Good afternoon. Hi, my name's Craig Bijou. I'm one of the med tech analysts here at Bank of America. It's a pleasure to have PROCEPT BioRobotics and from the company, Reza Zadno, CEO, and Kevin Waters, CFO. Reza, Kevin, welcome.
Thank you. Thanks for inviting us.
I want to start with Q1 results and talk about maybe 2025 guidance as well. Let's start with the procedures. The procedures came in better than expected, which was good to see following some of the disruption from the saline shortage that you saw in Q4. Maybe if you could just kind of walk through how procedures progressed through the quarter and maybe how it looked on a monthly basis, that'd be great.
Yeah, thanks. As we had said in Q4, we saw that impact of the saline shortage that affected roughly half of our accounts. Coming into Q1, we saw improvement. February was better than January, and March was better than February. In late February, we had guidance to about 10,700 procedures for the year, four for the quarter, and we finished the quarter at 11,200 plus cases. We were very happy with that outcome. Overall, Q1 year over year was about 4.5% more than the previous year. Considering the impact of saline going to January and February, we were very pleased with what we saw in Q1.
Let me just add to your second part of your question around kind of guidance, right? I mean, Reza just highlighted that we did beat Q1 procedures by essentially 500, but we kept full-year expectations the same. Our guide beyond Q1 is really just a more reflective conservatism, frankly, in a market that when we reported at the end of February, probably would not have been terribly receptive anyways to companies increasing guidance. We feel very confident about the underlying trends in procedures, not just that we saw in March, but now into April as well. We just feel good about our ability to continue to kind of exceed what we say we are going to do out there.
Got it. That is helpful. I want to talk about Q1 systems. I believe it was in line with the street.
I don't know, I guess the question is for you guys, how did it compare to what your expectations were? I guess along with that, I know a number of investors are asking about kind of the CapEx environment given the procedure number in the first quarter. Maybe just touch on how it played out relative to your expectations and then what you are seeing from a CapEx perspective.
Yeah, so related to CapEx on a day-to-day interaction of our reps and our communication with the accounts, we do not see a change in the tone of the interaction. We were very happy with the systems we placed. This was, let's call it, the second full quarter of Hydros launch. We were very happy. We saw, as we have indicated, we saw IDNs. We sold many IDNs in this first quarter. As far as the impact of the CapEx, we are not hearing that.
Yeah, I mean, you asked, it met our expectations to answer your question directly. I mean, we gave guidance at the end of February. I mean, there's being conservative and then there's being realistic, right? Given guidance two-thirds of the way into the quarter, we wanted to provide guidance that was realistic at that time. Frankly, we were happy with where Q1 capital landed. Q1 for capital equipment companies, it's always tough. It's the toughest quarter to execute because budgets are not fully vetted within hospital systems. When we start working with our IDN partners, those typically take a bit longer to move through the process earlier in the year with capital budgets. We feel really good about the funnel that we're seeing in the second quarter and for the rest of the year. Q1 met our expectations.
We were pleased both with the absolute number of systems we sold and the average selling price. The average selling price was at the high end of our guidance that we gave. Historically, you always typically see with PROCEPT, Q1 being the weakest in terms of ASPs and quantities as well. We feel good about where we're positioned heading into the rest of the year.
Got it. That's helpful. I do want to spend a little bit of time just talking about guidance, kind of philosophy that you guys have. I know you have a history of beaten raises, and you've impressively done that over the last couple of years. If you kind of look, you gave some specifics on revenue details on certain lines.
If you kind of look at what you did in Q1 and some of the kind of run rate, thinking about the full-year number, it looks a little, I'd say it looks conservative. Maybe just talk about, you touched on it a little bit, Kevin, to start the year on the procedure side, you're being a little bit conservative. Maybe just more broadly, how do you think about the guidance philosophy and kind of getting back to some of that beaten raise mentality?
Yeah, I mean, I think philosophically, we've been very consistent since we were public in 2021, where we're putting up numbers that even if we were just to achieve our guidance, I think if you look comparable around med tech, I think are still pretty fantastic and would be very successful, quite frankly.
