Lynn Pieper - IR Rami Elghandour - President & CEO Andrew Galligan - CFO.

Varun Kuchibhatla - Morgan Stanley Danielle Antalffy - Leerink Partners Adam Maeder - Wells Fargo Jason Mills - Canaccord Genuity Isaac Ro - Goldman Sachs.

My name is Sheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Nevro Q2 2018 Earnings Conference Call. [Operator Instructions] Lynn Pieper, you may begin your conference..

Thank you, Sheryl. And thank you all for participating in today's call. Joining me are Rami Elghandour, President and Chief Executive Officer; and Andrew Galligan, Chief Financial Officer. Earlier today, Nevro released financial results for the quarter ended June 30, 2018. A copy of the press release is available on the company's website.

I'd like to remind you that on this call, management will make forward-looking statements within the meaning of federal securities laws.

All forward-looking statements, including our discussion of operating trends and our expectations of future financial performance, including full year 2018 guidance, and our expectations with regard to profitability, are based upon our current estimates and various assumptions.

These statements involve material risks and uncertainties that could cause actual results or events to materially differ. Accordingly, you should not place undue reliance on these statements.

See our filings with the Securities and Exchange Commission, including our quarterly report on Form 10-Q, which we expect to file today, for a description of these risks and uncertainties.

Nevro disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements 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 2, 2018.

And with that, I'll turn the call over to Rami..

Thank you, Lynn, and thanks everyone for dialing in today. As we previously announced, worldwide revenue for the second quarter was $96.1 million, an increase of 28% as reported compared to the same period of the prior year. U.S.

revenue for the quarter was $79.9 million, an increase of 27%; and international revenue was $16.2 million, which represents a 4% increase on a constant currency basis. These results were driven by the continued global adoption of HF10 therapy and execution by our outstanding commercial team.

Our worldwide revenue guidance is $385 million to $390 million for the full year 2018. The fundamentals of our business are in place as we continue to scale our organization to broaden access to our innovative therapy.

The uniqueness of our product, combined with our commercial strategy, exceptional people, and clinical pipeline positions us for long-term success. I'd like to touch on each of these topics and turn the call over Andrew for a detailed review of our financials and guidance.

Starting with our product, we're pleased with the initial progress of our Senza II launch and the continued adoption of our Surpass surgical lead. We've also added full-body MRI compatibility to the benefit of our patients on our Senza I product.

We've significantly raised the bar in SCS, and as such have inspired incumbent and new competitors to invest in this space. Those competitive investments have yet to yield a product that can match HF10 in efficacy, patient experience and procedural efficiency.

Our commercial strategy of delivering on the promise of HF10 and uniquely tracking patient outcomes and sharing them back with our customers has helped us build our brand and maintain our differentiation in the field.

We have now collected patient follow-up data on over 10,000 patients, with results in the mid- to high 80s in terms of patient satisfaction, consistent with our Senza RCT. We've also had physicians replicate these results by surveying their own patients, further highlighting the robustness of our product and strategy.

This component of our commercial strategy, enabled by our clinically superior product, gives us a competitive advantage that is difficult to replicate and works to dispel competitive counter messaging.

Combining this 10,000 patient commercial data with our 2 24 months prospective studies in back and leg pain and our broad indication expansion pipeline, gives us an unmatched position in the market.

We're also continuing to invest in research and development efforts to further differentiate and improve our product offering and attempt to raise the bar yet again. We remain committed to attaining market leadership by scaling our organization and leveraging our differentiated position and our pipeline.

With our underlying focus on serving our patients and customers, we believe we're positioned for continued success. One story we'd like to share to highlight the impact of our therapy is about Al, a retired marine who suffered from chronic back pain due to injuries during his service in Vietnam, parachuting from helicopters and carrying heavy loads.

Al had spinal fusion surgery that didn't resolve his pain and was considering another surgery when his physician suggested an HF10 trial. An avid golfer, less than 3 months after his permanent implant, Al shot his lowest round ever at his 50th high school reunion. "At 68, I shot a 68, and won the reunion tournament", Al recalled with pleasure.

