Good afternoon, everyone. Thanks for joining us on day 2 of the 24th Annual Needham Healthcare Conference. My name is David Saxon. I'm an analyst on the MedTech research team here at Needham & Company. With me today, we have the RxSight team, including CEO Ron Kurtz and CFO Shelley Thunen. This afternoon, we'll do a fireside chat. For those on the conference portal, there should be a box where you can submit questions. Alternatively, you can feel free to email me any questions you might have, and I'll try my best to fit them in. With that, we'll jump into the Q&A. Obviously, a lot to talk about given the news last week. Before we get into those details of the quarter, I just wanted to touch quickly on tariffs.
Understanding you manufacture in the U.S., do you expect any impact from the tariffs on either ships or materials or component parts or anything like that?
Ron, do you want to take that or me?
Go ahead, Shelley.
Okay. Yeah. As you did say, David, we do manufacture all of our products, the LAL, the LDD, and some of the accessories here in the U.S. We do have suppliers such as board manufacturers that do source from outside the U.S., including China. On the LAL side, the material cost, as you know, is a very minor portion of the cost of the LAL to manufacture. On the LDD side, material is the majority of the cost to manufacture. Of course, we've taken those costs down quite a bit over the year. We're still assessing, but compared to others, just because of our manufacturing strategy, we don't think we're impacted significantly at all, except perhaps through third parties and a little bit that we might be getting direct.
I think we're in very good shape relative to the tariffs, but we're going to have to continue to assess that, just like everybody else.
Okay. All right. You are in Canada currently from a commercial perspective. You will be launching in Europe later this year. How are you thinking about the international launch against the backdrop of potential retaliatory tariffs?
Tariffs, yeah. Of course, Canada has been a lot of talk in the press. We do sell into Canada. We have had our tax accountants look at that. Medical devices are exempt from the incoming tariffs, retaliatory tariffs in Canada. That could change. At the moment, we think that that's very low risk unless something changes.
Okay. I guess you're a kind of TBD?
Yeah, I think you're TBD. We haven't done the research as much in Europe as we have otherwise. Of course, if we think about Asia, you know, China will, you know, that's a longer regulatory process for us as well. We still need to do some research in Europe. Of course, as we go into Europe, we've always said it's a limited launch. We will start first with the KOLs in each country and step into it gradually, very similar to what you would do in any other country. In terms of the aggregate revenue, it's very low risk. Again, typically, you will see some carve-outs for medical devices and/or foreign products. We'll just assess that as part of our analysis of which countries are best for us to go into first.
Okay. All right. Let's get into the quarter. You pronounced last week. Can you just give us an overview of what you saw in the quarter that resulted in the miss relative to consensus?
Maybe I'll start that and then Shelley, if you don't mind, adding. I think I would back up to 2024, just where there were general reports, especially from competitors, about slowing of the premium market. We were, of course, continuing to grow throughout the year. If you take out the growth from RxSight, then the market did slow considerably and was flat, especially in the second half of the year. I would say it was an overall softening of the market through the back half of 2024. In addition to that, we had an unusual competitive dynamic where we had two major companies launching new products, not directly competitive to the LAL, our product, but because of the marketing and incentives associated with those sequential launches in Q3 and Q4, definitely had some mind share. Doctors, of course, are incentivized to trial those lenses.
That continued into Q1, both those impacts. Of course, we had what I would term more of a shock to the system with the transition in administrations where we've seen all the news reports about how people perceive their own wealth status with sudden change. What we saw, typically in Q1, we would see sequential down from Q4 where patients are coming into the office. They're getting scheduled for, they're getting evaluated and then scheduled for cataract surgery, typically in March and the spring when, especially in certain parts of the country, weather improves. March will typically be a step up considerably for us, which we did not see in Q1. We saw it more flat with January and February. That really is what that combination or confluence of events is what led to our miss.
Okay.
Which was.
All right. I want to.
Just a couple of thousand procedures.
Okay. I want to we'll touch on kind of the sequential dynamics and outlook, but I wanted to drill down into the competitive dynamic. Obviously, you have one competitor who's now off the market, but there's also an upcoming launch from kind of a leader in the market. How are you thinking about those two dynamics as it relates to the second quarter?
