Lynn Pieper - IR Michael DeMane - Chairman and CEO Rami Elghandour - President Andrew Galligan - CFO.

Mike Weinstein - JPMorgan David Lewis - Morgan Stanley Danielle Antalffy - Leerink Partners Dave Turkaly - JMP Securities Shagun Singh - Sterne Agee.

Good afternoon. My name is John, and I'll be your conference operator today. At this time I'd like to welcome everyone to the Q2 2015 Financial Results Conference Call. [Operator Instructions] Lynn Pieper, with Investor Relations, you may begin your conference..

Thank you, John. Thank you all for participating in today's call. Joining me from Nevro are Michael DeMane, Chairman and Chief Executive Officer; Rami Elghandour, President; and Andrew Galligan, Chief Financial Officer. Earlier today Nevro released financial results for the quarter ended June 30, 2015.

A copy of the press release is available on the Company's website.

Before we begin I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Any statements contained in this call that are not statements of historical fact should be deemed to be forward-looking statements.

All forward-looking statements, including, without limitation, our examination of historical operating trends and our future financial expectations, include full-year 2015 international revenue guidance, are based upon our current estimates and various assumptions.

Statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied with these forward-looking statements. Accordingly, you should not place undue reliance on these statements.

For a list and description of the risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission.

Nevro disclaims any intention or obligation except as required by law to update or revise any financial projections or forward-looking statements, whether based - whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 6, 2015.

I'll now turn the call over to Michael DeMane.

Michael?.

The SENZA-RCT Randomized Controlled Trial. We are very grateful and wish to thank everyone that helped in this important clinical publication.

Moving to clinical development initiatives, we are currently conducting clinical trials for Senza to explore the potential of the therapy to treat other chronic pain conditions, to expand the clinical foundation of the therapy, as evidence orientation remains a key tenet of our strategy going forward.

To this end, we have begun enrolling patients in a feasibility trial testing the Senza system in the treatment of chronic upper limb and neck pain. This is a prospective trial in the U.S. to be conducted at 6 centers, with a target enrollment of 75 patients.

That is one of a number of trials we currently have ongoing around the world, and we look forward to sharing more with you as they develop. Finally, as previously announced in May, one of our competitors, Boston Scientific, filed two petitions with the U.S. Patent Office on one of our 53 U.S.

patents that are directed to our advancements in the neuromodulation field. We were confident in our position prior to these petitions being filed, and we continue to be confident about our IP position. The process will likely play out in its entirety over the next 6 to 18 months.

It will come as no surprise that we are going to vigorously defend our intellectual property. These innovations have profoundly changed and improved the market and have been proven to be superior effective paresthesia-free treatment for chronic intractable pain. So, in summary, I'm extremely pleased with the continued performance of the organization.

We have achieved a number of significant milestones in the first half of 2015 and have strong momentum going forward into the back half of the year.

We have a compelling technology that has the potential to provide improved relief for patients suffering from chronic pain, and we believe that the attributes of our proprietary HF10 therapy will allow us to both take share and to expand the current $1.5 billion SCS market, all under current reimbursement structures.

And with that I'd like to turn the call over to our CFO, Andrew Galligan, to elaborate more on the Company's financial highlights.

Andrew?.

Thank you, Michael. As Michael mentioned, revenue for the three months ended June 30, 2015 was $11.4 million, an increase of 52% year over year on a recorded basis. International revenue was up 51%, to $11.3 million, from $7.5 million during the same period of the prior year. This represents constant currency growth of 80%.

The revenue increase was primarily attributable to continued adoption of the Senza system. Going forward on this call, all revenue will be stated on a constant currency basis. Europe continued to be strong, with growth of 105% year on year, led by the U.K. and Germany. Australia was also strong, with growth of 40% compared to the prior-year period.

We now believe that we are approximately one-third of the overall Australian market for IPG units and total revenue. In addition, we believe that the overall Australian market grew by approximately 14% in revenue and 13% in IPG units for the 12-month period ended June 30. We began our initial commercial launch in the U.S.

in late May and recognized revenue of approximately $53,000 in the second quarter. Gross profit for the second quarter of 2015 was $5.9 million, representing a 52% gross margin from $5 million, a 66% gross margin in the same period for the prior year.

