Good afternoon, and welcome to the SI-BONE's Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. We'll be soliciting the question-and-answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Carrie Mendivil from Gilmartin Group for a few introductory comments.

Thank you. Joining me today are Jeff Dunn, President and CEO of SI-BONE; and Laura Francis; Chief Financial Officer. Earlier today, SI-BONE released financial results for the quarter and full year ended December 31, 2018. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities law, which are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance that are forward-looking statements. All forward-looking statements, including without limitation -- our examination of operating trends and our future financial expectations, which include expectations for hiring, active surgeons, reimbursement decisions and guidance for revenue are based upon our current estimation and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risk and uncertainties associated with our business, please refer to the Risk Factors section of our most recent quarterly report on Form 10-Q filed with the securities and exchange commission on -- SI-BONE disclaims any intention or obligation except as required by law to update or revise any forward-looking or forward-looking statements whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today March 7, 2019. And with that, I'll turn the call over to Jeff.

Thanks, Carrie. Good afternoon and thank you for joining us. I'm pleased to welcome you to SI-BONE's earnings call to review our fourth quarter and full year 2018 results. Our progress in 2018 was marked by consistent wins in the reimbursement front and ongoing investments in robust clinical data. We ended the year with $55.4 million in sales, up 15% compared to 2017. Revenue for the quarter was $15.6 million, up 13% compared to the fourth quarter of 2017. We are well-positioned to continue this progress and are issuing 2019 revenue guidance in the range of $65 million to $66.5 million and a reflecting 17% to 20% growth over the prior year. Looking ahead, increased commercial traction in the U.S. will be driven by a few key factors. Sales force expansion, surgeon training, adjacent market seg opportunities, incremental reimbursement coverage, supported by clinical evidence. Starting with our sales force, we finished the fourth quarter with 45 mature reps in our U.S. direct sales organizations -- organization. These sales reps are highly technical in their skill set with meaningful spine or interventional pain experience. Our direct reps are further supported by clinical support specialists, or CSSs, who assist in case coverage. At the end of the fourth quarter, we had 22 CSSs, most of our CSSs are -- were added during the second half of 2018 to capture new sales opportunities from exclusive payer coverage decisions. In 2019, we're focused on growing sales in new territories through the addition of direct sales reps and are -- and on more deeply penetrating existing territories through the addition of CSSs. To that effect, we plan to add 15 to -- 10 to 15 direct sales rep during the year to large or unpenetrated territories. We also plan to aggressively increase our number of…

Thanks, Jeff. For the fourth quarter of 2018, revenue increased 13% to $15.6 million, and that compares to $13.8 million for the fourth quarter of 2017. U.S. revenue for the fourth quarter was $14.5 million, representing 16% growth over the same period of the prior year. International revenue for the fourth quarter was $1.1 million. The increase primarily was driven by higher domestic case volumes from improved U.S. reimbursement coverage. Gross margin for the fourth quarter of 2018 was 91% and that was consistent with the corresponding prior-year period. Operating expenses increased 31% to $18.5 million for the fourth quarter of 2018, as compared to $14.2 million in the corresponding prior-year period. The increase primarily was driven by the opportunity to invest more IPO proceeds in field operations to take advantage of improved payer coverage. In addition, we incurred higher G&A expenses from new public company related costs. The operating loss was $4.3 million in the fourth quarter of 2018 as compared to $1.6 million in the corresponding prior-year period. And our net loss was $5.3 million or a loss of $0.26 per diluted share for the fourth quarter of 2018, as compared to $4.9 million or a loss of $1.39 per diluted share in the corresponding prior-year period. The non-GAAP net loss per share was $0.22 for the 3 months ended December 31, 2018. The non-GAAP net loss calculation assumes the inclusion of IPO shares and conversion of preferred stock and warrants outstanding into common stock for the entire period. The non-GAAP shares used to compute basic and diluted net loss per share were approximately 24.5 million shares that were outstanding at December 31, 2018. Turning to our full year results. Revenue for 2018 increased 15% to $55.4 million, and that compares to $48 million for 2017. U.S. revenue…

