LENSAR Inc

NASDAQ:LNSR

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, and thank you for your participation. [Operator Instructions] As a reminder, this conference call will be recorded.

I would now like to turn the call over to Cameron Radinovic of Burns McClellan.

[Cameron Radinovic, executive]

Thank you, Operator. Good morning, and welcome to the LENSAR's Second Quarter 2024 Financial Results Conference Call. Earlier this morning the company issued a press release providing an overview of its financial results for the quarter ended June 30, 2024. This press release is available on the Investor Relations section of the company's website at www.lenzar.com.

Joining me on the call today is Nick Curtis, Chief Executive Officer of LENSAR, who will review the company's recent business and operational progress. Following his comments, Tom Staab, Chief Financial Officer of LENSAR, who will provide an overview of the company's financial highlights before turning the call back over to the operator to facilitate answering any questions you may have.

Today's conference call will contain forward-looking statements, including those statements regarding future results, unaudited and forward-looking financial information as well as the company's future performance and/or achievements. These statements are subject to known and unknown risks and uncertainties, which may cause the company's actual results, performance or achievements to be materially different from any future results or performance expressed or implied in this presentation. You should not place any undue reliance on these forward-looking statements.

For additional information, including a detailed discussion of the company's risk factors, please refer to company's documents filed with the Securities and Exchange Commission, which can be accessed on the website. In addition, this call contains time-sensitive information that is accurate only as of the date of this live broadcast, August 8, 2024. LENSAR undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this live conference call.

With that, it is my pleasure to turn the call over to Nick Curtis. Nick?

[Nicholas Curtis, executive]

Thank you, Cam, and good morning to everyone. I appreciate you joining us and I'm excited to update you on an unprecedented second quarter for LENSAR.

Starting from an ALLY System placement standpoint, the second quarter was a record period for LENSAR. We placed 17 new ALLY Systems, a remarkable 30% increase over a strong second quarter of 2023. From a historical perspective, the second and fourth quarters are typically our strongest in terms of revenue. In each of these quarters in 2023, we achieved $12 million in revenue, which we exceeded with the $12.6 million in Q2 2024, an increase of 5%. Remember, however, this is without clearance to sell ALLYs outside the U.S.

With this past performance in mind and given the newly received EU and Taiwan clearances, we are excited about the system as well as procedure market share growth possibilities for the remainder of the year. In addition to the 17 placed ALLY Systems, we converted 6 previously installed systems on usage agreements to sold systems as well as ended the quarter with a backlog of an additional 17 ALLY Systems. We expect these to be placed in the second half of 2024.

The conversion of placed rental systems to sold systems demonstrate significant customer satisfaction with ALLY and provides further validation of ALLY's capabilities versus competitive systems in the marketplace. Demand for LENSAR's ALLY Systems is strong and growing despite some weakness and uncertainty in the overall economy with interest rates remaining high. In the face of these macroeconomic headwinds, LENSAR has proven resilient in our ability to meaningfully expand our footprint in refractive laser cataract surgery.

In addition to our record number of placements, procedure volume also had impressive growth with a 19% increase over Q2 2023 and first half 2024 procedure volumes up 22% over the first 6 months of 2023. Furthermore, we saw a 16% increase in our installed base with 80 ALLYs in the field and 330 LENSAR systems installed worldwide. I'm really proud of this impressive progress.

Another important performance metric is our penetration into new practices. In the second quarter, 88% of our ALLY placements were with new customers and more than 80% of the U.S. systems placed in the first half of the year were with first-time LENSAR users. This is another clear example of surgeons' growing choice to use ALLY over competitive systems and directly impacts the growth trajectory of our recurring revenue and procedures going forward.

Given ALLY clearance in the EU and Taiwan, we can begin to replace older competitive devices and attract new practices to LENSAR from those regions where there is already significant interest in ALLY and begin executing our OUS commercial strategy to further increase our worldwide installed base. I have a great deal of confidence that these efforts will prove successful as they have thus far in the U.S.

