Good afternoon, everyone. Welcome to the second day of the Wells Fargo Healthcare Conference. My name is Nathan Trebeck. I'm one of the analysts on the medical devices team. I'm pleased to introduce management from PROCEPT BioRobotics for this session. Joining us from the company are Reza Zadno, the CEO, Kevin Waters, the CFO, and in the audience, we have Matt Bacso from IR. Thank you for joining us. Thank you for inviting us. Thanks. So I guess just to get it out of the way, if we could just discuss your recent equity raise. You raised $150 million in an upsized raise in early August. Can you talk about why this was the right time for this raise, and what are the intended uses? Kevin Waters? Yeah. So, you know, we have always said, even previous to the raise, we felt we had the cash on the balance sheet to get our business to profitability. But at the same time, you know, we did feel that the capital on our balance sheet was a slight overhang, with whether that's our existing investors or even allowing new investors to get into the company. And coming off our Q2, where we felt very good about all the metrics in the business, you know, raising money at a time when we didn't need to raise money and being opportunistic, we felt the timing was right. The market was open. I think everyone's aware, in this day and age, you never know when it's going to close, so we just wanted to take advantage of that. And then, at the same time, kind of the use of funds was primarily to fortify the balance sheet. But at the same time, there are things around R&D initiatives, commercial initiatives, where around the fringes we think we can invest in to help accelerate growth even further. But you're not going to see a significant shift in how we spend money and how we're disciplined about how we spend money. I mean, if anything, as a management team, we sat down and said, with this raise, we need to be even more disciplined with how we're deploying capital and making sure that we're giving a return to shareholders. Okay. Kind of like you mentioned before, you did this raise, you talked about having sufficient cash to reach breaking profitability. Has nothing changed in this view? And also just when you talk about breaking profitability, are you talking about operating income, EBITDA, cash flow? Yeah. So nothing's changed in our view, to answer that question. But again, at the same time, what I had said is, given our market cap, given our growth, I think it could have gotten skinny. And in this environment, we just felt having a strong balance sheet would put that concern kind of behind us. And really, we believe a clearing event such that now the business performance can generate value, where the capital raise is always somewhat of an overhang, when we talk to investors. Okay. So if we could just shift to the capital environment, can you talk about what you're seeing? Have you seen capital budgets tighten? And I guess, what has been the impact on demand? We recently did a survey of U.S. hospital executives, and it showed, you know, they expect capital spending to be down, you know, around 2% year-over-year on average. So if you could just talk about what you're seeing in the capital environment. Yeah. So, from an environment point of view, yes, the hospitals see the pressure on P&L, and as much as the inflation is there, but has not, the situation is not worse than a few months ago. But the benefit of our system for the hospital is they see the benefit of maintaining patients, and they do not need to refer their patients to other hospitals. It makes the practice more efficient to use our technology in the sense that they can schedule on the time and retain... They retain physicians in that practice. The interesting information is also 20%-30% of our systems are placed in low-volume centers, so there is return because of the, I mean, we don't start by reimbursement, but because of the reimbursement on this, the return on the investment on the capital is in a short time. So it meets the requirement of a hospital to purchase, and based on visibility we have on our pipeline, we are confident for the balance of the year on the capital placement. Okay. So the FDA recently removed the contraindication for prostate cancer patients in your label, w.hich you just had in the U.S. I believe, OS., you didn't have that contraindication. How significant is this? If you could just size what, you know, how much of an opportunity this is for you. Yeah. So during the FDA trial, patients with known cancer were excluded from the study. That's why we had our approval only for BPH patient, and cancer was a contraindication. So we had to provide information to the FDA, and so that contraindication was removed. We don't expect that meaningfully change the revenue on utilization from utilization. Roughly 10%-12% of the patients who have BPH have cancer, so those are roughly the numbers. Okay. If we could switch to your guidance, just on starting with system placement. So, you know, you talk about your funnel, how much confidence you have in your 144 system guide for this year. You know, this