Mazor Robotics (MZOR) Q1 2018 Earnings Conference Call Transcript

Mazor Robotics (NASDAQ: MZOR) Q1 2018 Earnings Conference CallMay. 14, 2018 8:30 a.m. ET

Prepared Remarks:

Operator

Good morning, everyone, and welcome to Mazor Robotics 2018 first-quarter financial results conference call. Today's conference is being recorded. At this time I'd like to turn the conference over to Michael Polyviou. Please go ahead, sir.

Michael Polyviou -- Investor Relations

Thank you, Leeann. We also want to thank everyone for joining us today for Mazor Robotic's conference call and webcast to review the financial results for the first quarter ended March 31, 2018. On the call today are Ori Hadomi, chief executive officer, and Sharon Levita, chief financial officer and VP, business operations. Before turning the call over to Ori, I would like to make the following remarks concerning forward-looking statements.

All statements in this conference call, other than historical facts, are forward-looking statements. These forward-looking statements are not guarantee of future performance and may involved and are subject to risks and uncertainties and other factors that may affect Mazor's business, financial condition, and other operating results, which include, but are not limited to the risk factors and other qualifications contained in Form 20-F and other reports filed by Mazor with the SEC, to which your attention is directed. Therefore, actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements. Mazor expressly disclaims any intent or obligation to update these forward-looking statements.

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During this call, we'll present certain non-GAAP financial measures, such as non-GAAP net income loss and net loss income per share. In Mazor's press release and the financial tables issued earlier today, which is located on the company's website at www.mazorrobotics.com, you will find definitions of these non-GAAP financial measures, a reconciliation of these non-GAAP financial measures with the closest GAAP financial measures, as well as discussion about why these non-GAAP financial measures are relevant to the company's results. With that, I'd like to turn the call over to Ori Hadomi, chief executive officer. Ori, please go ahead.

Ori Hadomi -- Chief Executive Officer

Thank you, Michael, and welcome to Mazor first-quarter 2018 conference call. Earlier today, we reported record Q1 revenue of $15.5 million, 32% growth over the [Inaudible] quarter. The results were in line with our expectations for this quarter. We continue to believe that 2018 is going to be a year of transition due to our advancement to the next phase with Medtronic and its impact on mix of revenue streams.

Our performance is expected to be driven primarily by recurrent revenues from the expanding installed base. I'd like to review and provide details on the commercial activity of Q1 as follows: Strong interest and demand for Mazor continues, the breadth and depth of the sales pipeline is widening, and awareness of the Mazor X is spreading rapidly for the significant reach of Medtronic's marketing and sales effort. Medtronic received an order for the first European Mazor X system and that system was installed in Switzerland in April. We received orders for the Renaissance from international distributors in Asia and Europe and our presence in those markets expand.

In the United States, our Renaissance [Inaudible] are creating headway into the ambulatory surgery center market, and we have initiated a pilot program with a major ASC chain. As this quarter's results reflect, the partnership with Medtronic is bringing the productive and cost-effective performance that we envisioned in May 2016 when launching our partnership. Our performance in the quarter shows an increasing installed base, expanded market acceptance and adoption of the Mazor X and the Renaissance of Mazor Core-based systems. As I have said, installations are only beginning of the story.

Clinical adoption is the key indicator of value building and customer engagement. As of the end of Q1 2018, hundreds of surgeons have used Mazor systems to perform upward of 33,000 patient procedures, placing more than 200.000 implants. More surgeons are evaluating our systems and attending live procedure, something we encourage so they witness for themselves the potential, and this number is certain to keep growing. These procedures include nearly every type of spine surgery where implantable devices are needed or where [Inaudible] correction is done.

I'm optimistic and I sincerely believe that installed utilization is the best predictor of future system sales for any given robotic system as well as for the robotic market overall. Utilization promotes demand for systems and opens new market and is a driver for the shift that we are now seeing. The market is moving from early adopters to the large early majority, and there is plenty of room for growth. With over 400,000 thoracic lumbar [ph] cases being performed annually in the United States [Inaudible] in major market [Inaudible] still represent a small fraction of the tremendous market opportunity.