With the majority of our U.S. conversions thus far have been surgeons new to LENSAR, upgrading to ALLY is a better option than an aging suboptimal, however, still usable laser. We're approaching a significant industry-wide replacement cycle as competitive systems currently in use are nearing end of life. These systems are based on decade-plus-old technology. And while still functional, they're clearly inefficient and lack features capable of delivering improved outcomes for patients.

Given the slow pace of innovation from the largest eye care companies competing in our space, rapid servicing and system reliability are beginning to create challenges. As we have shared on previous calls, this reality is creating a perfect commercial opportunity for LENSAR. Adoption and placement of an ALLY System into a surgeon's practice or an ASC can result in meaningful revenue and EBITDA growth, thanks to its ability to significantly increase efficiency in patient throughput as well as enhanced outcomes.

Because of these factors, we believe it is a matter of when, not if they adopt our technology. And we're beginning to see a substantive acceleration in the rate of ALLY conversions. The current economic conditions I mentioned earlier, make it more challenging for surgeons and facilities to invest in upgrading their capital equipment. However, the speed and efficiency of ALLY, which is being discussed in an increasing number of peer-to-peer communications, surgeon-initiated studies and case studies discussed during this quarter's medical meetings demonstrate the financial benefit of adopting our system, helping to overcome the economic challenges surgeons face.

Additionally, penetration into important channels, such as the private equity groups, combined with the overall age of competitive systems in the market will continue to provide significant catalysts for ALLY adoption. Accordingly, we expect to see new customers and overall market share growth continue quarter-over-quarter as this perfect storm plays out. As we continue placing new systems with new users and these surgeons become more familiar with the ALLY experience and the associated advantages of working with LENSAR, we're confident that procedure volumes and recurring revenues will increase in parallel.

We had an exceptional quarter as evidenced by the continued revenue and placement growth in the U.S. and receiving CE Mark approval for ALLY, a major strategic milestone which we announced yesterday that sets the stage for commercial expansion into the European market. This important regulatory approval for ALLY further reinforces our belief LENSAR is paving the way to revolutionize advanced laser cataract surgery. The EU clearance is a critical step toward our objective of expanding ALLY's reach on a global scale.

There are a number of European surgeons eager to take their capabilities to the next level with ALLY. We have a solid network of distributors ready to deploy. And LENSAR is poised to replicate its U.S. success story in key markets elsewhere in the world. To that end, we have been training our EU field service and clinical application support partners and we have already initiated shipments to Europe. And the first ALLY was installed in a surgeon's facility this week. I look forward to updating you on all the progress of the European launch next quarter.

I also like to report, we recently received TFDA approval to make ALLY commercially available in Taiwan and Hong Kong. And like Europe, we've been working closely with our Southeastern Asian distributor to support an efficient launch. I'm pleased to share that we have also shipped our first systems to Taiwan with users having already performed the first ALLY cases and have additional OUS regulatory approvals on the horizon.

We continued to actively evangelize ALLY within the medical community with a strong LENSAR presence at both the AECOS Europe Symposium in Prague and the DOC Meeting in Nuremberg. We conducted a number of ALLY demos and interacted with European thought leaders highlighting ALLY's key differentiators and unique ability to address the shortcomings of first-generation systems. This actively dovetailed perfectly into the EU commercial launch on the heels of our fortuitous regulatory clearance.

With our growing installed base, encouraging utilization trends and an expanding international footprint, we're well positioned to further increase our market share both in the U.S. and the rest of the world as we move forward. I'm proud of what the LENSAR team has accomplished to date. And it's incredibly gratifying to share some of the details on how far we've come since receiving FDA clearance of ALLY just 2 years ago.

Gaining over 4 procedural market share points in the U.S. since launching ALLY is an incredibly positive milestone, but it's just the start. We continue to believe that ALLY is a transformative technology with the potential to positively impact the future of the laser cataract market. We're starting to see this play out, but view this as a marathon, not a sprint. Now that we can market and sell ALLY outside the U.S. with additional markets potentially available to us in the coming months, I expect that the positive momentum for LENSAR will begin building at a quicker pace.

Now let me turn the call over to Tom to cover our financial highlights for the quarter. Tom?

