Good afternoon. My name is Chris and I'll be your conference operator today. At this time, I would like to welcome everyone to the Nevro First Quarter 2019 Financial Results. [Operator Instructions]. Juliet Cunningham, Vice President of Investor Relations, you may begin the conference..

Thank you, Chris, and good afternoon, everyone. Joining me today are Keith Grossman, Nevro's President and Chief Executive Officer; and Andrew Galligan, Chief Financial Officer. Keith will discuss his early observations and the company's opportunities going forward and Andrew will cover our first quarter financial results and guidance.

Earlier today, Nevro released financial results for the first quarter, which 2018 ended March 31, 2019. A copy of our earnings press release is available on the company's Investor Relations website. This call is being broadcast live over the Internet to all interested parties and an archived copy of this webcast will be available on our IR website.

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

All forward-looking statements, including our discussion of operating results and trends and expectations of future financial performance as well as second quarter 2019 guidance, are based upon our current estimates and various assumptions.

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

Please review our filings with the SEC, including our quarterly report on Form 10-Q, which we will file later today, for a full description of 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 because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of today, May 9, 2019.

And now, I'd like to introduce Keith Grossman..

Thanks, Juliet, and good afternoon, everyone. Thanks for joining us. I am pleased to be speaking with you today on my first quarterly conference call as Nevro's CEO, and a quick 7 weeks into that role for me.

I'd like to begin by talking about where I see our business today and then discuss my early thinking on returning the business to growth and achieving operating leverage over time. Let me first provide a brief background on my interest in Nevro.

I was actually introduced to the company a number of years ago when Nevro was in its very early stages, and I recall being impressed then with the company's technology and clinical road map. And like many of you, I continued to follow Nevro as it experienced dramatic growth and then, more recently, as it faced some obvious challenges.

Many of you have asked me over the last several weeks why I decided to join as Nevro's CEO. And it's really pretty simple. I joined Nevro because I see a really large untapped market yet ahead of us and opportunities here for operational improvement, for growth and for value creation.

Having spent a number of years at the helm of multiple medical device companies, my confidence in the long-term opportunity here really is based on a few factors.

First, our innovative technology and products which are, importantly, differentiated, protected, best-in-class, backed by strong clinical evidence, and they make a difference, a real difference in patients' lives. Secondly, the company's clinical and product pipeline, which I believe can expand the addressable market and drive growth over time.

And finally, a positive reimbursement environment, which has enabled more than 40,000 patients to be treated with HF10 therapy already and many more who could benefit from this unique therapy in the future.

However, notwithstanding my belief that Nevro remains a mid- to long-term growth platform, I view 2019 as a transition year for Nevro as we tackle a number of near-term challenges. Notably and maybe not surprisingly, we're working to lay a stronger foundation in our commercial execution as we transition into our next phase of growth.

I've had discussions with some of you and you've asked me recently how a company like ours in a good market with great technology, data and people could ever suffer from a lack of healthy growth.

Let me share some early observations with you about where we are, how I think we got here and speak about some of the steps we'll be taking as an organization to better position the company for future growth. To begin, I want to tell you that I've been really impressed with many of the people I've found here inside Nevro.

We're lucky to have, I think, a smart and dedicated team of people, who are passionate about the company's mission, in our case, to bring a higher level of relief and function to countless patients who are debilitated by chronic pain.

And while certainly we've stumbled recently in our efforts to deliver growth and financial performance, we have, I think, a good understanding of how these challenges came about and increasingly a better understanding about what we need to do going forward. So let me take a step back to the company's commercial introduction.

The company obviously enjoyed dramatic early growth and, like, I think, most young companies in that situation, Nevro was consumed by keeping up with and accommodating that growth.

While much of what was done to drive and meet the needs of that kind of rapid expansion was admirable, the company, it didn't, in my view, lay the foundation for the next leg of market penetration and sustained growth particularly during a time when our competitors were changing and improving their approaches to respond to our early successes.

Amid this backdrop of initial gains with the early adopters of our technology, we used the number and pace of sales people hired in the field as a primary objective and even discussed, I think, our sales force headcount numbers with you as a growth metric.

Unfortunately, we lacked at least consistent executive sales leadership over too much of this time and didn't do some of the fundamental work to make sure our sales organization was equipped for longer-term success. To me, great sales execution at scale is an extremely tactical business.

Territory sizing, placement and alignment, management structure and span of control, training and ramping up of new people, proper compensation, market segmentation and targeting; the list is a very long one of things that have to be done and, in many cases, things we had not been doing as well as we could to support our field team and their managers and allow them to be as effective as possible.

As our growth rates began to show some of the early signs of strains imposed by these shortcomings, we added even more people to our field organization, making many of these problems more acute. It was these issues, in large part, that led to an unacceptable level of turnover within our field sales team.

And this, in turn, further slowed our field productivity and our business in general. Now amid this backdrop, we introduced the Senza II platform in 2018, but it seems pretty clear now, with admittedly the full benefit of hindsight, that we missed the mark on price positioning, which led to some measure of customer dissatisfaction.

And I think it's important that we learned a number of lessons that I believe will inform a much more effective launch of our next platform. Another area where we may have lost focus is around patient trials.

As most of you know, I think, patients enter our treatment pathway via a trial, the success of which leads to payer approval for the implantation of our device, which is the principal driver of our revenues.

Our trials began to flatten out in the middle of 2018 and this activity is obviously an important 1 to 2 quarter predictor of future implant revenues. So flat patient trials in the back half of 2018 have negatively impacted our results in the beginning of 2019.

