Good afternoon. My name is Craig Bijou. I'm one of the med tech analysts here at BoA, and it's a pleasure to have PROCEPT BioRobotics here. From the company, Reza Zadno, CEO, and Kevin Waters, CFO. Reza, Kevin, welcome. Thanks for inviting us. Thank you. What do you wanna talk about? No, I'm kidding. I apologize in advance, but we're probably gonna start with a number of system questions. Right. You know, given Q1 results. Maybe start there. You know, you placed 25 systems in the Q1, the lower end of the range that you had given for the year. Let's just start maybe kind of what happened during the quarter. You talked about a handful of maybe IDN sales that didn't come through. Would just love to kinda get your perspective on what happened in the quarter. Yeah. We provided that guidance. We were in February. We just wanted to give some visibility to our investors, how we thought the quarter was gonna go. But for now we are in April. We are confident for the number we gave for the year, $140, and that's based on the visibility we have on the pipeline, the capital pipeline, and the reps. We have hired them in the October of last year. Now they have been with the company for a few months building their pipeline very effectively. They are coming up their product very well. We signed a large IDN in April, and the goal is to sign the balance of the IDN. I mean, have contract with majority of the, we call them strategic IDN throughout 2023. The combination of these metrics and data we have put on pipeline and the reps gives us the confidence for the number we have given. Some of the strategic IDN in Q1 decided to push their purchases to Q2 that so they have opened up on that. The cadence we gave was, we said 45% of the capital will happen in the H1 of 2023, and the 55% in the H2, and we are still on that. Just to give more color on that, last year, we had 20 reps that did about 50 robots in the H2 of the year. Maybe 2.7 per rep. H2 of 2023, we are seeing roughly 74 robots, that is with 30 reps, that's still the same 22.6 per rep. Again, some of those capital moved to Q2. This is giving more color of our confidence for the balance of the year and what we think on this. I don't know, Kevin, you wanna? No, I think that's fine. Okay. Well, thanks for that, Reza. Obviously, the biggest investor question, I think, coming out of Q1, and, you know, as we're sitting here today is the implied ramp, based on what, you know, some of the metrics you just laid out, Reza. You're, you're expecting systems to go from 25 in the Q1 to 38 in the Q2. It's a ramp, you know, that you guys haven't done before. I think the biggest investor question, appreciating that you guys feel good about the full year is, you know, what gives you the confidence in really getting, you know, that Q2 ramp, you know, something that, you know, we haven't necessarily seen before. I guess, how do you get investors confident that you can do that? This is based on the stage and where those stage of those robots are in the pipeline. The confidence level we associate with every deal is based on that. The fact that we saw these strategic IDNs opening the purchase for the Q2. If we had seen any change similar to February that we gave a clarity to our investor that where we thought the quarter was gonna be, we are still confident on the numbers that we have. Yeah. Just maybe I'd make two further points there. We had talked about the timing and the shift of those IDN sales in the Q1. I mean, we pegged that at around five systems. If you were to say those would have been in Q1, I think that ramp, you know, it really means going from 30-33, not 25-37 or 38. When you include those, the ramp doesn't look as significant. The other point is with our pipeline, when we identify a surgeon champion, and that surgeon champion goes to administration, we call that stage one of the funnel. We see very low fallout. The fact that we have more deals in that funnel today than we need to get to the full year number and primarily the Q2 number, gives us a high degree of conviction around that sequential increase that you see. I know you guys aren't gonna give an intra-quarter, quarter update, but is there any. You know, I've covered a number of companies that sell capital, and sometimes there's an update of there were X number of systems that got pushed to the Q2 that we expected in the Q1, and they, you know, they communicate that, yes, we did make that sale. I mean, I guess. You know, trying to ask, is there a way that. Like, is your confidence in getting to that number, has it changed at all from, you know, when you reported Q1, based on what you've seen thus far in the quarter? I mean, as you mentioned, we won't give a monthly update on the capital. Based on the stage of those deals and the ones that push through Q2, we feel confident that they have committed. Okay. On the sales funnel, and the percentages, I guess, you've been