Good day, ladies and gentlemen, and welcome to the Neuronetics Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Mark Klausner from Westwicke. Sir, you may begin.

Thank you, operator. Good morning, and thank you for joining us for Neuronetics fourth quarter and full year 2018 conference call. A replay of this call will be available on our website for 30 days. Joining me on today's call are Neuronetics' Chief Executive Officer, Chris Thatcher and its Chief Financial Officer, Peter Donato. Before we begin, I would like to caution listeners that certain information discussed by management during this conference call will include forward-looking statements covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our business strategy, financial and revenue guidance, and other operational items and metrics. Actual results could differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the Company's business. For a discussion of risks and uncertainties associated with Neuronetics business, I encourage you to review the Company's filings with the Securities and Exchange Commission including the Company's annual report on Form 10-K that will be filed today. The Company disclaims any obligation to update any forward-looking statements made during the course of this call except as required by law. During the call, we will also discuss certain financial information on a non-GAAP basis including EBITDA. Management believes that non-GAAP financial measures taken in conjunction with U.S. GAAP financial measures provide useful information for both management and investors by excluding certain non-cash and other expenses that are not indicative of our core operating results. Management uses non-GAAP measures to compare our performance relative to forecasts and strategic plans, to benchmark our performance externally against competitors and for certain compensation decisions. Reconciliations between U.S. GAAP and non-GAAP results are presented in tables accompanying our press release which can be viewed on our website. With that, it's my pleasure to turn the call over to Neuronetics' Chief Executive Officer, Chris Thatcher.

Good morning, everyone, and thank you for joining us on today's call. I'll start by providing an update on our performance during the fourth quarter and the full year 2018, followed by an update on the progress we made towards our key priorities. I’ll then hand the call over to Peter to walk through our financial performance and guidance for Q1 and 2019 after which we will discuss our priorities for 2019 before opening up the line to take your questions. Overall, the fourth quarter was very strong as we continued to drive the adoption of NeuroStar Advanced Therapy. Total revenue was $15.6 million, an increase of 29% over the prior year, largely driven by 37% growth in U.S. NeuroStar Advanced Therapy revenue and 23% growth in U.S. treatment session revenue. For the full year of 2018, total revenue was $52.8 million, an increase of 31% over the prior year. We are proud of what we've been able to accomplish in 2018. Our performance demonstrates our ability to execute on our strategy to drive the adoption of NeuroStar Advanced Therapy and maintain a market leadership position. We continue to see strong growth in the number of psychiatric practices utilizing our therapy, which we believe is driven by our ability to offer a clinically proven therapy as both user and patient friendly while at the same time providing world-class training, practice support and service. Shifting gears to an update on our operating performance. As we outlined last year, we had three strategic priorities as we seek to drive growth in the business. As a reminder, the first was to continue to drive the adoption of NeuroStar Advanced Therapy in the U.S. through the expansion of our sales force and the implementation of marketing initiatives; second, increase recurrent treatment session revenue by…

Thanks, Chris. Total revenue for the quarter was $15.6 million, a 29% increase over the prior year quarter. U.S. revenue was $15.1 million, an increase of 27% over the fourth quarter of 2017. OUS revenue was approximately $550,000, an increase of 101% versus the prior-year period. The increase in OUS revenue was primarily a function of NeuroStar system sales in Japan, as well as the ongoing amortization of milestone payments from our Japanese partner. U.S. NeuroStar Advanced Therapy system revenue was $4.8 million during the fourth quarter, a 37% increase over the prior year. As a reminder, NeuroStar Advanced Therapy system revenue primarily consists of revenue from capital sales, but also includes revenue from system upgrades to allow our NeuroStar systems to perform 19-minute treatment sessions. Capital sales revenue grew 46%, driven by higher unit sales volume during the period, as a result of our ongoing sales force expansion and continued marketing initiatives. This was partially offset by a 4% decrease in average selling price as compared to the prior year period. The positive trends in capital sales volume and revenue were partially offset by lower upgrades for the 19-minute treatment session in 2018 versus 2017. During the quarter, we saw our active installed base increased to 907 units, a net increase of 49 units from the third quarter of 2018, and an increase of 155 units from year-end 2017. Keep in mind, we define an active unit as a NeuroStar unit that was placed in service during the quarter, a one that ordered treatment sessions during the last 12 months. U.S. treatment session revenue was $9.9 million for the fourth quarter of 2018, an increase of 23% over the prior year quarter. The increase was primarily due to an approximate 26% increase in treatment sessions purchased, as well as…