[Thomas Staab, executive]

Thank you, Nick. Just a few brief remarks from me on our strong second quarter performance. Revenue was $12.6 million in the second quarter of 2024 compared to $12 million in the second quarter of 2023, reflecting a 5% increase. This growth was generated from an increase in procedure volume. To echo Nick's earlier comments, U.S. procedure volume increased 16% over the second quarter of 2023. And on a worldwide basis, we saw an increase of 19%.

Given the timing of placements in the second quarter and ramp up time for sites and surgeons to reach an optimal utilization rate, we expect to see more robust procedure volume culminating in recurring revenue in the third and fourth quarters of 2024 when these recently installed systems begin to achieve a typical monthly run rate.

In addition, we are extremely excited to have recently received EU and Taiwan regulatory clearances that allow us to sell ALLY outside the United States. We are now able to increase ALLY's global footprint. Selling ALLY Systems in these operating regions is extremely important and enables us to increase our market share, total and recurring revenue as well as positively impact our cash flow. We have been anxiously awaiting these clearances as they are significant catalysts for our future success.

Gross margin for the quarter was $6.8 million, representing a gross margin of 54% compared to $6.8 million and 56% gross margin realized in the second quarter of 2023. Our gross margin was strong this quarter, although we anticipate a slight decrease in our future gross margin percentage as we see a higher concentration of ALLY sales and anticipate a higher concentration of revenue outside the United States in future quarters. For the year, we continue to expect a gross margin percentage of approximately 50%.

Total operating expenses for the second quarter of 2024 were $12.1 million and compared to $9.6 million in the second quarter of 2023. The increase in operating expenses was primarily attributable to a one-time impairment charge on intangible assets of $3.7 million. If you exclude this impairment charge, our total operating expenses were $8.4 million, which is largely a function of decreased general and administrative expenses, somewhat offset by increased selling and marketing expenses as we focus on growing our commercial organization and market share in the United States.

The $3.7 million charge relates to a strategic decision to terminate our collaboration with Oertli associated with the integration of their phacoemulsification system into ALLY. Although we remain committed to combining ALLY and phaco capabilities and we'll continue to maintain a robust portfolio of IP related to this integration, we have decided to discontinue activities with Oertli. The discontinuation of the collaboration eliminates any contractual and any other potential limitations on LENSAR collaborating with other phaco manufacturers in the future.

Net loss for the quarter was $9 million or a $0.79 loss per common share compared to an $8.8 million loss and a $0.81 loss per common share in the second quarter of 2023. However, as discussed previously, included in the net loss was the one-time impairment charge of $3.7 million and a charge associated with our outstanding warrants, which occurred in both second quarters relating to an increase in our stock price.

To evaluate our results and operations more intuitively, let us look at our adjusted EBITDA results. The second quarter is generally a strong quarter for us and you see we achieved breakeven having a positive adjusted EBITDA of $30,000, after narrowly missing breakeven in the second quarter of last year with a negative $188,000. Looking forward, we expect to see operating breakeven quarters with some consistency starting as soon as the fourth quarter of this year. If you exclude the warrant and impairment items from our net loss for the second quarter, our loss was $1.4 million in 2024 as compared to $2.8 million in 2023 or 1/2 of what it was for the second quarter a year ago.

As of June 30, 2024, we had cash and cash equivalents of $15.4 million as compared to $24.6 million at December 31, 2023. Cash used in the second quarter was $3.7 million and was largely dedicated to increases in inventory and our leased fleet of U.S. systems. These uses of cash are a function of building inventory to supply ALLY Systems to the EU and Taiwan for which shipments have begun as well as expanding our fleet of ALLY Systems in the United States.

Now I'd like to turn the call over to the operator, and we look forward to your questions. Marjorie?

[Operator]

[Operator Instructions] And while we wait for those questions to come in, we will next go to Frank Takkinen from Lake Street Capital Markets.

[Frank Takkinen, analyst]

Congrats on all of the progress. I was hoping to start with one on the mix of sales versus placements in the quarter. Obviously, a really impressive placement quarter. Nick, can you maybe talk a little bit more about the mix of how much of those were actual upfront sales versus placements? And then how the prospects look to fit those into a full purchase or do they stay as placements and just develop a big recurring revenue stream?