The market growth dynamics and increasing adoption of robotics are apparent this quarter. Mazor has expanded into new markets and opened a new market segment with our two Mazor Core-based robotic guidance systems. In the United States, the Renaissance market efforts are focusing on the 5,000-strong ASC market. Our systems' low price point uniquely positions Mazor to provide a robotic guidance solution for this segment.

And efforts to develop these markets are paying off. In April, we will launch a pilot program with a nationally recognized ASC chain. And though I'm not able to disclose the details, first patient procedures are occurring [ph] these days. Surgeons in this segment are embracing the Renaissance to help reduce radiation exposure to the staff, to differentiating themselves from the competition and to broaden their catchment.

With Mazor X we're expanding domestically in the United States and internationally. The quarter ended with an installed base of over 200 systems in 15 countries, including a first Mazor X installation in Europe. The expansion of the Mazor Core systems installed base and clinical adoption provide more patients with access to the clinical benefit of our robotic technology. We're driving [Inaudible] adoption, with nearly 50% of our procedures performed [Inaudible].

Patient benefit of MIS are known and include less pain, low risk of infection, short hospital stay, and quick recovery. However, the learning curve is [Inaudible] and MIS [Inaudible] higher level each quarter variation. Multiple studies have shown clearly that Mazor Core-based robotic guidance MIS procedures are characterized by high-precision [Inaudible] when reducing [Inaudible] radiation exposure to the patient and to [Inaudible] team. Using our Mazor Core-based systems, surgeons are able to perform complex procedures [Inaudible].

In the past, these would have required an open incision. We have opened the door for a new era. Patient benefits are substantiated by the towering mountain of clinical evidence validating the clinical vision for Mazor System. In the past month, nearly [Inaudible] spine conference have included surgeon presentations that highlighted the advantages and patient benefit of Mazor Core systems for spine and for brain surgeries.

Updated data from MIS ReFRESH were presented at the International Society for the Advancement of Spine Surgery last month in Toronto by Dr. Su of Erdington Hospital and Global Spine Congress earlier this month in Singapore by Dr. [Inaudible]. To remind you of MIS ReFRESH is a prospective multi-center comparative study of complications and revisions rate in robotic-guided versus fluoro-guided MIS procedures and they now include over 400 patients.

As we've reported in the past, Mazor Core-based robotic system reduced the complication rate and revision rates several-fold compared to freehand. The latest data included an analysis of single-level spine fusions in almost 300 patients which echoed the reduction in complications and revisions seen in the full cohort. The complication rate was almost four times lower and the revision rate almost ninefold lower compared to the control arm. In the American Association of Neurological Surgeons in New Orleans, at the end of April, Dr.

Allen Ho of Stanford discussed his initial experience with the Renaissance-guided insertion of DBS electrode placement for the brain procedure. This doctor demonstrated significant reduction in operating time and increased operating efficiency improvement but also significantly [Inaudible] passage to the brain, meaning accuracy [ph] achieved faster and with much less risk to the patient. These presentations at major international conferences are beyond the more than 60 peer-reviewed clinical studies of Mazor Core technology that form the basis of our evidence-based medicine. The impact of this evidence is overwhelming and profound.

In the age of value-based healthcare, Mazor systems has been scrutinized and investigated not just from technical aspects like accuracy but also on their impact on patient outcome. This provided significant and measurable clinical benefits to doctors, hospitals, and, foremost, patients. And we continue to innovate and improve, expanding product offerings and capabilities. As I've stated, our fundamental aspects of Mazor strategy is to invest in R&D, to drive innovation, and deliver value-based healthcare solutions and product offering to generate future growth.