implies 22% growth in the H2 over the H1. Last year's H2 growth was 20%. I guess, what gives you confidence in this growth in system placements in the H2? Yeah. So, we see this opportunity for funnel increase. We have seen that growing year-over-year. And as I mentioned, that is because of the benefits of the technology that the hospitals see. The increase is mainly due to the increase in capital reps. We hired 50% more. Last year, similar, we had said roughly 45% of the deals were done in the H1, 55% were done in the H2 of the year. So it has maintained the same, roughly the same increase from H2 2020 to 2022. The number of capital reps are more this year, and that was, that is what gives us confidence. Especially we have seen the Q4 being a better quarter for the robot placement. If you look, Nathan Trebeck, at our, what our 2023 guidance implies on capital, it essentially assumes a 50% increase over our capital sales in the back half of 2022. And ironically, we have 50% more capital reps in the back half of 2023 than we had in the back half of 2022. So we're not relying on increases in productivity of our sales team to meet our back half sales numbers. And last point I would make is guidance would imply a Q4 number somewhere in the 43-45 range systems sold, depending on what you have for Q3. And we're just coming off a Q2 where we sold 40, and we had said even in the Q2, we weren't expecting the reps that we hired in the back half of 2022 to really start being fully productive till the Q4. So I think our rep productivity, our rep adds, the growing funnel, all give us a lot of conviction around the full year capital number. Okay. And if you could just comment on the rep productivity that you're seeing, is it tracking to expectations? Because, you know, if I do the math, it implies, you know, rep productivity around 5.3 systems per rep in the H2, which is up from 4.3 in the H1. You know, it doesn't seem like much of a stretch in the H2 of 2022, rep productivity was around 5.4. But just what are you seeing on the rep productivity front? It's been consistent when a rep has been here for six months -nine months, that you're in that 5-5.5 range. So the 5.3 that you referenced would suggest that we're not expecting increases in productivity. And the 10 new reps that we brought on in the latter half of 2022, we're pleased with, you know, how they've managed their funnel. It's important to remember, the majority of those reps were placed in greenfield opportunities, so that is why it takes time right now in our stage of commercialization for that rep to become fully productive, because it takes time to grow their funnel, because they're predominantly in new territories. Should we expect any significant rep additions in the H2 of this year? So, our OpEx guide does assume that we are going to hire both capital utilization and clinical reps as we head into 2024. Okay. Can you talk about your recent successes with securing IDN contracts? I believe you have contracts with all 17 large IDNs. Do these IDNs have centralized capital purchasing? And I guess, what is the likelihood that we'll see a multi-system purchase in 2023? So yes, they have the centralized system. Going to Q3, we will continue our partnership with the IDNs, and that's going well. Having said that, we are not anticipating the multi-system orders from these IDNs. We will continue with individual IDN-affiliated hospitals to place our robot. Okay. In terms of your funnel mix of high volume to low to mid-volume centers, how does it compare to your install base mix, where like, like you said, 20%-30% are low- to- mid-volume hospitals? And I, I guess, are times from prospect to a sale different between high volume and low volume hospitals? Yeah. Yeah, that's correct. 20%-30% of our hospitals are low and mid-volume, but again, low and mid-volume hospitals are not small hospitals. They just historically were referring some of the patients to other hospitals. Interestingly, the utilization and ramp is similar to high volume hospitals, but the close times generally is six months-nine months. It's variables. It's not that different between the high volume or low volume. Again, these, these hospitals are not small hospital. It's just the volume of BPH is, is low. In terms of just the mix within your funnel, not install base, is it similar to? Yes. Yes. Okay. Great. So you noted Q3 system placements will be down sequentially. Is this because Q2 included, you know, systems that were pushed out of Q1, or is there something else in the overall environment? No, I think a very normal cadence for capital equipment, and we're going to be kind of susceptible to that now that we're in a, I would say, a more steady state compared to a year or two ago. It's Q1 is typically going to be a low... your lowest capital quarter. Q2, you typically see significantly higher than Q1, which we did see. Q3, in my experience, is typically flat to down in capital, and then you do see in Q4 kind of capital budgets unlocking at hospitals. You see them having to use dollars, and Q4 is always going to be, should be our highest quarter. So