Operator: Good day and thank you for standing by. Welcome to the Q4 2023 PROCEPT BioRobotics Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker, Matt Bacso, Vice President of Investor Relations, please go ahead.

Matt Bacso: Good afternoon, and thank you for joining PROCEPT BioRobotics’ Fourth 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 not to place undue reliance on these forward-looking statements, which speak only as of today’s date, February 27, 2024. Except as required by law, PROCEPT BioRobotics undertakes no obligation to update or revise any forward-looking statements to reflect new information, circumstances, 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.

Reza Zadno: Good afternoon, 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 detail regarding our financial performance and initial 2024 guidance before opening the call to Q and A. Starting with our quarterly revenue results, we are pleased to report another strong quarter with total revenue for the fourth quarter of 2023 of $43.6 million, representing growth of 83% compared to the fourth quarter of 2022. On a full-year basis, total revenue was $136.2 million representing growth of 82%, increased average monthly utilization in the U.S. by approximately 10%, and exceptional fee, especially considering the substantial 89% increase in our U.S. install base.

The significant increase in new accounts in conjunction with our ability to get these accounts of the utilization care faster, further amplifies my pride in our team’s accomplishment throughout the year. Given the strong underlying demand for Aquablation therapy, we were able to deliver average utilization of approximately 6.6 handpieces per account per month in 2023 and a record 7.3 handpieces per account in our fiscal fourth quarter. As a reminder, our initial 2023 guidance had assumed utilization of approximately 6.0 handpieces per month. Due to this rapid rate of adoption and support for Aquablation therapy, I am more confident than ever in our company’s ability to become the standard of care for BPH patients. As we enter 2024, we believe there are several positive factors which will allow us to continue to execute against our long-term growth plan, while being disciplined in showing a path to profitability.

We believe these underlying fundamentals like the technology that is laying the foundation to become the BPH surgical standard of care and a business that will be a leading urology franchise globally. Starting with the current urology market in the United States, we are very fortunate to operate in a large market where the number one reason men see urologists are symptoms associated with BPH. Given the shortcomings of current surgical alternatives, an aging population that continues to increase, and the millions of men who currently forego treatment, we believe underlying market growth will be attractive for many years to come. We also believe urology patient volumes at our accounts continue to grow nicely. In fact, some urologists have indicated that in addition to normal patient activities, an increasing number of men who have failed medication are now seeking to schedule Aquablation therapy procedure as it pertains to hospital capital spending.

2023 was a challenging year for most hospitals due to accelerating inflation pressure to lengthen the average recovery from the pandemic. Through these persistent headwinds, we were able to achieve our 2023 sales goals. However, we believe the market is more stable now compared to the previous six to nine months. With a growing and increasingly educated patient population along with motivated urologists, we are seeing hospitals continue to prioritize investment in cutting-edge technologies to ensure they stay competitive and not lose patients to other area hospitals. We believe our AQUABEAM Robotic System allows hospitals to offer a cutting-edge technology in the BPH surgical space. We also exited the fourth quarter of 2023 with the U.S. installed base of 315 system out of a target market of 2,700 total hospitals that perform BPH surgeries.

While our initial commercial strategy was to target the most influential KOLs at the 860 high-volume hospitals, we have also been successful selling Aquablation therapy programs to remaining 1,800 low-volume hospitals. It is important to point out that a low-volume BPH hospital does not mean it is small. A significant number of low-volume BPH hospitals are large surgery centers, who historically did not perform resective surgeries. Given the disruptive nature of our technology and that patient outcomes are independent of surgeon skill or experience, low-volume centers can build a robust BPH practice with Aquablation therapy and not have to refer patients out to area specialists. Given this market dynamics, we are still very early in our adoption curve with the long runway in front of us.

In terms of our pipeline, a number of opportunities continue to grow meaningfully as we expand into new greenfield territories and add to our capital sales team. Compared to a year ago, we currently have more than doubled the opportunity to have cleared the stage where we assigned a high level of competence to close. Also, a significant percentage of our pipeline consists of low-volume hospitals. As Kevin will discuss later, our guidance philosophy continues to be informed by what we are seeing in our pipeline, how opportunities progress, what customers are telling us, and overall close rate. Turning to commercial organization. As mentioned on previous earnings call, our plan was to further expand our field-based commercial team in 2023. Speaking specifically about our capital sales personnel, we entered 2024 with approximately 40 capital reps, of which 10 were added in the third and fourth quarter of 2023.

As a reminder, we believe the productivity curve of capital reps is approximately six months. Over this six-month period, they are responsible for building out their respective pipelines. Thus, we do not expect the capital reps added in the fourth quarter of 2023 to start meaningfully contributing to U.S. system sales until the second half of 2024, which is factored into our 2024 guidance. However, we entered 2024 with the highest percentage of capital reps who have been with PROCEPT for more than 12 months. This is an important metric we track closely since continuity within territories correlates strongly to increased confidence of future deals closing. Additionally, we hired a new strategic account team which is not included in the 40 capital reps mentioned previously.