Thanks, Peter. As we look to 2019, our primary focus is driving the continued adoption of NeuroStar Advanced Therapy and bringing relief to the greatest number of patients possible. I'm pleased to note that our year is off to a good start, in particular at the recent CTMS and Brain Stimulation conference, we showed significant booth traffic, which led to strong lead generation. As we continue to drive growth in 2019, our strategic priorities are as follows: first, continue the expansion of our sales force and related marketing efforts; second, continuing to focus on driving long-term increases in system utilization; third, the continuing development of our next generation NeuroStar system; fourth, beginning the clinical work to set the stage for the expansion into new indications; and lastly, launch NeuroStar Advanced Therapy in Japan and selectively evaluate entry into other international markets. Taking each of these in order, beginning with the continued expansion of our sales force and related marketing efforts. In 2019, our goal is to add an incremental 15 BDM territories, bringing our total to 59, by the end of the year. We continue to be very excited about the quality of the sales people we're able to attract, and we feel very confident that we can continue to drive predictable growth in new system sales and subsequent pull through as a result. In addition to the expansion of our sales force, we will continue to utilize DTC marketing campaigns throughout the year. We launched multiple campaigns during 2018, each of which allowed us to drive greater insight into the most effective ways to turn a viewer of a television ad into a patient undergoing treatment for MDD with NeuroStar Advanced Therapy. We believe that further investments will pay dividends in the form of increased patient awareness, lead generation,…

[Operator Instructions] Our first question comes from Margaret Kaczor with William Blair. Your line is now open.

Hi. Good afternoon, everyone -- or good morning, everyone, excuse me. Thanks for taking the questions. First off, just wanted to follow-up on the inputs to guidance, what gets you to the low end, the high end. It seems like you are going to add more sales reps, more BDMs than originally thought, and the guidance appears relatively in line. So are you assuming that maybe the sales rep productivity goes down or just walk us through those?

Yes. I assume, Margaret, before we answer your -- this is Peter. Good morning. I assume you're referring to the full year 2019 guidance?

Correct.

Sure. I mean, just to remind you, we set our guidance based off of the model, right? And it's worked well for us. You've been following us for a while. The number of BDMs are the key driver to that model. And we put them in there at flat productivity, always hoping for better, but we put them in there at flat productivity. We use their -- we use historical utilization rates for the utilization, based on the prior year test, which is the largest test, as well as the new installs for 2019. We assume a little bit of a decline in ASP on the treatment sessions at 3% to 5%, and as Chris indicated in his prepared remarks, there is no revenue for Japan, right. So that's how we setup the guidance for the full year. And you're right, we do have a few additional BDMs in the plan, with the total of 15 expected for 2019. Those are staged through the year and we put them into the model and it generated the guidance which we guided you to today.

Okay. So, if we kind of look at the BDMs and the fact that they outperformed for 2018 and the number of system sales, is that those historical reps versus the new reps that are coming online? And then can you speak anything to the quality of reps you are bringing on and the advertising dollars you're spending, any kind of clarity on the ROI there?

Yes. So, I'll take the first part and maybe we can tag team with Chris parts two and three. So what we have in there for the BDMs, Margaret, are -- they did, you are right, they slightly over-performed our expectations. And if you remember, a BDM is considered a full BDM in month 13. So there's some blending there, but if you take the blended average of the seasoned reps versus the new reps and I think we're a little skewed right now toward the unseasoned rep, which would lower the blended rate, but what we did is, we did not take into some of that over-achievement in 2019 --into our 2019 guidance. We've used kind of where we have always been, just assuming for a conservative sake that that's their productivity for the BDMs, I hope that answers the first part of your question. And then, obviously, we take -- ASP is a big driver. If you recall, we guided to at least a few kind of low single digits price deterioration on the capital piece and we are pleasantly surprised we came up at less than 1% decline. So we did build in some decline in ASP into our guidance for 2019, again in the low single digits, knowing that we achieved less than 1% price decline and have been seven or eight quarters straight of kind of record ASPs on the NeuroStars.