"I'm back to playing golf with my wife 3 or 4 times a week, something I never thought I'd be able to do again," Al said. He also pointed out that he no longer takes pain medications, and is doing home improvement projects that would've been out of the question before his HF10 implant.

This is one of many stories that highlights the tower of HF10 therapy to only treat pain, but to give people their lives back and to help them to reduce or eliminate their dependence on opioids. We're proud to offer a non-opioid, non-pharmacologic therapy and are inspired by story like Al's to fulfill our mission.

On the people front, we have consistently attracted and retained exceptional talent and have maintained our vibrant cultures as we've grown. With respect to sales, I'm proud of our team and the work they've done to expand access to HF10 to over 35,000 patients in need.

Our team consistently displays passion for our product, empathy for our patients and a competitive spirit to drive towards success. We've learned a lot in the past three years building our U.S. sales organization and continue to apply those learnings to improve our hiring and on-boarding to drive greater efficiency in our business.

We're in a process of rebuilding our hiring pipeline and expect to get that back on track over the next 2 quarters to keep up with our growth potential. We're also in the process of expanding regionally and refocusing territories to ensure our sales team has the appropriate support to drive the business forward.

With respect to the VP of Sales opening, we will be initiating a search, and as I mentioned previously, we will take the appropriate time to identify the right candidate for our business. I remain confident in the quality of talent we're attracting and the opportunity ahead.

Transitioning to our clinical study update, as I've said, evidence is our product and has been the foundation of our success. As we embark on building that foundation, I'll start with an update on 2 current RCTs and expand into over broader pipeline.

Our painful diabetic neuropathy, or PDN RCT, is underway, and as we continue to add clinical sites, we're seeing enrollment trending positively. We're optimistic that we can enroll our PDN study during 2019.

The PDN RCT was designed to initiate sites on a stage basis in order for us to test our protocol and ensure we are well-positioned with the appropriate enrollment criteria in this new patient population. The stage process is on track and the enrollment timeline is consistent with our goal.

As we've said previously, a key learning from our studies in new indications is the market development requirements for commercialization, which we will assess as the study progresses. On our last earnings call, we communicated our decision to split our nonsurgical back bean study into separate European and U.S. studies, and as such, our U.S.

study is just getting underway in terms of clinical site initiation. Our goal is to complete enrollment in the study by late 2019 or early 2020. We look forward to providing updates as we advance both of these studies. Stepping back, our clinical pipeline is promising, and we're excited to see the full weight of our data sets come to life.

In the next 6 months, we expect to present 12-month results for our 3 upper limb and neck-related studies, 2 chronic post-surgical pain studies, our chronic abdominal pain study and results on our spinal cord injury study.

We also expect to present 24-month results from our painful peripheral neuropathy study; that is data from 8 studies covering a range of indication that we believe will expand access to many more patients in need.

These are our initial studies in many of these indications, and we plan to leverage learnings from them to inform our clinical pipeline progress and prioritization as well as our regulatory and commercial strategies. There are additionally other indications in earlier stages that we're hopeful we'll continue to advance.

We have been encouraged by the robustness of HF10 in feeding these new, often difficult to treat, indications, but are also cognizant of the early nature of these studies and the need for additional work to expand on our findings.

We're uniquely investing in the investment of neuromodulation and believe this investment will continue to maintain our differentiated positioning in the market. As we announced last Tuesday, the summary judgment order was issued, which upheld key method patents that collectively cover 1.5 to 100 kilohertz.

We believe our patent portfolio, including these patents upheld by the District Court, preclude Boston Scientific from launching in the United States.

Subsequently, on the basis of Boston Scientific's representations to the court, both Nevro and Boston Scientific jointly agreed to dismissal of Nevro's declaratory judgment claims without prejudice on the grounds of the dispute between the parties is not ripe given Boston Scientific has no plans to launch a high-frequency system.

And at statement to the court, Boston Scientific declared " that as of now, it has not decided whether to launch such a product, and has not established a time line from when such a decision might be made, if ever".

Since the filing of our legal action, we believe Boston Scientific has taken active steps in an attempt to avoid infringement, including the removal of high-frequency capability from their systems and the 2-year delay of their ACCELERATE study.

Based on these results, we are confident we maintained our exclusivity and demonstrated our commitment to defending our intellectual property.