The role of our strategic accounts team will be focused exclusively on partnering with strategic idea networks across the country to improve our sales efficiency in both the capital selling process and improve utilization at targeted IDNs. As a reminder, we were successful in establishing sales and legal contracts with the majority of large strategic ideas in 2023. Despite not receiving any corporate IDN bulk buys in 2023, we believe we are making progress building these relationships, which could be a tailwind in our initial 2024 revenue guidance. Next, touching on our utilization team. Given our strong commercial momentum and expanding pipeline, 2023 was an investment year to meaningfully increase headcount and add capacity to support future growth.

Similar to our capital rep team, we entered 2024 with the most experienced utilization team in the company’s history. While we will continue to increase headcount in 2024, it will be at a much slower pace compared to 2023. Our goal in 2024 will be for these reps to continue identifying, training, and educating new surgeons at existing and new accounts to increase utilization. Turning to surgeon interest and patient awareness. As we’ve communicated to investors over the last 12 months, our primary focus is for Aquablation therapy to become the standard of care for BPH surgery, and to achieve this goal, we have prioritized surgeon engagement, patient outcomes, and training. Surgeon interest has increased meaningfully, resulting in active surgeon growth of approximately 70% compared to 2022 levels.

While the primary driver of procedure volume continues to be active surgeon growth, our ability to also sustain surgeon retention rates above 90% quarter-to-quarter demonstrates the clear patient and surgeon benefits of our technology, which ultimately leads to increased utilization. As a company, we benefit greatly from this high-level of surgeon retention as our commercial team can focus on adding new surgeons. As it relates to specific Aquablation therapy, patient interest we have also seen a meaningful uptick in our search activity. Hospital customers continue to drive a significant amount of direct patient advertising and have reported attracting many new patients to their hospital that are seeking Aquablation therapy. Our current strategy will continue to be focused on surgeon engagement and awareness.

However, we believe patients actively researching Aquablation therapy and following through to see a surgeon is another positive indicator for our expanding product awareness and presence in the marketplace. Next, I want to touch on reimbursement and private pay coverage. The fourth quarter of 2023, CMS finalized its 2024 hospital outpatient prospective payment system. The Level 6 APC code for our procedure will provide the hospital approximately $8,800 for each Aquablation procedure, which is roughly 2.5% increase over the 2023 rates. Following the addition of United Healthcare in June, we now estimate roughly 95% of men in the U.S. have access to Aquabulation therapy, which is an increase from approximately 75% in January of 2023. With respect to the international market development activities, we generated $3.3 million of international revenue in the fourth quarter of 2023, representing growth of 64% compared to the prior year period.

A medical technician using surgical robotics to perform minimally-invasive urologic surgery in an operating room.

Growth in the fourth quarter was driven primarily by strong sales momentum in the United Kingdom. Since NICE granted its strongest endorsement, the standard arrangement, recommendation for Aquablation therapy in October, our pipeline of large NHS hospitals has increased meaningfully. With respect to market development activities in the UK, we are very pleased with the initial momentum we have generated. Given the accelerating interest from UK surgeons and strong unit economics on handpiece and system average selling prices, we plan to make further investment over the next 12 months in the UK to accelerate growth and expand patient awareness. Additionally, in December, we completed enrollment of our post-market survey in Japan to treat 100 patients with Aquablation therapy.

While we view Japan as a very attractive market long term, it’s going to take some time to build our pipeline and launch accounts to start generating meaningful procedure volume. Like the U.S. and United Kingdom, our strategy is to lead with clinical data to support a more robust and sustainable commercial launch. Lastly, we continue to make progress enrolling patients in both prostate cancer studies. In fact, since we announced our prostate cancer initiative in September, we have received numerous inquiries from urologists all around the world, who are not only interested in BPH, but also very enthusiastic about the potential to treat prostate cancer. As we continue to make progress on the clinical front, we will disclose information when appropriate.

In summary, as I look back over the last 12 months, I’m extremely proud of what our company was able to accomplish in a challenging macro environment. Despite this macro headwind, we generated significant revenue growth by selling capital and increasing utilization at active accounts. Additionally, we moved into a new and larger facility and hired a significant number of commercial team members, which presented its own execution challenges that the team was able to successfully navigate. These investments were necessary as essential for our future growth. Moving into 2024, I 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, these catalysts, our pipeline, and sales funnel continue to grow nicely in what we currently believe is a more stable macro environment.