Thank you, Laura. I'm pleased by our performance in fourth quarter and throughout 2018, as we made headway on the reimbursement and clinical fronts, further validating our position as the market leader for providing differentiated surgical devices in this sacral pelvic space. Looking ahead in 2019, we are focused on expanding our commercial team in the U.S. and overseas, ramping up training and educational efforts and continuing our efforts on the reimbursement front. In the near term, we will be presenting at the Canaccord Musculoskeletal Conference in Las Vegas next week on March 12, and hosting an investor event the following day at the American Academy of Orthopaedic Surgeons Annual Meeting. This event will offer perspective from Dr. David Polly, Professor and Chief of Spine Surgery for the University of Minnesota's Department of Orthopedic Surgery on our opportunity in the adult deformity market for our recently cleared iFuse Bedrock Technique. We're inviting both analysts and investors to the event to learn more about this opportunity for SI-BONE. In sum, we are well positioned for growth and look forward to what is ahead. I want to thank the growing team of SI-BONE employees for their enthusiasm and hard work. We look forward to updating you on our progress. With that, we will now open it up to questions. Operator?

Thank you. [Operator Instructions] And the first question comes from the line of David Lewis with Morgan Stanley. Your line is now open.

Good afternoon. Maybe a few questions from me. I will start with Laura. So Laura, just optically, pretty tight guidance range to start the year. What gets us to the top and bottom of that range? Kind of, how is it formulated and kind of what is your level confidence in this range? And I have a couple of follow-ups for Jeff.

Great. Thanks, David. I think, as we built the model, what we did was we looked at where we're at currently. And so, especially, from a reimbursement perspective, we only took into consideration the reimbursement that we currently have, when we were developing those growth numbers. And then we also put some thought into the additions that we're going to make from a sales perspective, both the territory managers, the senior reps as well as the more junior clinical support specialists, and what impact they are going to have on the business. And then we also looked at the number of surgeons as well and the work that we are doing on the training side. So we put those numbers together with those 3 factors that we considered -- reimbursement, the growth in our sales team, and the targeted growth in the number of active surgeons, and developed our guidance accordingly. And feel -- we feel good about that revenue guidance.

Okay, very helpful, very specific, Laura. Jeff, a couple of things for you here. So obviously, guidance reflects acceleration. As you think about 2019, where is this acceleration coming from? How much of it is dependent on new accounts, greater existing account penetration or increased payer traction? And then related to that, you were very helpful in giving us the rep hiring guidance for the year, where are you year-to-date already against that quasi-40 number of additional equivalents?

Yes. I mean, David, we're not going to give quarterly numbers on the sales hiring. I can tell you all that we are absolutely right on plan with our hiring. And feel very confident that we will meet and exceed the hiring goals. The quality of the people that are coming to us and the quantity of people that are coming to us, unsolicited, that want to come to work here is enabling us to bring people on right on schedule. And so I have very high confidence on the hiring side. And as importantly, on the quality side of the people we're bringing on. As to what's going to drive the business, as we mentioned, we're increasing our expectation around number of active surgeons by about 100 or so. We certainly feel very confident that we can do that, and we are on track to even on -- early on in the year, to doing that kind of thing. On the reimbursement front, we mentioned 5 new payers, including 1 that switched from non-exclusive to exclusive. We are highly confident that there are more coming. We have seen drafts of additional payer policies that I did not mention today that show, let's just say, progress in moving from nonexclusive to exclusive. And we also have information that other payers will come on. And we will just have to see how the big ones come along, which I'm sure is on your mind and other investors' minds. But we are very engaged with all the payers, and including the ones that stayed experimental last year. I, personally, and Jeff Zigler, are having interactions frequently with all of them. For instance, I had a meeting with one of them, and I don't think necessarily that everything has to wait a year as they do those kinds of things. So we're working on them. I can't tell you the timing, I don't know the timing. But we are engaged with all of them.

Very helpful, Jeff. Just last one for me. Very good, Jeff. And I'll jump back in the queue, just one last question. You mentioned this large construct, new therapeutic area, we'll hear more about in the Academy meeting. I'm just curious, how much of this is about driving growth in the new therapeutic area? Or how much of this is just about trying to drive broader adoption of knowledge or awareness of SI fusion with important KOLs? Thanks so much. I'll drop back in queue.