tracking this for a little while, and, you know, has there been any divergence in those percentages, or have they been pretty consistent? I guess the question is really, you know, is there any reason to think that maybe that those percentages of completion change at all? No. In fact, last quarter, we mentioned that, you know, when we have a funnel from top of the funnel, when they come to the stage where, as Kevin's mentioned, a surgeon champion has been identified, we call that phase I of the deal. When we reach that phase, there is very little, if not none, that drop out. Last quarter, we said that had increased. It was the highest level we have seen. The new capital rep we have hired, they were placed in new territories, and they are making good progress to filling that funnel and bringing them to the phase I. Okay. Reza, you mentioned some of the strategic IDN targeting, and I believe, at the investor event at AUA, you talked about 17 strategic IDNs, and they represent, I believe it's 1,000+ BPH hospitals, and maybe 30% of all hospitals. 30% of all hospitals, and so 26% of high volume, 30% of all, so 30% out of 27. We define them as IDNs that have more than 20 hospitals. Okay. Yes. You announced a sales contract that started April 1st with the largest IDN. You know, how many of those IDNs are you currently contracted with? I know you said that the goal is to get all of those under contract. I mean, the goal is to have majority of them. We have a number of them, and some of them, you know, we cannot mention their name. Some that we had approval to have a press release. We have mentioned their name. The goal is by the end of 2023, have contract with majority of those 17. What our guidance implies with specifically the IDNs is that they continue to operate in the normal course of business. That means we're not anticipating a large multi-system order, for example, in any given quarter. What we do expect is IDN networks continue to purchase, but that purchase decision is hospital by hospital. What this contract does is it really allows kind of that predictability to close and certainty to close, certainty around pricing, that that is all already taken care of. Our guidance does not. We do not need large multi-system orders to get to the implied system number for the year. Have you guys or are you guys willing to share what percentage of your install base is kind of in that strategic IDN network? We haven't disclosed that, but if you look at the fact that the large IDNs, the strategic IDNs represent 25% or 30% of all high-volume hospitals, I think that's a fair way to look at how our install base should shake out over time. Okay. All right. Then one other system question, you know, for now, you know, system ASP. Number of it in Q1 came in below expectations. You guys don't, you know, you reiterated that you expected it to, you know, so it came in at $350,000. You expect it to be $370,000 for the rest of the year. You know, investors, you know, ask questions about whether there was an implication from either demand or market demand. I guess I just wanted to give you a chance to, you know, what was the reason for the lower ASP and why, you know, why should we think that that's not gonna be something that will continue? Yeah. I'm gonna start by not answering your question, then I'm gonna get to your question. We're very disciplined on our handpiece pricing is what I would say, right? I mean, our new customer pricing of $3,250 is fairly standard. We don't discount the handpiece, and ultimately, we believe that's the main driver of the business long term, and we're disciplined there. With that said, our hospital pricing, it has always been variable between accounts, and it's a negotiation. We'll work with the hospital, perhaps look at their payer mix, perhaps look at the number of physicians they're bringing on board, their anticipated volumes, and we have a fair degree of flexibility in negotiating price. While ASPs have been relatively consistent on a whole over the last three quarters, there has been variability. We've sold robots north of $400,000. For example, we've sold robots less than $350,000. What I will say is Q1, we don't believe is any type of trend from a macro level where we're seeing weakness or we're seeing more pushback than we normally receive. It is really reflective of a handful of deals being at the lower end as opposed to the higher end. We, we don't see this as a long-term trend. With that said, moving forward, while we did guide to average ASPs being $370,000 for the rest of the year We would be surprised if we do have variability here quarter to quarter, and I'd encourage investors to not look at it negatively or positive either way. It wouldn't surprise me if we have a quarter at $390. It wouldn't surprise me if we have another quarter at $350. That's gonna be variable, and it's important for us to get the robot sold. Ultimately, again, utilization