We think that, again, this is a continuation of a somewhat pretty unusual sequence of competitive launches where you have all three major companies launching new products within nine months of each other. We certainly view that this incentivization, competitive trialing will continue. If we go back historically, we have not seen these very sequential launches, but we have seen the impacts of just individual launches. That has been very common in the premium, especially the multifocal part of the market, where a competitor will come in. There will be marketing claims regarding how this lens is somehow different than the previous multifocal offerings. Doctors will be incentivized and will trial those lenses.
Over the time period that they start to do those surgeries, see those patients back, which is typically in the three to six months, people usually find that, in fact, multifocal lenses have the same trade-offs that they always do, which is that if you try to improve the quality of vision, you reduce the range of vision. This is the two areas that new launches, new products, try to address. They typically either go more toward the quality side or more toward the range side. We've seen in the last year or so that people have moved toward the quality side, which, in effect, is going to potentially reduce the range. We think that's going in our direction since our primary benefit is high-quality customized vision. We think that is a positive overall dynamic for us.
In the short term, that will lead to this incentivized trialing behavior. We anticipate that that'll continue for a little while. We've already seen it wane for the previous launches. Obviously, there was a recall of one of those products, but we still feel that that would have followed the traditional pattern that we've seen over the last 20 years.
Okay. I think in your answer to that question, you talked about trialing lasting three to six months. With this upcoming launch in May, we should be thinking about three to six months following that, the market kind of normalizes from that specific launch at least. Is that the right way to think about it?
I think that's a reasonable way to think. Go ahead, Shelley.
Yeah. I think in our guidance, we're thinking about that as well. We expect the year to be more back-end loaded with the trialing. We don't know if Bausch + Lomb will come back into the market, how that's going to work out with the FDA for them, but that starts to wane in the fourth quarter.
Okay. All right. Let's see. Just in terms of the premium market and the macro environment, how much of an impact has kind of that and the stock market performance played into patients' willingness to pay for premium lenses? You talked about kind of the market softening in the back half and early this year. What are you hearing from doctors in terms of patients' willingness to pay for these procedures?
I think that it's still early. We're obviously reaching out to our customers and getting additional information. I think that'll, and those organizations or our customers are looking more, analyzing more of their own data. Certainly, there's anecdotal reports that people might be more inclined to trade down if they're feeling less wealthy. At the same time, I think that this is something that our customers need to remind their patients that this is a once-in-a-lifetime opportunity, cataract surgery. You can put it off for a little while. Some patients may have decided to put it off as well. At some point, a cataract patient's going to proceed. This is their one opportunity to have flexibility in terms of glasses for the next 20-25 years.
We certainly think that as you look at the constellation of things that this population can apply their wealth to, this is an area that has extremely high value to them. Vision is continually rated as one of the highest value that people place.
Okay. All right. You revised guidance to $160 million-$170 million. Just talk about the underlying assumptions specifically for utilization across mature accounts and the new accounts that you've added.
Yeah, I'll go ahead and take that. I think that in terms of the guidance, internally, of course, in our numbers, we did reduce the number of LDDs we expect to sell, but still said that we expect to sell more than the 305 that we sold in 2024. We're still looking for that growth opportunity and the value it offers to patients as well as to doctors, financial practice, economics. We did reduce the number of LALs more in that guidance as well. We think that the second quarter should be informative in terms of the economic impact. We do think some of the economic impact we haven't since we've been commercial in the last five years. I think overall in the economy, we've seen this significant and sudden impact to the economy and to the stock market.
We're going to see whether patients and other individuals are just saying, "Let's stop so I can assess where I'm at," right? Versus, "Are we going to have a long-term impact in terms of patients being able to do this?" I think the second quarter is going to be pretty informative relative to the shake-up in the markets as well as the continuing news on tariffs and other macroeconomics as well. For that reason, we think the year could be much more back-end loaded. We're cautious in the second quarter as well. The guidance at the low end assumes a pretty flat year, right? If you add in some additional LDDs overall. Our real contribution on the LAL front is same-store sales. We've got over 1,000 installed LDDs and about 2,000 doctors trained. That'll be the major driver.
