RxSight, Inc. Q2 FY2023 Earnings Call

Good day and thank you for standing by. Welcome to the RxSight Second Quarter 2023 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Alex Huang. Please go ahead.

Thank you, operator. Presenting today are RxSight President and Chief Executive Officer, Dr. Ron Kurtz; and Chief Financial Officer, Shelley Thunen. Earlier today, RxSight released financial results for the three months and six months ended June 30, 2023. A copy of the press release is available on the company's website. Before we begin, I would like to inform you that comments and responses to the questions during today's call reflect management's views as of today, August 7, 2023. And will include forward-looking and opinion statements, including predictions, estimates, plans, expectations, and other information. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are more fully described in our press release issued today and in our filings with the Securities and Exchange Commission, or SEC. Our SEC filings can be found on our website or the SEC's website. Investors are cautioned not to place undue reliance on forward-looking statements, and we disclaim any obligation to update or revise these forward-looking statements. We will also discuss certain non-GAAP financial measures. Disclosures regarding non-GAAP financial measures, including reconciliations with the most comparable GAAP measures can be found in the press release. Please note that this conference call will be available for audio replay on our investor website. With that, I will turn the call over to President and Chief Executive Officer, Dr. Ron Kurtz.

Good afternoon, and thank you for joining us. Today, we report another strong quarterly performance for RxSight, representing our tenth consecutive period of quarter-over-quarter top-line growth driven by higher key operating metrics. In addition, we have taken further steps to strengthen our financial position. I'll discuss the favorable trends underlying our business later in the call. But first, Shelly will review our second quarter 2023 financial performance and recent balance sheet transactions.

