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

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

Good morning and thank you for joining us. For today's call, I will provide opening comments and a business update followed by Kevin, who will provide additional details regarding our financial performance and 2023 guidance before opening the call to Q&A. Starting with our quarterly revenue results. We are pleased to report another strong quarter where our customers and patients continue to realize the significant clinical benefits of Aquablation therapy. Total revenue for the first quarter of 2023 was $24.4 million, representing growth of 72% compared to the first quarter of 2022. Growth in the quarter was driven primarily by increased utilization from an expanded install base and strong patient volume. We believe the combination of positive long-term clinical data, increased private payer coverage, outstanding real world patient outcomes, and an expanded field-based commercial team continued to drive surgeon interest and adoption of our AquaBeam Robotic System. As we move to 2023, we believe there are several positive factors which give us a high degree of competence to achieve our increased full year financial guidance, and Kevin will touch on later. Longer term, we believe these underlying fundamentals reflect the business that is laying the foundation to become the BPH surgical standard of care. Starting with a recent payer coverage. In early April, we announced that United Healthcare updated its policy for prostate surgery and interventions to include Aquablation as medically necessary. This updated policy will go into effect on June 1, 2023. Being one of the largest commercial payers in the United States, with approximately 45 million covered lives, United's positive coverage policy will greatly improve accessibility of our Aquablation therapy for men suffering from BPH. Additionally, in early March, we also obtained a positive coverage policy from Blue Cross Blue Shield of Michigan, which will be effective May…

Thanks, Reza. Total revenue for the first quarter of 2023 was $24.4 million, representing growth of 73% compared to the first quarter of 2022. U.S. revenue for the quarter was $21.8 million, representing growth of 74% compared to the prior year period. In the first quarter, we sold 25 AquaBeam Robotic Systems, generating total U.S. system revenue of $8.8 million, representing growth of 13% compared to the first quarter of 2022. First quarter system average selling prices were $350,000, which was approximately 5% below our expectations. However, we still expect full year system average selling prices based on the deals in our pipeline to be in the $370,000 to $375,000 range. U.S. handpiece and consumable revenue for Q1 was $11.8 million, representing growth of approximately 165% compared to the first quarter of 2022. Handpiece revenue growth was driven by an increase in the install base of AquaBeam Robotic Systems, which has grown 106% in the first quarter of 2022. Additionally, we have seen an increase in utilization from our install base. Monthly utilization per count of 6.3 increased approximately 14% compared to the first quarter of 2022. Utilization outperformance in the first quarter was a reflection of strong commercial execution, and surgeons taking the next step to Aquablation therapy as their treatment of choice for all resected procedures. We view utilization as a true leading indicator of overall market adoption long term. We shipped approximately 3,400 handpieces in the U.S. in the first quarter, representing a unit growth of 139% compared to the first quarter of 2022, with average selling prices of approximately $3,140. International revenue for the first quarter was $2.6 million, representing growth of approximately 50%. International revenue in the quarter was driven by both increased system sales and improved utilization. Gross margin for the first quarter of…

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

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

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

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

Got it. Thanks. And maybe I'll stick with systems, and just I guess two pieces here. One, on the ASP, it came in lower in Q1 than what it traditionally has been and what you expect for the year. So just wanted to understand if there was any -- what was driving that pressure? And then on the IDNs, how much of that is kind of baked into that 140 systems or how should we think -- how are you guys thinking about the opportunity that the IDNs present, whether it's the contract that was just signed or future contracts you expect to sign, how much of that factors into that 140?

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

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

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

Thanks, Craig.

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

Hi. Good morning. Thanks for taking the questions. I wanted to ask on two topics. The first is just on the low volume accounts representing 30% of, I believe, the install base you said, Reza, but wanted to -- maybe just help us understand the opportunity there and how this channel could expand the TAM? Are these mostly robotic prostatectomy surgeons that are familiar with robotic platforms and have been compelled to adopt the AquaBeam system and the Aquablation treatment? And then how do you see low volume accounts contributing to system placements in 2023? And then I just have one follow up.

Yes. Thanks. We are very pleased with the progress we have seen with this account. Again, just as a reminder, low volume does not necessarily mean low volume surgeries. These are high volume surgeries, but historically they have been doing lower number of BPH surgeries. The reason they are growing is they see better patient outcomes. They're standardizing the procedure. They can feel their robot BPH practice, and also allows them to recruit talented urologists. Yes, these are accounts that they have robots there, but they have not been using it for -- they were not using many BPH, but they are high volume surgery centers. As we mentioned, 2,700 hospitals in the U.S., 806 of them were high volumes centers. So these other 2,000 is a great opportunity for the future and growth of our business.

