Good afternoon, and welcome to PROCEPT BioRobotics Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Matt Bacso from the Gilmartin Group for a few introductory comments.

Thanks, operator. Good afternoon, and thank you for participating in today's call. Joining me from PROCEPT BioRobotics are Reza Zadno, CEO; and Kevin Waters, CFO. Earlier today, PROCEPT released financial results for the quarter ended June 30, 2022. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. All forward-looking statements, including, without limitation, those related to our sales and operating trends and future financial performance, expense management, expectations for hiring or growth, market opportunity, revenue guidance, commercial expansion and future product development and approvals are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our most recent annual report on Form 10-K filed with the Securities and Exchange Commission on March 22, 2022, and available on EDGAR and in our other public reports filed periodically with the SEC. This conference call contains time-sensitive information and is accurate only as of the live broadcast on August 4, 2022. PROCEPT BioRobotics disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements whether because of new information, future events, or otherwise. And with that, I will now turn the call over to Reza.

Thanks, Matt. Good afternoon, and thank you for joining us. For today's call, I will provide opening comments and a business update, followed by Kevin, who will provide additional details regarding our financial performance and updated 2022 financial guidance before opening the call to Q&A. Starting with our quarterly revenue results. Total revenue for the second quarter of 2022 was $16.7 million, representing growth of 97%, compared to the second quarter of 2021 and 18% sequential growth compared to the first quarter of 2022. U.S. revenue for the quarter was $14.8 million, representing growth of 126%, compared to the prior year period. In the second quarter, we sold 23 AquaBeam Robotic Systems, generating total U.S. revenue of $8.5 million, representing growth of 79%, compared to the second quarter of 2021. AquaBeam Robotic Systems continues to be primarily driven by sales at high-volume BPH hospitals. U.S. handpiece and consumables revenue was $5.7 million, representing growth of approximately 246%, compared to the second quarter of 2021, and this growth was driven by an increase in the installed base of AquaBeam Robotic Systems, which has grown 56% from the second quarter of 2021. Additionally, we have seen an increase in utilization from our installed base as measured by handpiece sold per account. Utilization per account increased approximately 90%, compared to the second quarter of 2021. We believe the combination of releasing positive long-term clinical data, increased private payer coverage, and outstanding real-world patient outcome continues to drive certain interest and hospital adoption of our AquaBeam Robotic Systems. Before providing a business update, let me briefly address the current macro environment, specifically supply chain and hospital capital equipment spending. First, I want to highlight we have not experienced material product constraints in our ability to meet customer demand, nor has inflation been a concerning…

Thanks, Reza. As Reza highlighted, our revenue for the second quarter of 2022 was $16.7 million, representing growth of 97%, compared to the second quarter of 2021. The increase was primarily driven by U.S. revenues, including both system sales to new hospital customers and increased handpiece revenue. In the second quarter, we generated total U.S. system revenue of $8.5 million, representing growth of 79%, compared to the second quarter of 2021. In the U.S., we sold 23 AquaBeam Robotic Systems with an average selling price of approximately $370,000. Average selling price increased approximately 6% sequentially and 10%, compared to the prior year second quarter. Our ending second quarter U.S. installed base was 114 AquaBeam Robotic Systems. Second quarter 2022 U.S. handpiece and consumable revenue was $5.7 million, representing growth of approximately 246%, compared to the second quarter of 2021. Handpiece average selling prices in the quarter were approximately $3,000. We shipped approximately 1,740 handpieces in the U.S. in the second quarter, representing annual unit growth of 176%. International revenue for the second quarter was $1.9 million, which was roughly flat compared to the prior year period and increased 15% sequentially. International revenues in the second quarter of 2021 benefited from a meaningful number of rescheduled procedures and the deferral of capital sales from a severely impacted first quarter of 2021, due to COVID. Our strategy in Europe continues to be to increase brand awareness and market development activities. On a year-to-date basis, international revenue has increased approximately 23% from prior year and is in-line with our expectations. Gross margin for the second quarter of 2022 was approximately 51%, an increase from 42% in the second quarter of 2021. The increase in gross margin was driven by a variety of factors, including higher U.S. sales, increased average selling prices, and higher…

Thanks, Kevin. In closing, I want to thank our employees, customers and shareholders for all their support to help us along our journey to becoming the standard of care for BPH. We will continue to leverage our commercial and clinical investments to execute on our long-term strategy. Have a great day, and I look forward to meeting many of you at upcoming investor conferences. At this point, we will take questions. Operator?