If you look at the low end of guidance, you're not getting much productivity from them. It's mostly from adding new customers. We still found in the first quarter that the cohorts of LDD installs, 2021 and prior, 2022 and 2023, the number of LALs per LDD are very similar. It's been like that for quite some time. They all went down, but really very tight distribution between the three of them. What we have seen is that the 2024, and it's just the first half of 2024 installs, are not growing as quickly as the 2023 installs. That is largely a function of the market, we think, but it's something that we need to work with them very closely on and also develop the confidence of the new accounts that were installed in the second half of 2024 and in this quarter as well.
That is part of the overall look in the range of guidance, particularly at the low end. It is assuming a very flat sequential growth annualized over Q4 and Q1 overall. That is how we are looking at the guidance. Again, it is very focused when we look at the overall guidance in OpEx as well. While we cut the revenue guidance, we did leave the gross margin guidance at 71%-73%. In OpEx, we did not drop as much to the bottom line from the sales and gross margin impact because we are very aware of the fact that in an environment, we have about 200 people in the field right now, customer-facing, that we want to make sure that we are properly resourced to work just as intensely with our customers and, again, focus on education for them.
That's kind of an overall look at guidance and where we're focusing our time and attention. Did I answer that adequately for you, David?
Yeah. No, that was great. Thanks for that, Shelley. Maybe just to follow up on a couple of things you said and Ron from an earlier answer you gave. You talked about March being flat versus January and February. Shelley, you're talking about the second quarter being "informative." I guess prior guidance assumed second and fourth quarters would be stronger. I'm assuming that means sequential growth off the prior quarter. Just given how first quarter played out, how, I guess, consumer sentiment, the market, etc., is playing out in early second quarter, I guess, how are you thinking about the sequential cadence? Should we be thinking more flat? I don't know. Any color you can give there just relative to kind of the prior comments you talked about here?
Yeah. I do think we're being cautious about the second quarter. Typically, it's a nice up quarter from the first quarter, and it is our second strongest quarter. While we don't give quarterly guidance, I think that, and I can't be that specific relative to what I expect to the first quarter, I do think that it's going to be a more back-end loaded year. I am being cautious about the second quarter. I don't want to get over our skis. We're only a few days in at this point in time. I don't think I have a lot of anything that's informative yet.
Yeah. Okay. All right. That's fair. On last week's call, I think I asked a similar question, but I want to revisit it here. You have talked about the premium category being weak over the last few months, started in the second half of 2024. What is driving that assumption around LDD placements? If the category is weaker, what is driving practices' appetite for the LDD and that capital purchase?
Maybe I'll go first, Shelley, and then we can fill in. Again, we think that weakness is primarily on the consumer side, the patient side, and that certainly was impacted in Q1. On the other hand, we had a nice LDD quarter in Q1. I think that underlies the overall situation, the longer-term situation that ophthalmic practices in the U.S. and other countries are facing, which is with the aging of the population, there's more pressure on national health systems, including Medicare, obviously here. That has led to progressive cuts in reimbursed services over the last 20 years and sequentially in the last few years in cataract surgery specifically, which continues to be a major line item just because of the volume of procedures. Doctors, that's a major portion of their practice revenue. They need to find additional sources.
Other private pay procedures like LASIK and competitive procedures to LASIK, appealing to a younger demographic, have been much more severely impacted by the economic environment over the last couple of years. We've heard that LASIK volumes last year were the lowest that they were since the procedure was introduced in the U.S. That has not been a viable alternative for practices to look for this additional revenue. That's been why they've been interested in building their premium. The LAL is unique in the sense that we appeal disproportionately to patients who otherwise would be getting a monofocal IOL for which practices don't get any additional revenue or a toric IOL where there's just a modest amount of additional revenue. Those account for about 75% of our procedures.
That's really what drives the ROI calculation for practices in acquiring an LDD so that they can offer LALs to their patients at the locations that they're seeing cataract patients at. That trend is not going to change, that long-term trend. We still see practices continuing to invest. That's maybe somewhat lower because of the overall, but still we're seeing a continued increase.
Okay. On the LAL side, kind of going back to the second quarter outlook, IOLs are placed on consignment, I believe, for you guys, at least for other players they are. What level of visibility do you have into customers' case schedules into the second quarter? Do you do any surveys, customer surveys or anything like that? How do you kind of gauge the near-term outlook?