Yes. And that's helpful. And then just to follow up on the advertising ROI. If you can give us a sense of what that was in 2018, expectations for spend into 2019? Knowing that you guys are trialing the stuff, but it seems like you referenced maybe an ability to improve the psychiatrist-customer conversion rate, so ways that you could potentially do that as well would be helpful?

So, good morning, Margaret. So, this is really a beta that we're running and I've qualified as a test and retest, and we're still in the learning process here. And we haven't and we don't plan to share the level of detail as it relates to the expense, but it's incorporated in our OpEx guidance as well. But I can give you a little bit better sense, so the first metric we look at is just the basic increase in traffic and it is the either increased significantly, or the cost at -- the number of -- the cost has been reduced each time we've done this to get patients to come to our website. And more importantly, we look at the leads generated, which is the physician locator searches, appointments booked online and click-to-call. And from our side of the funnel and this is our side of funnel, which we feel we are optimizing each time we've done this. But, we still have some work to do in converting these leads treated patients once they go to practice. And what we've learned is most recent time around is we've found that practices that follow up quickly on patients, and remember, these patients are depressed, have a much higher conversion rate. And we are exploring opportunities to capitalize on this finding, and we'll keep you abreast of how that evolves. But, we'll start talking about ROIs when we start what I would say, investing significantly on this. And at this point, I would qualify what we're doing is a beta.

And there was one other question to you Chris, the second part of Margaret's original question was just on the quality of the reps. And Chris can certainly take it. From where I sit, Margaret, as we've put it into the model as we've shared with you before, we are at or ahead of our hiring schedule, we were all of 2018. We're attracting kind of President's Club winners from a lot of the larger medical device companies, where it's a lot easier to recruit when you're growing 31% and have a unique technology out there. So we've found that the quality of the rep and our ability to attract that talent has exceeded our expectations. So we're confident that we could fill the 15 reps again in 2019 at or ahead of schedule because we've done it for the last two years. I don't know, Chris, if you have any more to add?

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

Thanks. I know you mentioned in some of the meetings that you guys were out in February, and it looks like at the first one in Vancouver that there was a discussion of the contact sensing. And I think it's sort of one of the bigger differentiators of your technology and mentioned the head to head study. So I was just curious, could you talk to us about how big a differentiator that is and what were the outcomes of that study?

I think what you're referring to is we did a human factors testing that showed that [technical difficulty] by a NeuroStar user than it is for one of the competitors to be more reproducible on placing their magnet. And at a high level and we haven't published this yet. We will publish it shortly, but at a high level, it shows that the NeuroStar is much more predictable and reproducible in finding the treatment location and having the magnet aligned and it is relatively significant. The findings generally were in the high teens, around 15% of the NeuroStar users were more precise in finding the treatment location than one of our competitors. And then, in the study, we actually crossed over treaters as well and the competitors were actually much more efficient in finding the treatment location time and time again and using our system. And we have several -- and you might recall, our product was actually designed for psychiatry and a high throughput device, where these products are actually neurological products that were not designed for this. And I think that came out in this human factor study. And it did bring up kind of the benefits of NeuroStar and the way it's designed versus how the competitor's product isn't.

No. Thank you for that. And two quick ones on the account base. So I think you mentioned the upgrades were a little lower in '18, but I imagine that's because most people have already decided to do so. So I guess what percent of your installed base do you think has upgraded to the faster regimen? And as a last one, you mentioned some of the ASP decline because of the high volume accounts, so obviously not a bad thing, if you're getting a lot of volume from -- you're discounting a bit because the accounts are using it so often. I guess any color on what percent of the installed base you think is moving toward that high volume area or is there today? Thanks a lot.