Our innovation effort is [Inaudible] on delivering technology to improve clinical outcomes while assuring safe and efficient procedures. We have the luxury of being able to learn from thousands of robotics-guided surgeries performed by our systems around [Inaudible]. A competitive differentiator, we constantly analyze data and [Inaudible] customer. Our innovation is driven by the desire to address their future needs.

For the spine market, we decided in May 2016 to partner with Medtronic and to deleverage our joint experience and market position. Medtronic is a leader in the spine operating room with its implant systems, market-leading navigation, and [Inaudible] system. Mazor is a pioneer end market leader in the robotics field. Together carefully and thoughtfully, we planned a product road map to transform the spine market and are allocating resources and investments to realize this path.

I'm happy to share that the first outcome of our joint effort will be commercialized at the end of 2018. This effort will result in Medtronic's robotic technology being integrated onto the Medtronic's robotics-guidance platform. Our robot will continue to be driven by a physician with precision using the Mazor Core engine and our proprietary robotics. This will provide both accuracy and [Audio gap] with the patient during surgery.

The cell technology will enhance user experience enabling real-time visualization and verification for the surgeon. Our system will also provide a robot-guided implant solution that eliminates the need for guidewire with Medtronic implants, eliminating guidewire [Inaudible] surgical efficiency, reduced cost, and may enhance surgical safety. Medtronic has taken significant steps to ensure that this integration succeeds, including adapting their portfolio to the Mazor X. With the integration of Medtronic implant systems, staff capability, and the seamless overall arm workflow [ph], the Mazor X is becoming entrenched at a central hub of the Medtronic product line.

The scope of the joint Medtronic and Mazor spine innovation road map extends well beyond the end of 2018, with a rich pipeline of projects focused on procedures and advanced capabilities. Outside of spine, Mazor continues to innovate independently from Medtronic as we embark on a path that will carry us toward the future of surgery. Our sights are set beyond the horizon and into the next decade with what we believe will catapult Mazor's success beyond spine and brain. We have chosen not to elaborate or disclose at this point of time our plans beyond spine.

We will remain the leader in surgical robotic innovation and will pioneer and lead the promising future of surgical robotics. Now to review the financial highlights of the first quarter, I will turn the call over to Sharon. Sharon?

Sharon Levita -- Chief Financial Officer

Thank you, Ori, and hello, everyone. I will review our financial results for the first-quarter of 2018. Revenue for the three months ended March 31, 2018, was $15.5 million, an increase of 32% compared to $11.7 million in the year-ago first quarter. Geographically, revenue in the U.S.

increased 27% to $14.2 million, compared to $11.2 million in the year-ago first quarter, representing 92% of total revenue. One point three million, or 8% of revenue, originated from sales in the international markets. Capital sales revenue was $6.6 million in the first quarter of 2018, compared to $6.5 million in the first quarter of 2017. As we disclosed in the past, the pricing models for the Mazor X under the global distribution phase with Medtronic is at a lower per-system rate compared to the rates we have been realizing for our direct sales channels, including the year-ago results, thus impacting our average selling price.

Recurring revenue from disposable kit sales grew to $5 million, a 72% increase compared to $2.9 million in the last year's first quarter, reflecting the increase in our installed base, primarily in the U.S. market. Revenue from service and others increased 70% to $3.9 million in the first-quarter of 2018, compared to $2.3 million in the year-ago first quarter. Gross margin for the first quarter of 2018 was $58.3 million, [Inaudible] %, compared to 64.6% in last year's first quarter.

This expected decrease is mainly due to the pricing terms with Medtronic, as mentioned earlier. Operating expense were $10.5 million, compared to $13.3 million in the year-ago first quarter, reflecting mainly the decrease of $3.8 million in selling and marketing expense, following the transition to global distribution phase of Medtronic relations and partnership, as Medtronic assumed global responsibility for sales and marketing activities of Mazor X systems for spinal application globally. On a GAAP basis, the net loss for 2018 in the first quarter was $1.3 million, or $0.02 per share, compared to the net loss of $5.2 million, or $0.11 per share, in the 2017 first quarter. On a non-GAAP basis, the net income for the 2018 first quarter was $0.3 million, or $0.01 per share, compared to a net loss of $3.9 million, or $0.08 per share, in the first quarter of 2017.