Do you want to take that, Shelley?
Yeah. First of all, we do consign at the ASC, same as all of our other competitors. So the revenue recognition is at the time the ASC reports that the IOL has been implanted, same procedure as everybody else. We do not survey 1,000 people before the quarter because, one, not practical. And two, it is hard for a doctor to forecast because while your monofocal procedures could be scheduled out months in advance, in the U.S., there is a lot more ASC availability than there is perhaps in other countries where they are doing some ASC in some hospitals. Typically, doctors will put their premium patients at the beginning of the queue. They will figure out how to get them in quickly if they can, and it works for that. We do not have a lot of visibility. It really grows over the quarter as we get that visibility.
Obviously, we are reaching out to our customers right now and saying, "Could you tell us if they know how much of your volume decreased?" We did have some who increased, but in particular, the decrease was trialing, was it concerns about the economy, things like that. We will not hit all 2,000. We will hit the major customers as well. We are primarily looking for the drivers and, more importantly, if they need some additional help from us. We have 200 people in the field. They reach out constantly. It is a little different focus, right? A lot of what we spend time with in the field is what we call value-add. We have two or three upgrades each year. They could be fairly minor, but it gives our folks an opportunity to go in and train and find out what the customer needs.
This is a bit more focused on their economics than their clinicals. As we go into the second quarter, I think we'll know a little bit more. I think the other advantage as well is that we have the LDD, and there's always this talk about lost sales from IOLs, right? You go in, cycle count, and find things that are missing. You're not going to be able to take revenue on that. In fact, we don't see a lot of this. The ASCs are good about reporting. They're consistent. What we do have is the LDD because we have most of the LDDs connected to us, in part because a lot of customers are submitting data into our registry. If there is a serial number that pops up as being treated, but the revenue hasn't been reported, we're able to go back to the customer.
I think that that's important as well in terms of the cadence of what we learned during the quarter.
Okay. All right. Maybe last one on the quarter, and then we'll move on to other topics. On last week's call, there were some questions around the level of penetration in the U.S. Talk about what you're seeing among prospective customers and their volume profile. Are you still seeing traction in that kind of higher volume cohort? I think you've sized around like 4,000.
Yeah. I think we are. I think that if you look at, obviously, the initial customers that we focused on were customers that were more focused on premium. They could be higher volume or mid or even low volume. They were ones that were more focused on premium. That typically includes many of the KOLs in the community. There are still the vast majority of surgeons and practices who do not have access to an LDD and therefore our technology. There are about 10,000 doctors doing cataract surgery. While we have talked about those 4,000, the split is it is not an 80/20 rule. It is more of maybe a 60/40 or two-thirds, one-third rule. There are still a lot of procedures because cataract is so distributed amongst surgeons in the U.S.
There are a lot of surgeons that are out there that do a lot of cataract surgery that can offer the LAL. We have been focused on those for quite a while. We have those in our cohorts as well. We can access those through surgeons through our traditional methodology, which is selling an LDD into the practice and having that be delivered within the practice.
As I mentioned, we do see, as we saw in LASIK, new business models developing over the last few years where alternative methods of delivering light treatments to patients are being developed where patients can be seen by the ophthalmologist, have the surgery in the ophthalmologist's office, and then be referred to a third party to do the light treatment at a light treatment center to do the light treatments subsequently, and then going back to the surgeon. While that's relatively small now, we have seen more interest in that. That's another way that we can introduce the technology to a wider group of surgeons.
That business model that you just talked about, I think hopefully I'm in the right ballpark, but I think there's a couple in kind of the middle of the country. Do you envision that being more of a U.S. business model, or can you kind of replicate that OUS, or are the dynamics just different internationally?
I think it depends on the country. It is very market-dependent. In the U.S., obviously, we're able to leverage the large number of optometrists who can do the LDD procedure and for whom this is really a natural part of their knowledge base. The optometry is pretty widely distributed, but it's not in every country. It also depends a little bit on the pattern of urbanization in a country. We see this a little bit more in the population centers of the U.S. where there's a lot of doctors within a smaller geographic zone and where that probably makes more sense. Those dynamics are also true in countries in Asia and Europe where we're focused internationally.