Well, if you asked me to choose -- if I could choose, every single surgeon in the United States would pay attention to the sacroiliac joint, and I could snap my fingers and have that happen, David, I would choose that over the revenue that's associated with adult deformities. I do think that there's significant revenue opportunity in the adult deformity space. But the thinking here, and this has been validated by our interactions with some of those academics centers that are we are engaged in, and we will show the list of academic centers when I present next Tuesday at the conference just prior to AAOS. But we believe that by engaging and having every major academic center looking at this, engaged with adult deformities and paying attention to the sacroiliac joint, 2 things will happen. One is there will be a trickle-down effect of surgeons paying attention to the sacroiliac joint, and they -- because their bosses will say you better pay attention to the sacroiliac joint, this is really a very important issue from an adjacent segment disorder standpoint, and we will show those biomechanical force -- our percentages and clinical data next week. And then secondarily, we just believe that there will be greater recognition based on the JBJS paper that we just published in a -- for the first time in a general orthopedic journal, where you'll see hip surgeons reading about this. So I think it's some surgeries that will be de novo where these surgeons in academic centers, the fellows and residents that we are training across the country to pay attention to the sacroiliac joint, all those pieces we will come -- we think will come together, adding revenue. But most importantly, if we could get 7500 surgeons and all the fellows and residents and all of the supporting peripheral folks to pay attention to the SI joint that, that will drive growth in a very significant way because of awareness.

Thank you. And our next question comes from the line of Travis Steed with Bank of America. Your line is now open.

Hi, Jeff and Laura. Thanks for taking the questions. I wanted to have you help us think through the impact of incremental payer wins at this point. You've got significant payer coverage already, but still some large payers still in the sidelines. So maybe one way to ask the question would be how different would probably the outlook have been if you had seen some of the large payer decisions in January?

So I think you're referring to some of the payers that aren't covering yet, so -- and some Cigna and Humana specifically?

Yes. As those come through, how much incremental opportunity is there? And how long does it take to see an impact on the procedure growth?

So we feel very good about the growth numbers that Laura and I shared without those that she said. That said, you have Anthem at something like 34 million lives, you have Aetna at 24 million lives, you have Cigna at I think it's 16 million or 17 million lives -- maybe it's 14 million. And Humana. And then you have a few Blues of -- like Alabama, Arkansas and others. And so between those that are not covering, maybe you have 60 million, 70 million, 80 million people that are there. So I think it's -- from a modeling standpoint, I guess, the way I think about it is if you add those kinds of things, what percentage of the population are they? And maybe that would add a point here and a point there, and a couple of points here to growth. But it's hard to predict exactly when they're going to come. Obviously, if one of them -- we know that for instance, Aetna did not post any update in January, even though that they had posted publicly that they were going to. So I think they're just still working on that. So we don't know whether they're going to post in March or April or May, but I'm sure they're going to post. And when that happens, that's 24 million, 25 million lives, and if they go positive, and, obviously, it's helpful if they go exclusive. But I have to some extent stopped trying to predict exactly what they're going to do. We have, as I said, had lots of interactions with the Bob McDonoughs there and with Dr. Babinski at Cigna, and these others recently. But I think JBJS helps, I think the 5-year evidence that is coming up helps. As you know, we published the 4-year clinical data, and we have 6 years, but it wasn't prospective. The prospective 5-year is another milestone that will come up this year. So does that help you?

Yes, That's helpful. Go ahead, Laura.

I think the only other thing that I would add to that is a lot of these decisions are -- it's territory-by-territory, and it depends upon where these covered lives are located in the U.S. And so if there are a preponderance of Anthem patients in a particular part of the country, we are less apt to be placing our clinical support specialists and our territory managers until we have a preponderance of coverage in those locations. So the impact on the model is really one of where do we place our resources, where we have the most coverage. And then as those coverage decisions come on, we will add additional sales people to those territories, and ramp up surgeon training in those territories.

That makes sense. And on the sales reps, is there some type of structural or organizational limit to hiring more reps? Or any capacity constraints there? Just trying to think through why is 10 to 15 new direct reps and the 25 to 30 new specialists, kind of the right number for 2019 and not more so you can accelerate your opportunity even faster?