As previously noted, the entry to the global distribution agreement with Medtronic is delivering significant savings to Mazor by reducing our 2018 sales and marketing expense. While the expected annual savings will be approximately $13 million, the revenue for the Mazor X capital system and disposables is also affected by distribution model pricing with Medtronic. We reaffirm our view that beyond 2018, the revenue growth is expected to accelerate, being driven primarily by expanding installed base and increased recurring revenue. Cash provided by operating activities in the first quarter was $2.7 million, compared to $0.7 million cash provided by operating activities in last year's first quarter.

We ended the first quarter with cash and cash-equivalents of $114.5 million. That concludes my remarks. And I now will pass the call back to Ori for summary comments and then we'll take questions.

Ori Hadomi -- Chief Executive Officer

Thank you, Sharon. I decided to observe a patient procedure several weeks ago. I do this periodically to help keep patients and their health in my focus and mindset. From start to finish, the robotic procedure and implant placement took a mere six minutes, a procedure that years ago would have required a major incision and lengthy OR time was complete in 360 seconds.

I was pleased to observe in person what I know from the clinical study outcome: minimally invasive procedures have become routine and easier than open procedures when using the Mazor robotic systems. When Mazor introduced the first surgical robot for spine, we encountered strong headwinds from the market. Now it is gratifying to reap the rewards of Mazor's continuous commercial and development efforts that have changed market perception, creating tailwinds that carry us forward. We continue to be attuned to the importance of the patients, the voice of the customer, and the investment in technology development.

Robotics is in its early stages, especially in spine. And as our customers have been saying, "We love the robot. We want it to do even more," we are listening and hearing their voices. In summary, our first quarter met our expectations and we continue to believe 2018 will be a transition year.

However, we are experiencing tremendous progress across our core growth strategies as we set up for growth beyond this year. Thank you again for joining the call. Operator, we are now open for questions.

Questions and Answers:

Operator

Thank you. [Operator instructions] We will take our first question from Jeffrey Cohen with Ladenburg Thalmann.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

So, a few questions, if I may. Firstly, will you no longer be providing specific numbers as far as placements for X and Renaissance going forward?

Ori Hadomi -- Chief Executive Officer

Yes, Jeff. We are -- how should I say, we're aligning with the industry standards. We looked around and we felt that we are now the only one who shared so much information. And when the environment has been changed and we have to align ourselves with the industry standards, we will not share any longer the type of information shared in the past.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

OK. But your commentary on the over 200 systems' installed base refers to both platforms, correct?

Ori Hadomi -- Chief Executive Officer

That's correct.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

OK. Can you provide a little bit of commentary relating the robot-guided implant solution? Who's driving the R&D? Is that Medtronic as well as Mazor? Both companies, one or the other? And will that enable -- will that system theoretically be driving screws? And if so, can the screws be cannulated as well as solid? And/or are they specific or agnostic?

Ori Hadomi -- Chief Executive Officer

Yes. You probably know, you may remember that in the agreement we signed, there were three main elements: One was about the commercial activity, the other one was investment, and the last one was co-development. And one of the projects, within many others, was the integration that I shared the information about earlier. It's too early now to elaborate on the specifics of the product but -- that will be introduced.

What I can say is that at this point of time, integration of the mitigation together with the wireless opened the door to new procedures and new applications. And in terms of what else robots can be done because you suggested whether the robot will drive the screw and others, the sky is the limit. There is a lot more that can -- to be done. And as I mentioned in my remarks, we have a road map of projects and applications that will be introduced in the future and some of it will be intravenous [Inaudible].