Thank you, Ron. Good afternoon, everyone. RxSight generated second quarter 2023 revenue of $20.8 million, up 83% compared to $11.4 million in the year-ago quarter and up 19% compared to the $17.5 million in the first quarter of 2023. We sold 67 light delivery devices in the second quarter of 2023, up 37% compared to 49 units in the year-ago period. And up 20% compared to the 56 units in the first quarter of 2023. Second quarter 2023, LDD sales generated revenue of $7.7 million, up 36% and 19% versus the second quarter of 2022 and first quarter of 2023, respectively. As of June 30, 2023, our LDD installed base increased to 523 units, up 78% and 15% versus the second quarter of 2022 and first quarter of 2023, respectively. We sold 12,622 LALs in the second quarter of 2023, up 134% and 20% compared to the 5,400 units and 10,523 units in the same year-ago quarter and first quarter of this year, respectively. Second quarter 2023 LAL unit sales generated $12.4 million in revenue, up 132% and 19% compared to $5.3 million and $10.4 million in the second quarter of 2022 and the first quarter of 2023, respectively. LAL revenue represented 60% of total revenue in the second quarter of 2023, up from 47% and 59% in the second quarter of 2022 and first quarter of 2023, respectively. Gross margin in the second quarter of 2023 was 58% compared to 42% in the same year-ago quarter and 59% in the first quarter of 2023. Recall that the first quarter 2023 gross margin was favorably impacted by LDD material price decreases, freight savings, and improvements in other costs included in LAL cost of sales. So, the slight sequential change is consistent with our expectations. SG&A expenses in the second quarter of 2023 were $18.2 million, up 27% compared to $14.4 million in the year-ago quarter, reflecting increased expenses in sales and marketing personnel costs and travel, and increased noncash stock-based compensation in sales, marketing, and G&A. On a sequential basis, SG&A expenses were up 12%, primarily due to increased personnel costs from increased headcount and increased marketing costs. R&D expenses in the second quarter of 2023 rose 20% to $7.4 million compared to $6.2 million in the year-ago quarter and $7.2 million in the first quarter of 2023. The change versus the year-ago quarter was primarily due to increased clinical study costs and increased headcount. We reported a GAAP net loss in the second quarter of 2023 of $13.8 million or a loss of $0.40 per basic and diluted share using weighted average shares outstanding of 34.5 million shares. This compares to a GAAP net loss of $16.7 million or $0.61 per share on a basic and diluted basis in the same year-ago quarter. Noncash stock-based compensation and loss on extinguishment of debt in the second quarter of 2023 was $4 million and $362,000, respectively, resulting in a non-GAAP loss of $9.5 million, or a loss of $0.28 per basic and diluted share. Please refer to the unaudited non-GAAP reconciliation and disclosure included in today's press release for more comparative information. We ended the second quarter of 2023 with cash, cash equivalents, and short-term investments of $147.1 million compared to $153.9 million at March 31, 2023. The change in the cash balance includes proceeds from our at-the-market program, or ATM stock option exercises, and employee stock purchase plan share issuances, less the paydown of $20 million in GAAP plus termination fees and cash used in operations. Excluding the proceeds from financing and capital activities and use of capital for principal debt repayments, cash used in operating activities during the second quarter was $9.5 million. This compares to $16.5 million in cash used in operating activities in the first quarter of 2023, which included annual bonus payouts and higher increases in accounts receivable and inventory relative to the second quarter of 2023. On our last conference call, we indicated that we expect sequential quarterly reductions in cash used from operations in 2023. However, we may see a tick up in the third quarter because our second quarter cash used from operations was lower than expected due primarily to improvements in accounts receivable terms and higher accounts payable and accrued expenses. During the second quarter of 2023, we continued to implement our ATM program designed to further strengthen our balance sheet, raising $19.4 million net of fees through the sale of common shares. We used these proceeds to reduce our term loan debt by $0.5 million to $20 million. And as noted in today's press release, we raised an additional $11.9 million net of fees in July under the ATM and paid off our remaining $20 million debt balance. Turning now to guidance. Based on our second quarter 2023 performance, we are increasing our 2023 guidance range to $81 million to $86 million, up from prior guidance of $79 million to $84 million. Our new guidance implies a year-over-year growth rate of 65% to 75% and assumes a typical cataract seasonality pattern with the third quarter lighter due to summer vacation schedules. We are also revising our 2023 guidance range for gross margin to 58% to 60% versus prior guidance of 56% to 58%. The increase reflects the continuing favorable revenue mix of LAL sales, along with improved gross margin from our reconfigured LDD, which we expect to begin shipping this year with a gross margin benefit largely in the fourth quarter. We are increasing our 2023 operating expense guidance of $106 million to $109 million, an increase of $1 million at the top and bottom of the range. The increase reflects consulting fees, additional headcount, and expanded auditor fees relating to the implementation of Sarbanes-Oxley. With the increase in our market cap in the second quarter, we became subject to Section 404(b) of the Sarbanes-Oxley Act effective with our December 31, 2023 fiscal year-end and 10-K to be filed in February 2024. The 2023 OpEx guidance represents a 25% to 29% rise over 2022 and primarily reflects our continued investments to build a large, durable postoperative light treatment infrastructure to support sustained long-term LAL procedure growth. It also includes noncash stock-based compensation expense of $15 million to $16 million. Since late 2022, we have raised $102.5 million net of fees through our confidentially marketed public offering and ATM program, paid off $40 million in term loan debt, and reduced our annual interest expense by approximately $5.6 million. We believe our cash interest term investment balances, combined with no outstanding debt, strengthen our balance sheet and leave us well-positioned to achieve profitability from operations with a healthy balance sheet. With that, I'll turn the call back to Ron.

Thank you, Shelly. Last week, we marked the second anniversary of our IPO, and I'd like to use my time today to highlight the progress we've made to position RxSight for long-term success. First, we substantially increased the size and scope of our commercial organization, which has done a remarkable job as evidenced by the two-year growth trends in our business. Compared to the second quarter of 2021, revenue was up 325%, and quarterly LDD unit sales are up by more than 160%. Our installed base is roughly three times the size it was two years ago and now extends into Canada. Over this same period, LAL unit sales are up almost 600% and currently account for the majority of our total revenue. As Shelly just summarized, we have also continued to strengthen our balance sheet and investor base, which we believe provides a strong foundation for continued execution of our growth strategy and sets us on a path for future operating profit. At the same time, we've added new institutional shareholders to our ownership base and experienced a fivefold increase in the average daily trading volume of our stock. Which, along with the rise in market capitalization, has substantially increased the universe of institutions that can consider a meaningful RxSight position. Driving our success since the IPO has been the outstanding performance of our light adjustable lens across a wide range of patient types and preferences. We focused our efforts these past two years on continually refining the LAL technology and the critical knowledge base to enable doctors to deliver the best possible experience and results for patients. The LAL stands apart from every other premium IOL in the market today because postoperative adjustability allows patients to achieve precise high-quality vision that they can test drive and customize to arrive at their unique desired visual outcome. The growing body of real-world clinical data collected over the past two years underscores the LAL's ability to deliver superior uncorrected binocular visual acuity with the vast majority of patients achieving excellent vision over a range of distances without increases in visual side effects such as glare and halo or reductions in contrast vision. A combination of outcomes that are increasingly being prioritized by doctors and patients but are difficult to achieve consistently with competing fixed power lenses. By appealing to a wide variety of standard and premium IOL patients, the LAL enables practices to achieve a rapid return on investment for the LDD and establish an important ongoing premium revenue stream that can be further leveraged as additional practitioners tap into an existing light treatment infrastructure. We believe this will continue to be an important factor in growing LAL utilization, which has been rising steadily over the past two years. In closing, we are pleased with the strides that the RxSight team has made in collaborating with our customers and investors as a public company. While we are still in the early stages of adoption, the LAL is beginning to change the premium IOL landscape and fuel expansion of this high-growth market. Through a continued focus on customer needs and the thoughtful execution of our growth strategy, we believe the LAL can ultimately occupy a leading position in the premium cataract market, delivering sustained long-term value to all stakeholders. With that, I'll ask the operator to open the call for questions.

Our first question is from Craig Bijou of BofA Securities. Please go ahead with your question. Our next question comes from Robbie Marcus of JPMorgan. Please go ahead with your question.

Great. Thanks for taking the question. Congrats on a nice quarter. Maybe, to start, this is the third quarter in a row, by my math, where we're seeing a really nice tick-up in utilization in lens per LDD in the quarter. I think starting in the fourth quarter and now first and second, it's a pretty significant step up. So maybe just speak to some of the trends you're seeing. How broad-based is this across the portfolio? Is it driven by a top percentage or is it more wholesome from top to bottom across users? And then, I'll throw my second question in as well. You've had another quarter of really nice LDD placement. The installed base is now over 500. How are you thinking about where you stand in terms of penetration of LDDs versus the broader potential base? And is future growth going to be coming more from LAL uptake or LDD placements? Thanks a lot.

Thank you, Robbie. I'll begin, and Shelly can add any additional thoughts. Regarding utilization, we believe the increase has been widespread. Part of this increase comes from existing customers who have continued to raise their utilization as they recognize the benefits of the technology, particularly as more doctors in their practices gain access to the established infrastructure. Additionally, new customers are more aware of the light adjustable lens, leading to greater confidence in committing to the technology with larger initial volumes. Our team, which includes both sales and clinical trainers, has gained insights over the past few years on how to equip practices to start and expand more effectively. All of these factors have contributed to the growth of LAL utilization, and we expect these factors to persist. Shelly, do you have anything to add?

No.

With respect to LDD penetration, as you noted, we're above 500 now. We still think that's a fraction of the overall possibility in the U.S. There are several thousand practices that do cataract surgery. And we're still in a minority of those. So, we still see room for growth on the LDT side as well.

Yes, I would like to clarify a bit. One positive aspect of our LDD sales is that we have maintained good pricing discipline, with minimal changes in pricing and average selling price for the LDD. Regarding penetration, there are currently about 10,000 surgeons in the U.S. performing cataract surgeries. We estimate that a few thousand, around 2,000 to 3,000, represent the majority, approximately 70% of the total. However, we believe our total market extends beyond these high-volume practices. As we mature, we are initially targeting those with higher volume, but there is also an opportunity for other surgeons to offer premium IOLs, particularly the LAL, to their patients with excellent outcomes, thereby entering the market. Is there anything else, Ron?

No. Any follow-up, Robby?

No, you answered it all. I appreciate taking the question. Thanks a lot.

Our next question comes from Steve Lichtman of Oppenheimer & Co. Please proceed with your question.

Thank you, everyone. Beyond the top line, the other standout looked to be on the gross margin side. So, a couple of questions there. One, what's driving the underlying gross margin benefit? Is it just a mix? Or is there something else afoot? And then secondly, Shelley, can you level set us on where you think we should be exiting the fourth quarter with a lower-cost LDD system in place?

Thank you, Steve. The gross margin has been influenced by several factors. One key factor is the product mix, as the LAL is significantly more profitable at the margin compared to the LDD, and we expect this trend to continue. Additionally, costs have decreased because we have increased production in the LAL. We anticipate some margin expansion in the fourth quarter, although it will be limited in the third quarter compared to the first and second quarters. This is due to our reconfigured LDD, which will yield a higher gross margin and provide benefits. Therefore, we expect a noticeable difference between the third and fourth quarters, influenced by both product mix and the introduction of our reconfigured LDD.

Great. Thanks. And then just my follow-up, I guess, on the LDD number, real nice sequential increase here and above our expectations. Can you talk to ASCRS and how coming out of that, any tailwinds that you saw coming out of that conference where you did have a pretty big presence? And is that part of what we're seeing here in this LDD number? Thanks.

I agree. We had a very strong ASCRS, and certainly, that has helped us in Q2. I think it's generally consistent with increasing awareness about the light adjustable lens and that awareness drives interest on the parts of practices. So, we see that as a trend that has grown sequentially, and we would hope that would continue to grow.

Thanks, Ron. Thanks, Shelley.

Our next question comes from Ryan Zimmerman of BTIG. Please proceed with your question.

Hi, good afternoon. Congratulations on a strong quarter. I have a couple of questions, starting with a broader question. As you've noticed the increase in market uptake, it seems like your ambitions are expanding and your perspective is broadening. Given the positive adoption, does this influence your view of your commercial strategy, not just in the U.S. but also regarding potential opportunities in Canada, Mexico, or other areas where clinical trials have been conducted? When do you anticipate we might see international opportunities?

Ophthalmology is a global field, and while the U.S. has historically been a leader, particularly in private pay markets, our primary focus is on fully developing the U.S. market initially. However, we also recognize significant opportunities outside the U.S. We have already started in Canada and will continue to expand into other markets over time.

I think from specifically to you because the CE mark and kind of their disarray relative to approvals. And so that does push off any kind of European opportunity for us. But we don't think that that's something we would have pulled the trigger on anyway, given the opportunity in the U.S.

Okay. I appreciate that incremental color, Shelly. And then the second question, one of the large peers in the ophthalmic market reported earlier this earnings season said the health of the premium market has been weak. Since the second quarter in a row, they've said that, yet you continue to put up kind of, I think, really good results. And I'm curious if what your view is of the health of cataract market, given some of the commentary we've seen from some of your larger competitors?

Overall, the cataract market continues to grow, driven by demographics. Within this market, the premium segment remains the key opportunity for practices to increase their revenue in light of ongoing reductions in reimbursement for cataract surgery and other reimbursed services. We view the premium market as a primary growth driver in ophthalmology, and as you've noted, our numbers continue to show positive growth.

Our next question comes from Larry Biegelsen of Wells Fargo. Please proceed with your question.

This is Charles on for Larry. Can you hear me okay?

Yes.

First, congrats on the nice quarter. I wanted to follow up a little bit on your newer lower-cost LDD, that was approved at the start of the year. Can you just refresh us give an update where you guys are at preparing for the launch and building inventory? Last year, it sounded like second half launch. Is that going to be a phased approach? And is there going to be any kind of limit by inventory availability there to talk about? Thanks.

Thank you, Charles. So, as you noted, the reconfigured LDD was approved earlier in the year. It has the same functionality as our current LDD primarily will have its impact on the margin. And as Shelly noted, we're anticipating that to be primarily towards the end of the year. So, that has really been our plan for the year, and I don't see many changes there.

To your question is supply chain. Supply chain is still tough, but it's continuing to improve. And one of our strategies is not to introduce the reconfigured LDD until we're certain that we have the finished goods and stock as well as the supply chain has stabilized. And so that is part of our strategy and ensuring that we have full availability for our customers.

Okay, great. Thank you.

Our next question comes from Craig Bijou of BofA Securities. Please go ahead with your question.