Our first question comes from Joshua Jennings with Cowen. Your line is open.

Hi, good afternoon. Thanks for taking my questions, and congratulations on another strong quarter. I was hoping to start with just asking about the raise of the revenue guidance range, and it suggests that sales funnel continues to fill against a backdrop of tightening capital budgets in the U.S. hospital budgets. But can you talk about the sales pipeline for AquaBeam and how PROCEPT is navigating through the soft capital spending environment?

Yeah. Thanks, Josh. We feel very good about our updated guidance and expect unit sales to increase sequentially in Q3 and Q4. Yes, there is some discussion about macro environment, but we are in a unique competitive position in the sense that we are early in our adoption curve. And there are a number of factors helping with adoption and utilization, and that starts with the clinical outcomes and real-world outcomes that physicians are seeing with our procedure. Hospitals and surgeons are using our procedure for all prostate sizes and shapes. And in fact, we are seeing in some hospitals standardization of the procedure. And also with the broad coverage, now we have full Medicare coverage. Many commercial payers are covering, and more importantly, patients are now seeking more durable, safe and effective procedures. All these factors are driving for better adoption and utilization. And I think, Kevin, do you want to add anything on utilization here?

Yeah. Great. Josh, just to frame the guidance raise, Reza gave a lot of background on the capital pipeline, but the high-end of our guidance raise essentially is about a $3 million raise on capital, $3 million on handpiece. So, it's both penetration and utilization that's driving the increase in the revenue range.

Thanks for that. And then just a follow-up. I wanted to ask about the proposed rule that you cited, maintaining Aquablation procedures at Level 6 APC code and that's, I think, 3.5% tick-up in reimbursement. I think everyone – you guys have been clear that the transitional pass-through payment is going away next year, but maybe you could help us understand relative to other resective procedures the profitability of this proposed level that CMS just issued. And then also just touch on the reimbursement premiums that Aquablation procedures are receiving from private payers? Thanks for taking the questions, guys.

Yes. Thanks, Josh. So, related to APC Level 6, this was expected and we obtained the APC Level 6. And we believe our customers, we are confident they will be satisfied with the APC Level 6. As far as the transitional pass-through is concerned, this is not new, it's not a surprise, and quite frankly, not a concern in the sense that transitional pass-through was transitional, and if you look a year ago, we compare the coverage that we have today, compare where we are compared to last year, we have many private payers covering that on top of the Medicare. And we believe that addition, based on the conversation with hospitals, additions of this private payer outweighs the transitional pass-through going away. And again, this is an information that we have been communicating with all customers and they were aware and we believe this is not a material issue.

Great. Thanks again.

Our next question comes from Craig Bijou with Bank of America. Your line is open.

Great. Thanks for taking the questions, and congrats on another strong quarter. I wanted to ask first on utilization and maybe a little bit more about what you're seeing from individual doctors? Reza, I appreciate your comments that hospitals are – you're starting to see hospitals bring on new urologists to the system. But maybe if you can talk a little bit about the trends, the individual utilization trends once a urologist decides to adopt? You guys have been in the market now for a number of quarters, so maybe you can touch on maybe where the early adopters, where their utilization is now, does it continue to grow within their own practice?

Yes. Thanks for this question. I mean utilization increase is driven by multiple factors. As I mentioned, starts with clinical outcomes. And physicians and hospitals are using on a broad range of prostate. In fact, in the last 18 months, when we look at where the majority of these cases are done, it's on the prostate in the 60 to 80 milliliter range. And they are using, again, on all prostate sizes and prostate shapes. And in fact, they are standardizing resective procedures, many accounts to our, and some accounts have converted all their resective procedures to Aquablation. And these are the driving factors for utilization. And I don't know, Kevin, do you want to add on the most – definitely, accounts which have been with us for many quarters, we see sequential growth of utilization of those accounts and Kevin can …

Yeah. No. So, to Reza's point, I mean, we still recognize that the largest or highest utilized group are the customers that have been with us the longest. And the utilization dynamic is still one that we're keeping a close eye on. And it's important to remember that our installed base is growing significantly. It grew roughly 40% in the first half of the year. By the time we get to the end of the year, we're going to have an installed base that is up 100% over the end of 2021. So, as we get additional cohort each quarter, Craig, we'll be able to provide more specificity around utilization metrics. But for now, it's fair to say that our oldest customers have our highest utilization. And then on top of that, we are also seeing, even in those customers that have been with us for multiple quarters, they're still adding new physicians to those accounts today which is helping the utilization rate.