On average, the longer an account has been active, the more procedures they do. We are launching new accounts with more surgeons while sustaining retention rates consistently above 90%. Our commercial organization is the largest and most tenured in the company’s history, which we believe will lead to increased productivity. And lastly, we will continue to enroll patients in both prostate cancer studies to support Aquablation therapy’s clinical value in this therapeutic area to expand our footprint in the larger urology market. 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. With that, I will turn the call over to Kevin.

Kevin Waters: Thanks, Reza. Total revenue for the fourth quarter of 2023 was $43.6 million, representing growth of 83% compared to the fourth quarter of 2022. U.S. revenue for the quarter was $40.3 million representing growth of 85% compared to the prior year period. In the fourth quarter, we sold 44 AQUABEAM Robotic Systems with average selling prices of $376,000, generating total U.S. System revenue of $16.6 million, representing system revenue growth of 59% compared to the fourth quarter of 2022. U.S. handpiece and consumable revenue for the fourth quarter of 2023 was $21.6 million representing growth of approximately 109% compared to the fourth quarter of 2022. Handpiece growth was driven by an increase in the installed base of AQUABEAM Robotics System, which has grown 89% from the fourth quarter of 2022.

Additionally, we have seen an increase in utilization from our install base. Monthly utilization per account, 7.3, increased approximately 13% compared to the fourth quarter of 2022. Utilization outperformance in the fourth quarter was due to normal fourth quarter seasonal strength from elective procedure volumes, the direct reflection of strong commercial execution, and surgeons taking the next step to adopt Aquablation therapy as their treatment of choice for all resective procedures. We continue to see increased account level utilization over time as we train new surgeons and increase utilization of our existing surgeon base. We shipped approximately 6,400 handpieces in the United States in the fourth quarter, representing unit growth of 116% compared to the fourth quarter of 2022 with stable average selling prices.

We also recorded $1.6 million of other consumable revenue in the fourth quarter of 2023. International revenue for the fourth quarter was $3.3 million representing growth of approximately 64%. Gross margin for the fourth quarter of 2023 was 49%, which was negatively impacted by approximately $2.5 million of items primarily associated with the relocation of our corporate headquarters on September 2023. To provide more detail on this $2.5 million impact, first, we recorded year-end inventory adjustments, which were mainly due to certain write-offs primarily attributable to our move. Second, we produced fewer units than anticipated in the back half of 2023, thus increasing the average cost of inventory sold due to unabsorbed overhead expense. Lastly, we incurred an approximate 35% increase in scrap when producing units compared to the third quarter of 2023.

We have addressed these factors and are already seeing improvements in the first quarter of 2024. I will discuss guidance shortly where we will see margin levels return to the mid-50% range in the first quarter, sequentially increased throughout 2024. Moving down the income statement. Total operating expenses in the fourth quarter of 2023 were $50.8 million compared to $35.7 million in the same period of the prior year and $44.5 million in the third quarter of 2023. Although operating expenses sequentially increased $6 million when comparing revenue growth to operating expense growth, we grew revenues 83% in the fourth quarter on 42% operating expense growth. In the fourth quarter, operating expenses exceeded our guidance as we pulled forward investments to expand our commercial organization and accelerated R&D investments ahead of 2024.

Total interest and other income was $2 million as quarterly interest expense from our $52 million term loan was offset by favorable interest income from our cash balances, which were significantly increased with our recent equity financing in August 2023. Net loss was $27.5 million for the fourth quarter of 2023 compared to $28.2 million in the same period of prior year. Adjusted EBITDA was a loss of $23.3 million compared to a loss of $21.7 million in the fourth quarter of 2022. Our cash and cash equivalents balance as of December 31 was $257 million. 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 expect full year 2024 total revenue to be approximately $210 million, representing growth of approximately 54% compared to 2023.

Starting with U.S. Systems, we expect full year system sales that exhibit a similar cadence to 2023 were roughly 45% of our system sales or in the first half of the year, which we attribute to normal seasonality and our expanded sales force becoming more productive in the second half of 2024. We also anticipate stable average selling prices in 2024 compared to 2023. Turning to U.S. Handpieces. We expect to sell approximately 33,000 handpieces for the full year with average selling prices of approximately $3,150. We also expect other consumables revenue to be approximately $9 million for the full year. Regarding quarterly cadence, similar to 2023 seasonal trends, we expect first quarter 2024 utilization sequentially decline compared to the fourth quarter of 2023.

Additionally, we expect U.S. service revenue to be approximately $11.5 million. Lastly, on international revenue. Given another strong quarter and positive momentum in the United Kingdom, we expect full year international revenue to be approximately $18 million, representing growth of approximately 60%. Moving down the income statement. We expect full year 2024 gross margins to be approximately 57% to 59%. Based on what we are seeing quarter to date, we expect first quarter gross margins to be in the 53% to 55% range and increasing sequentially throughout the year. Regarding 2024 gross margins, we believe 2023 was a transition year with temporary headwinds associated with moving into a larger facility and investments to support future growth.