This concludes our district court litigation against Boston Scientific in the Northern District of California, with the exception of our appeal of certain portions of the summary judgment order with which we disagreed. In closing, I'd like to step back and provide some perspective on our progress and potential.

Over the last 3 years, we've doubled the size of our organization, and in the process, grew revenue 9x; progressed our clinical pipeline by initiating a number of clinical studies in areas of unmet need including 2 RCTs; and responded to, as well as initiated efforts to protect our intellectual property, effectively maintaining our exclusivity.

Through all of these challenges and achievements we've maintained and fostered our culture. Recently, we received recognition as one of the best places to work in the Bay Area as well as several awards related to diversity. We believe our technology, people and strategy, underscored by our passion for making a difference, positions us for success.

As we drive towards market leadership, we're focused on delivering sustainable growth and investing in maintaining our innovative edge. In doing so, we believe we will create shareholder value by leveraging the strong fundamentals of our business and are committed to delivering on that responsibility.

And with that, I'd like to turn the call over to Andrew Galligan, our CFO, for a more detailed review of our financials and guidance.

Andrew?.

Thank you, Rami. Revenue for the three months ended June 30, 2018 was $96.1 million, an increase of 23% year-over-year on a reported basis. U.S. revenue in the second quarter was $79.9 million, up 27% from $63 million during the same period of the prior year.

International revenue was up 8%, $16.2 million, from $15 million during the same period of the prior year. This represents a constant currency growth rate of 4%. In international markets, constraints such as capitation and our increasing share result in lower growth rates than in the U.S.

Gross profit for the second quarter of 2018 was $67.9 million, or 71% gross margin, as compared to $53.9 million, or 69% gross margin, in the same period the prior year. The gross margin improvement is primarily due to a reduction in charges for inventory related write-downs in the current period.

Operating expenses for the second quarter of 2018 were $76.1 million, an increase of 19% compared to the second quarter of 2017. The increase in operating expenses was driven primarily by increased headcount and related personnel costs as well as legal expenses associated with the Boston Scientific intellectual property litigations.

Legal expense in connection with those litigations was $5.8 million for the quarter as compared to $4 million in the same quarter of last year. Net loss from operations for the period was $8.2 million compared to $9.9 million for the second quarter of 2017.

Excluding the effect of the IP litigation spend in each period, we saw a $3.5 million decrease, or 60% improvement, in net operating loss this quarter as compared to Q2 of 2017. At the end of the second quarter of 2018, we had $263.9 million in cash, cash equivalents and short-term investments.

Cash flow from operations, excluding litigation, was a positive $8.4 million for the quarter and positive $7.7 million year-to-date. Turning to our guidance for 2018. Our worldwide revenue guidance is $385 million to $390 million for the full year 2018. As background, we expect the U.S. SCS market should grow in the mid-teens in 2018.

Turning to our international business, we believe that we can grow in the mid-single digit constant currency rate for the balance of 2018. For gross margins in 2018, we continue to expect margins to be in the 70% to 71% range.

With regard to our operating expenses for 2018, we intend to ramp-up our hiring over the next 6 months in support of our expansion of HF10. We also plan to continue investing in our clinical trials and development activities.

And as a result, expect to see total OpEx of approximately $290 million and $295 million for the year, excluding litigation expense.

As a result for our continued investment in the long-term success of our business and as our revenues and related gross profit increased, we expect to be around breakeven EBITDA by the end of the current year excluding litigation expense. Now back to your Rami..

Thanks Andrew. So that will conclude our prepared remarks for today. Sheryl, please open up the call for questions..

[Operator Instructions] You're first question comes from the line of Robert Marcus of JPMorgan. Please go ahead. Your line is open..

This is actually Alan on for Robbie. I just had one quick question to start off on the status of sales force hires that you made in the first quarter and near the back of last year. I was just wondering how those reps were ramping up.

And then moving forward, when it comes - , or I guess your strategy to increase hiring, whether there's anything specific you could highlight there?.

Thanks for the question, Alan. I'll ask Andrew to comment as well. We felt like, obviously, we've consistently had a very strong hiring pipeline that is a function of, I think, the attractiveness of our company and opportunity. And we certainly are very confident in getting that back on track.