is what's gonna drive the valuation of our business. The $20K discount that we're looking at in Q1 on average, I mean, frankly, that represents one month of utilization revenue. If hospitals are willing to purchase a system earlier in the quarter, and we have flexibility to negotiate there, I think that's a trade-off we would make and continue to make. We have nice standard margins on our capital. It's not a drag on our business either. It's not as if we're at the bloody edge of making money on our capital. Got it. Sorry, one more question on systems. You guys got United coverage, you know, if I think back to when you got some of the other larger payers, Reza, I think you actually said that it's a driver of system sales. We think of it as a driver of utilization t can be a driver of system sales. I guess, you know, getting United and the fact that they're the largest commercial payer, you know, what does that do? Or have you seen an impact on system sales since that coverage announcement? I mean, first of all, it's too early to mention that, definitely makes the job of a. First of all, United, it depends on territory. You know, some geographies there is more United. Some areas, the local Blue Cross Blue Shield is more important than United. Short term, it makes the job of a capital rep easier to say that we have access, 95%+ of paid men have access. We needed to have United. In long term to become standard of care, we absolutely should have United. It makes the rep's job much easier to start a conversation, but too early to say yes to United. It's almost counterintuitive, right? 'Cause the short-term benefit really is penetration, but the long-term benefit is definitely utilization. Given United really isn't effective until June 1st, you know, we did not raise our utilization guidance specific to United. I'll say that. I think we could have seen the 6.5 procedures per month per account with or without United, but it's definitely helpful. I think that the true impact is more longer term as opposed to near term. Yeah. Let's talk about the utilization. You raised guidance 6.5 from six. I know you track utilization pretty closely by cohort of system when they're installed. You know, that's been kinda, I guess, the newer systems have been tracking ahead of what the older system placement. Yeah. Maybe just expand on that. What you're seeing. you know, you chose to raise guidance, which, I think some investors asked. you know, why you chose that time to do it? Would just love to hear kind of your thoughts there. Last year, every quarter, we were saying because we are installing new system, it was early in our launch, we said the new accounts will bring down the average. Few quarters, we saw a trend that new accounts that were coming on board, their ramp was better than the accounts that had started a year earlier. Two things are helping for us to change this view to increase this utilization. One, we are seeing accounts who have been with us in time, their utilization increases. More importantly, the new accounts, let's say the ones we started in Q1, their start is faster than the one that started in Q1 of 2022, and also more surgeons per account enter. These are the 3 factors that allowed us to increase the utilization. Yeah. I wanna talk about prostate size. You get the question from investors a lot. Mm-hmm. where Aquablation is being used, where it's, you know, most efficient or best used. There are two questions really. It's, you know, when a typical surgeon first starts Aquablation cases, where are they in that, you know, size distribution? Again, you know, I know you get the question all the time, but, you know, just kinda looking at your distribution of sizes and, you know, how that matches up with how you perceive, you know, all prostate sizes, or at least all the resective procedures on all prostate sizes. Where surgeons start, it's all over the map. When we look at all the prostates that we have treated, it represents pretty closely what men's prostate size actually are. A few years ago, we, in one of the hospitals, we asked them to measure men's prostate size, whether they were on medication or and t hat graph, the distribution graph they showed, was showing at top of the bell curve around 70 grams, and the rectangle there, 60-80. What we have gathered in the last two years represents that. In fact, if we added our Q1 to the numbers in the previous year, it didn't change. It's not that the new accounts are starting on smaller or larger because we would have seen a shift in the graph. The graph stays the same when we added all the Q1 numbers to it. They are using in all prostate sizes and shapes. I don't know if this is the question you're asking? The predominant size, and we have a histogram in our investor deck I'd encourage everyone to look at, and those are actual Aquablation cases over the last two years. The most prevalent size