Good morning, ladies and gentlemen and welcome to the Q2 2019 Neuronetics Inc Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Klausner from Westwicke Partners.

Thank you, operator. Good morning and thank you for joining us for Neuronetics second quarter 2019 conference call. A replay of this call will be available on our website for 30 days. Joining me on today’s call are Neuronetics’ Chief Executive Officer, Chris Thatcher and its Chief Financial Officer, Steve Furlong. Before we begin, I would like to caution listeners that certain information discussed by management during this conference call will include forward-looking statements covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our business strategy, financial and revenue guidance and other operational items and metrics. Actual results could differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the company's business. For a discussion of risks and uncertainties associated with Neuronetics' business, I encourage you to review the company's filings with the Securities and Exchange Commission, including the company's annual report on Form 10-K filed on March 5, 2019, and the Form 10-Q expected to be filed later today. The company disclaims any obligation to update any forward-looking statements made during the course of this call except as required by law. During the call, we'll also discuss certain financial information on a non-GAAP basis that includes EBITDA. Management believes that non-GAAP financial information, taken in conjunction with U.S. GAAP financial measures provide useful information for both management and investors by excluding certain noncash and other expenses that are not indicative of our core operating results. Management uses non-GAAP measures to compare our performance relative to forecast and strategic plans to benchmark our performance externally against competitors and for certain compensation decisions. Reconciliations between U.S. GAAP and non-GAAP results are presented in tables accompanying our press release, which can be viewed on our website. With that, it's my pleasure to turn the call over to Neuronetics' chief executive officer, Chris Thatcher.

Good morning, everyone, and thank you for joining us on today's call. Before I get started, I'd like to welcome Steve Furlong, Neuronetics' New Chief Financial Officer. Steve brings extensive medical device experience to the team, most notably having spent 14 years at Hologic, where he held a variety of senior leadership positions. We're very excited to have Steve on board as we look to continue to drive the adoption of NeuroStar Advanced Therapy and expand our market leadership position. On today's call, I will provide an update on our performance during the second quarter, followed by an update on the progress we made toward our key priorities. I'll then hand the call over to Steve to walk through our financial performance and guidance for Q3 and 2019, after which we will provide our closing remarks before opening up the line to take your questions. Our strong performance continued in the second quarter. Total revenue was $16.6 million, an increase of 25% over the prior year, primarily driven by a 30% growth in the U.S. NeuroStar Advanced Therapy revenue and a 22% growth in U.S. Treatment Session revenue. This represents the fifth consecutive quarter since becoming a public company that we've delivered top-line growth in excess of 20%. Moving on to an update on our strategic priorities for the year. As a reminder, these priorities are to continue the expansion of our sales force and marketing efforts, focus on driving long-term increases in system utilization, launching NeuroStar Advanced Therapy in Japan and selectively evaluate entry into other international markets; develop our next-generation NeuroStar system and beginning the clinical work to set the stage for the expansion of new indications. Taking each of these in order, as we look to continue the expansion of our sales force and related marketing efforts…

Thanks, Chris. Before providing the financial update, I would like to say how excited I am to join the Neuronetics' team and help realize the mission of improving the quality of life for patients who suffer from psychiatric disorders. Neuronetics has a well-defined leadership position in the TMS space and the track record of growth is truly impressive. In addition, there is still a significant untapped market for TMS, both for the treatment of MDD, as well as other psychiatric disorders. And I look forward to being a part of Neuronetics as we continue to advance NeuroStar Advanced Therapy to treat these patients. Now shifting gears to our financial update. Total revenue for the quarter was $16.6 million, a 25% increase over the prior-year quarter. U.S. revenue was $15.9 million, an increase of 23% over the second quarter of 2018. International revenue was approximately $682,000, an increase of 93% versus the prior-year period due primarily to the sale of systems to our distribution partner in Japan. U.S. NeuroStar Advanced Therapy system revenue for the second quarter of 2019 was $4.6 million, an increase of 30% over the second-quarter 2018 revenue of $3.6 million. The increase in U.S. NeuroStar Advanced Therapy system revenue was primarily driven by higher capital, upgrades and rent-to-own revenue. Capital units sold increased by 26%, while average selling prices declined by 9% as compared to last year. On a sequential basis, average selling prices declined by 4%. During the quarter, we saw our active installed base increase to 976 units, a net increase of 160 units from the second quarter of 2018 and an increase of 45 units from first-quarter 2019. U.S. Treatment Session revenue was $10.8 million for the second quarter of 2019, an increase of 22% over the prior-year quarter. The increase was primarily due…