At the same time, we appreciate that the valuation of our business and expectations are probably higher than other companies. We just want to maintain our ability to continue to beat and raise, both in terms of absolute units and then also in terms of pricing. I mean, I would characterize pricing, and I'll just say Reza and I have received probably numerous questions today just kind of around pricing, what does capital pricing look like? I think historically, we've always used pricing as an upside lever. Why we do that, particularly on capital, is because ultimately, placing the capital is far more important than the ASP. The ASP, we want to get a reasonable ASP, do not get me wrong. We will sacrifice some capital ASP to get systems installed sooner, to get volumes going with procedures in a more timely manner.
We're going to continue to do that. I think you're right to characterize our guidance as conservative, but even our conservative guidance, I think, produces some really good growth.
Got it. No, that's helpful. I want to touch on procedures maybe in a little bit more depth and utilization. I think utilization was 7.1 in the first quarter. I think it was up 5% growth. If you look at where the street is in Q2, I think it's 2%. Q3, maybe mid-single digits. Q4, and I think you've alluded to this or talked about it on the call, that it's going to be 20% given the easier comp. Maybe just talk about kind of the cadence of utilization and procedures as we go through the year and how investors should be.
Is the street kind of under, is the street got your message on how procedures should look and what should investors be thinking about in terms of utilization growth?
Yeah, so we did not guide to a quarterly number on procedures. With that said, I think now looking at kind of where consensus sits, we feel very comfortable with how it's been modeled. I think it's consistent with our prepared remarks and what we talked about in Q&A and feel good about where the street is sitting, both in Q2, Q3, and Q4. I think you've highlighted growth in Q2 year over year. In Q2 and Q3, it's kind of low single digits, and we feel good about our ability to execute against that.
Got it. Maybe just a bigger picture question on utilization. It comes up a lot.
Just thinking about how the utilization for the different cohorts are progressing. This may have taken a little bit of a—the Q4 disruption may have kind of interrupted the progress that you were seeing there. I do not know. I am just kind of thinking about it. I guess how would you describe the progress of the different cohorts on average? I know you track that pretty closely.
We use many metrics to track the progress, and we are very pleased with the results that we are seeing. Definitely different cores, the longer the accounts stay, we see progress in them. We track also the active surgeons in the account. We look at the number of surgeons per account that we see. Now we are in the two to three surgeons per account. For utilization, really, in an account is function of the first surgeons that we call them existing surgeons doing more cases, but also other surgeons in existing accounts bringing new surgeons in existing accounts. We track all of those along with other metrics to see how we are progressing, and we see good progress in them.
I think progress and visibility, I think it's important to call that out. I've been part of, now this is my fifth publicly traded medical device company, and the data we are able to collect and analyze at PROCEPT, I mean, I'd argue it's best in class. And what I mean by that is we have visibility into every surgeon that's doing our procedure. We have visibility into how many surgeons per account. We have visibility into surgeon retention rates and surgeon satisfaction. I think all of these factors, keeping our eye on procedures as opposed to handpieces sold, keeping our eye on surgeons as opposed to hospitals has really helped us produce a model that's been highly predictable. It also is a tool we use when we talk to the sales team.
We're not going to talk about kind of outer years here, but at the same time, if you look at expectations in 2026 and 2027, we call it small wins for a very big impact. We talk about that a lot as a management team. It has permeated throughout our organization where if just every rep can get one more case per month, that has an outsized impact on utilization. We feel good that we can execute against kind of long-range expectations, given that we already have numerous surgeons and many accounts at levels people expect us to be at one, two, three years down the road.
Reps are not compensated on handpieces sold. It's on utilization.
Got it. I know you even at AUA, you guys talked about this a little bit, maybe just to follow up on that. With Hydros and even some of your later AquaBeam sales, you used to initially place a system, and it was one doc, and you're starting to see more docs. Maybe just talk about that dynamic and how that has changed or evolved over the last couple of years and how that can impact utilization.
Yeah. As you mentioned, we always start with one or two surgeons at a given account, and those are typically the high-volume surgeons of the account. With time, these other surgeons, because in a high-volume surgeon, there may be surgeons that do not do any cases in a month. Those will, with time, that is how we are increasing the number of surgeons. Definitely, Hydros, because of the ease of use, is much easier to train new surgeons. The training of that is simpler. The setup time is simpler. That will help bringing more surgeons at existing accounts after the first two.
Got it. Thank you. Maybe moving on to tariffs. I think some investors were surprised that you guys were exposed to tariffs when you said it on the Q1 call. Obviously, still just a small number. Maybe just kind of frame for us what you guys did say on the call, the impact, I think it was 340 basis points. 150. Sorry, 150 basis points. What would it look like now with the new tariffs from this weekend?
Yes. So I mean, we're not getting to details of how we are mitigating tariffs as this is a very dynamic situation. But coming into 2025, we were anticipating changes, and for that, we increased the inventory, particularly components we were buying from China. And we got an inventory of about nine months. So that mitigated that risk. In fact, we didn't buy, haven't bought anything at the 145% tariffs. So as we are seeing tariffs improving, this headwind that we are seeing in the back half of the year on the gross margins will diminish.
Yeah. Let me quantify kind of what we said and where we're at. Tomorrow may be different. I'll preface my comments with that. Our guidance on the call assumed a $5 million impact to gross margins in Q3 and Q4. That was based on a 145% import tariff of a few of our key components from China. My understanding as of yesterday is that 145% is now 30%. I think it's fair sitting here today to take our impact that we gave on our last call and reduce it by the delta between 145% and 30%. I think that probably puts the impact more in the $1 million-$2 million range as opposed to $5 million. That would be the impact, obviously, that'd be significantly less than the 150 basis points that we communicated.
With that said, we do recognize that this environment, it's going to persist at least for the foreseeable future. Longer term, we are looking at different mitigation strategies to bring some of those components that we currently import from China to either find a second source or perhaps work with the same suppliers to make that product in the U.S. or in a jurisdiction that would not be subject to tariffs. That is really a 2026-2027 impact. What I feel comfortable saying is even in an elevated tariff environment, we feel that our ability to expand gross margins and get this company to profitability is not impacted in any way, shape, or form. Now, are we going to have to go look at expenses in other areas if they were to stay at 145%? Sure.
I think we feel we have enough levers we could go pull on to offset that exposure.
Yeah. Helpful. Want to move on, come back to the P&L, but want to move on and maybe talk about the reimbursement and the CPT code change. Obviously, it's on a lot of investors' minds. You guys are moving from a Category III code to a Category I code. It's going to happen this summer. I mean, I guess I want to level set for investors, and maybe you guys can talk about kind of where the professional fee is today and how to think about any potential changes. And then also, well, we'll go with that right now.
Yes. The RUC process, when you move from Category III to Category I, the RUC process, the surveys with about 100 surgeons. That's done. Then based on that, they establish an RVU and define the surgeon payment. This does not impact the facility payment. The facility payment is separate, that has not changed. This is in the group of resected procedures. Today, whether it's TUR, U.S., Greenlight, they're all paid depending on, especially with private payer, anywhere between $700-$800. Our procedure is in that group, and we don't expect this to be meaningfully different. They're all going to be in the same group. From an adoption point of view, it is the APC level six payment that makes the ROI for the hospital. That's not changed.
This is the physician payment, and we expect that to be in the same range as other resected procedure. Quite frankly, surgeons are not using our product because they're getting paid $600 or $800. It's for clinical outcomes. They're buying it for that purpose. In the past, I understand the anxiety. I don't know what else I can frame this of people because in the past, other companies, when they went from Category III to Category I, there were other parameters that caused the payment to go down because maybe some part of the procedure was not done. This is not the case. This is a procedure that has been there for the last five years, and the time of the procedure is well established. We expect to be in line with other resected procedures.
I guess that's the key. At least from investor questions, it seems like that, I don't know if it's being misunderstood, but in general, you guys today are in line with the other resected procedures. Going forward or whenever the reimbursement gets updated, you're still likely going to be somewhere in the ballpark.
Yeah, in the ballpark. It's sometime in July when it's called the preliminary results will come out. Then by October, it will be finalized. We expect that to be in line with other resected procedures.
Yeah. Great. Maybe moving on to you were at AUA a couple of weeks ago, and maybe just want to talk about some of the cancer opportunity. You highlighted some of the early clinical data at that conference. Maybe just give us a little bit on the opportunity in prostate cancer.
Yeah, we are very excited about this opportunity. We are early in this journey. There are about 3 million men in the United States with prostate cancer. Vast majority of them sit on the sidelines because of the side effects of current treatment, whether it is focal therapy or prostatectomy, high incidence of incontinence or erectile dysfunction. They ask the patient to be on the sidelines and wait until it progresses to later stage with the vast majority of these patients. It is not that if, it is a matter of when. A procedure that can have the low incidence of incontinence and erectile dysfunction or sexual dysfunction will be well accepted by the surgeons and the patients. What we presented, the first question is, do we spread cancer? The next question is, do we reach the peripheral zone? Can we treat in the transitional zone?
Is cancer a focal therapy or a diffuse or multifocal? And also, what has been the first result we have seen with our PRCD 001? These were the five areas we wanted to address at AUA. Definitely, on the first one, we had done some studies and showed the circulating tumor cells prior to resection, during resection, and after we were not spreading cancer. We submitted that with some literature shared to the FDA. FDA removed the cancer contraindications. That question is gone. We showed that MRI does not detect all prostate cancer. Focal therapy that just focuses on the images that MRI showed is not sufficient to treat prostate cancer. You need to resect the vast majority of the prostate without inducing incontinence. We also showed that in our PRCD 001 and 002, we were able to resect all the way to the peripheral zone.
The question was, is our treatment will work for prostate cancer? The answer is, if you use BPH treatment, no, it does not. Because for BPH, you do not need to remove the vast majority of prostate. All you need to do is remove enough to remove the stress from the urethra. For prostate cancer, you remove almost double the amount of tissue that you are removing in BPH. We showed all of those. We showed data, combination of PRCD 001, 002, very low incidence of incontinence and ED. In these patients, we had data on some number of patients at three months and six months that did not progress to a higher grade group. The purpose of that was to show the design of the study, Water IV, to give a confidence.
Why we designed the primary endpoint of Water IV is safety, incontinence, and sexual dysfunction. You want that to be as low as possible. The secondary endpoint is efficacy. We were very happy that we had three surgeons over there. They presented.
Great. Thank you, Reza, for that. Maybe just the milestones, the timing milestones. What should we expect? Water IV, and maybe if you could just kind of give us a framework for how to think about timing of the next couple of years.
Definitely PRCD 001 and 002. As we finished PRCD 002, enrollment is finished. PRCD 001, there are still some patients left. As those patients, we gather more follow-up, we will present as we have more follow-up and more patients. That is a separate study. On Water IV, we will give information as we get to different conferences. I do not know, Kevin, you want to share about some of the timing?
Yeah. Before I talk about maybe the information dissemination, let's just put the timeline. Let's put a realistic timeframe around this for everybody. A realistic timeframe to enroll Water IV is 24 months. We believe that that is a very reasonable goal based on comparable studies that have been done and given some of the nuances in enrolling patients in this study. With that said, we're trying to influence that to the best of our ability. I think a best-case scenario for PROCEPT would be to have this study fully enrolled in 18 months instead of 24. That's kind of how we're thinking about it. That would mean the majority of patients would be enrolled in this study by the end of 2025, which we have kind of seven, eight months here left to go, and we feel good about that.
That would put any prostate cancer revenue with a prostate cancer indication in the back half of 2027 at the earliest and probably the most likely scenario entering 2028. I just remind everybody, if you look at where models sit today, you'd be looking at a company that has over 1,000 robots installed in the US exiting 2027. While I still believe and don't see our BPH growth slowing at all in those years, the growth that we could generate from prostate cancer is fully incremental. It's leveraging an existing installed base, leveraging our existing physician relationships. It's using the same sales force. If you just put that in perspective, even if we charge the same price as we did for a BPH procedure, which we're not prepared to comment on pricing for cancer today, way too early, but let's assume that it was the same.