I don't think there's anything to read into with the Q3 number being sequentially down to Q2. I mean, you have to remember Q2, even though we did have a handful of sales move into that quarter from Q1, it was still a record quarter for us, and pleased with Q2 and happy with how the full year is looking. Okay. In terms of system ASPs in the H2, is $370,000 the right number for the H2, or is that more for 2023? I know you guided $370,000. And can you talk about how we should think about ASP quarterly cadence in the future? I know that Q1 seems to be down, and I think there was some concern, you know, investors had earlier just around why ASPs were coming down. But if you could just clarify how we should think about ASPs going forward. Yeah. In general, $370 is the right way to model the business. With that said, you know, quarter-to-quarter variability, it could exist. We do negotiate individually with hospitals around system pricing. That could include a hospital that has a high percentage of Medicare patients, where reimbursement could be less than a hospital that has a high percentage of private pay. With that said, that variability, we're also cognizant of making sure we get an appropriate margin on, on the system itself. While you do have kind of quarter-to-quarter variability, I do think $370 is kind of the right way to look at it. There's nothing going on that we see macro or company specific, where there's downward pricing pressure on capital. That is not happening. It's the variability within our system sales, which has always existed. Our ASP was $350 back in Q1 of 2022 as well, and then it steadily increased throughout the year. So really nothing to read into, Nathan Trebeck, with that pricing dynamic. I'll also say, and this is an important point, we're relatively inflexible when it comes to handpiece pricing and disposable pricing. We want to make sure that that ongoing revenue stream is very predictable. We don't discount. That also impacts reimbursements, so we want to be very cognizant of what we're doing there. If we're going to negotiate anywhere, it's on the capital, not on the disposable. Okay. You recently announced your first hospital that installed two systems. Can you talk about what drove that decision? And, you know, if you could just comment on where that hospital's monthly utilization was before it made the decision to purchase a second system. I mean, I'm estimating it was around 20-25 procedures per month. And, you know, just part B of the question is: it took this hospital about four years to purchase a second system. Is this a fair proxy for how we should think about multisystem placements going forward? So we are very pleased to see they placed a second robot, but I mean, we don't get into specifics of an account. But since you are bringing Dr. Brian Helfand in, that has been using our system for a while, he's a key opinion leader, and we are very happy that they purchased a second system. But I wouldn't use that as a norm, that hospitals would purchase a second one. We model one per account. Would this happen another time? Maybe. But I would not take that as a norm. The system is... You can move it around, and right now we are counting one per hospital. Yeah. We're so early in our penetration journey. I mean, even when you get to the end of 2023, our guidance would imply an installed base of kind of 310-315, somewhere in that range. There's 2,700 hospitals in the U.S. that currently perform BPH. We've talked about the 860 high-volume hospitals that we're targeting initially. We have a long runway in front of us of selling capital to greenfield accounts to where... Are there going to be more hospitals like NorthShore in the future? Sure. But think of this as onesies and twosies, not as a main driver, as we move forward in the near-term. Okay. So if we could just switch to utilization overall, procedure volumes. You know, your Q2 handpiece sold and monthly utilization missed street estimates. You noted that, you know, basically new system additions drove down utilization, while you saw quarter-over-quarter growth in existing customers. So, you know, if I look, you know, your install base grew 21% quarter-over-quarter in Q2, and it was in about that range in 2022, but your utilization expanded in every quarter in 2022. So I'm just trying to understand, why would utilization be down this quarter? Q2? Or specifically- Q2 of 2023. Yeah. So I'll go back to your reference to 2022, and small number changes on a small install base lead to significant percentage increase and decrease. So I tend to not look at it going back to 2022. What I look for is, in each individual cohort, do we have sequential increases in utilization from accounts that were sold in a given quarter? And the answer in Q2 is yes. So we feel very good about the underlying utilization trends. But the 40 systems that we sold in Q2, the reality is the majority of those didn't do a lot of procedures. Some didn't do any in Q2. And when you have that increase to the denominator, it does have an outsized impact. One of the things we've done as a company is