We had our first quarter, which Andrew can comment on, was kind of consistent with our historical precedence where we definitely had a tailing off in the second quarter. So Andrew, go ahead..

The specifics are that people would've recognized our net hiring in the first quarter has been in the normal rate that we're used to doing overtime. But we essentially had no net adds in the second quarter, which is a problem that we're addressing..

And then just with respect to the VP search, it's obviously still very early, but any updates on that? And then in terms of the time frame, I know you're focused on finding the right person, but I don’t know - that would be very helpful..

Yes. I think - look, I think I've been pretty consistent on this one. We're going to take our time on that particular search, and so I don't have an update at this time. We're confident in our ability to executing against our business with the sales management team that we have.

And I think in terms of the search itself, we're going to take the appropriate time to find the right person..

Your next question comes from the line of David Lewis of Morgan Stanley. Please go ahead. Your line is open..

This is Varun on for David. Two quick questions. The first one, just on the broader market. It appears competitor launches are having an impact where they are getting some traction in the market, at least with some of the growth rates put up this quarter from Boston.

Do you think you need to make any changes to your commercial strategy, or maybe even augmented, basically, to offer Tonic or other wave forms and make that a bigger part of your strategy? And then I've got one quick follow-up..

Sure, Varun. So look, I think at a high level, first and most importantly, our commercial strategy is intact, as I talked about in my opening comments here. I think anytime you have a new product that's introduced with a large installed base and a large sales force, you're going to see some attention and some response.

But I think it's really important to distinguish between short-term competitive tactics versus changes in the competitive landscape. I think we see a lot of things. As you saw, there's a lot of up and downs from our competitors. We've been consistently growing over time, and I don't see anything in the competitive landscape that's changing.

I think with respect to your comment about options, options existed last year also. And with the specific competitor that you mentioned, I don't recall them having the sort of growth rate that you specifically referenced this quarter.

So I think the thing I would think through here is why didn't options make that much of a difference last year, and suddenly, it's making a difference this year.

I think that's tied much more to kind of a new product introduction and the marketing around that, which, again, historically, I will tell you, is generally transient and non-indicative of a fundamental change in the competitive landscape.

And so the short answer to your question is, no, we don't feel like there's a change that's required from our strategy. We believe our strategy's been remarkably effective and continues to be effective in the marketplace..

And then just on the updated timelines for PDN and nonsurgical back. Just reading between the lines from your comments. Is it fair to say that NANS 2020, it sounds like the data would probably come after NANS 2020. Just wanted to confirm that, that's not really a potential conference for data release..

I was very specific in mentioning what our targeted timelines for enrollment as I did not discuss with respect to those 2 studies when we may or may not present data.

I think I was - in terms of the other data sets that I talked about on - in my opening comments, we do expect those to be presented in the next 6 months, but I haven't commented specifically on when we might present data from those 2 RCTs..

Your next question comes from the line of Danielle Antalffy of Leerink Partners. Please go ahead. Your line is open..

Just a question now a few weeks into earnings season and having 3 data points in the marketplace. One of your competitors put up a very strong growth number, but actually, another large competitor put up a relatively weak number.

So I just was hopping you could maybe update us on what you think your - what is potentially happening in the marketplace from a volume perspective, and if you're seeing any slowdown or more dramatic share shifts.

And do you think that you guys are still in a share gain position even with the VP of Sales situation and the productivity issues you talked about?.

Sure. There's a lot in there Danielle. First, I guess in terms of your comment, we - you said productivity. We haven't talked about productivity at all. We talked specifically about being behind on hiring, and as Andrew mentioned, there was a pretty dramatic shift from Q1 to Q2 hiring, which resulted in some of the actions we've taken.

The share capture question is an interesting one. I think we can definitively say that we are capturing share. I mean, by definition, that is how we have to grow. We're starting from a no share position, and we're growing principally by taking share.

I think the tricky thing comes when folks are trying to sort of ascertain our share capture rate by comparing our growth rate versus the market growth. And as you mentioned yourself, one of our competitors had a significant deceleration in growth.