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

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

Understood, thanks a lot.

Thanks, Joshua.

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

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

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

Got it. Okay. It's very helpful, Kevin. And then the second question -- I guess two questions from me. One, what is the percentage of the IDNs? I think you called out 17 strategic IDNs that have more than one system today, or you expect to have more than one system right now I think that'd be helpful to understand? And then the last question, and I'll hop back in queue, is just -- and Craig asked this, but I'm not clear. Why does pricing come back in the second quarter and through the remainder of the year if it were at 350? And why not -- can you spur more demand maybe at that lower price point than what you had previously?

Yes, so the first question on the 17 strategic IDNs, those represent over 200 hospitals in the U.S. So we -- you should assume that as these IDNs that we signed with, we will have systems at their various hospital network. But if your question is around multi-systems within the same hospital, that's currently not part of our near-term growth plan, and we don't believe given the current volume today that most hospitals will not necessitate having a second system. Did I answer your question, Ryan? I just want to make sure I covered that.

Yes, maybe I'll take that offline. We can take that offline, just because I think -- I was just trying to understand kind of the potential for the 17 strategic IDNs, but I'll follow up --

I'll say we have very low penetration in those 17 strategic IDNs. So there's a lot of room for us to sell systems in the future there.

Okay.

And then on pricing, again, one of the nice aspects of our business is we have a high degree of visibility into the funnel, so we can actually see the deals in the pipeline in the next three to nine months. And that is why we feel comfortable talking about full year average selling prices in that $370,000 to $375,000 range, based on deals we see in the pipeline. And really, we view Q1 as just an anomaly in terms of the variability around pricing and settling at 350. We don't think this is reflective of any future ASP decreases on the capital side of the business.

Okay. Thanks for taking my questions.

Thanks, Ryan.

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

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

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

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

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

Appreciate it.

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

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

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

Great. And just one follow up. I noticed that you had a Midwest site with UroPartners [ph] press release. Just curious what kind of impact that can have across that network or on influencing kind of the affiliated hospitals for those groups and thoughts on the impact from potentially large urology groups?

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

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

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

Hi. Thanks for taking the questions. A couple for me. Maybe just starting off on -- you sound very confident in kind of the step up in 2Q placements implied by your first half guidance, and I appreciate the capital can be lumpy. But can you just maybe characterize where or what you see is the risk of potentially having some of whatever you anticipate coming in 2Q spilling into the back half, like it kind of did in 1Q as you came in at the low end of your rage and it spilled into 2Q, just to get a sense for where your confidence level is, at this point, especially where you are in the quarter? Is this a pretty high confidence that your 2Q number is based on what spills into 2Q from 1Q plus assuming your conversion rates hold, is this pretty much a stronger kind of visibility level than what you had heading into 1Q?

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

And there are factors that we mentioned. The United covering their transitional pass through going for another one year, the recent rep hires that we have made, they're making great progress. And on the surgeon front, we are seeing increased retention, and these are all -- and the largest IDN that we signed up, these are all the factors that gives us more confidence.

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

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

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

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

Yes, I don't think -- I think 30% is the right way to think about it moving forward. I appreciate I'm not being terribly specific there. But I don't see why in the near term it should change from our historical norms and would be a drag on utilization. In fact, we are seeing many of these low volume accounts start doing utilization at comparative levels. And one thing to keep in mind, and Reza said it in his remarks, is a low volume account doesn't mean a low volume surgery hospital. So these are hospitals that are very used to turning over patients having a high volume of patients and having a lot of surgeons. They're just not doing a lot of BPH and they're not doing a lot of BPH because they frankly didn't have a great alternative previously, and now they do. So it's not as if we have to convert this hospital into now doing a lot of surgery, they're already doing surgeries.

We remain focused on high volume accounts and the low volume accounts will happen opportunistically. And based on their case-by-case, we will look at them.

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

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

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

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

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

Great. Thanks.

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

Great. Thank you for taking the questions. I'll take the other side of this capital question. If you were to see -- I don't know how -- let me try and figure out how I want to kind of raise it. You kind of tend to move at a predictable pace for net system adds. Do you see an opportunity as capital budgets are released -- and the procedural environment looks good. Do you see an opportunity to still exceed the 140 capital placements for 2023, or is that a really good number that you really think you'll stick with?

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

Okay. And then just on the accounts where you've placed the -- we've seen utilization increase on the system, which is a positive. Just how sticky are the procedures once a doc starts to use it? Have you seen any procedures slipping where somebody uses it and then -- not any, but it seems some procedure people use it and then say, I won't use it as much, or is it tending to really be sticky?

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

Thank you.

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

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

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

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