I provide this context to demonstrate why 2024 will begin to show meaningful margin expansion. First, we are now firmly in our new facility and are operating with stability and have refined our manufacturing processes to reduce production-related expenses such as scrap. Second, the pace of hiring production personnel will slow in 2024. Third, and most importantly, the largest cost component of our disposable handpieces are fixed overhead expenses, which at forecasted production levels and spend in 2024 provide us with increased confidence that we will begin to more fully absorb these expenses, which we believe will allow us to show consistent gross margin expansion. Turning to operating expenses. We expect full year 2024 operating expenses to be approximately $231.5 million, representing growth of 29%.

When comparing our revenue growth guidance to operating expenses, we expected to deliver leverage of 1.9 times, which is an improvement compared to 2023 at 1.5 times. This increase in operating expense is associated with strategic investments in R&D, commercial team expansion, and underlying general and administrative costs to support the business and put us in a favorable position to execute on our long term growth plan. Given current interest rates, we expect to generate net interest income of approximately $7 million in 2024. We expect a full year 2024 adjusted EBITDA loss to be approximately $73 million. Lastly, given our move to San Jose is complete, we expect 2024 CapEx spend to be more normalized at approximately $6 million to $8 million, down significantly from $25.2 million in 2023.

At this point, I’d like to turn the call back to Reza for closing comments.

Reza Zadno: 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 investment to execute on our long term strategy. Have a great day and I look forward to meeting many of you at upcoming investor conferences. At this point, we will take questions. Operator?

Operator: [Operator Instructions] One moment for our first question. And our first question will come from Craig Bijou of Bank of America. Your line is open.

Craig Bijou: Good afternoon, guys. Thanks for taking the question, and congrats on a strong finish to the year. I wanted to start, Kevin and Reza, you guys always — you talk about your comfort level with street estimates, and the rev guide kind of came in about $5 million or so above the street, and I know you gave a little bit of color on some of the specific categories or expectations for the categories, but just wanted to kind of ask specifically your confidence in putting out a number that was a little bit higher than the street. And maybe, I think Systems was a number that you didn’t give. So maybe just talk about how the street estimates for Systems and how that compares to what you guys are thinking.

Kevin Waters: Yeah, thanks, Craig, and good to speak with you. So if you look at where consensus was, I mean, that was really set after Q3, right? And the reality is we did see outperformance in the fourth quarter primarily around utilization, and our guidance, as I said in my prepared remarks, is really informed by what we’re seeing in the market. And when we look at utilization, we had a fantastic fourth quarter. We see that carrying into 2024 and really the raise was primarily in part to the utilization overachievement we saw in the fourth quarter. On top of that, we also increase the international expectation. So we’re seeing a lot of good things coming out of the U.K. We’re now guiding to $18 million of international revenue.

I think the street was probably somewhere in the $15 million to $16 million range, so that was another part of the guide. And then, you are correct in observing that we did not guide an absolute number of systems sold. I think as our business shifts to a more predictable recurring revenue model, we do feel that all of the other metrics we provided around ASPs, international revenue, and utilization, given the street an opportunity to back into the number of systems, and I think you’ll find that our implied guidance for system sales encompasses current street consensus as well.

Craig Bijou: Got it, that’s helpful. Thanks, Kevin. And wanted to follow up on OpEx and that number came in a little bit higher than expected. So wanted to ask specifically where is that increase coming from. You did mention that there was some pull forward of R&D expense in Q4, so is it going to be a higher R&D expense? Is it higher SG&A? And then maybe just more broadly, I recognize that the ratio of rev growth to OpEx growth is improving, but is there potential for even more leverage in 2024? And then should we expect that ratio to continue to increase as we get into 2025 and beyond?

Kevin Waters: Yeah, you’re correct. We guided a full year operating expenses of $231.5 million, which does represent growth of 29%, but as you pointed out, our revenue guidance is 54%. When you look at that on a leverage basis, that’s almost 2 times as in growing revenue, almost twice the rate of OpEx growth, which is an improvement from 2023, where we were right around 1.5 and 1.6 times. And we do believe this kind of ratio is a very good indicator of our ability to become a profitable company with margin expansion. And I don’t think 1.9 is as good as it gets to answer your question, kind of forward-looking. At this time, we’re not prepared to comment on what 2025 or 2026 would look like, but I don’t — I can see us improving from 1.9 times when I look at the scalability of the business.

Then to the last question, to the specific around what are those expenses, you’re correct. Most of the increase above street consensus are strategic investments in R&D primarily. We have added an incremental $2 million to support our prostate cancer studies. We’ve added some muscle to our commercial team around the ability to cover cases and key accounts to take advantage of our IDN relationships. And those factors are what are driving the incremental OpEx to street consensus in 2024. But again, we still feel very good about the leverage we’re demonstrating in the business on OpEx and our guidance.

Craig Bijou: Great. Thanks for taking the questions, guys.

Kevin Waters: Thanks, Craig.

Operator: And one moment for our next question. Our next question will be coming from Joshua Jennings of TD Cowen. Joshua, your line is open.

Joshua Jennings: Thanks a lot. Great to see the strong finish of the year. Wanted to ask a two-part question just on patient and surgeon demand. I think, Reza, you talked, I think, in your remarks or relayed that some urologists are seeing more patients failing medical therapy seeking out Aquablation, I was hoping that you could build on that comment and also just help us understand if there’s been any impact on utilization rates since September when the contraindication localized prostate cancer was removed from the label? And I just have one follow-up

Reza Zadno: Thanks, Josh. So, utilization, as Kevin mentioned, was high in Q4, and multiple factors contributed to that. Surgeon retention was very strong. New surgeons added in Q4, and there was some contribution from [indiscernible], and we did a great job of launching new accounts. Definitely, we see an indicator of low and mid-volume centers coming on board, and that is an indicator of interest from surgeons not only at these high-volume accounts but low- and mid-volume accounts that in the past they would refer those patients to other hospitals. Now they are treating those patients and do not refer those patients to other centers. But anecdotally, we see some accounts, as we mentioned, that they are using our treatment for all of the resective or majority of the resective procedures and that is because, as we said in the past, they’re using one algorithm to treat all prostates shapes and sizes.

And your second part of your — contraindication. It’s very hard for us to assess that, but that’s one less step that they need to go through when they are checking to schedule a patient. It’s very hard to assess whether how much that contributed [Technical Difficulty]

Joshua Jennings: Thanks. And then just a follow-up on just the capital pipeline, and I think, Reza, you, and Kevin, you both mentioned some of the confidence in guidance based on the pipeline, I was hoping to just provide any more detail on the mix of the pipeline here entering early days of 2024 versus early days of 2023. It sounds like you’re seeing more lower volume resective centers in the mix here, and maybe some robotic programs that may be in the mix as well. Any details you can share just on where the capital pipeline stands today versus a year ago would be great. Thanks.

Kevin Waters: Definitely. Thanks for the question. Definitely, what we see is the capital environment is, current capital is more stable than a year ago. 2023 was a fairly difficult environment. However, I’m very happy to say in that environment we were able to deliver and exceed our guidance. We see that our customers continue prioritizing capital investment based on where they see great ROI and increased patient flow. Definitely, when we talk to some of our accounts, they see increased patient flow, and also they continue to produce favorable clinical outcomes. And from — in terms of pipeline, we see the number of potential robot placement continue to grow, but the environment is more stable, and the accounts continue being interested. And also, as I mentioned, in low-volume and — volume centers, they are also coming on board.

Joshua Jennings: Great. Thanks a lot.

Operator: One moment for our next question. Our next question will be coming from Matthew O’Brien of Piper Sandler. Your line is open.

Matthew O’Brien: Good afternoon. Thanks so much for taking the questions. Just maybe starting on the robot side, I’m getting something like 185 systems for this year domestically, is that about right? And what does the IDN investment bring to the table? Are those going to be some more bulk purchases? Potentially, some of these systems, is there going to be some ASP discounting that’s required to do that? How do we think about the contribution there? Because I think, Kevin, you said that’s actually not even in guidance, so anything that you get there is all upside to this year, is that fair?

Reza Zadno: So, I’ll take the IDN, and Kevin will comment on the numbers. Quite frankly, it’s difficult to predict with the IDNs. The short answer is no. However, we continue to have positive conversation with national IDNs, and we maintain a very close relationship. Twelve months ago, we thought we would benefit from a multi-system order, of course, it didn’t happen, and as we move into 2024, you see continuously the interest from surgeons at these IDNs. And I’ll let Kevin talk about the number.

Kevin Waters: Yeah, Matt, it’s good to hear from you, and you’re in the ballpark, right? I mean, if you take all of the metrics we’ve given and you’re backing into 185 systems, which is kind of around consensus, you’re in the range of kind of how we’re thinking about capital sales for 2024. And as Reza mentioned, this is an important point on IDN. So we’ve been very fortunate to have most all of the large IDN contracts signed, and we haven’t been dependent on any bulk buys. And while our guidance doesn’t rely on any bulk buys, it does continue to rely on our strong relationships and purchasing being done at the local level. But we’re not dependent in 2024 on large bulk buys from any large strategic IDNs to meet the capital number that we put out there.