[Nicholas Curtis, executive]

Yes. Frank, I appreciate the questions. So of the 17 on the installs, 10 of those were sold and 7 of those were leases, if you will. So about 59% of the systems were actually sold systems of the 17. And then of course, we converted the additional 6 systems that had been placed previously.

[Frank Takkinen, analyst]

Got it. That makes sense. And then maybe shifting over to manufacturing capacity, clearly, you're scaling well and I think I asked about this last quarter too, but do you still feel confident you're able to produce the amount of ALLY Systems required to keep up with demand now that you're entering a couple of new geographies?

[Nicholas Curtis, executive]

I do, actually. We had anticipated these approvals. And so as Tom had made some remarks in his comments here, we had been buying inventory and building inventory. There's some lead time to receiving some of the critical parts such as the laser aspect and certain other components computer-wise and whatnot and chips. So we've been placing orders and we have been receiving items in anticipation of this. So manufacturing is actively building systems now as we speak. And we feel good that we're going to be able to deal with our backlog. And by the way, that was U.S. backlog that I was talking about going into the quarter. And we'll see, as we move forward in this quarter, as we start to get more orders from outside U.S. But we feel comfortable that we've ordered enough parts and we're actively building and people are pretty fired up around here.

[Frank Takkinen, analyst]

Nice. And then maybe just the last one. Help us with back half expectations. I heard the comment, Q2, Q4 typically the strongest. But maybe if you can help us think about how we should be thinking about our models for Q2 and Q4 and bridging to the expectation for 20% growth for this year?

[Nicholas Curtis, executive]

Yes. So typically, as we said, Q2, Q4 would be the best quarters. I certainly expect, based on the continued interest in getting approvals outside U.S. and sort of early indication of demand for systems to be shipping OUS that we'll have a reasonable quarter this quarter in the third quarter, which typically just globally, cataract surgery volumes are the lowest -- overall cataract surgery volumes are the lowest in Q3 as compared to all the 4 -- the other 3 quarters over the course of the year because of extensive European vacation schedules, people generally traveling more, doing less. And then the fourth quarter typically is the strongest from a procedure number perspective, overall cataract procedures.

So I expect that to follow suit with LENSAR, but even more so for us because we've got a large number of systems that installed at the end of the first quarter and certainly into second quarter with a big backlog moving into third quarter. We'll have a reasonable third quarter and then I expect fourth quarter that between the meetings that we've got, the shipments that are going OUS in this quarter and in fourth quarter that we're really going to finish the year really strong going into the first quarter. So I would expect that both on the procedure level as well as on an overall capital level and numbers of systems, you're going to see some really strong performance here as we get into the fourth quarter.

[Thomas Staab, executive]

And Frank, maybe just a little bit of color. So in my remarks, I had mentioned that we expect the procedure volume to increase in the third and fourth quarter. If you look at the third quarter and the 17 placements and you split the quarter right in the middle, the vast majority of those placements were actually installed in the latter half of the quarter. And so what that means is you got to ramp up those systems and they should kick in, in significance in the third quarter, but really all of them will be hopefully operating at an optimal level in the fourth quarter.

The other thing to consider is with the 2 clearances, we just started shipping systems. And obviously, it's at least 1/3 of the order is done. So it will take us a while to get that. But those procedures from an ex-U.S. perspective should kick in, in the fourth quarter. So we really do expect the fourth quarter to be very, very strong for us just because of those catalysts.

[Operator]

And next, we're going to go to Ryan Zimmerman with BTIG.

[Ryan Zimmerman, analyst]

Congrats on all the approvals. It's exciting to see. I want to ask about your OUS strategy a little bit, Nick. So just talk to us kind of how you're thinking about approaching the market. I mean, obviously, you have distributors there, but is there something beyond just attendance at clinical meetings? Are you putting any resources in these markets? Just help us understand kind of how you're thinking about approaching that?

[Nicholas Curtis, executive]

Yes. Ryan, appreciate the question. So it's interesting. We didn't have the luxury 12 years ago when we were introducing the first gen of being able to sort of control the launch, if you will. We kind of had to go global and introduce the product everywhere 12 years ago because we were sort of the last company and we were the smallest independent moving into the marketplace. Things are a lot different right now. We're the leader in the technology moving into the marketplace now with a significantly enhanced new product. And Europe has been pretty polarized in terms of people's belief or lack thereof in the femtosecond laser market space for cataract surgery.