Thanks, Steve. We're very happy about our performance during the first half of 2019, as we have consistently demonstrated the execution of our growth strategy and achieved our financial objectives. Our ability to sustain growth is a direct reflection of our ability to successfully execute on improving long-term commercial strategy that we put in place in combination with the ongoing development of our industry-leading NeuroStar Advanced therapy system for the treatment of drug-resistant depression and potentially new indications. As we look to the second half of 2019 and into 2020, we believe our strong foundation in the U.S., as well as our recent expansion internationally sets the stage for continued growth. With that, I'd like now to open up the line for questions.

[Operator instructions] Your first question comes from the line of Jason Mills with Canaccord Genuity.

Thank you very much, Chris. Can you hear me OK?

Yes, Jason. Good morning.

Good morning, and thank you taking the questions. I look forward to seeing you over the next couple of days at our conference. So Chris first, congratulations on a great quarter. I wanted to ask you about the juxtaposition of your upside growth in treatment session revenue which -- or treatment session procedures, which has been quite strong frankly for several quarters now. And then that juxtaposed to the treatment session ASPs. So I know that your policy has been to offer volume discounts and seemingly happy to do it given treatment session revenue procedures are growing so fast. But how should we think about this juxtaposition, let's say, over the next couple of years? Are we going to continue to see this level of volume discount pricing or will that moderate a little bit? I just can't help but think that with this level of growth in procedures, if ASPs were more in line with your long-term view of sort of 3%, 4%, that the numbers could be even bigger. And I just wanted your thoughts on that.

Right. So thanks, Jason, looking forward to seeing you on Thursday at Canaccord Conference. As it relates to our general guidance, we've generally guided mid-single-digit declines in ASP for NeuroStar treatment session and that will -- the decline in ASP will increase if our volume expectations are higher than we assumed in our guidance because along with higher volumes, providers get greater decreases. And if our treatment session approach should slow, then our price decline would be less in a given quarter. And that's played out consistently for the last four, five quarters. So we've had another nice unit volume uptick again this quarter. And in return, the pricing decline for NeuroStar treatment sessions is slightly higher than our guidance. And that's going to remain fairly consistent. Over time, right, over time, over a year or two, as that installed base gets larger, those price declines could be tempered longer term because they are weighted out.

Okay. So to follow up on that, I mean obviously, you're not going to give the treatment sessions away. So there's going to be a diminishing returns to the ASP declines, if you will, I would assume even for the higher volume guys, right? I mean are you going to continue to offer the same level of price breaks for, let's say, the same person they got, let's say, a 10% reduction in price this year if they grow treatment session revenue in their own practice 20% to 30%? Again next year, will they also see the same level of price cuts? Does that make sense?

Yes. So just to be clear, so our pricing program and plan is based on volume, we don't have many one-off agreements on pricing. So -- and we don't renegotiate pricing every year. So when they hit a maximum volume, the price does not continue to decline year after year.

Okay Great. I'll move on. Just one quick other category. I mean I was interested to see your updated operating expense guidance. The spending on PTSD and bipolar. You mentioned a little bit in your prepared remarks, but I would be interested and I think investors are interested in this sort of indication expansion opportunity. And maybe a bit more color on what your timing expectations are? What nuances you expect with respect to a clinical study? And just in general, maybe a bit more color on the target addressable market opportunity you see ahead in these markets as opposed to a market in OCD that one of your competitors is approaching? Thanks, Chris, and congrats on a good quarter.