Got it. That's helpful, guys. And on the sales reps, the adds that you expect in the second half, I'm not sure if I missed it or not, but did you say whether they were going to be capital or Aquablation reps, maybe both? And then maybe if you could go into a little bit of detail on the strategy for adding those reps. You guys have obviously been doing extremely well thus far. So, maybe the strategy there, whether they're targeting certain geographies or you just need more feet on the street in current geographies?

Yeah, this is Kevin. Let me start with the strategy. We've been very clear on this that we would increase the size of our sales force when we felt it won't jeopardize the excellent real-world commercial outcomes that we expect. And we're at that point now where we feel comfortable with our clinical data and commercial performance that we will increase the size of the field team. So, that's the strategy. In terms of the bifurcation, we're going to continue to add at this time probably equal number of both capital and Aquablation sales reps. We're nowhere near penetrated in every U.S. territory where we need to be. We have capital reps right now in some fairly large territories that we want to take a look at. But my point being is, we have a long runway in front of us in terms of adding commercial headcount to the business. And we'll continue to do that. The other point I want to make on our reps is our guidance in the back half of 2022 doesn't imply really any meaningful contribution from these new folks. What we do want to do, however, though is make sure they get on board, we get them trained, they learn the protocol such that they could be productive as we enter 2023. But again, back to the strategy, we felt now is the right time given what we're seeing in the real world to both outcome physician and patient interest.

Great. Thanks for taking the questions, guys.

Thanks, Craig.

Our next question comes from Amit Hazan with Goldman Sachs. Your line is open.

Hello, thanks. Hey, good afternoon, guys. I wanted to maybe start with a couple of the macro questions that have been on other earnings calls in the sector and just get your take on it. One is just on hospital staffing shortages and whether you all are seeing an impact from that at all that you would call out? Is it making it hard to get into case observations, training done, installations? Anything like that that you would call out that's impactful to you?

Thanks, Amit, for the question. So, it has not impacted us. We are hearing that, but we have been able to achieve our forecast. So, it has not been a material event for us.

Okay. And I know, kind of you're small and growing very fast, but do you have a sense of where we are in the BPH market overall in terms of just underlying market conditions as a percent of, kind of where we were in 2019, the health of the BPH market, if you will, and how it's recovering? And maybe inside of that question, we just love to hear, if you saw any change in trend during the quarter, whether procedures that same, kind of high level, I know for you, they improve a lot because you're growing. But overall procedures, do you get a sense that your customers saw improvement at all during the quarter and exiting into 3Q at a high level for the BPH segment?

Yeah. Good question, Amit. This is Kevin. And look, we definitely believe that 2019 is the last, I would say, macro year that we can look at resective surgical numbers and consider that a normal operating environment. We would suggest that 2020 and 2021 were impacted by COVID. Therefore, frankly, we're not paying much attention to the procedures in those years. And when I think about the macro environment, we're in a bit of a unique position that, as you mentioned, we're still at relatively low volumes. I mean our current average utilization is around 5.5 procedures per account per month. And if you look at the customers we're targeting, on average, even in 2019, those customers were doing approximately 17 procedures a month. So, we're still very focused on increasing utilization with the accounts we penetrated, which shields us a bit from some of the macro factors. And frankly, it's not terribly relevant to our growth in the near term if the market is growing 10% or decreasing 10%, but I would definitely agree with you that 2020 and 2021 have been, on the macro level, impacted, but that hasn't really impacted our ability to grow.

Great. Just one last quick one for me is on the system side. Can you share how many systems that you sold were new accounts versus evals and if there were any retirements in the quarter?

Yeah. So, no retirements. And we're now through the eval and demo pool. So, moving forward, every new sale is a greenfield sale. And we may periodically put a rental out with a customer, but right now, our model is pretty much we're going to sell and not offer a demo program.

Okay. Thanks very much.

Our next question comes from Matthew Mishan with KeyBanc. Your line is open.

Hey, good afternoon, and thank you for taking the questions. Just first, it does seem like you're maintaining price as inflation goes, especially around the systems. Why would gross margin decline in the second half versus the first half of the guidance?

Yes, it's a good question. Our guidance – by the way, welcome, Matt, it's your first call with us. Glad you're on board.

Thank you.