Yes. I think we gave pretty specific guidance on those numbers. But what's really important is making sure that we have the appropriate sales management structure to handle all of this. And so we have Tony Recupero as our Chief Commercial Officer, that you know came from Kyphon has done something very similar to what we're doing here of rapidly scaling a sales force. He's supported by our VP of Sales, Troy Wahlenmaier. We will in the second quarter of this year add area vice presidents, one to cover the east, one to cover the west. We've already expanded our regional sales organization from 7 to 10. And so the idea here is that you need to have the management structure in order to handle the growth and we're out in front of that with putting that management in place.

That makes sense. And then one last one for me, and I'll jump back in queue. Does your outlook assume any revenue impact? And if so, how much from deformity? And then on that topic, how much synergy is there between the 2 different procedures for your sales force? I guess, is there a risk that your sales force is going to get distracted focusing on more than 1 procedure at this point when there's a lot of opportunity in your core procedure?

Well I think, there's -- I think, there were 2 parts to that question. We're not assuming a large amount of revenue in adult deformity. As I think I mentioned on the last call, we're going to roll this out slowly in 2019. It is largely at first an educational effort. But we have engaged a -- but let's just say we'll show you next week. But more than a dozen academic centers that are very much into the boat on the adult deformity initiative, and we will keep that relatively limited. I'm not saying we're not going to expand beyond that, but we're not going to go out to 400 adult deformity spots during the year. We're going to keep that pretty focused. As to the distraction of the sales force. I don't think so in the sense that it's still spine surgeons, it's still neurosurgeons, it's still orthopedic surgeons. And so if anything, I think, a sales rep who makes a call and brings on an academic center is highly incentivized to get the chief of surgery who may be doing these adult deformity cases on-board, and then sometimes when that happens, and I'll just use the example of Duke -- or I should say UVA where Chris Shaffrey was, and we went to him originally, and there was no activity at UVA, and now there's -- Chris Shaffrey left and went to Duke, but now there's activity, for instance, at UVA in regular SI joint surgeries. So that trickle down effect is something that is very much in line with the sales rep and what they do from an educational standpoint. So we feel like it fits together really well.

Hey great. Thanks for taking the questions.

You're welcome. Thank you.

Thank you. And our next question comes from the line of Dave Turkaly with JMP Securities. Your line is now open.

Thank you. Yes. The exclusive conversion you mentioned, it seems like it's sort of a rare event, but you mentioned the eviCore guidelines. And I'm wondering, on the heels of that, is there sort of a blueprint you can follow? Was that a first? And do you think that you can get others to do the same?

Well, we do. eviCore is an advisor and manages 107 million lives. An example is -- when you get these specialty benefit advisors, who advise the payers. And another example, David, is Milliman Care Guidelines and UnitedHealthcare went a few months after that happened. Here you have eviCore coming out last fall, and now you see Highmark following the eviCore guidelines. So do I think -- as you guys know, as an example, Cigna owns -- bought Express Scripts and Express Scripts bought eviCore. So there is this connection between eviCore and Cigna, i.e. they own them. And at Anthem, AIM Specialty Health, which is the clinical advisory organization, is owned by Anthem. So is there is a connection, and is there's a possibility to work within the system to influence this thing in the right direction? Absolutely. And I think, we as a company have done nothing short of a phenomenal job understanding what they're looking for and delivering the clinical evidence that they believe makes sense for their insurance company to cover the procedure. And I think that as we talked about the parade started January 1 last year. And we have seen a nice acceleration, and we expect a nice continuation with the same very robust strategy.

Thank you for that. And obviously, a big step up in active surgeons in the quarter. You mentioned sort of 7500 spine guys out there, being split between ortho and neuro. I'm just wondering, 2 things, are you seeing more of either one of those groups, and obviously, in your 450 base is there one of those ortho versus neuro that are gravitating towards the SI procedure? And then do you think that step up is due to your training efforts? And have you talked about how many of those you'll have in 2019 versus 2018? Thanks.

Yes. So I don't think the mix has changed or I should say, David, the mix has not really changed that much. It's 60%-ish ortho and 40% neuro. I don't think that, that's going to move around a lot. As to the training efforts, we're not giving guidance on the number of folks we're training. We are giving guidance on the active surgeons. But I will tell you that we are right on plan with the number of surgeons we had planned to train in Q1, and it is an important step up in the number of surgeons we're training. So we feel like we have our hands firmly on that wheel as well besides the sales training hiring, the surgeon training hiring. We are literally dead on our plan.