And so -- and it's been polarized there because when these technologies launched, there was a high expectation for efficiencies, outcome and performance. And quite frankly, the first generation systems went into the marketplace and they didn't necessarily perform like that to start. And now that we've had the benefit of a ramp up in the U.S., there's been a significant amount of cross-pollination between European physicians and physicians outside U.S. hearing about ALLY. We've certainly got a much better handle on ALLY now and understand very well how it works. And we've already put very substantive kind of continuous improvement and upgrades into the system.

And so we expect that when we get these first systems installed, there's a couple of different areas. I talked about channels in the U.S. from a private equity perspective. Well, those same channels exist outside U.S. And we've begun in the EU, at least, and we've begun to penetrate into one of the larger -- 2 of the larger private equity groups actually in with first gen lasers of LENSAR and we'll be evolving into the ALLY lasers there. We've also reached out to a group of KOLs that heretofore, we haven't necessarily had a relationship with and done business before. And as you know, peer-to-peer is really strong in -- for these types of technologies and products. And we're really focused on how we address the shortcomings of the first gen lasers as in practice in the EU.

And so we are putting some resources into those areas. We're doing -- we're going to be present there. ESCRS is coming up. And I'll talk more about some of the activities that we're going to be doing at the ESCRS in next quarter's call because I'll be able to give you an update as to actually how we did. And we're also going to likely be sending some of our people over to Europe and into Taiwan, Hong Kong to work with the distributors there in getting a quicker uptake with installs, because they don't have the numbers of employees dedicated to it. Sorry to take up so much time there, but it's important, it's a multi-process approach here.

[Ryan Zimmerman, analyst]

Great color, and I appreciate that. Now I want to ask, I mean, -- last quarter, if I recall, you weren't building in a contribution from international revenue. I think I heard you correctly say that the backlog of 17 is all U.S. So just want to understand, are you expecting some revenue in the back half of this year internationally?

[Nicholas Curtis, executive]

100%. And in fact, it's interesting because rev rec, Tom touched on it in his remarks, rev rec in the U.S. takes longer than it does OUS, because in the U.S. to give red rec, we have to ship, we have to take the order, we have to site visit, we have to ship, we install, we have to train. And then when we have certified users on the product, we get to rev rec, whether it's a sold system or whether it's a place system in the U.S. And so there's a time lag there. Rev rec outside the U.S. with the distributors works that when it leaves our dock, it becomes the property, if you will, sold system to the distributor.

So rev rec occurs faster outside the U.S. than it does in U.S., #1. However, lower margins, because distributors are, in essence, reselling, contracting with the customer. And the pathway to procedure revenue once it leaves our dock is very similar to the U.S. because they still have to install it, they have to train, they have to get people certified before there's revenue on procedures, which is why there's always a lag between the installs and when you start to see productive, Tom said, gets to their normal rate, if you will, of procedures. And so that's sort of the process. So I'm excited because we'll actually see revenue in the third quarter when typically we might not see as much revenue in the third quarter OUS because we just -- with just getting the approvals, regardless of vacations, we're shipping some systems, which is good. So does that make sense?

[Thomas Staab, executive]

Ryan, we'll be getting sales outside the United States in the third quarter, but I wouldn't expect a whole lot of procedure revenue until the fourth quarter, which is why when I answered Frank's question, not only do you have the timing in the United States of placements in the second quarter that were late in the second quarter, but then you also have the contribution from Europe on procedure volume going into the fourth quarter. So I think the fourth quarter should be a nice quarter for us.

[Ryan Zimmerman, analyst]

Very helpful. And then maybe 2 more questions for me and then I'll hop back in queue. But just you guys accelerated your growth 16% against a 13% comp in the U.S., really great to see. What's your read, Nick, on the health of the procedure environment, particularly for cataracts right now, both the U.S. and globally?