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

OK. Got it. To clarify, you were a little unclear before on your percentage for MIS procedures at your performance quarter. Did you say 50?

Ori Hadomi -- Chief Executive Officer

Yes. I said 50, and I do want just to add what is really important to say, Jeffrey, referring to your earlier question, the system remains open platform. So our system will support each and every implant that is used in the market but with added value and specific applications that will support the Medtronic implant as part of the application we will introduce.

Sharon Levita -- Chief Financial Officer

Jeff, and also to your question, it will be guidewire-less and also regular screw.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

OK. Got it. And then lastly, Sharon, on the sales and marketing line, would you say that Q1 level is somewhat of a good level to think about for the balance of the year at approximately, call it, $25 million on an annual basis? Is that probably a good level to think about for 2018?

Sharon Levita -- Chief Financial Officer

Yes. That's fair. We do continue to invest often in the Renaissance but the increase in expense will be very minor, so this is a good level.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

OK. I'll jump back in the queue. Thanks.

Ori Hadomi -- Chief Executive Officer

Thank you,

Sharon Levita -- Chief Financial Officer

Thank you, Jeff.

Operator

And we'll take our next question from Larry Biegelsen with Wells Fargo.

Larry Biegelsen -- Wells Fargo Securities -- Analyst

Good morning, guys, and thanks for taking the question. Just Sharon, I'm just curious, if I look at our model, system sales -- system revenues were about $2 million below what we were modeling. Recurring revenue, if I heard correctly, at a total of $8.9 million, $5 million for disposable, $3.9 million for service and other. Was about $2 million above what we had, but overall, you're in line kind of with what we were modeling.

So I'm just curious when you looked at Street models, where were those differences coming from? Was it a little bit -- was it lower ASPs for system sales, lower system, lower placements? And on the recurring revenue, was the disconnect just greater utilization? Any comments there would be helpful.

Sharon Levita -- Chief Financial Officer

Yes. We are not providing the number of systems any longer. So it's a little bit more difficult to comment. But in general, I think ASP impact, including the fact that we are deferring service revenue for the first year, were not completely estimated correctly in some of the models.

And regarding the utilization, and disposable sales and recurring revenue overall, there will be fluctuation as we work with distributors and we don't work directly with the market, sometimes it can be stocking inventory in one quarter and less in the other.

Larry Biegelsen -- Wells Fargo Securities -- Analyst

So, Ori, you talked about utilization being kind of the best metric or future predictor for system sales going forward. In the press release, you stated over 33,000 procedures to date versus 30,000 to date, I think, on the Q4 call. Can you give us any more color on procedure numbers or procedure growth in Q1? Anything that would be helpful for us to better evaluate your performance? And just lastly, Sharon, on the Q4 call, I think you said in 2018, sales should be similar to 2017 overall. Is that still the case? And why would that be if you grew over 30% in Q1?

Ori Hadomi -- Chief Executive Officer

Sure. So I'll start with -- referring to the utilization, Larry. Generally speaking, I would say, first of all, I do believe that utilization is one of the most important predictor for the adoption and the future sales of systems and that's why we always invested heavily in the assimilation of the system in the market. But you may remember that we always look at utilization just following the first year following the installation.

I think that at this point of time, it is too early, at least for the Mazor X and for the Renaissance, to make any conclusion. We are very pleased with the learning curve, with the adoption, with the progress. We think that there, all the signs show that we're in the right direction, but it's too early to make any conclusions. We know the technique.

We know what needs to be done and how to assimilate systems in the hospital and train the team. We are sharing all this information with Medtronic, who will assume now responsibility on that. And we expect and we believe that the same performance that we were able to generate with the Renaissance will be achieved and even more than that with Mazor X for Medtronic. Sharon?

Sharon Levita -- Chief Financial Officer

Yes. With respect to the question regarding the revenue, we stand behind the same statements we have disclosed in Q4 and one which would explain the results would be the impact of the ASPs, both on disposables and systems and service revenue, as we mentioned previously, so we're still behind the same statements.