If every one of our customers is doing two prostate cancer treatments a month, you're looking at an incremental $100 million that is just full drop-through to the company in a relatively short period of time with a relatively small amount of investment. I mean, Water IV is $10-$15 million for an incremental $100 million in year one. We think has a great ROI. In regards to how we're going to disseminate information to everyone here and our investors in general, I think you should expect that at AUA next year, we would have another fairly robust and large update. I appreciate AUA is now 12 months away. This is an important initiative. We'll continue to update people with enrollment. I wouldn't expect much on our Q2 call. Just to be frank, we're coming off of AUA.
I think on our Q3 call, we'll give a nice update as to kind of where we're at with enrollment, how things are progressing, and what the world's looking like at that time.
Got it. That's great. We have three minutes left. Maybe, Kevin, just touch on the P&L. You guys have shown a lot of gross margin leverage, shown a lot of operating leverage over the last couple of years. Maybe just talk about kind of what's driving that, how you see that playing out in 2025. I think you're going to be close to break-even, EBITDA, maybe at the end of this year.
Yeah. So a few comments. I mean, I'm really pleased with the leverage ratio and OPEX. And what I mean by that is our ability in being kind of in this hyper-growth mode to still only grow OPEX at roughly half the rate of growth in revenues. I think when you look at 2025, it's a bit worse than that, but that is primarily the investments that I just highlighted that we're making in the Water IV study. I think what investors should expect, though, regarding OPEX is that our OPEX guide will not materially change throughout the year, meaning that if we have any revenue upside, we think this all flows to the bottom line. It's similar to what we did in 2024. And we've built an operating base, particularly in our sales and marketing, that could support much higher revenue. So anything incremental should drop through.
You did mention EBITDA break-even in Q4. There is a scenario where we achieve EBITDA break-even. That's not our guidance, but I think if you look at kind of where consensus sits and what our full-year guide implies, it would imply that Q4 is right around break-even. Obviously, we're not managing the business that way right now. We're focused on scaling the business. We're focused on increasing procedures. We're focused on showing all of you a very clear pathway to profitability, but we are not going to sacrifice investments that can continue to fuel growth in a market that's large and we're early. I mean, that's one thing I stress to everybody. We've had a ton of success. We have a ton of growth. There's a long way to go here in terms of the opportunity. We want to make sure that we're being fiscally prudent and responsible.
This will be a profitable company. Don't get me wrong. It's not if, it's just when. And when with $300 million cash on the balance sheet, we have more than enough cash to get there. To answer your question directly, sure, we could be EBITDA positive in Q4, but it's not a huge goal of us internally at all.
Maybe just following up on that. Gross margin, you guys have expanded that significantly over the last couple of years. Expecting a little bit less this year, putting the tariffs aside. I guess maybe just anything to think about there or I guess why not expect similar type expansion that you have had?
I think remembering the single biggest driver of margin expansion for us, it's not pricing, it's not mix. It's really absorbing the fixed costs we've built into this business. I mean, we're trying to build this business to a multi-billion dollar business, and our fixed costs are higher than, I would say, a comparable company of our size because we see the bigger opportunity. As we continue to grow, we're going to continue to leverage overhead. I believe kind of this march from 64-65% to 70% over the next one to two years, that can be done by just leveraging our overhead alone. By the way, this company can be profitable at 65% margins. We've talked to all of you about kind of getting to 70% here in the next two to three years, but that's not necessary, Craig, for profitability.
I think even at 70, once you get to that point, we are thinking even longer term, what can we do with the cost of our product? Now, the simplicity of our disposable, can we produce the capital at a cheaper cost? I think that could drive margins even higher longer term, but none of that is necessary for profitability.
Got it. With that, I think we're out of time. So Reza, Kevin, thank you.
Thank you.
Great. Thanks, Craig. Thanks, everybody.