And then the second question, I'll just ask upfront. Tom, as we think about margins, I appreciate the guidance this year, conceivably, with all the consumable revenue and recurring revenue next year, margins could step up a little more materially. Just help us think about maybe the longer term margin opportunity for you guys?

[Nicholas Curtis, executive]

So Ryan, I'm sorry, I was tracking on your gross margin. Can you...

[Ryan Zimmerman, analyst]

Yes. First question, Nick, was just U.S. accelerated 16% on its...

[Nicholas Curtis, executive]

How I look at the cataract market overall.

[Ryan Zimmerman, analyst]

Yes, just your read on cataract help procedure -- help the procedures.

[Nicholas Curtis, executive]

So it's interesting because there is still some pent-up demand from a cataract surgery perspective. The people -- this is kind of still a little bit of a hangover from COVID, right? There's patients that didn't have surgery that now have surgery. On the other hand, there's some uncertainty with interest rates and talk about the economy and inflation and whatnot. And so I think patients -- I think there's some pressure on physicians from a premium surgery perspective.

On the other hand, you also have the generation of patients that are becoming cataract age patients that have had and made investments, significant investments in their eyes in refractive procedures leading up to this. And so in ACOS, there was an interesting session. Doctors are under pressure in their offices to maintain profitability, which is very difficult to do with present patients and time necessary in the office.

On the other hand, with reimbursements under pressure, and they certainly -- in incidence of the astigmatism 70% to 90% of patients who have visually significant astigmatism, it's imperative that doctors begin offering alternatives to patients from a surgical perspective that aligns patient need and patient want with really surgeons' needs to be able to offer those services and make a profit.

So I think I feel pretty comfortable that with these -- on the astigmatism side that you'll see a higher management of astigmatism as more routine to cataract surgery. Cataract surgery is refractive surgery. And doctors are relating to that. Private equity groups also have been pretty static. They haven't been able to continue to do deals. They made some pretty rich deals in paid premiums for these practices. So we're seeing the private equity groups who are on the business side, they were not that interested in looking at these types of things as replacement technologies to the older technologies that are when they're hearing the efficiencies, they have to improve efficiencies. They have to be able to have better patient throughput. We deliver on that.

So while the macroeconomic climate is difficult, this is not an if, it's a win with this. They're having to look at this and they are giving serious consideration. So I feel like our volume and just by the nature of the percentage of new customers that are coming to LENSAR, this is going to -- this is -- on the macro market, doctors need to do and offer these types of procedures patients want them and need them. And regardless, there's enough patients to be able to do this.

[Ryan Zimmerman, analyst]

So Ryan, in regards to gross margins, obviously, we're predicting that we're around 50% for this year. And that's -- we're seeing a few more sales than what we had originally anticipated, and it goes to Nick's comments about the difficult macro economic market just being a little harder for capital equipment sales. That -- we've been pleasantly surprised that it's ticked up a little more than what we had anticipated. So you take that forward.

And the short answer to your question is, if we're at 50% right now, we could easily go to 53% to 55%. And there's a number of factors that we are evaluating there. One is the floodgates have opened outside the United States. Right now, we've been captive to growing in the United States and we've done really well. We will continue to do that next year. But what you're going to see is, now we have the ability to place outside the United States, and that's very important for 2 reasons. One is all those placements will be sales unlike in the United States. But our margins generally carry an 80% or our procedures carry an 80% margin or so, obviously, our systems carry a much lower percentage. And then outside the United States, even lower than the United States simply because we have to make sure that our distributors are motivated and compensated appropriately.

And so I think that you have benefit in margin associated with more throughput of systems and utilization of overhead, more sales of systems is going to pull on that margin down a little bit. But as we play systems, the procedures and the recurring revenue associated with that obviously gets a much higher margin. [ Chisenbopping ] all out, and I would say, 53% to 55%.

[Operator]

I'd like to turn the call back to our speakers for any closing remarks.

[Nicholas Curtis, executive]

I appreciate everybody for joining the call today. Thank you for your continued interest in LENSAR. We really look forward to updating you as we make further progress in the exciting remainder of 2024 and beyond. Thank you for your attention today and questions. Appreciate it.

[Operator]

This does conclude today's program. Thank you for your participation. You may disconnect at any time.