So, we think it's about half that have taken advantage of the upgrade, Dave. And keep in mind too that, beginning in the second quarter of 2017, all the systems have the 19-minute treatment sessions. So each successive quarter as you get past that April of 2017, there'll be less upgrade revenue, right, because there are less folks taking advantage of it. So we have found that it's really good for customers that are trying to manage peak load, as you can imagine, a lot of folks would like to come in before work or start their day doing treatment or come in over lunch or in their day a little early. So there's -- it helps alleviate that. So those customers that are generally trying to manage that and it's more cost effective than buying a second system. So those are the folks that take advantage of the treatment session upgrade technology, right? And then, you mentioned, you were talking a little bit about treatments, I want to make sure I answer all your questions. Treatment session pricing, we've been pretty consistent, Chris, and I have, over the course of last few quarters have telling folks, we expect mid-single digits, 3% to 4%, 5% range of price breaks that we give customers. And then, reminding folks out there, this is not a discount we do to drive sales at the end of the quarter or just put promotions on these treatment sessions. These are predetermined, we negotiate with the customer and it's all part of this surrounding the customer and partnering with them, right. So we share in their success as the volume goes up. We give them price breaks. And as we've said, 3% to 5% and that's what volumes, Dave, growing in the kind of that 23% ,24% 25% range when you see volumes growing faster or system sales growing faster, then you could see getting above the 5% range, but we are comfortable guiding that that's where we'll be. 3% to 5% price breaks will take hold again in 2019 versus 2018. And we'll come back and tell you the good news, right. It's really good news, because we will trade a point or a few basis points of ASP on our product, that's growing 95% -- has 90% to 95% margins for us that's growing and people are taking advantage of the technology.

Thank you. And our next question comes from Matthew O'Brien with Piper Jaffray. Your line is now open. Matthew O’Brien: Good morning, thanks for taking the questions. Hopefully, you can hear me okay. Just to start off with guidance and put a little bit finer points on it. You've grown north of 25%ish for the last six quarters, you're now guiding 18% to 22%. It implies a pretty meaningful deceleration in the back half of the year, even though in Q1 you have your toughest comp, yet you're still guiding very good top line growth. So I'm just wondering if there's something specifically that you're trying to call out in the back half that we need to pay attention to or if it's just a bit of management conservatism.

So, good morning, Matt. Thanks for the question. And I'll pair it first what I told Margaret, we're basing full-year guidance at 18% to 22%, right, and that's all the reasons I cited to Margaret a few minutes ago. We are using all kind of historical utilization rates, historical averages, productivity, we've build in some price declines, as I've answered in a couple of previous questions, and that spits out a number, Matt, for full-year guidance in that 20% range. So that's where we as a management team want to be comfortable giving that number. For the first quarter, given that we're two months into the quarter already, we have more visibility. So we have a lot more confidence in projecting a higher growth rate for the first quarter relative to the annual guidance, but the annual guidance is set based on all those predicates that I pointed out on the call, which is the addition of the BDMs, their flat productivity year-over-year, some modest price declines on the capital, and 3% to 5% price breaks on the treatment sessions, with no increase in utilization. Now, obviously, we intend to overachieve on those and we'll come back to you as we go out through the year and if we can point to something, a trend, then we'll adjust our guidance accordingly. Matthew O’Brien: So, you've built in quite a few leverage points, and potentially -- and if those come through like you did in '18 there could be upside?

When we put this together, Matt, we think about a lot of things. And so, we think about the productivity of the business development managers, as they add more productivity, potentially decline, could they stay the same, could it slightly increase like it did this year, and we've put that range in there. We make an assumption range on pricing and we make an assumption range on utilization. We consider the marketplace that we're in as well and we put that all together and we try to be really thoughtful with it and give you a range where we feel comfortable that we're going to achieve within that range. So this is where we've come out. We are, I think, giving a pretty good range for the first quarter. Our growth is really strong coming off of Q4, and you can project from there and we'll keep you updated quarter-to-quarter. As we implement in Q1, we will give you an update on how we feel the rest of the year is going to go. Matthew O’Brien: Okay. Fair enough. Can we talk a little bit about the -- you've added so many systems in the last -- especially, the back half of last year, but over the last couple of years, it's difficult to tease out the growth rates on the treatment side for some of your more tenured facilities. So when we look at the growth rate in treatment session revenue, I think it is up 23%, can you talk a little bit about some of the more mature centers and how they're trending as far as their growth rates go? I mean, are they growing well ahead of what you expected or just any qualitative commentary there would be helpful?

