Penumbra, Inc. (NYSE:PEN) Q2 2023 Earnings Call Transcript August 1, 2023
Penumbra, Inc. misses on earnings expectations. Reported EPS is $0.01 EPS, expectations were $0.28.
Operator: Good afternoon. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to Penumbra’s Second Quarter 2023 Conference Call. [Operator Instructions] Thank you. I would like to introduce Ms. Jee Hamlyn-Harris, Investor Relations for Penumbra. Ms. Hamlyn-Harris, you may begin your conference.
Jee Hamlyn-Harris: Thank you, operator, and thank you all for joining us on today’s call to discuss Penumbra’s earnings release for the second quarter of 2023. A copy of the press release and financial tables, which includes a GAAP to non-GAAP reconciliation can be viewed under the Investors tab on our company website at www.penumbrainc.com. During the course of this conference call, the company will make forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding our financial performance, commercialization, clinical trials, regulatory status, quality, compliance and business trends. Actual results could differ materially from those stated or implied by our forward-looking statements due to certain risks and uncertainties, including those referenced in our 10-K for the year ended December 31, 2022, filed with the SEC.
As a result, we caution you against placing undue reliance on these forward-looking statements, and we encourage you to review our periodic filings with the SEC, including the 10-K previously mentioned, for a more complete discussion of these factors and other risks that may affect our future results or the market price of our stock. Penumbra disclaims any duty to update or revise our forward-looking statements as a result of new information, future events, developments or otherwise. On this call, certain financial measures are presented on a non-GAAP basis. The corresponding GAAP measures and a reconciliation of GAAP to non-GAAP financial measures are provided in our posted press release. Adam Elsesser, Penumbra’s Chairman and CEO, will provide a business update.
Maggie Yuen, our Chief Financial Officer, will then discuss our financial results for the quarter. And Jason Mills, our Executive Vice President of Strategy, will discuss our 2023 guidance. With that, I would like to turn over the call to Adam Elsesser.
Adam Elsesser: Thank you, Jee. Good afternoon. Thank you for joining Penumbra’s second quarter 2023 conference call. Our total revenues for the second quarter were $261.5 million, a year-over-year increase of 25.5% as reported and on a constant currency basis. Our revenue growth in the United States accelerated to 32% year-over-year our fastest in half a decade, excluding the COVID impacted second quarter of 2020. U.S. growth was driven by our thrombectomy products in both vascular and neuro as total U.S. thrombectomy revenue increased more than 40% year-over-year. U.S. vascular thrombectomy revenue accelerated to 50% year-over-year growth and U.S. neurothrombectomy grew 20% year-over-year, the fastest growth in our U.S. stroke business in five years.
We expanded gross margins in the second quarter, consistent with our expectations and we expect to make more progress in the second half of the year. We also increased our operating profitability in the second quarter. Non-GAAP operating income was $20.3 million, representing 7.8% of revenue in the second quarter. We grew our operating cash balance by $22 million sequentially as well. Looking forward, we expect to deliver strong revenue growth, gross margin expansion and increasing profitability and cash flow over the foreseeable future. Penumbra had a very successful quarter, and we are still in the early stages of the journey to bring our proprietary thrombectomy technologies to patients in the United States and around the world. Our momentum is being driven by the extraordinary outcomes we are seeing in patients treated with Lightning Flash, Lightning Bolt 7 and RED 72 with SENDit technology in the early days of launch for each of these products.
Starting with Lightning Flash, we doubled the number of venous thrombectomy cases employing Flash in the second quarter compared to the first quarter. And we grew our total venous case volume double-digits sequentially, coming off a very strong Q1. We had another extraordinary quarter with Lightning Flash, and we have many more new customers just learning about and starting to try Flash in the next several quarters. Lightning Flash’s transformative power, speed, safety, and efficacy profile is the biggest driver of the exceptional early adoption of the product. The other important factor resonating with physicians is our straightforward pricing, which adheres to the same simple value-sharing pricing philosophy to which we’ve been committed throughout our history.
Moving to Lightning Bolt 7. Our U.S. arterial revenue grew double-digits sequentially, representing the fastest growth in this franchise since the launch of Lightning 7 in early 2021. We saw acceleration of Lightning Bolt 7 cases in the last two months of the quarter as conversion from surgery, lytics and other mechanical thrombectomy products gained momentum. That said, we are even earlier in the launch process for Lightning Bolt 7 than we were with Flash this time last quarter. As many prospective customers are waited to allow some time to pass before starting the back process for Bolt after engaging in the same process for Lightning Flash last quarter. Consequently, we think that adoption of Lightning Bolt 7 will build momentum as we move through this quarter and into the fourth quarter of 2023 and the first quarter of 2024.