Yes, thanks. So the first thing is, this is a large unmet need, both PTSD and bipolar. Directionally, these markets in total are just slightly smaller than the MDD market. This represents not only a big unmet need, but it also allows us to leverage our installed base. Psychiatrists treat PTSD and bipolar, as well as MDD and they're prevalent within their practices. So this is a terrific same-store growth opportunity for us. That said, we're planning a study that's going to be a large study. These are going to be RCT studies, and these will be designed to address several things. One, the FDA's need. Second is they'll also be designed for -- to separate clinically in a way that's compelling for providers to use the technology. And then lastly, it will be designed to be compelling for financial payers to pay for it. So these are -- when we take a product to market, I've said this before, the difference between a product and a business is you have to get reimbursement. And without reimbursement, it's just a product, patients can't afford it, doctors can't afford to deliver it. So when we do a clinical trial, we think about the whole continuum as I outlined there. These are much bigger markets than OCD and you need typically larger studies that were provided -- that were provided for OCD to get reimbursement in play. So that's our thoughts on the category. We're really excited about this opportunity, and we're just kicking off the process now.

Thank you. I'll get back in queue.

Your next question is from the line of Matthew O'Brien from Piper Jaffray.

Good morning. Thanks for taking my questions, and welcome, Steve, to your new role. I wanted to start with the fixed pricing commentary on the modeling side. I would just love to hear a little bit more about what you're doing there and then kind of how that flows through the P&L? And how we should think about that influencing numbers over the next several quarters?

Yes. Good morning, Matt. Yes, sure. So we wanted to comment on this because I know that we've had some questions on the U.S. Treatment Session revenue number. So just to break this down is, we've also provided commentary on the increase and the decrease in volume and price relative to prior year. I know everyone's tracking that in your models. And if you've been tracking our historical volumes and price and you utilize our reported growth rate that we share each quarter, you're going to calculate a number that is typically lower than we report in U.S. Treatment Session revenue. And that difference is what we call other treatment session revenue, which is comprised of revenue from fixed-price contracts and other ancillary components. And we want to provide you that color here today in the call.

Okay Chris, but I think you said that the interest level in that fixed pricing model is lifting. Can you just talk a little bit more about, again, why that is? And so I think a lot of people on the call are really trying to understand the whole competitive dynamic and make sure that with that commentary plus the pricing declines that this isn't a result of you having to be more aggressive in the marketplace to get more customers and more treatment session volume.

Yeah. So just to be clear, the fixed pricing model is not reflected in any ASP decline. Fixed pricing model just goes to total treatment session revenue. So they're not -- they're not interacting at all. So this is a function of what I would call a positive signal to our successful HVT penetration. This is for the best HVT targets. And we're learning how to best really partner with this customer to create a successful NeuroStar program with them. And at this point, I think -- I hope you understand, we're not going to get into all the specifics for competitive reasons on a public call, but this is definitely an emerging sales strategy for us, and we wanted to highlight it here, and I think it validates our HVT strategy overall that these larger accounts are very interested in buying multiple systems at multiple locations and working with us over a longer period of time in a contracted fashion.

Got it. Okay, that makes sense. And then the other question I had was just on the international performance. So the guidance lift for the year is really just a function of a little better visibility with what you're doing with Tiejin. And first of all, is that true? And then secondly, can you just talk a little bit more about kind of the cadence of sales into Tiejin with there a big bulk of systems placed and sold here in Q2, and you won't see that in Q3, Q4? Just any kind of color there would be helpful? Thanks so much.

Yeah. Thanks, Matt. So we're excited about Japan. I'd call it tempered enthusiasm. We're in a fuzzy front end of a commercial launch. Actually, Tiejin has done a very good job during the pre-commercialization phase, and it's paying off. Overall, they're off to a good start in this targeted segment. As you can see in Q2, our OUS revenues are up nicely, a result of the most recent round of NeuroStar Advanced Therapy systems sales to Tiejin. I'd also note that our increased annual guidance range does not reflect our revenue expectations for the year for Japan. I'm sorry, it does now reflect our revenue expectations for the year for Japan. So that's included in our annual guidance.

Okay. So you lifted it because of Japan specifically. Is that the right way of view that?

Yes, the remainder of the year, what we think is going to happen.

Got it, okay. Thank you.

Your next question comes from the line of Margaret Kaczor with William Blair.