we've taken a look at utilization. If you just exclude the current quarter installs, and as the denominator, you go back and use the previous quarter, I think you'll find that Q2 utilization was roughly flat to Q1. It wasn't down. To us, that's a more appropriate way to look at it. Utilization is the most important metric that we track, but it's also the most sensitive metric. And at this stage of our commercialization, I mean, you're talking about 100-200 handpieces can swing utilization up or down by a significant percent. In general, we can say with a high degree of conviction, the longer you have an AquaBeam System, the more procedures you do, the longer you have an AquaBeam System, the more physicians that are practicing on that system, and the longer you have a system, the greater number of procedures you do, and that continues to increase on a sequential basis. ... Okay. Just in terms of guidance, so you basically pointed investors to monthly utilization staying around flat in Q3, which is 6.1 in Q2, and for the full year, you're talking about 6.5. So this implies a utilization step up in Q4 to around 7, north of 7. What drives the utilization ramp in Q4, and are there any risks to this guidance? Yes, I just want to clarify the numbers, and then I'll just talk about kind of the dynamics. So the 6.5 average utilization for the year is a weighted average. So you have to weight the Q4 handpiece sales to a greater degree than the lowest quarter, which would be Q1. And when you do that weighting, the Q4 utilization actually implies a number more like 6.7 versus a 7.1. Still up from Q3, so I think your question obviously is still valid, but just to clarify, the guidance would imply 6.1 in Q3, 6.7 in Q4. That will get you to a weighted average of 6.5 for the year. So that's the math. But the underlying dynamics to get us there, Q4, typically in a procedure business, and we saw this last year in Q4, it will be the strongest quarter. We now have our cohorts that are aging, and in fact, to get to the six-seven in Q4, every system that we've sold in 2023 does not need to be at the corporate average to get there. So when you look at it on a cohort basis, you'll find that that six-seven, yes, it's incremental over Q3, but with an aging installed base and with some seasonality factored into that number, it's very comparable to 2022 and the uplift we saw from Q3 to Q4. Okay, that's helpful. Can you talk about... So you indicated that you expect a modest benefit in Q4 from the UnitedHealthcare coverage. In the past, you talked about UnitedHealthcare not being meaningful to- Right -to the near-term. So can you just comment how much of an uplift to utilization you expect in Q4, and, you know, how should we think about contribution from UnitedHealthcare in 2024? So, UnitedHealthcare became effective in June. We are very happy. They are the largest private carrier. The impact of that in going for the balance of the year is similar to seasonality. We expect modest increase from UnitedHealthcare on utilization. We do, again, anecdotally seeing that it's helping with the some accounts' utilization. We should remember that as much as UnitedHealthcare is a very large carrier, they are not at every state. You know, there are some states that there is local Blue Crosses. So definitely to become standard of care, we needed to have UnitedHealthcare. We are very happy to have UnitedHealthcare. It helps with the reps to... There's one less topic to talk about, but it will, for the balance of the year, we believe, we'll have a modest increase in the utilization. Yeah, and for Q4 specifically, I view it as a lever, right? I mean, this business has levers. It's sales reps, it's utilization reps, it's our clinical reps in cases recruiting new physicians. UnitedHealthcare is just another lever I feel we can pull on that will be helpful and should give everyone just more conviction around the Q4 number in and of itself. I mean, I can't quantify for you what is that impact, but, you know, it's definitely a tool we have in our bag now to help increase utilization both in Q4 and in 2024. But to quantify that right now, this early, I, I just can't do. Okay. Is there any update you can give us just on surgeon retention rates? I think at AUA, you said it was around 94% in Q1. How has that trended? Yeah. So yes, we mentioned that we are very happy with our surgeon retention rate. We were saying we had high surgeon retention, so we said 94%, and then later on, recently, we had said 90%. I wouldn't read too much into 91%, 92%, nine- We wanted to mention what we meant by high surgeon retention. We are very happy with that. It continues to be very high, as manifested by utilization. The longer the accounts have been with us, we see those accounts' utilization is increased. I wouldn't read too much in the specific number. Rather than just saying high retention, we just provided the exact numbers. Yeah, I just want to make a comment on this, because it's something I'm really proud of, what we've built here. I mean, we're a procedure-based business, and it's important for us to never lose