Larry Biegelsen -- Wells Fargo Securities -- Analyst

Thanks for taking the questions, guys.

Sharon Levita -- Chief Financial Officer

Thank you, Larry.

Ori Hadomi -- Chief Executive Officer

Thank you.

Operator

[Operator instructions] We'll take our next question from Mike Matson with Needham and Company. [Silence] And sir, your line is open. You may have us on mute.

Mike Matson -- Needham & Company -- Analyst

Oh, I'm sorry about that. Good morning/afternoon. Thanks for taking my questions. So just want to ask about this -- the navigation integration you're seeing by the end of the year.

So is there -- how much risk is there around the timing of that? And then, can you comment at all on the pricing, what that does for price? And I know you probably won't give us kind of specific dollar amounts, but is that going to add significantly to the price of the system when they have to integrate the Stealth in there? Thanks.

Ori Hadomi -- Chief Executive Officer

Right. Thank you, Mike. First of all, as with any development project, there's always uncertainty and some level of risk. But in this case, I think we feel quite confident that close to the end of the year or at the end of the year, this product will be commercially available.

In terms of price, it will probably -- the pricing will be defined by Medtronic and I believe it will be a premium add-on. It is important to say that the whole project will be also -- we will also issue an upgrade kit that we will be able to upgrade the entire installed base with this capability. Medtronic will be able to upgrade the entire installed base with this capability and they will sell both upgrade kits as well as the new system. So -- and I expect beginning of 2019, the standard system that will be sold will include all the features that will be part -- that are part of this project.

Mike Matson -- Needham & Company -- Analyst

OK. Thanks. And then can you comment at all about this ASC deal that you referred to? Can you give us any insight into how this is sort of structured or what the potential impact is on the sales over the Renaissance systems?

Ori Hadomi -- Chief Executive Officer

I think it's still early. We were very pleased with the progress of the Renaissance. As I mentioned, we're able to sell systems both domestically and internationally. And the ability to successfully enter chain of ASCs is a great step forward.

We are big believers in the ASC market, there were a lot of questions in the past about the ability to come with a robotic technology today in the ASC market because of reimbursement as well as with the availability of capital budgets. And we found a way to do it. We believe that the Renaissance is the right technology and we have the right business model and also the appropriate clinical results to support and to justify this move. And without going specifically to the specific terms of this deal it's the only way -- it's the first step in penetrating and expanding our activity within the ASC.

Mike Matson -- Needham & Company -- Analyst

OK. Thanks. And just one more final question. I wanted to follow up on Larry's question around the disposables, because it was higher than I think what we are modeling as well.

So, Sharon, you mentioned stocking orders. I just wanted -- one, were there any stocking orders in there to Medtronic? And two, can you comment on synergy fees, as maybe synergy fee is part of the disconnect if you're getting some of that revenue or maybe people weren't modeling that?

Sharon Levita -- Chief Financial Officer

With respect to synergy fees, there are some, it's not a number that will be disclosed at this stage. And with respect to disposable, it's a matter of inventory management in Medtronic. And I don't know exactly the details of the decision-making there. And there were slightly higher disposable kits sold this quarter than I expected.

Mike Matson -- Needham & Company -- Analyst

OK. Understand. Thank you.

Operator

And we have reached the end of today's call. I would now like to turn things back to Ori Hadomi for any additional or closing remarks.

Ori Hadomi -- Chief Executive Officer

Thank you all for your questions and for joining the call today. Have a good day.

Operator

[Operator signoff]

Duration: 33 minutes

Call Participants:

Michael Polyviou -- Investor Relations

Ori Hadomi -- Chief Executive Officer

Sharon Levita -- Chief Financial Officer

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Larry Biegelsen -- Wells Fargo Securities -- Analyst

Mike Matson -- Needham & Company -- Analyst

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Contents:

Prepared Remarks:

Questions and Answers:

Call Participants: