Da Vinci surgeons who mentioned they are acquiring AquaBeam specifically for this indication. I want to know if that is a trend as well.

We have removed the cancer contraindication for the treatment of BPH, but this hasn't led to a significant market increase. We are not marketing our product for cancer treatment at this time. What we presented was preliminary data from outside the United States at AUA, which has excited both surgeons and us due to the strong safety profile of the product, particularly concerning incontinence and erectile dysfunction. Patients are interested in avoiding cancer treatments that come with side effects, and there are millions of men in the United States who are currently hesitant about these treatments. However, we are not promoting our product for cancer treatment; we are conducting studies instead.

Regarding the patients being treated for BPH with Aquablation who also have a form of prostate cancer or lower intermediate disease under active surveillance or watchful waiting, many of these patients are receiving treatment for BPH with our system. Some of this data was even presented at the AUA. We are quite excited about the prospect of treating BPH in these patients, who are achieving great long-term results in other aspects as well. Urologists are very interested in following our progress, and we are eager to report on this data in the future. While we are currently focused on BPH patients, it is important to note that many of them also have cancer, which indicates that we will be treating patients with cancer as part of the BPH indication.

And our next question comes from Nathan Treybeck from Wells Fargo.

Hi. This is Dino Weinstock on for Nathan Treybeck. Congratulations on the strong quarter. On replacements for Q2, it looks like one system came out of the install base alongside the 47 placements. Could you talk about why the system came out of the total install base?

Yes. It's a great observation and a system did not come out of that install base actually. So to break this down, we did sell 47 systems in the quarter, but the install base went up 46, which is, I think, what you're alluding to. And this goes back to Q2 of 2023. And if you recall, we placed a system in the second quarter of '23 under an operating lease. This was the first operating lease that the company had executed. This system actually converted to a sale this quarter at a very reasonable average selling price. So we included it in our sale number, but it was already in the install base. And when we had put that system under lease in Q2, we said this was going to occur. And it was good to see this account commit to a purchase. At this point, we're not thinking of changing, obviously, our sales mechanism and how we sell, but it was good to see our first operating lease that we've done convert to a sale at an ASP that was not materially different than the rest of our sales. So really good to see.

And can you also talk about your expectations for multisystem purchases by IDNs at the corporate level in 2024? And are they necessary to reach above your guidance of 185 placements?

Yes. Look, it's not as black and white as the question may appear on the surface. To be direct, we are not relying on multisystem IDN orders to meet the guidance that we put forward. With that said, what we've seen over the last few quarters is multisystem orders get executed at the corporate level that were already in our funnel that we're planning to be executed at the local level, but now are being used by corporate funds. And I would suggest that we do expect that to continue to happen, but we are not reliant on an unexpected multisystem order from a large IDN to meet the guidance that we provided for our systems in 2024.

And our next question comes from Ryan Zimmerman from BTIG.

Hey, guys. Thanks for taking my question. Can you hear me, okay? Okay, good. Just a couple for me this evening. So one, Sham, you were over in the U.K. We were over there maybe a month ago. The NHS had a big cyber-attack. And we talked to a few urologists who had said that there might have been some trickle down to the procedure level. I just was curious if you're seeing any of that impact. And just remind us how much of your OUS or your total sales is related to the U.K. at this point. And then I have a follow-up question on margins.

Sure. We are fully aware of the cyber-attack that occurred. It wasn't widespread in the NHS; only one hospital was affected. They developed protocols to address cybersecurity issues. Many surgeries at that particular large hospital in London have been canceled. However, Aquablation was not affected. They established a protocol that allowed them to continue performing Aquablation because the procedure is safe and doesn't require additional processes. We are confident in our ability to manage this issue, unlike other companies currently facing similar challenges. Kevin, would you like to address the final part of that?

Yes. In rough numbers, about 50% of our international sales come from the U.K. The primary reason for raising our international guidance in the last two calls has been the positive momentum in the U.K. We're seeing strong growth and were not affected by the cyber-attack that Sham mentioned. Additionally, the average selling prices in the U.K. with the NICE endorsement are similar to those in the U.S., which is also helping to improve our margins. I'll hand it back to you now; I believe you had another question about margins.

Yes, it's great to hear that. Regarding margins, Kevin, I understand you won't provide the 2025 guidance on margins. However, as I consider the margin trajectory and the current sales ratio of capital versus consumables, could you remind us of your comfort level with the margin related to capital? As you shift away from capital sales, what kind of leverage do you anticipate from your handpieces regarding your margin trajectory? If you're projecting 59% this year and you've experienced a significant improvement this quarter due to good utilization, I'm curious about your potential to further increase your margins. You mentioned leverage, especially on the operating expense side, but I'm interested in your thoughts on gross margin as well.