we treat are 60- 80 grams. I think, Craig, that's a common misconception about our technology and our company. We're the obvious choice for large prostates because we don't believe there's great alternatives out there to treat a 100 gram plus prostate. Just because we're the obvious choice for those doesn't mean we're not getting our fair share of the majority, which is that 60- 80 gram. If you look at that cohort, it's by far the largest we're treating, which again, I think it just goes to the value proposition. When we go into a hospital, they can now replace four to five different modalities that they had to use depending on shape, size with Aquablation. That's a primary driver of our business right now. In fact, on what Kevin says, our FDA trial that we ran against TURP showed exactly in the 50- 80. From 30- 80, we showed superiority in safety to TURP but i n 50- 80 also showed even efficacy better than TURP. In the 50, that's where the majority of the patients are. Maybe that's a good segue into just talking about another hot topic for investors. Intuitive Surgical talked about their da Vinci SP, the single port robot, got clearance for simple prostatectomies. Would love to kinda understand from you guys, you know, how does simple prostatectomy overlap with Aquablation, if at all. And maybe start there. I mean, definitely when we saw that, we took it as endorsement of this large market. It doesn't change at all our perspective on our growth. I think it's important to know that robotic prostatectomy multi-port existed, and it is accepted for large prostates. Because of the nature of its invasiveness, people do not use it for prostate below 100 gram. Multiple factors, one, it's a 2-3 hour procedure, long hospital stay, high incidence of sexual dysfunction. Independent of even clinical outcomes, just the time it takes to do that procedure, 2-3 hours, it just is not effective and it doesn't make sense. We don't see that as a barrier for our. Again, multi-port existed, so the single-port is not gonna bring much better clinical outcomes or faster or. We don't It's in the, let's call it 100 gram plus. But even there at AUA, there was one user who, in fact, was a da Vinci user. The question was asked to him, and he said, independent of clinical outcomes, he preferred he would spend his 2-3 hours if he wants to use da Vinci for a cancer procedure than for a BPH. He explained why it made sense for him to use our procedure, a 60-minute procedure for those large prostate than a 2-3 hours. Maybe this last point on da Vinci is, and I think this is important for investors to realize, is almost all of our accounts are also da Vinci accounts. We've been coexisting in this space ever since we've been commercial, and it really hasn't been a hindrance to our market adoption at all. In fact, surgeons' familiarity with the robotic technology that offers great clinical outcomes has been helpful to us. Yeah. As Kevin said, they already had, they were using even multi-port or single port. They still bought our system. Got it. That's helpful. Maybe moving on to profitability, Kevin. Good beat and raise on gross margin in Q1. I think you expect sequential improvement throughout the year, exit with gross margins in mid-50s. I know overhead absorption is driving a lot of the gross margin improvement. Are you seeing specific improvement on systems versus handpieces? Are you seeing it on both? No. We actually have a very favorable margin profile on both capital and disposable when you exclude overhead. Really what we're seeing this year are all of the investments that we made in 2022 to make this business scalable and to meet the demand that is anticipated both this year and the following years, really now coming to fruition through margin improvements, where we're not gonna need to invest in that overhead at the same rates we have had historically. Our margin expansion, we're fortunate, is that is a function of volume. We are not reliant on cost reduction initiatives. We're not even terribly reliant on a more significant shift to disposables versus capital. It's really just growing into the expense base that we built to support the business. If you go back to last year, I mean, supply chain was probably the most prevalent topic, and we invested heavily to make sure we weren't impacted by the dynamic. We are currently running two facilities. That will end at the end of this year. Again, getting to 55% gross margins by the end of this year, it's really just achieving our revenue goals and the cost profile of the system is there. Have you quantified the impact or will you quantify the impact of running the two systems in 2023? We haven't quantified it. There is an impact, but I think the volume impact is much more meaningful than the dual facilities. When we think about optimal or ultimate gross margin, where, you know, where is that? Is that 70%? Can you do that in a couple of