So, if you look at our guidance, the high-end of the margin range does imply approximately 50% gross margins in the back half of the year. And you're recognizing that we just came off the second quarter where we recorded 51%. I'd point out a few things. The first being that we are still at relatively modest revenue level. And gross margin percentages, they're going to fluctuate, and they can fluctuate fairly significantly on pretty low dollar volume. Just to put that in context, a $300,000 cost equates to a full 2 percentage points on margins. So that relatively modest revenue with a high degree of fixed costs tends to have gross margin metrics that will be variable here in the near-term, but trending in the right direction. That would be point one. Point two is, we are increasing staffing levels in our operations group in anticipation of future growth. These are in areas like supply chain and production. This does create some additional expense. However, I would point out, there's nothing unusual. There's nothing infrequent in our margins that's implied in our second half guidance. And at least the supply chain and production, this does create some additional expense. However, I would point out, there's nothing unusual. There's nothing infrequent in our margins that's implied in our second half guidance. And we still do believe that at scale, this business does have a potential for significant margin expansion over the long-term. But there's going to be some variability in the near term. There's nothing unusual again in the second half. It's just a multitude of factors.

Okay. Excellent. And then just, it does seem like you're controlling almost the pace at which you're installing these systems, pace at which expanding your sales force, just what makes you comfortable with the sales rep or a doctor or a system that you're placing this with that you're going to get the outcome from that new placement you expect?

Yeah. So, this is Reza. Definitely, we are very disciplined in targeting our accounts. We are – in the U.S., those high-volume hospitals that are doing on average more than 200 resective procedures per year, we are targeting those. And even before talking to the administrators in the hospital, we make sure we have a physician champion. And because of this disciplined approach, we have not seen pushback and we have had high success rate in placing our robots. And we are aware that we have an extra capital equipment and this disciplined approach has allowed us to be successful. And that is the reason that you're talking.

Thank you very much.

Our next question comes from Neil Chatterji with B. Riley. Your line is open.

Hey, guys, thanks for taking the questions. Just maybe circling back on just the commercial team adds for the second half. Just wondering if you could just talk about, kind of the expected like maybe quarterly cadence of that, if you expect that to be weighted more towards third quarter or fourth quarter. And then if you could just maybe remind us on, kind of the expected productivity ramp. Is that before you start to see meaningful impact of that three to six months or if you could just add some color there?

Yeah. By the way, welcome as well, Neil, I appreciate you having covering the company now. In terms of cadence, I'll just talk about our OpEx spend of $110 million. So that does imply about a $60 million spend in the back half of the year. And that expense cadence is relevant to how we're going to build the sales team where the fourth quarter should be larger than the third quarter. And sequentially, Q3 should be up about $2 million to $3 million from Q2. So that does suggest that the will be primarily mid to late Q3 by the time we have folks on board and that does manifest itself in OpEx expense guidance. That was on OpEx. What was your second question? Do you mind repeating?

I mean, I think that was pretty much…

You asked about the productivity, sorry. Generally, it's three to six months for a rep to become fully productive. And again, that depends if you're going into new territories, which some of these reps will be doing or will be looking at perhaps splitting larger territories, which we may also have to do as we continue to grow. But on average, it's a three to six month ramp.

Got it. And if I could just add a follow-up question here. Just kind of circling back on the international front, you talked about it last quarter with the Asia Pacific regulatory approvals for Korea and Japan. Just kind of curious if there's any updates there in terms of adoption in Korea and kind of the reimbursement pathway in Japan? And then secondly, if you could talk about maybe your strategy for China and any expectations for the market there?

Yeah. So, just in terms of – I'll take you to those separately. So, in Korea, as mentioned on the last call, we expected very modest contribution in 2022, really no greater than $1 million is how I phrased that last quarter. We did sell another robot in Korea in the second quarter, so that's in the number there. So, again, continued penetration, but relatively modest revenue contributions moving forward. Japan, we're continuing to work through the reimbursement pathway there. We do not anticipate any Japan revenue in 2022. The next time we'll probably give a meaningful update on Japan would be when we introduce 2023 guidance. And then flipping to China, we have started the regulatory process there, but that could be a fairly lengthy process. We are not expecting any meaningful contribution in China in the short-term.

Great. That's all for me. Thanks.

There's no further questions at this time. I'd like to turn the call back over to Reza.

Yes. Thanks, everyone, for attending our earnings call. We look forward to seeing you in the future investment meetings. Have a nice day.

This concludes the program. You may now disconnect. Good-bye.