During the quarter we had a $1.2 million write-down of inventory that did not conform to our product requirements. This resulted in a margin reduction of approximately 11 gross margin points. As we continue to grow revenue we expect to expand margins by improving efficiency and further leveraging manufacturing overhead.

Operating expenses for the second quarter of 2015 were $25.1 million, an increase of 101% compared to $12.5 million in the second quarter of 2014. The increase in operating expenses was driven primarily by increased headcount and related personnel costs for the sales and marketing organization to support the U.S.

launch, as well as an increase in general and administrative costs associated with being a public company. Net loss from operations for the period was $19.2 million, compared to a loss of $7.5 million for the second quarter of 2014.

At the end of the second quarter of 2015 we had approximately $254 million in cash, cash equivalents and short-term investments. As mentioned earlier by Michael, in June we completed an underwritten public offering, raising net proceeds to the Company of approximately $118 million.

Turning to our outlook, we are increasing our international revenue guidance for 2015. We now project international revenue of approximately $41 million to $43 million for 2015, which represents year-over-year growth of 44% to 52%, using Q2 2015 foreign exchange rates.

This is up from previous guidance for international revenue of approximately $36 million to $38 million. As we've previously noted, we will not be giving revenue guidance that includes the U.S. market until we have enough experience in that market.

We expect operating expenses to approach $30 million in the third quarter and to level off from there for the remainder of the year in support of our deliberate controlled launch. And now back to you, Michael..

Thank you, Andrew. So that concludes our prepared remarks this afternoon, and we will now open the call up for your questions..

[Operator Instructions] And our first question comes from the line of Mike Weinstein from JPMorgan..

So, I really want to just spend a few minutes on two topics. One is the U.S. launch and two is the intellectual property behind Senza.

And so on the launch, I think you did a good job, Michael, of walking people through kind of the time lag that basically you see in this marketplace from identifying the patient to the trial implant to doing the permanent implant and therefore recognizing revenues, but that doesn't give people a great feel for how the launch is going other than your kind of your qualitative encouraging comments.

Can you just give us a little bit more in terms of a sense for the interest level out there and maybe what you're seeing kind of early on in the trial implants that would then convert to permanent implants, give us a better sense for the strength of the launch?.

Right. Thanks, Mike. Appreciate the question. Let me say a few comments and then I'll ask Rami to also add to it. I think I mentioned in my comments that I am very pleased with where we are and the reception we're seeing in the market.

It's - how to put it - the reception we're seeing, and I would call it a broad-based reception from reputable and notable accounts is quite good. They're showing a lot of interest in the data, in the product, and interest in, frankly, working with us. So I just feel very good about where we are. I think we've got the right strategy.

And, as you know, Mike, we've spent a lot of time talking about how we were not going to simply do a land grab for revenue but we are going to build a strong foundation and do it in a deliberate way. We are doing exactly that. I think it's the right strategy. And I think we're executing it exceptionally well. So I'm actually - I feel very good about it.

Rami, why don't you add to that?.

Sure. Thanks, Michael. So I'll start in the same place, Mike, and thanks for the question, with respect to the reception. I would characterize it very much as pull demand versus push demand.

The number of clinicians, frankly, and we've certainly spent a lot of time on the road of late, particularly with these conferences, that are just coming up to us requesting the device, that are buying into the evidence, the study and the quality of outcomes is phenomenal.

Translating that into the other part of your question of what we're actually seeing, what we're seeing is that we're replicating the outcomes from the pivotal study in the marketplace.

And that is in terms of trial-to-permanent ratios that are at or above what we're seeing in the pivotal study, as well as, frankly, having physicians call us, call our sales management and say, you know what? I beat your pivotal study. I got better results than your pivotal study. You need to have me in your next study.

So that's the sort of feedback that we're getting from the marketplace, which is incredibly, incredibly encouraging. And you hit the nail on the head in terms of, as Michael said, priming the pump. That takes time. When you have a lag of over a month between when you do a trial to when you do a permanent implant, that's going to have an impact.