And that ties back to my previous response to Varun's question, which is you have to separate long-term competitive strategy and competitive landscape from short-term competitive tactics that could influence or inflate someone's growth rate for a couple of quarters but isn't necessarily sustainable.

So I can definitively say that we have been and expect to continue to be in share capture mode. I think that is fundamentally what we're doing. We expect to be the market share leader. We haven't wavered on that expectation and it is a function of continuing to make sure that we're hiring and adding to our exceptional team to advance towards that goal.

And on a short-term basis, in any given quarter during to - due to competitive tactics, that may or may not reconcile with growth rates or market share numbers on a short-term basis..

Your next question comes from the line of Larry Biegelsen of Wells Fargo. Please go ahead. Your line is open..

It's Adam Maeder in for Larry. I wanted to ask a question first on reimbursement. We thought the commentary in the CMS 2019 proposed outpatient rule around alternative non-opioid pain treatments such as SCS were pretty positive. So I guess how do you think this could potentially impact your business.

Any thoughts around potential timelines for this review process? And they talked about considering incentivizing non-opioid treatment. So what types of incentives could you envision being put in place, then I had a follow-up..

Thanks for the question, Adam. Look, I think as we've discussed historically, there are a number of positive tailwinds for our space and for our company, and that happens to be one of them.

We're excited about any potential initiative or change that supports use of a non-opioid and non-pharmacologic therapies, and certainly, we'll look to see what develops in that area..

And then on the new IPG, our understanding is that you're utilizing a 2-tiered strategy with Senza I and Senza II.

So anymore you can share on how you're positioning those devices and early feedback from customers? And then maybe just longer-term, how are you thinking about the mix between the gen 1 and gen 2 products?.

I think we've talked about this previously where, obviously, we're in a competitive market and we're not going to comment on specific strategies and certainly not pricing on these calls. So but appreciate the question..

Your next question comes from the line of Jason Mills of Canaccord Genuity. Please go ahead. Your line is open..

First question for me is around the complexion of those folks that you're interviewing now. As you fill the funnel, are you looking for the same profile you've been looking for over the last couple of years? Has that profile changed? Have you had to adapt to try to fill the number of folks that are coming to the screening process.

What can you tell us about that dynamic, if anything?.

I would say that in the very early days in the U.S. launch, going back to 2015 and early 2016, there was definitely a heavier mix of folks with prior SCS background. But I think we've talked about this. We haven't talked about it in a while, but over time, we obviously shift to a broader range of folks without that background.

But I would say that since that change, the sort of fundamental mix hasn't really changed all too much. So I would say that it's been fairly stable..

And on the pricing side, I understand you don't want to talk about it too much. But gross margins were quite good. A little bit better than we were expecting. It seems to imply that pricing is fairly stable.

Would that be a fair assessment?.

I think, yes, that's a fair assessment..

Your next question comes from the line of Isaac Ro of Goldman Sachs. Please go ahead. Your line is open..

Just thinking through the cadence with regards to the year, given there's some unusual items going on this year. Could you help us think through the sequential growth trend here? I think in last couple of years, you guys have been anywhere between 5% and 10% sequential growth from 2Q to 3Q.

If I think about what's embedded in your guidance this year, is that still realistic? Or should we assume it's a little bit more back-end-loaded as you restaff the sales force?.

Yes. I mean, in very general terms, our expectations here are that the - based from the SCS industry as a whole, it tends to be flattish from Q2 into Q3, and the big quarter in the year as Q4. And we see no reason why that would be any different for us..

And then how about from a gross margin perspective. I mean, I think if I look at prior years, again, the gross margin trends has been not all that seasonal. But just given the things that are "different" this year, it'd be helpful to think through the flow-through effect to profitability of the business..

Sure. I think we've talked about this, but again, not for some time. Because we're totally outsourced, our product cost tend to be flattish over a long period of time and exhibit more of a step-function when we have, kind of, over time, have established the bigger volume and are able to get bigger volume discounts.

So they tend, perhaps, to be a little bit more stable, I think, over time..

There are no further questions at this time. I would now like to turn the call back over to Rami Elghandour for closing remarks..

Thank you, Sheryl. And thanks, again, everyone, for joining the call today. We certainly appreciate your continued interest in Nevro and look forward to our next progress update. Have a great day..

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