Okay. I wanted to talk about international. Last week, you talked about obtaining the CE mark in Europe. What are the next steps or milestones for launching in Europe?
They're very similar to what we've gone through in the U.S. In the U.S., of course, we had the benefit of having completed a clinical trial where there were 15 or 20 experienced practices who had already gone through an extensive clinical trial. That was a natural transition. We have to establish that same clinical expertise in each market. That usually starts more slowly, and that's what our focus will be initially, building that clinical experience. In some geographies, we've been able to start that where there's mechanisms to get product into a country before full approval. That is true in some of the countries in Asia. We've been able to leverage some historical approvals that we had in Europe as well. The bulk of that work is going to be done in 2025 and into 2026.
Okay. You just mentioned some, I guess, regulatory dynamics, and you talked about some countries in Asia. China is obviously the largest market in Asia. Are you in front of the Chinese FDA or any more color on which countries in Asia that you're specifically, I guess, looking to get approval over the next, call it 12, 24 months?
What we've said is that our focus is on the 20 markets, countries where premium IOLs are well established and where we can leverage that already existing interest and customer base. Those include the major countries in Asia, Japan, China, Korea, as well as some of the also significant Southeast Asian countries that also have established markets. We're pursuing regulatory approval in all of those. Similarly, in Europe, the major countries in Europe are where we'll focus our initial clinical and commercial efforts for the same reasons, just size of the market.
Okay. Okay. Maybe just a follow-up on China, acknowledging you're not confirming it here today, but theoretically, China does VBP. If and when you do get approval in China, how would that VBP program work into kind of when you can launch? Would you need to wait until the next round of VBP, or are there ways to get in under, I mean, I guess, the existing bids? How would that work?
Yeah. I think that some of that remains to be seen. Typically, new technologies don't go directly into VBP. That can be a benefit as well. I think it's still ahead of us, but we are getting some experience in the China market through our efforts in Hong Kong. I think that, as you said, that's an exciting market. Right now, it's a little bit in turmoil. If you look at the demographics of that market, it's a market that we think is going to be highly conducive to the LAL. It's patients, a large fraction of patients who've had previous corneal refractive surgery. They have high degrees of myopia, which makes it more difficult for them to have highly predictive refractive results.
The LAL is now we have the widest range of dioptric powers going down from negative 2 diopters all the way up to 30 diopters. Those lower-range lenses are much more common in the Asian demographic. I think that there's a lot of, and the general, I would say, precision-based medicine that is practiced in Asia is also conducive to our technology.
Okay. All right. Maybe a handful for Shelley in the remaining minutes. On the gross margin, you've talked historically about you do have a path to 85% plus at scale. In 2025, you're guiding to just over a point of margin improvement at the midpoint. What's driving that pace of margin expansion currently, kind of excluding potential impacts from tariffs at this point?
Yes. We are excluding impact from tariff in our ASP and just a little bit of tariff impact in our cost of sales. Also, you have to look at the factor of how much inventory we carry. That is because we consign. On the LAL, typically, first in, first out is six, seven, eight months, depending on our production levels. The first half will really be about cost that we already know. LDD, it is about two months, right? It is a very fast turn. We do know some of our costs in terms of cost of sales. Primarily, we are looking at mix and some cost impact on the LAL primarily. The LDD is primarily pretty fixed because it is material.
Okay. All right. Let's see. We have just a minute left. Maybe I'll just kick it over to you guys. Anything you want to leave investors with relative to the first quarter, how you're thinking about the year ahead? Would love to hear that.
Maybe I would just say that we definitely have some transitory effects that have affected us in Q1. The long-term trends for the technology and for the company are quite positive. We're focused on measures that address both short-term and long-term trends, driving educational initiatives both in the ophthalmic and optometric communities, driving alternative access models, continued product development initiatives to drive utilization. Of course, as we talked about, laying the groundwork for international growth. I think all positive in the long term, and we're obviously addressing the situation that we're in currently.
Great. Ron and Shelley, thanks so much for joining us this year again. Thank you for everyone who tuned in. We will wrap there and have a great rest of the day.
Thank you very much, Stephen.
Thank you.