And certainly we had these early investigator sites that - like Dr. Kapural, who did the first trial and the permanent Michael mentioned, but in terms of broader calling on accounts, that really began in earnest in early June, and that certainly contributed to the results that we're seeing here. So I'll turn it back to you..

Let me ask you guys. As we go forward here, other than just obviously reporting U.S.

sales, have you given thought into certain metrics that you may want to report on upcoming calls relative to number of implanters or any other commentary that might be valuable for us to track?.

Yes, I mean, obviously we're spending a lot of time talking about that right now, Mike. We clearly are going to be giving the revenue number. We are going to be giving the number of trained and in-the-field representatives. So those two are kind of the foundation.

Beyond that I think going forward we may add some, but we haven't made a final determination yet..

Okay. Let me then just switch and try and cover IP quickly, because obviously that was a topic that came up during the quarter. And I'm familiar with kind of the breadth of the IP portfolio, and I think people have kind of heard your headline commentary.

But maybe explain for people a little bit more about what the breadth of that IP in terms of the number of patents you guys have, what that covers, and so people have a better sense of kind of what's been issued and what's out there and how to think about challenges to your IP going forward.

Because obviously Boston challenging, which isn't surprising, given that they have a substantial stake in the market, they're behind, obviously you're going to see more challenges going forward. So maybe set the table for what the IP looks like today and then we can then consider further challenges going forward..

Sure.

Excellent question, and, Rami, can you maybe address that?.

Sure. Thanks again for the question, Mike. So we have 50-plus patents in the U.S. covering our innovations in high frequency. The particular - digging one layer deeper, what we've covered is, generally speaking, 1500 Hz to 100,000 Hz in the epidural space without paresthesia.

That's really the core of our innovation, and we feel very confident in how we've protected that. What Boston Scientific has done is they've challenged one of those patents, and really very specifically they challenged a subset of claims of one of those patents. I think it is worthwhile mentioning the IPR process at a very high level.

The Boston petition came in midyear, and that process will take approximately, at a high level, about 18 months to play out. So we're looking at December of 2016 for it to potentially fully play out. The first milestone really in that process is around December of this year.

So we are allowed to file a petition, and it's somewhat limited, in response to Boston's petition, and that the PTAB will then look at our response in conjunction with Boston's petition and make a determination as to whether to review all of those claims, a subset of the claims that Boston's challenged or none of the claims.

So that's a little bit of a background about our portfolio and the process, and I'll kind of stop there and see if that answers your question or if you have any follow-up..

Yes, and so the expectation, assuming the PTAB takes the case, is that there should be - I would assume there's going to be from you guys some additional disclosure that may help the Street maybe in early September, and then if PTAB, and then PTAB takes the case, then we might hear more from you that might help people a bit more on the IP maybe early next year.

Is that right?.

That's right, Mike. So we have until September 1 to file our preliminary response. And one point that's of note, for example, is that Boston's petition includes expert testimony, so it's a more comprehensive petition. Our response is partly limited in that we're not allowed expert testimony.

But we will have something out there that certainly gives somewhat of our view relative to that petition by September 1, so that will help the Street understand, if you will, our side of the story to some degree.

And then the PTAB has from September 1 to approximately December 1 to take those two pieces of - those two documents in conjunction and make a determination. So that is absolutely right..

Perfect. Well, listen, I have a bunch of questions, but I'll let some others jump in. Thank you, guys..

Our next question comes from the line of David Lewis from Morgan Stanley..

Good afternoon. I wanted to build on some of Mike's commentary here on the second quarter here. So I'm just trying to get you, maybe, to give us a little more detail.

And so, Michael, you were kind enough I think at the time of commercialization to share with us your intraquarter rep number, which I think was 52 reps as of May 11 and 70 reps by the end of the second quarter.

So what's your rep number as of today, and what percent of those 52 reps back in May were trained and actively calling on physicians by the end of the second quarter?.

Well, so, David, we're going to stick with the disclosures we've put out there relative to reps. So it was 52 when we received the approval and 70 at the end of the second quarter. As I - as you may recall, we have been very cautious not to promote ahead of the approval, and we pointed that out on the call with the PMA approval.

And we were very cautious about that. That said, we do have those 70 people as of the end of the second quarter, and they are out right now going to targeted accounts. We have specifically targeted those accounts. And I do want to underscore again my earlier comments, and that is the reception is quite strong and very positive..

Okay. So 70 reps actively calling on physicians. And it's probably too early to talk about rep utilization. I totally understand. But would you say, Michael, that you're telling them to go out and do a certain number of implants, so Rep. No.

1 does five implants, or what type of productivity metrics in this earliest phase are they being compensated on or do you expect from them?.

Rami, do you want to take that?.

Sure. David, at a high level, like any sales force, there's certainly a forecast and a quota. But obviously we're not going to get into how we compensate our sales force in detail.

And just to build on Michael's comments, certainly we understand the need to share some of this information, but at the same time we're obviously cognizant of the competitive interest in our disclosures and activities. So we're trying to strike an appropriate balance, and we'll continue to evaluate that. But certainly from a - there is a target.

They have a quota like anybody else. But we're not going to kind of get into further detail beyond that..

Okay. But we have 70 quota-carrying reps as of the end of the second quarter..

Yes..

Okay, perfect. And then this may be a tougher one, but you mentioned the disconnect between trials and permanent implants, which we all expect, so I think we all appreciated the second quarter was not going to be a particularly probative quarter for business momentum.

But can you share with us at all, even in broad ranges, how many trial implants you think have occurred to date, whether that's 10, 25, 50, 100, in broad scope?.

No, because we talked earlier about our trial success rate, so that's tantamount to giving you a revenue projection. So I think we're going to need to hold off on that..

Okay. And then two more quick ones and I'll jump back in queue.

Andrew, I just want to make sure, the inventory write-down was sizable, so could you just give us a sense of what the nature of the nonconformity was, whether that impacted the ability to supply in the second quarter, and could it at all impact the ability to supply in the third quarter? And SG&A this quarter came in a little lighter than we had.

Could you just kind of give us a sense of how SG&A is going to track across the balance of the year? Thank you..

Okay, just because my memory works that way I'll do the last first, which is we expect to hit close to $30 million for the third quarter I think is what we - what's in our guidance. And we were a little light this quarter, but I think we're going to hit $30 million next quarter, because it's really a full, all out U.S. launch quarter.

Then the other one was put the $1 million - it is a big number - but put it into context of we have about $25 million of inventory. So it will have no impact on third quarter and did not have an impact on the second quarter..

Great. Thank you very much..

Our next question comes from the line of Danielle Antalffy from Leerink Partners..

Guys, we did some work, talked to a few docs intraquarter, and we're hearing some commentary about physicians that aren't trained yet warehousing patients.

And I was wondering if you could comment on that at all, sort of what sort of backlog you think there might be of these patients that could come on in the coming quarters as physicians get trained..

So, thanks for the question, Danielle. So let's look at it like this. We clearly do have some accounts, both accounts that we're working with right now and are trained and others that have not been trained that are identified, targeted accounts that we have heard, always unofficially, that they are warehousing patients.

That said, look, we've all been - I mean, I've been doing this for 35 years. I would never take rumors and tally them up and count on them. So I can confirm that there is some of that, but I would really shy away from giving you any sort of number in terms of magnitude.

Rami?.

Sure. Yes, Danielle, the other consideration is going back to Michael's earlier comments with respect to priming the pump. So warehousing patients doesn't really obviate that. The fact of the matter, those patients have to be brought into the office. They have to go through preauthorization. They have to be trialed.

They have to be scheduled for a permanent implant. So it really, while it is wonderful and we hear about it, and, frankly, with some accounts we are confident in it, but it varies a lot.

But at the end of the day it's still - the immutable facts of this market are what they are, and that's certainly something we'll see the benefit of over time but doesn't change the facts of where we are today..

Okay. That's fair. And then just wanted to comment on the pipeline. Thanks for the color there. That's very helpful. Can you help frame the potential addressable market opportunity there? And I know it's just a feasibility study, but how we should be thinking about timing to a potential commercial product. Thanks..

Rami?.

Sure, yes, based on the research initiatives that we've done we believe that the market size there could be similar to the existing leg pain market today. However, that's why you do these studies.

Part of what you learn in addition to the efficacy of the therapy is how is enrollment going, how much referral work is required to drive patients into the practice for this particular indication? So there's a lot for us to learn, but we do believe it's potentially a sizable market for us over the long term..

All right. Thanks so much again..

Our next question comes from the line of Dave Turkaly from JMP Securities..

Thanks.

I guess given your approval and your marketing claims, I was curious, these 18 new reps, any comment as to whether any of these folks came from some of the larger incumbents in the space?.

So, thanks, Dave. We clearly - I would say the last batch of people was not different than the earliest group we brought on, and that is we get a range of people.

We certainly do get some from our competition, and I think to a person, yes, they are enthusiastic and impressed with the superiority claim, because they've come from a market where there had been not a whole lot of level one evidence and certainly no superiority claims or labeling.

So, yes, I would say that that's been a factor, but I would say it hasn't really notably changed the mix of people we're hiring to date..

And just a clarification, are you giving some of these reps guarantees?.

Again, we're not going to get into compensation here, or comp plans for our reps. That's just a layer of detail we won't get into, Dave..

Okay. One other, and so we were at INS with you guys, and obviously there was some positive reaction there. Your Europe sales are up 105% year on year.

I'm curious as to whether you think the data and some of the superiority claims that you may have gotten clear had anything there or what you would explain that jump to, what you would attribute that to..

Yes, well, look, it's a great question. And as I said in my comments I am profoundly pleased with the fact that markets we've been in for five years now are continuing to expand at this level. I think that speaks to the power of the therapy to provide good outcomes in those accounts, because without it you don't - you just don't get that.

So it's something we talk about a lot. I in fact talked today with Michael Enxing, our Head of Sales, and he was in Europe with the European group, and, yes, clearly the clinical data and now the publication is something that is - it is important to them, and it's important to their customers.

To the - I'm not sure I can feather out exactly how much that is responsible for the uplift in Europe versus simply the outcomes those accounts are seeing in their patients. But it clearly is a contributing factor, yes..

Thanks a lot..

And our next question comes from the line of Shagun Singh from Sterne Agee..

I was hoping to ask a couple of questions on the U.S. launch. Thus far can you tell us what kind of patients are being treated? Is it mainly for leg pain or back pain? Were they considering other devices and have now switched to Senza? And I was just curious if you could provide some color on your learning about the U.S.

market so far versus being in Europe..

Sure. So, thanks, Shagun, for the question. So we certainly are treating the broad set of patients with both back and/or leg pain, which is, frankly, a great position to be in.

I think we may have mentioned this before, but one of the principal differences with our international commercialization from four years ago to where we are today is patient selection for us was very limited back then.

So without the type of evidence we have today we were certainly much more relegated to just predominant back pain patients or in some accounts only failed SCS patients.

But the patients that we're seeing today are very similar to the patients that we studied and are a very broad set of patients, which is a very, very welcoming and great sign of progress in the U.S. launch and the impact of the data and our sales force.

Does that answer your question?.

Yes, it does. Thank you. I just had a follow-up on guidance. So I believe current Street estimates imply about $14 million to $16 million in U.S. revenue for this year. I was just wondering if you could comment on your comfort level with that..

That would be kind of giving guidance..

Okay, fair enough. And then, finally, I was wondering if you could comment on fourth quarter seasonality. Thank you..

Well, the plain fact is that the neuromod market is like any other medical device market, that it has seasonality. And Q3 typically is a down quarter because people are on vacation, both in the U.S. and international. And then Q4 tends to be one of the higher quarters of the year.

But in our case you have to consider that on the one hand you have seasonality issues, but on the other hand you have our just underlying growth rate, which tend to overwhelm seasonality. But that isn't to say that the seasonality doesn't cause a dip in your growth rate in the third quarter, for instance.

So, while I don't expect to see the traditional medical device seasonality, it certainly will have an effect on our growth rate..

Got it. Thank you so much..

At this time we have no further questions. I turn the call back over to Michael DeMane for closing remarks..

Okay, well, thank you, and thank you, everyone, for joining the call today. We do appreciate your continued interest in Nevro and look forward to providing an update on our progress. Thanks very much..

This concludes today's conference call. You may now disconnect..