Matthew O’Brien: Got it. That’s really helpful. And then, I think the other thing that’s tripping up folks — the other thing that’s tripping up folks here is really on the gross margin and OpEx side of things. And so the gross margin number is lifting nicely, but maybe a little bit below expectation, is that a mix issue? And then 1.9 times leverage I think is really good in acceleration versus 2023, but that’s in the face of a lot of investments. So maybe just talk a little bit about some of these different investments from the IDN side, R&D side, et cetera, that you’re making even international, that’s incremental. That’s even weighing on the improvement that you’re seeing on the margin side of things. Thank you.

Kevin Waters: So, let me comment on our 2024 gross margin guidance and I’ll turn it over to Reza to perhaps provide a little more color on our R&D initiatives. When we look at gross margins, we do feel that 2024 is a year for us with increasing revenue, slower hiring, ability to absorb overhead, that really gives us conviction around this being the year where we’re going to be able to show consistent margin expansion throughout the year. And if you look historically, we’ve bounced around a bit quarter-to-quarter, been somewhat unpredictable, and that is just due to the rapid growth in the business coupled with our move. And 2024 is really the year where I think we’re going to start to see margin expansion, starting in the first quarter in the 53% to 55% range.

And I think what’s important is, while our guide is 57% to 59%, which I would say is kind of at the midpoint of how the street is thinking about it, that’s going to imply a margin exit velocity that’s going to have to be north of 60%, which then I think is frankly an exciting event for this business of this company, because you couple that margin expansion with the 1.9 times leverage, you could see your way to profitability at higher revenue levels just with what’s inherent in our model. So that’s some backstory on the margins. You have correctly pointed out in operating expenses that we continue to invest in the business. I’m going to let Reza spend a little time talking about those investments in R&D because, as I said to Craig earlier, that is the main driver of us being over consensus in 2024.

Reza Zadno: Thanks, Kevin. So that’s a very good question. As a robotic company, we are committed to innovation, and these innovations are critical for our long term strategy. The ultimate goal is to deliver superior value products. Last quarter, we decided to accelerate some of our R&D initiatives. These are internal milestones that we have. I’m sure — I hope you appreciate that discussion of R&D. Initiatives are sensitive, not only economic competitive nature, but also minimize potential disruption [Technical Difficulty]

Matthew O’Brien: Thank you.

Operator: I hear nothing.

Reza Zadno: Operator, is there — everyone there?

Operator: Yes, sir. Our next question or comment comes from the line of Chris Pasquale from Nephron Research. Mr. Pasquale, your line is now open.

Chris Pasquale: Comments about hospitals that have historically not done much resective BPH work now adopting Aquablation, we started off thinking about a resective market of about 300,000 procedures that you were going to penetrate. You did 185 last year, so you’ve got a long way to go, but if you then layer in the idea that you’re actually expanding the market by bringing in new hospitals, it implies even more runways, so I’d love to get your thoughts on how much TURP cannibalization versus market expansion has really driven your growth to date. And that 300,000 number, where do you think it could actually be in a few years as you expand the pool of centers that are providing treatment?

Reza Zadno: So definitely, there are hospitals — thanks for this question. Definitely, the hospital that you mentioned are low-volume hospitals that in the past they were not doing many resective procedures, and where we have seen those hospitals, the ramp is [Technical Difficulty] high-volume centers, so they are not. Again, as we said in the past, low-volume hospitals are not small hospitals. These hospitals see these patients and in the past they have the patients. In the past, they were deferring them to other hospitals, now they keep them. At this point, we’re still early in this process based on the number of cases that we did last year or in 2024, we believe the market will expand, but at this point, we are still cannibalizing current resective procedures. When we ask this question from our surgeons, where if they were not using our product, what other they would use, the common answer we get is TURP and green light. That is where currently it stands.

Kevin Waters: Let me just talk a little bit about the TAM. I mean, we’re in an enviable position where we’re in a market, where, as you pointed out, we agree with you, we think the market, given the 12 million men being actively managed for BPH and the lack of good surgical alternatives available today, we definitely think that market could grow. But our growth isn’t reliant on that market expansion in the near term, which, again, is just a great position for us to be in. And it’s early innings, as you’ve pointed out, with us doing 33,000 procedures next year, but we definitely think there’s millions of men that are waiting on the sidelines that with a treatment like Aquablation therapy are great candidates, and it’s great to see those men already coming into the funnel, but as Reza pointed out, we would suggest the majority of our procedures today are cannibalized from TURP and greenlight.

Chris Pasquale: Okay, that’s helpful. And then, Kevin, how are you thinking about the salesforce expansion from here? Up until now, you’ve been adding reps kind of in bunches every few quarters, which leads to some kind of stop-start dynamics in terms of their productivity. Does that continue or do you shift into kind of a steadier cadence of just doing sort of a couple every quarter?

Kevin Waters: I think it’s the latter. We’re at a point now where case coverage utilization, those adds become much more of a steady cadence as we see the salesforce expand. We’ve added a few different layers to our team. Reza mentioned one of them in his remarks, the key account team. We’ve also added some junior capital reps to the sales team to help support the business. So as we move forward, it becomes a much more steady cadence with not the big bulky adds that you’ve seen in the past. At the same time, I do think we’re going to have additional capital rep adds in the back half of 2024, that’s factored into our guidance.

Chris Pasquale: Thanks.

Kevin Waters: Thank you.

Operator: Thank you. Our next question or comment comes from the line of Richard Newitter from Truist Securities. Mr. Newwitter, your line is now open.

Unidentified Analyst: Hi, can you hear me?

Matt Bacso: Yes, ma’am, we can hear you.

Unidentified Analyst: Great. This is [indiscernible] on for Rich. Thank you for taking the question. So I’m wondering when you think you will be in a position to commit to more substantial profit improvement. It had — it seemed like this year would be on track to make more progress. Thanks.

Kevin Waters: Yeah, we’re having a little bit of a hard time hearing you, but at this time, we’re not providing a long term financial target for when the business will be profitable. With that said, we’ve been very consistent in stating that we do believe this business today has sufficient cash on the balance sheet to reach profitability given the pace at which our revenue is growing and our plans to support the business, the operating expense increase, we are showing EBITDA improvement in 2024. And I do think, as we’ve characterized in the past, this business flips to profitability given the recurring nature of the revenue, given the margin profile, given our OpEx leverage, it flips pretty quickly and at significant levels at scale, but we’re not prepared today to give a long term kind of financial target for when that will be. And again, I would just reiterate, with our capital raise, we’re very comfortable with our cash position and our ability to get there.

Unidentified Analyst: Great. Also, could you provide some color on your system ASP cadence throughout the year? Thanks.

Kevin Waters: ASPs or cadence? I’m sorry, again, I’m having a hard time understanding. I’ll give them both to you. [Multiple Speakers] How about that? Okay. All right. Yeah, so I said in my prepared remarks, we’re not guiding to a specific number, but at the same time, I did suggest that our system sold the cadence will be very similar to 2023, where approximately 45% of all of our systems, we’re in the first half and 55% were in the second half. Then regarding pricing, if that was in there, we also said that we expect ASPs to be relatively stable to 2023 to somewhere in that $365,000 to $370,000 range.

Unidentified Analyst: Thanks.

Operator: Thank you. Our next question or comment comes from the line of Brandon Vasquez from William Blair. Mr. Vasquez, your line is now open.

Brandon Vasquez: Hi, everyone. Can you hear me okay?

Reza Zadno: Perfect. Yes.

Brandon Vasquez: All right, great. Thanks for taking the question. I guess first, on the OpEx side, if I can try to ask it slightly different, I know we won’t get a timeline on maybe when you turn profitable or maybe more specific timelines on when it gets more meaningfully positive, but can you just talk about what are some milestones or catalysts within the P&L over the coming years that I think might flip this? You guys have a highly recurring business, good margins, like what are the milestones or catalysts that need to happen to see more meaningful P&L leverage in the coming years?

Kevin Waters: I think for us it’s gross margin expansion is the meaningful metric as we look towards being able to have a proof point to be a profitable business. The recurring revenue, as you pointed out, now is slightly north of 60% in 2024, which is a good place to be. That will continue to improve as we get more systems installed and become more even greater than that with recurring revenue. But really, I think the exit velocity that we’re planning to show in 2024 on gross margins, that is going to be the proof point, I would think, regarding a very clear pathway to profitability. At the same time just being disciplined around operating expenses. In 2023, we revised OpEx guidance a few times throughout the year and our cadence and goal this year as a business is to not do that as we move throughout the year, which I also think will be a proof point for investors to show that we have a business with a high degree of recurring revenue, great operating expense leverage, and expanding gross margins that will demonstrate a pathway to profitability.

Brandon Vasquez: Okay. And then, if you have a follow-up, I’ll lump two questions together here, but can you talk a little bit about what you’re seeing in terms of utilization in some of your oldest cohorts of system placements, compare that to what kind of the newer levels are doing? And then the quick little follow-up is with TPT kind of expiring now in 2024, kind of a couple of months into the year here, any changes you’re seeing in ordering patterns, any impacts that you’d call out from that TPT expiration? Thanks, guys.

Reza Zadno: So, related to utilization, what we see is the longer the accounts have been with us, their utilization continue to increase. And related to TPT, no, we do not see an impact. Utilization that we have delivered is really driven by the clinical outcome. Customers are not buying because of a short term benefit from TPT. Now with roughly 95% access, payment and coverage, that is not an issue.

Kevin Waters: Yeah, just to follow up to Reza, we continue to see new accounts that we are installing systems at today, ramping up the utilization curve faster than accounts did one to two years ago, and we obviously attribute that to just normal market adoption awareness, but it’s also very purposeful and it’s related to our increase in OpEx quite frankly. We’ve made investments in this utilization team and those utilization specialists are manifesting themselves in higher utilization, higher ramp. So again, we think these are investments that are going to pay off longer term. Just on the TPT, I just want to be definitive here, we’re seeing zero impact in the first quarter with the TPT going away now that we’re almost two months through.

Operator: Thank you. Our next question or comment comes from the line of Nathan Treybeck from Wells Fargo. Mr. Treybeck, your line is now open.

Nathan Treybeck: [Technical Difficulty] So I’m estimating implied in your guide that utilization is about seven a month, which would be about 5% growth year-over-year. Your utilization just grew 10% in 2023 and given your comments on just positive surgeon adoption trends and your active surgeon growth trends, is there conservatism into the guide?

Reza Zadno: No. So as far as utilization, what we see is typical seasonality trends, trends that we see in other combat companies, Q4 generally is very strong, Q1 is the lowest. Overall, we feel very good about the underlying trends of our business and see strong momentum in our account. So we believe following a normal low point of seasonality in Q1, the utilization will continue to increase throughout the year.

Kevin Waters: Just your question around conservative versus aggressive, I mean, I think if you just look at the history that we’ve shown over the last two years, philosophically, we guide tend to be conservative based on what we’re seeing in the market. I think last year, one of the things that went a bit not according to plan in the first quarter was that our system guide was — we felt like we were playing catch up all year, and therefore this year, I think if you’re going to characterize our utilization guidance, given the commentary we’ve made, I think conservative is an appropriate way to classify it. And at the same time, I would hope that our track record over the last nine quarters, 10 quarters as a public company, is a proof point for you on that.

Nathan Treybeck: Okay, thanks for that. In terms of timing for your prostate cancer trial data, I think previously you talked about early 2024 and people were assuming it would be AUA, is there any update you could provide?

Reza Zadno: Thanks. We continue making progress on those studies, and in fact, since we announced the initiation of those studies, we see numerous inquiries from urologists around the world who are both interested in our cancer and BPH. So as we continue making progress, we will disclose information when it becomes appropriate.

Kevin Waters: And on AUA, we are more likely, like we’ve done in the last few years, we’ll have an investor event. Obviously, we recognize the importance to prostate cancer not only to our company but within the urology community at AUA, so we can’t promise you, Nathan, as to what we’re going to present, but we will definitely, at a minimum, educate the market as to kind of where we see ourselves playing. Why we believe we have an ability to treat, so things like that. We haven’t fully flushed out the agenda, but I think it’s fair to say you’ll definitely hear from the management team and key opinion leaders at AUA.

Nathan Treybeck: Okay, thanks.

Operator: Thank you. Our next question or comment comes from the line of Mike Kratky from Leerink Partners. Mr. Cratkey, your line is now open.

Mike Kratky: Hi, everyone. Thanks for taking our questions. So, qualitatively, to what extent are you expecting additional penetration within the 860 high-volume hospitals in 2024 compared to the penetration growth you saw between 2022 and 2023?

Kevin Waters: So, we’ve been seeing pretty consistent numbers there, where roughly 20% to 30% of both our pipeline and our installed base are the low- and medium-volume hospitals, and that would mean that 70% to 80% of our pipeline and installed base are the 860 hospitals that you have referenced.

Mike Kratky: Got it. Understood. And then just as a follow-up, taking a step back, you talked a little bit about seeing signals of an underlying shift in the overall BPH market, just in terms of the portion of patients that are ultimately seeking treatment from surgical intervention, are there any factors you’d kind of highlight that you think could really help accelerate the growth of this market given it’s so large but remains so underpenetrated?

Reza Zadno: Definitely, as our accounts are direct-to-consumer, where we don’t have direct-to-consumer advertising, but our accounts advertise for their robot, so there is increased awareness among patients. Patients who come for treatment for various other — even if they come ask for another treatment, many times Aquablation is a better option for them. But as we see in low-volume accounts and mid-volume accounts, that is where with our technology, they keep those patients and they treat them. So as Kevin mentioned, in the near future, we do not rely on expansion of this market. We are still early in our process of tapping into the current resective market, but definitely there is those 12 million men who have seen a doctor and either have medication or have failed to medication, the goal is to capture those patients.

Mike Kratky: Got it. Thanks very much.

Reza Zadno: Thanks.

Operator: Thank you. I’m showing no additional questions or comments in the queue at this time. I’d like to turn the conference back over to management for any closing remarks.

Reza Zadno: Yeah. I want to thank everyone for attending this conference call, and I hope to see many of you in the upcoming conferences. Thank you very much and have a nice day.

Operator: Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.

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PROCEPT BIOROBOTICS CORP

Q4 2023

Earnings Transcript

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