Yes. I'll start, Matt, and then I'll like Chris to weigh in if he needs to. If you look at the historical base, it's roughly two patients a day. And obviously the new HVT strategy, once they get up and running, have three times more potential around numbers. As we just talked about, we're not factoring in that potential into our guidance. But, certainly, the newer accounts are achieving at a much higher level or will be at a much higher level over time. And we're starting to see some of the fruits of that strategy, which is we are still believe or not, still kind of in the early innings with respect to that strategy. So we're comfortable that those accounts have a much higher potential, but we haven't given you the granularity around that just yet. Matthew O’Brien: Okay. Fair enough. And then last one from me just on the OpEx side. I mean the guide for the year was a little bit -- was more than we were modeling in. I think I get it. I think it's more on the personnel side, with the BDMs and CTCs, CPCs, et cetera. So how do we think about those investments? Is it fair to say 2019 is a personnel driven year above what we may have expected, and then, into 2020, it could be more on the clinical side, and then with the new indications you are going after, plus next-generation technology? And I don't know, if you want to talk about it or not, but do you want to give us any sense for when that next-generation product could be out?

Yes. I will handle the quantitative stuff and I'll let Chris come in. So I think what you said, Matt, for the most part is pretty accurate. If you think about 2019, the largest driver versus 2018 will be the increase in personnel, it's the 15 BDMs. And I know folks were thinking, it might be as low as 10 or as high as 15, and we are at the high end of that range. So that's the lion's share of the OpEx increase. And then, as you think about the R&D line, it's two components, which is the product development next-gen platform, that's the second largest driver of the year-over-year increase and the largest driver within the R&D line. And then there is a small component, as you -- especially, as we get into the back half of 2019 on the clinical spend, which is the two indications. You are correct that, that will ramp and start to be a little bit of a higher number as you look out to 2020, before starting to tail back down much like most clinicals would do. And then there is a small increase, just as you think about 2018 versus 2019, Matt, in terms of the G&A costs, which is the full year of public company costs. But those are one through four, the drivers of the year-over-year increase and perhaps differences in how you were initially viewing our 2019.

Thank you. And our next question comes from Jason Mills with Canaccord Genuity. Your line is now open.

Hi, Chris and Peter. This is actually Cecilia on for Jason. And I just wanted to ask further around BDMs, CTCs and what you're viewing as, what your current ratio, and then, just what would be an optimal ratio going forward? And then just thinking about 2019, how you're looking at or expecting your cadence of hires and to occur through -- of the BDMs and if this could provide upside to your guidance?

Well, let me dissect those. I didn't write them all down. If I miss any, we can circle back. So it's 15 BDMs. We'll, much like we did -- as our first year as a public company, we will come out and we'll update you how many we're adding each quarter. What we have generally guided folks to is, to use the half year convention. So 15 BDM adds would probably equate to seven or eight full-time equivalents over the course of the year, and we will fine tune that throughout the year. As far as BDMs versus CPC, we don't have a ratio on that. We -- basically, we look and assess, where the territories that -- where we need to add the BDMs. And we said -- we've been saying consistently, we've gone from 15 to 29, 29 to 44 and we will go 44 to 59. We're going to continue to add and split territories because we have full geographic coverage now. So we'll be looking to add in those territories that we think have potential in those accounts. The CPCs again, not on a ratio basis, but you can see that we've had a little bit of leverage on the CPCs, if you just take the treatment session revenue line over the number of CPCs that we've shared with you over time. At the same time, we're always -- it's not a ratio, but we're assessing the workload in those territories and the account maintenance required, not all accounts are created equal, some require a little bit more maintenance. So that's sort of how we view the world. We have said that the CPC's revenue per territory has, historically, been down and closer to $1 million, and we said, over time that could -- could get a little better over time. And I think if you do the math yourself, you'll see that there's a little bit of leverage going on over the last couple years, but that's sort of how we assess the situation and we work hand-in-glove with the commercial team on where they think they need help relative to the territories.