First, maybe a bigger picture strategic question. We talked through some of the more tactical strategic decisions that you guys are doing in terms of vis-à-vis with education and some of these new pricing models. But if we think about some of the bigger, longer-term strategic decisions that really get TMS more broadly adopted and maybe even accelerated from the point where you're at. What measures are those? What are you doing on those measures? Is it price, reimbursement, data? And do you still have room in those high-value accounts that you guys have focused on for the last year or two?

Yes. So thanks for the question, Margaret. Our growth strategy is pretty straightforward. This is a really large market as we all know. It's underpenetrated and our ability to grow and get the patients is about hiring more people, selling more systems. And we're at the cusp of an amazing milestone, almost 1,000 systems, but that's really just a drop in the bucket. We're in the low single digits of penetration, the number of patients that we can treat, mid-single digits in the number of locations that have our systems. And this is just about us commercializing in the U.S. and continue to sell systems and demonstrate that when we hire people, we sell more systems. If we sell more systems, we treat more patients. And that is really the strategy for the next 36 months in the U.S. and then the continued growth that will come from outside the U.S. and Japan. And as we indicated, we're looking at other select thoughtful commercialization paths outside the U.S. And then right around that period of time, then we would come out with a new system that's really going to wow providers and set a new high bar for what people think about in a TMS system. And then shortly on the heels of that, PTSD and bipolar and two new indications, that's our growth strategy, and we're not changing. And I know something that you have a lot interest, we have a lot of interest is, we still think that there's an opportunity in the direct-to-consumer marketing campaign. We've made some good steps this past flight of TV and reducing our cost and increasing our lead-to-consults conversion rates by adding some new functionality and some new learnings. So that's our strategy. I don't think there's really a silver bullet here. I just think that it's good commercial execution as we've outlined.

Got it. So maybe switching over to guidance for a second, you guys had growth of 25% this quarter. Overall, third-quarter guidance has implied kind of the 15% to 19% range. And that implies fourth-quarter growth comes in, I think, a little bit slower than third-quarter growth. So maybe walk us through the comps this year. What this means for the U.S., as well as for international? And, I guess, more importantly, how does it set up for 2020 and beyond? Do you guys continue to view yourself, I guess, as a 20-percent-plus top-line grower going forward?

Yes. So the guidance demonstrates a full-year growth now between 19% and 23%, which is slightly higher than our original guidance. Q3 has been typically a sideways and sometimes down quarter. And this is a seasonal fluctuation that we've seen in the past. And you can back into our Q4 number, which is in line with full-year expectations. And from there, you can start to model Q1 in 2020, and we're not going to get into guidance for 2020, but you can quickly see based on history, what that sets up Q1 to look like. So we're guiding right now from 19% to 23%, which puts us on track to be a continued 20% grower through the end of the year. And as we move into 2020, we'll provide guidance on 2020.

Okay, yes. And I guess just one last one in terms of capital placements. I'm not sure if you guys can give us any kind of breakdown from capital sales going to existing accounts versus some of the new center openings and then are you continuing to see those repeat sales with the existing accounts continuing to drive that above average utilization? Seems like it, but just double checking. And as we look at volatility on pricing within capital, should we assume very much? Or is this kind of the new level going forward?

Yes. So we've given all the metrics to determine our installed base, how big our installed base and our NeuroStar treatment sessions. And you can see that once again, our installed base is up 20% over prior year. And utilization rate is up again in this quarter. So we don't report out on the systems that we're selling to existing customers versus new customers. And we haven't broken out our NeuroStar treatment sessions by customers, but we're giving you enough metrics that you can see that even adding 20% more volume to our installed base, that our utilization rates are up, that 20% is really dilutive, right, on a per system utilization rate seeing that they just got the systems. So we're quite excited about the utilization rates within our business, consistent growth rate now for five quarters, 20-plus percent NeuroStar treatment session, 30% on NeuroStar's, 25% overall, five quarters over 20%, taking up guidance, we're quite enthusiastic about what we're accomplishing here.

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

Thanks for joining us this morning. We look forward to updating you on our next quarterly call.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may now disconnect.