Thanks a lot.

You're welcome.

Thank you. And your last question comes from the line of Kyle Rose with Canaccord. Your line is now open.

Great. Thank you for taking the questions and good evening everyone. So I just -- I wanted to follow-up on some of the expectations or kind of the goal posts around guidance for the year. Specifically, rep productivity. I appreciate the 45 mature reps as of the end of the year, going to add 10 to 15 and adding the support reps on. But just when I look at annualized productivity of those 45 reps exiting the Q4, and kind of think about that on a 12-month basis for 2019, I'm just trying to understand how you think -- at what rate you think we will get from the $1 million to $1.1 million of current productivity that we're at now up to that $1.5 million? Just because when I think about it in the lens of the resources you're adding to the sales force, your guidance looks conservative when I think about getting your $1.5 million out of those territories. So kind of just help me frame how we should expect the productivity increases to move as we move through 2019 and eventually into 2020?

The way that we're trying to think about this, Kyle, is we have been increasing our rep productivity over the last 12 months, primarily due to the fact that our adds have been these clinical support specialists. But given that we're planning to hire an additional 10 to 15 people this year on top of the 45 that are there, what we're anticipating is that the rep productivity for this year will remain at approximately the same level because, of course, the older ones are going to continue to increase in terms of their productivity. But then our new ones take around 12 months in order to ramp up to that $1 million of sales. Now they'll also be supported by the reps that already have a clinical support specialist. But all of this when you're averaging it together, you're going to continue to see rep productivity numbers that are hovering just a little above $1 million as we continue to add additional reps into the mix.

Okay, that's very helpful. I appreciate that. And, Jeff, on the call in the prepared remarks, you talked about some of the changes you made in Europe, specifically in Germany and in France. How should we think about international growth in 2019? I mean -- should we think about it as Q1 or Q3, Q4 that, kind of, $1.1 million to $1.2 million as the new base going forward and we should grow from there? How do you think about OUS in '19 when you framed out that guidance number?

We think the U.S. and the OUS growth will be about the same percentage wise. As you know, we had a deceleration in Q4, Kyle. We absolutely believe it's getting back on track and as you know that dragged down we had 15 or -- we had 16% growth in the U.S. last year in Q4 and 15% overall. It would have been higher overall, certainly, if we hadn't had that challenge in Germany. So we're bringing Germany back into shape. And we feel, as I said, terrific about this woman that we hired who is leading the sales organization there, we expect that to be in the 17% to 20% growth rate for OUS as well.

Yes. And Kyle, just to clarify, so international revenue, we ended the year at that $5.2 million, and if you take that 17% to 20% growth throughout the year, that gives you an idea of what that's going to look like.

Okay. That's very helpful. And just the last question I had was -- gross margin, terrific finish to the year from a profitability and gross margin standpoint. I mean, how should we think about just the puts-and-takes from the margin standpoint into 2019, particularly with the new Bedrock technique launching. Will that be a drag in the near term? Or how should we think about gross margins here? And then I'll hop back in.

So the margin that we ended up with at 91% is not where we had -- to be honest, it wasn't where we expected to be. It was because of the cost management activities that we engaged it in the first half of the year, when our resources were pretty constrained. And -- so what we want to do in 2019 is we want to invest in our operations, so that we are properly scaling the company that we're supporting our new territory reps as well as our existing ones, that they have the trays in hand that they need, that they have the product in hand they need, that they have the new product in hand, there's that. And then there's also a little bit of an impact from the ASP as well. We normally expect to see a couple percent decline on the ASP side per year. Given how high our margins are, we don't want to lose business because of some sort of a pricing issue. So our targets are more in the high 80s versus the low 90s where we ended up this year.

Great. Thank you very much.

You're welcome.

Thank you. And that does conclude today's question-and-answer session. I would now like to turn the call back to Jeff Dunn, CEO, for any further remarks.

Just to thank you for -- to the investors on the call for your support. As I said, we're excited about '19, '20 and '21. We feel very good about where we are. And to the analysts on the call, thank you for your time and for your questions. We will talk to you all soon. And hopefully, we'll see some of you in person next week on Tuesday or on Wednesday at AAOS, and we'll be there for a good portion of the week. Thank you very much for your time today, everyone. And good evening to you, those folks on the East Coast.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.