visibility into who's doing our procedure. And there's a lot of procedure-based businesses that you don't even know who's performing your procedure, and when you're in this kind of hyper-growth early stage that we're in, you can make some mistakes when you look at the business if you're not monitoring surgeon retention. You can very easily, in a market like this, have a leaky bucket that you don't even know is leaky because the top of the funnel is so large. So it's very important for us to continue to monitor those surgeon metrics and make sure that once we put the surgeon in the funnel, that they're not falling out the other side, and we are seeing that. And I think, you know, kind of 90+% of my experience is a good goal, and we're obviously above that. It shows the technology is sticky and that, you know, folks are not falling out of the funnel, which ultimately is going to drive a lot of growth. Okay, that's helpful. If we could just touch on 2024. I appreciate you're not going to guide to the year, but are there any qualitative comments you can make on just puts and takes for the year? Any catalysts we should be aware of? You know, obviously you extended the TPT that's going to expire. You know, if you could comment on that and just anything else we should keep in mind for next year. Yeah, look, you're right, we're not going to comment on 2024 consensus, but I think it's important to keep in mind, and just starting with systems, this is a large market, and I said this earlier: we're gonna be in roughly 310-315 accounts at the end of this year. 2,700 hospitals in the U.S. that perform BPH, so a large pool to still fish from to meet objectives in 2024. On top of that, we are gonna have 30 fully productive reps entering the year that on average sell five, right? So you can do that math and see what that could mean for 2024 potential. And at the same time, we've said we're planning to add reps in the back half of the year to grow that number. We're obviously aware where Street consensus is, but there's a lot of, again, levers we're pulling on to, you know, make sure our business continues to have outsized revenue growth in the, in this space. We're nowhere near the penetration levels where I think growth should be a concern for investors at this point. Okay. Just in terms of just going back to the break-even, can you clarify, you know, I think you've been asked this many times, but just on gross margin, operating margin, what is the peak that we could see as the business eventually shifts to more of a consumables-based business? Yeah, so we've talked about kind of our ability and pathway to get to 70% gross margins on a blended basis, right? And, you know, I think this will be a very measured march. We haven't given timeframes around it, but, you know, this year, our margin's grown from 49% to 55%. I think it's a reasonable way to look at margin growth, as we move forward. You know, we also haven't been specific as to exactly the timeframe around profitability. What we have said is that, particularly now post follow-on, this business has more than sufficient cash to get to profitability, and we are already starting to demonstrate some leverage in our OpEx that should give people comfort that the business model works. And when I say that, I mean, if you look at our OpEx growth compared to our revenue growth, it's already at levels that I would suggest are better than most of our high-growth peers on that line. And when you blend that leverage with the business approaching 70% margins, you're gonna find that this business is gonna produce significant operating margins at scale. Now, we haven't said if that's 20% or 30%, and we don't wanna do that now, because we don't know what we're gonna wanna invest back in the business when we get to those levels. But this is not a company that has a great product that is gonna struggle as a business. I mean, this business model with recurring revenue, 70% gross margins, leveragable OpEx, gets to profitability, and when it gets there, it flips very quickly. You're gonna see that in any type of model you put together, Nathan Trebeck. Okay. In terms of just the investments that you're making in R&D, is this mainly on the hardware or software side of your business? And then how much can AI, I guess, improve AquaBeam, and would it be on efficacy, safety, procedure, efficiency? Like, just comment on your R&D investment that you're making. Start, go ahead. The improvements in our current system, definitely the obvious ones, are improving the workflow, the setup of the system. Those are where improvements could happen. As far as the soft... I mean, today, we, we make those improvements, and many of those we deploy, we have done it in the past. For future, definitely, because we have been on every case, we have seen the prostate sizes, we have seen the techniques doctors use for treatment, all that information definitely will be helpful for us to, to be incorporated in assisted planning and AI. Those are improvements that we can incorporate in our current system to make the workflow easier and to make the planning more