And then, if I could just ask on OpEx [ph] just specifically around clinical trials. I mean, you've mentioned seeing a little bit more of an impact from PTSD and bipolar in your second half. Can you just walk us through kind of your current thinking around timelines, what we should expect to hear from you, and then just thinking about 2020 and how that plays through?

So, our plan here is we're meeting with the FDA later in the year on both of these trials, and that's around the trial design. So, at this point in time, I really can't comment on a timeline, and we'll keep you updated and abreast on it. But basically, we have to get -- like every other company, we'd have to get our IDE approved; we'd have to enroll the patients; we'd have to assess the clinical data and then submit that to the FDA. So, this is, fair to say, a several -year program for both PTSD and bipolar. And as the quarters continue to advance, we will keep you abreast of how those conversations with the FDA are and what the specific timelines are, when we know them. I think it's an exciting time for psychiatry and patients. When you think about PTSD and bipolar, those two diseases, which have significant unmet needs, both of them we know in early clinical findings have responded to NeuroStar TMS Therapy in small pilots. And we're excited about the potential of helping a group of really sick patients that don't have an alternative today. And it's on our call point as well. So, that's why we're kicking this off this year.

Thank you. And our next question comes from Alex Silverman with Special Situations. Your line is now open.

A couple of quick questions, wondering if you could give us any sense of that $71.5 million to $76.5 million OpEx, how much of that is non-cash?

The majority -- Alex, this is Peter, just kind of making sure, I am fully thinking through. Most of it is in our cash expenses. It's personnel related to the R&D efforts, to consulting efforts that go around next-gen platform, the clinical trial piece, and then, obviously, the sales force expansion, would be all salary benefits and the fully loaded. So I would say, all, if not most, though there is a small equity comp component in there that would lower the number but the lion's share is cash.

Okay. Secondly, given that you haven't been public that long, wondering if you could give us a sense of seasonality in terms of first quarter mix. How we should think about it?

Yes. So -- and this is evolving a little bit as well as we get larger and larger. And there is seasonality effects for sure. Typically, in November and December, what we see is, less patients getting started in November and December, because they are starting a six-week therapy and a lot of doctors delay, which usually leads to a slightly lower NeuroStar treatment session in the first quarter. And then, usually treatment sessions from there take off for a couple reasons, is because we have much more systems that are installed in later part of Q3 and early part of Q4. And I would say, in Q1 -- Q1 is a little bit compounded with NeuroStar treatment sessions starts, because what happens is, in Q4, you can see we had a record-breaking Q4. Our system sales were up 46%, north of $4 million, was quite a quarter. And what happens is, when we get that many systems in a short period of time and many of those systems are actually back loaded into November and December. Getting them up, it somewhat is a high class problem and it overwhelms the CPCs in short [technical difficulty]. So, in Q1, we're digging out and getting customers up and running and trained. So, for those reasons, we see a little bit softness on the NeuroStar treatment sessions. But, we typically though see a nice bump in NeuroStars placed year-over-year because we now have 15 more BDMs in the territory in the beginning of this quarter versus last year. So, typically, we see a really nice lift in NeuroStar sales in the first quarter.

And last question is, what's your typical length of NeuroStar sales cycle?

So, we do and we have implemented, as of the beginning of last year, a CRM module last year. We actually are now calling on a different sub-segment of psychiatrists and the -- our expectation is that deals typically close in less than six months. That's at a maximum length of time and we've had deals closed as quickly as three weeks and a lot is deal specific. So, somewhere between three weeks and six months is the typical cycle.

Thank you. That concludes our question-and-answer session for today. I would now like to turn the call back over to Chris Thatcher for any closing remarks.

So, thank you for joining us this morning. And we look forward to keeping you abreast of the progress we make in 2019 in upcoming earnings calls. Have a good day.

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