years? Yeah. At scale, I mean, we haven't given guidance around 2024 and 2025. What I would say is that the standard margin profile of our system and handpiece today are significantly in excess of our current margin profile, even our exit margin profile of mid-50s, which gives us confidence to have meaningful gross margin expansion in the future. All right. Okay. Maybe on the OpEx side, you know, it continues to tick a little bit higher. You know, given the top line growth potential and I guess how you think about the right balance of OpEx growth versus top line growth? Yeah. I'm gonna use round numbers, and if you assume 70% revenue growth this year, I think operating expense growth is 40%. I'd suggest we're already demonstrating some leverage on the OpEx line in essentially what is year three of our U.S. commercialization. You know, longer term, I would like to see this business get to a point where operating expense growth is maybe half the rate of growth in revenues. With an expanding margin profile, I think you're gonna find a company that at scale is not a business that will struggle with profitability. In fact, you know, we think it has the potential to be highly profitable. On top of that, we do believe the cash we raised in our IPO is sufficient to get us there, where we won't have to go out and raise money out of necessity. If we were ever to consider that, it would be to accelerate commercialization, to accelerate innovation, but not because it's necessary to get to profitability. Got it. With the last few minutes, wanted to talk about the pipeline and R&D spend has increased or accelerated over the last several quarters. You know, kind of where is that spend going? I think, it might have been on the Q1 call, you said the next generation system is years away. I presume there's software updates, maybe some hardware, maybe just a little bit more help trying to think about where you're spending, and then what contribution that could have or any of these updates could have, from a revenue perspective. Yes. Yeah. Look, innovation, we're a robotic company. Innovation's at our core. Yes, we're focused on commercialization, but at the same time, you know, we always wanna be kind of ahead of the curve. We're investing in kind of multiple pathways in R&D. First is the blocking and tackling, right? It's the software updates to our current system. It's improving workflow. It's incorporating all of the learnings over the last 2- 3 years into our system, things like artificial intelligence. You know, I think if you look at a Tesla type of model, it's important for us to continue to update our current system and provide updates via software and hardware. At the same time, you know, there are things next generational that we think a new system could have and have potential. We're not talking about any details around what that could look like or what the timing would be. We're not dependent, I would say, on a next generation system to become the standard of care in BPH. This would be an acceleration, not a necessity around R&D, is what we're looking at today. You know, maybe a minute and a half left, but just kinda international expansion. you just talk about where you see the opportunities over the next couple of years. I know Japan is one. We started focusing on Western, a few countries in Western Europe, France, Germany, Italy, Spain, U.K. We said we want to do market development, and that's more on the reimbursement. We made very good progress in U.K. We announced the report that came and NICE that said we could replace TURP and challenge other procedures and the reimbursement that came not far from what U.S. reimbursement is. In Japan, we received the regulatory approval. We are starting a post-market clinical study to get reimbursement and launch the product. We are very excited about these two markets. Approval we have in South Korea through a distributor and in other countries in Europe, we are working to improve the reimbursement in those countries. That's our focus. It doesn't represent today a big portion of revenue, but, based on the progress we have made in U.K. and Japan, we see those as very attractive markets. What's the timing on reimbursement in Japan? I know. So. Reimbursement timing would be kinda mid to late 2023, but we're not anticipating any revenue contribution from Japan in 2023. We'll kinda update the street when we give 2024 guidance, if there could be anything there. Reimbursement compared to other procedures in Japan, do you have any idea of what it may be? Yeah. I mean, look, at a minimum, we would hope to be reimbursed what a TURP is reimbursed. You know, we think like in the U.S., with kind of our value proposition, we would hope we can get north of what a TURP is reimbursed. Yeah. Good. I think with that, we're out of time. Okay. Thank you very much. Reza and Kevin, thank you. Thanks, Craig. Appreciate you having us. Thank you.