Good afternoon. I apologize for missing my initial slot. I have two questions regarding the competition. I would like to know what you are observing at the field level and what feedback you are receiving from doctors. Is the focus on patient awareness and satisfaction? Are the results seen by the doctors influencing this? Is there a potential to price at a premium compared to other competitive premium IOLs? My second question is whether you have any insights or concerns about the larger players and their development of new lenses.

So, I think all the things that you mentioned, Craig, are in play. Certainly, the awareness of the quality of the results that patients and doctors can obtain with the light-adjustable lens is an important factor. Once the system becomes available to doctors, then that allows them to offer it to more patients, more doctors in the practice. So, I think all of these things are in play. and the ability to have a really strong ROI is obviously a factor as well. And doctors are pricing the technology at a level commensurate with the quality of the results that it produces. So, all of those are important to growth. With respect to competition, again, we have the same visibility of the competition that everybody else does as far as we can tell, we don't see anything on the horizon even in the near midterm. There are some projects out there, but it's not an easy task to make a technology that delivers all the aspects of the light adjustable lens, and it remains to be seen whether and when somebody is going to be able to do that. And then, even when somebody enters, if they do, they'll be entering at a point when we'll already have introduced a whole slew of improvements to the technology in response to market requirements. So, I think it's going to be a tough road for somebody to follow.

Got it. That's helpful. Thanks, Ron. And maybe a quick follow-up for Shelley. On the new LDD and I guess it's part of longer-term peak margins. But I guess my question is about how should we think about where you can bring peak gross margin? And how long does it take you to get to that level?

I believe you're inquiring not just about the reconfigured LDD, but whether you're referring to the overall long-term margins for the company.

Yes, more overall margins, Shelley. I know you have been reluctant to provide some details. So, if you're willing to give detail, I'd love to hear it, but just overall margins for the company.

Yes. With the reconfigured LDD, we expect to stabilize that margin in the 20% to 30% range, and while we've been lower than that, we hope to lean more toward the high end due to good volume in that product. Looking long term, there is a significant market for LDD sales. However, like typical razor and razor blade companies, we anticipate that about 90% of our revenue will likely come from the LAL, which has proven to be very price stable because of the value it provides. I would expect that in the long run, we'll be at a gross margin level in the mid-80% range, potentially even reaching 90%, although that is yet to be determined.

Our next question comes from David Saxon of Needham & Co. Please proceed with your question.

Hi, Ron. Hi, Shelley. Thank you for taking my question. Congratulations on the quarter. To follow up on one of Craig's questions, it's been two years since your public listing, and you’ve progressed further with your launch. Are you encountering the same areas of resistance from prospective doctors as you did a few years ago, or has awareness and interest improved? Is it now more about engaging with the doctors and placing LDDs? Also, can you provide any insight on how the sales cycle has evolved?

Thank you, David. The same general interactions are still happening. We clearly have a larger and more experienced commercial team, and we can provide more references for new practices considering our technology, allowing them to get insights from us as well as from other similar customers. For instance, unlike other intraocular lenses, we have a piece of capital equipment which incurs a cost. However, over the past few years, we've demonstrated that the return on investment for this equipment is relatively quick, averaging between six to nine months, and can often be quicker. This helps new practices feel more comfortable, although they still need to perform their own financial analyses. Both Shelly and I have encountered similar business models before, and it never gets easy. However, we believe we now have more solutions for potential customers.

Got it. Maybe a follow-up for Shelly. Just on the operating expense guidance. I think it implies around 33% growth in the back half compared to the 20% growth we saw in the first half. So, what's driving that? What investments are you making? Anything there would be helpful.

Thank you very much. I previously mentioned the stock expenses and audit fees related to stock, which are mostly incurred at the end of the year. Additionally, at the end of the year, we are expanding our clinical applications personnel in line with our LDD sales. We have also brought on a few account managers and other staff to enhance our marketing efforts. By the third and fourth quarters, the full impact of these additions will be felt, and this is what significantly increases our operating expenses as we approach the end of the year.

Great. Thank you.

I'm showing no further questions at this time, and I would now like to turn the conference back to Ron Kurtz for closing remarks.

Well, thank you all for your time and attention today. As always, we appreciate your interest in RxSight and look forward to updating you on our progress in future quarters. Goodbye.

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