This is a great question, Ryan. While I won’t provide guidance for 2025, I hope to address some of your concerns from a broad perspective. The primary factor driving our margin expansion is total revenue, rather than the actual mix between consumables and capital. Over the long term, that mix may become more significant, but that’s beyond 2025. Currently, our overhead absorption is the main driver, shared equally between our capital and disposables. The expansion we’re experiencing in 2024 reflects our overhead absorption and some operational efficiencies, rather than just the fact that 60% of our business is now consumables. This will be more beneficial in the long run. We are very pleased with the margin expansion achieved in 2024, and we believe our business cost structure supports continued improvements. We've discussed the expectation of comparative margin improvements over the coming years, achievable through volume alone. Looking ahead, our management team is excited about exploring additional projects focused on cost reduction, particularly concerning disposables, but those efforts may not begin to show in our income statement until later in 2026 or 2027.

And Kevin, just to follow up, the margin profile of capital relative to consumable, are you comfortable sharing that?

What I would say is the capital is not a drag on our overall margins to the extent it may be for some.

And our next question comes from Mike Kratky from Leerink Partners.

Hi, guys. This is Brett on for Mike. Congrats on another great quarter. So I do want to hit on margins again. Obviously, you raised the EBITDA guide by a couple of million, $2.5 million, and the revenue guide by about $3.5 million. So obviously, that's implying a pretty decent incremental margin, pretty high versus what you've shown historically. Just wanted to get a sense for your confidence and the durability of that incremental margin going forward. And what are some of the key toggles that we can see that can get a flex head up or down going forward?

I apologize if I felt like a broken record here. But again, I think it's durable because the single biggest driver of margin improvement is increased revenues. It's not as if we're reliant on offshoring manufacturing or significant cost reductions in our product to get margin expansion in the near-term. Again, when I was answering Ryan's question, I think those really start to impact the business beyond 2025. And that gives us a high level of confidence with where we're at today that we have a very high fixed cost structure that we think is highly leverageable as we grow revenue. And we've been telling investors since we went public that we're building this business to support a $500 million-plus business. And with that, you have to create a certain structure of overhead that was detrimental or hurtful to margins in our early years, but we're starting to now see that leverage come to fruition. And given that it's just leverage, we feel very good about our ability moving forward here to expand margins. I would also just lastly point out that the operations team here has improved things around first pass yield, around warranty. A lot of that is attributable to us now fully being in our new facility. We moved facilities last year into a facility that's four times the size we were previously in. We had a few speed bumps that we hit in that transition that are now fully behind us. We feel really confident.

As a follow-up, regarding the 90% retention rate of your existing surgeons, that's certainly impressive. However, for the 10% that do not continue, have you received any feedback that could influence your commercial strategy in the market? Is there anything specific that stands out that could help in this area?

I want to turn it over to Sham and Reza. I want to clarify the metric and what it actually means. When we say 90% retention, that indicates that in the second quarter, 90% of the surgeons who performed a procedure in the first quarter also performed a procedure in the second quarter. However, this does not consider surgeons who are occasional users, meaning they might have done a procedure in the fourth quarter, skipped the first quarter, and then returned in the second quarter. Therefore, the actual retention rate is likely higher than 90%. I'll hand it over to Sham to discuss any potential reasons for the fallout.

I would just add that if I take a step back and remember that BPH is a very commonly treated procedure. There are over 12,000 urologists that do at least one BPH procedure a year. So with that number in mind, we are going to have low volume BPH surgeons do Aquablation and we love it because our technology has a low learning curve. It works very, very predictably. And so you have the ability to standardize treatment across different sizes of prostate and shapes. So you have low-volume BPH surgeons who will use our technology, but maybe don't do a lot of BPH surgery. So when you think about that surgeon, somebody who's necessarily fallen out, it's just somebody who doesn't do cases consistently. And then we're in the operating room to support those surgeons. They have a great experience. And we rarely lose surgeons, but not every surgeon does a case every quarter.

Okay and thank you. And I'm showing no further questions. I would now like to turn the call back over to Reza Zadno, CEO, for closing remarks.

Thank you, everyone, for attending our second quarter earnings call. We hope to see you in the future conferences. And have a nice day.

This concludes today's conference call. Thank you for participating. You may now disconnect.