Taken together, Lightning Flash and Lightning Bolt 7 have generated more pending hospital customers than during any other launch in our history. We currently have well over 1,000 active submissions in hospitals for approval of either Lightning Flash or Lightning Bolt 7. In order to be under submission for approval, a specific physician or a group of physicians must champion bringing the product into the hospitals. Importantly, the majority of these physicians represent new customers to our thrombectomy products. Even further, we expect many additional hospital submissions over the next few quarters. Historically, once the submission process starts at a hospital, we have been extremely successful in getting our products through these approval processes.
We are just getting started with Lightning Flash and Lightning Bolt 7. Our commercial team’s execution of our strategy for Lightning Flash and Lightning Bolt 7 is incredible. We have a clear strategy to reach the majority of the 800,000 annual venous and arterial patients in the United States over the next five-plus years, and we are convinced computer-aided thrombectomy is the way forward. Our neuro business also had a strong quarter, and I saw firsthand this momentum at the Society of NeuroInterventional Surgery Conference yesterday in San Diego. The outstanding early results we are seeing with RED 72, with inner catheter SENDit technology foreshadow an exciting period for our stroke franchise. This early feedback suggests SENDit could prove to be the most important technology ever launched, addressing the most challenging part of stroke intervention.
Safe, fast and repeatable trackability around the ophthalmic artery to the face of the clot. We believe RED 72 with SENDit represents the premium aspiration catheter and is as differentiated in innovation for the front end of the stroke intervention as Thunderbolt could be for clot removal once the catheters track to the face of the clot. We have seen positive share shift with this technology for the last two quarters, and expect even more meaningful share shift in stroke in the quarters ahead leading to a dominant share of the U.S. stroke market over the next three to four quarters. Launching RED 72 with SENDit means we don’t have to wait for Thunderbolt to see real share gains and market growth in stroke. And this technology only furthers our enthusiasm and confidence in Thunderbolt once it is cleared.
Internationally, we are seeing early success with the launch of our first-generation computer-aided products in Europe, and we have plans to expand access to our most advanced thrombectomy products to our international vascular teams over the next few years. In addition, our international teams and partners also see enormous potential to further expand our leadership in stroke intervention outside the U.S. with SENDit and Thunderbolt over the coming years. Turning to Immersive Healthcare. I am excited about the additional progress we’ve made during the quarter working with the Department of Veterans Affairs and key private healthcare partners. We’re hitting important milestones together as we monitor the clinical success of our VR platform across myriad applications in physical rehabilitation, mental and cognitive health.
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Before I turn the call over to Maggie, I want to say that we recognize expectations for our business are high. In fact, we had very high expectations for ourselves. We have a lot of confidence and our ability to succeed in the near term while we navigate agitated competitive reactions. We also believe in expediting the inevitable. And so, we are laying the foundation to help all patients who can benefit from our thrombectomy products. Our current year guidance is a guidepost to near-term success, but it’s just the first year within the next five-plus year journey. We are paying a lot of attention to the guideposts and success over this longer period, and I believe this visibility we have to the larger patient opportunity is clearer to us now than it has ever been, owing to the feedback we’re getting on Lightning Flash, Lightning Bolt 7 and RED 72 SENDit.
That visibility gives us increasing confidence that we will continue to deliver strong revenue growth, gross margin expansion, and significant profitability and cash flow over the foreseeable future. I’ll now turn the call over to Maggie to go over our financial results for the second quarter of 2023.
Maggie Yuen: Thank you, Adam. Good afternoon, everyone. Today, I will discuss the financial results for the second quarter of 2023. Financial results on this call for revenue and gross margin are on a GAAP basis, while operating expenses and operating income are on a non-GAAP basis. The corresponding GAAP measures and a reconciliation of GAAP to non-GAAP financial measures are provided in our posted press release. For the second quarter ended June 30, 2023, our total revenues were $261.5 million, an increase of 25.5% reported and 25.5% in constant currency compared to the second quarter of 2022. Our geographic mix of sales in the quarter was 71.4% U.S. and 28.6% international. U.S. reported growth of 32% and our international regions increased 11.7% reported and 11.6% in constant currency.