consistent across different accounts. Okay. So AquaBeam has been in the market, or it's been FDA approved since 2018. I guess, how should we think about a replacement cycle here, and when could it start? Or anything of that sort. Yeah, so even though we were FDA approved in 2018, I think when we look at true commercial trajectory, it's really Medicare approval, which was fiscal 2021, and even in that year, we roughly only had 50% of covered lives. So you really have to go to 2022 when you start to see significant increases in our installed base. So that's point one. But your question on the replacement cycle, I do think, given our price point and given our relatively quick ROI, given the large patient pool, our replacement cycle could be shorter than a large capital equipment company, which in my experience is eight years-10 years, some even eight years-12 years. You know, I view this technology not due to the fact that the outcomes won't be the same over this timeframe, but just due to the fact that, again, the ROI is very reasonable for a hospital, so somewhere in the five-seven-year, maybe four-seven-year timeframe, which is shorter than I think most capital equipment companies. Okay. We recently did a survey for BPH, and, you know, it came back showing that Aquablation share will kind of expand 300 basis points every year in the next two years. I guess, how should we think about penetration into procedures just in the hospital setting? Where can that peak? So, we are very happy with the technology we have. We think the features in our product with ultrasound-assisted planning, robotic. We believe this will ultimately become the standard of care, and that's our vision, because it can treat small prostate, large prostate. It is not dependent on surgical skill. And our initial focus, the low-hanging fruit, has been the high-volume hospital, 860. And as Kevin Waters mentioned, we are very still early in that penetration. But at the same time, as we talked just a few minutes ago, 20%-30% of our current accounts are low volume and mid-volume hospital, which total represents 2,700 hospitals. And in those low volume, we are seeing the ramp very similar to the high-volume hospitals. So we are targeting all those 2,700 hospitals, but very focused initially on 860 hospitals. Okay. You know, I appreciate the fact that you're still kind of early in the trajectory, but when can outpatient become more of a focus for the company? Yes. By, you mean ASCs, yeah. Correct. Today, 90% of the procedures are done at the hospital setting. We are. And again, just to be more effective and, have penetrate those accounts, we are focusing on hospitals within high-volume hospitals. The recent, payment that came ruling for, ASC was very attractive, so this can also be used at the ASC, but for that, we have to target those. Our focus currently is at ASC, and at the same time, we should implement the same-day discharge for those patients. But today, we have such a long way, long, runway for the, hospitals. That's our primary focus. Okay. When you entered the market, you talked about the biggest focus for you is to convert TURP and PVP procedures. At what point do you think you'll need to focus more on market expansion as opposed to share capture, and what would that entail from a strategy shift? Yeah, I mean, we got to keep the numbers in perspective, and again, I'll use consensus since we're not guiding anything in the future. I mean, consensus procedures in 2025 are roughly 52,000. There's 300,000 resective procedures done today in the U.S. alone. So even 2025 would suggest that we're very early in our commercialization, and we would not be relying on market expansion. With that said, are there things we can do to expand the market? Definitely. There's an aging population, there's growing awareness. You know, we're aware of those things and, you know, we'll capitalize on them as appropriate. But I think what that means as a company is we don't have to go do a huge national DTC campaign for hospitals to get patients, given the volumes we're at today, and given even from a market share, where we'll be in 2025. So it's a very, I would say, disciplined approach on OpEx, but at the same time, we don't want to miss an opportunity as well. So we are. We do work with our local hospital partners, where they do local advertising, they do local awareness campaigns. So we are involved in those things today, but in the near-term, we don't believe there's a need for a broad-scale DTC campaign, just given the market we're in. Okay. Well, we have about 40 seconds left. I'll leave you with closing remarks, anything you want to leave investors with. No, we are very excited about the technology that we introduced two years ago. As Kevin Waters mentioned, the utilizations at the time when we went public are ahead of our expectation. They are exceeding our expectation from the time we went public two years ago, and our vision continues to become the standard of care in BPH, and I think we are making great progress on that journey. Thank you for inviting us. Great. Thanks, again. We appreciate it.