The sequential growth of 8.3% was primarily driven by continued momentum in our U.S. Vascular thrombectomy business as well as growth in neuro thrombectomy business across all regions. Moving to revenue by franchise. Revenue from our vascular business grew to $152.7 million in the second quarter of 2023, an increase of 23.6% reported and 23.7% in constant currency compared to the same period last year, driven by a 50% year-over-year growth in U.S. thrombectomy and a relatively flat year-over-year for the rest of our global Vascular business. Revenue from our Neuro business was $108.8 million in the second quarter of 2023, an increase of 28.3% reported and 28.1% in constant currency compared to the same period a year ago, driven by new products in the U.S., Europe and Asia Pacific.
Gross margin for the second quarter of 2023 is 63.8% compared to 64.3% for the second quarter of 2022 and 62.6% last quarter. The sequential improvement is in line with our expectations, driven by higher thrombectomy mix and ramping up new product launches productivity, offsetting inflation headwinds. As our second quarter gross margin still reflects some Lightning start-up costs from the prior quarter, our operation team continues to execute well to support the increasing demand and we expect further gross margin expansion in the second half of 2023. Now on to our non-GAAP operating expenses, which exclude the amortization of acquired intangible assets of $2.4 million, $1.8 million and $2.4 million for this quarter, for the same quarter last year, and last quarter, respectively.
Total operating expense for the quarter was $146.6 million or 56.1% of revenue compared to $132.4 million or 63.5% of revenue for the same quarter last year and $140.7 million or 58.3% of revenue last quarter. Our Research and Development expenses for Q2, 2023 were $21.5 million compared to $19.6 million for Q2, 2022 and $20 million for last quarter. SG&A expenses for Q2, 2023 were $125.1 million or 47.8% of revenue compared to $112.8 million or 54.2% of revenue for Q2, 2022 and $120.7 million or 50% of revenue last quarter. We recorded operating income of $20.3 million or 7.8% of revenue in the second quarter of 2023 compared to operating income of $1.6 million for the same period last year and operating income of $10.4 million or 4.3% of revenue last quarter.
While we continue to invest in long-term growth and effectively allocate resources and investment to support new product launches, I’m very pleased with our team’s great execution and expect our operating margin expansion trend to continue in the second half of 2023 and beyond. Turning to our cash flow and balance sheet. We ended the second quarter with a cash, cash equivalents and marketable securities balance of $221.1 million and no debt, which is an increase of $22 million from the last quarter. The sequential increase in cash is driven by an increase in profitability and improvements in working capital turns. And now, I’d like to turn the call over to Jason to discuss our guidance.
Jason Mills: Thank you, Maggie, and good afternoon, everyone. We increased our 2023 revenue guidance to a range of $1.05 billion to $1.07 billion, which represents 24% to 26% growth over 2022 total revenue. We continue to expect growth in our global Vascular business to be slightly above this range and growth in our global Neuro business to be below this range for the full year 2023. From a quarterly perspective, we expect growth in the United States to accelerate modestly from the record 32% growth we posted in the second quarter, while we expect our international growth to be mid-single digits in the third quarter due to seasonality and a challenging year-over-year comparison and reaccelerate to double-digit growth in the fourth quarter.
In sum, we expect our global revenue to grow in the range of 23% to 25% in the third quarter on a year-over-year basis, accelerating to 30% cost growth in the fourth quarter. Moving down the income statement. We expect both gross margins and non-GAAP operating margins to expand further as we move through the second half of 2023. We continue to target over 70% gross margins within a few years and over 10% operating margins by the end of 2023 with further expansion expected in subsequent years. I will now turn the call back to Adam for closing remarks.
Adam Elsesser: Thank you, Jason, Maggie and Jee. I know I speak for the entire Penumbra team when I say that we are at a defining moment in our company’s history, a moment almost 20 years in the making, where we can see clearly now how our innovation with computer-aided thrombectomy can help almost everyone with blood clots in their arteries and veins. We fully understand how much work we have to do going forward. We have studied and learned from the best companies before us who have taken on market development and done it the right way. I can promise the following, myself, our entire Penumbra team, the physicians we will work with and the hospital systems are ready to take on this challenge. We are going to keep on trying until we reach our highest ground. The next five-plus years will be hard work, but the most exciting part of the Penumbra journey. Thank you. Operator, we can now open the call to questions for the next 40 minutes.
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