The good news here is that we're encouraged by signs of renewal in patient trials that began to happen throughout the first quarter.

And looking, more importantly, to the second quarter, we have focused and re-engaged our field team very intensely on patient trial growth, and, while it's early, we've seen some very promising early signs and responsiveness to those efforts. Now we don't disclose the number of patient trials as a regular metric.

I'm not persuaded, by the way, that we should start. But it's important that you understand the issue and the recent trends, at least directionally. Now let's talk a little bit about our product offering strategy as well.

As we look back on our response to changing market and competitive developments, and again with the full benefit of hindsight, it seems clear to me that we made our transition to a multi-waveform product strategy perhaps later than we should have.

While our recently announced transition in this area was absolutely the correct approach to take, its absence prior to this year probably weighed on our results a bit over the last 18 months or so.

Finally, and in response to the pricing pushback and sales force productivity issues in 2018, we began to respond by offering some volume price discounting for larger orders.

Now up to a point, this approach can be an effective practice, though in our case it increased each quarter through 2018 resulting in a greater than desired impact on sequential quarterly revenue patterns particularly in the fourth quarter. And of course, this had the predictable effect on Q1 order demand.

Upon my arrival at the end of Q1, we decided to moderate some of these larger orders because of the impact they would have on future quarters. And while I believe strongly this is a prudent decision for our business going forward, it did, of course, impact our revenue in the first quarter.

And it's important to note that had we continued with the pace of this strategy of some of the larger-volume orders, we would have reported revenue for the quarter approximately in line with about consensus and prior year. So those are some issues. And the problem is not, by the way, that we don't have very good people in the field.

It certainly appears to me that we do. The problem is also not that we need to add yet more people to our field organization. We don't, at least for this year. What we need is to regroup and do the important work of professionalizing our commercial execution and giving our people the tools to allow them to be successful.

This is particularly vital in a competitive market, in which our field presence plays such an important role in our competitiveness. I'm working closely on these issues with our new VP of Global Sales, Mike Carter, and I'm encouraged by some of our early progress.

Of course, these improvements in commercial leverage are not only an important part of regaining our growth footing, but by making our existing resources more effective, they're also key to navigating a path to ultimate profitability.

And I, for one, firmly believe that we shouldn't have to make a tradeoff between growth and profitability goals indefinitely.

Regarding timing, and while I certainly reserve the right to adjust my expectations when I have more than 6 or 7 weeks under my belt, I would think that many of these changes will take us a couple of quarters to get into place. That said, it's my hope that by the fourth quarter of this year, we begin to see the benefit of their implementation.

And that timing is key. We're planning to put important new products and data in the hands of commercial team late this year into early next year.

Among a number of initiatives, our next product platform, Omnia, will put a very fine point on our strategy to do what no other competitor can do; offer not only our proprietary HF10 stimulation waveform, but also nearly every other waveform available from competitive devices to our customers.

We intend to preserve what we still believe to be the most efficacious approach to patient care with our HF10 therapy, but we'll now be in a better position to much more seamlessly offer clinicians the freedom to do more, to preserve all other treatment optionality for their patients.

Additionally, I'm pleased to report that we should finalize the enrollment in our painful diabetic neuropathy trial this quarter and we hope to release primary endpoint efficacy data from this cohort in early next year.

I know there's been some speculation regarding whether the market segment or segments that drove some of our early growth are different from those that must drive our future growth and whether or not we've adequately factored those differences into our product road map as well as our marketing and selling strategies and tactics.

But with some outside help, we've launched a very deep analysis into our U.S. market, our user segments, our growth initiatives and positioning and our past results, and it's our intent in this process to better understand and segment our customer base and ultimately improve our results.

And this, by the way, is a process I've used in the past with good effect. I know that many of you will have a question on the details of these commercial changes and others.

While we'll try to be more transparent with you on the most important higher-level issues going forward, just as I'm doing today, please understand why we may be a little less specific on certain details.

We have good competitors in this space, much larger companies who don't have to disclose details on this product segment relative to their overall business. And I'm really not interested in providing anyone unfair competitive advantage.

One of the effects of being in the relatively opaque SCS market has been its impact on our ability to accurately forecast our business. Our historical internal model was based, at least primarily, on a territory-level buildup, which was driven by sales rep productivity by tenure.

And this model became, at least partially, broken and inappropriate some time ago for the obvious reasons, but we really didn't do a good job of creating a suitable replacement. And this is going to be an area of intense focus for us over the next quarter or 2, as you might well imagine.

While I would expect we'll get back into the business of forecasting total market growth at least in the near term, we must have and provide a better sense of where our own business can and will go. And I want to emphasize that I remain very optimistic about our underlying business and our market.

Our cautious approach to our guidance today is driven more by our desire to ensure that we're confident in our forecasting capabilities before sharing them externally. Before I turn the call over to Andrew, I want to offer 2 final observations. The first, my remarks this afternoon may sound critical of the company's past performance or leadership.

They're not. Nevro has truly disrupted the SCS market with not only its innovation and technology, but also through some of its early decisions such as the randomized trial on which it launched the Senza product line.

The growth results over the first couple of years of commercialization were distinctive in the medical device industry and the team deserves to feel a great deal of pride in that accomplishment. And I also want to thank our many customers and clinical advisors, who have worked really hard to help get us to this point.

The issues and areas of focus that I've described today merely represent corners that maybe should have been turned a bit earlier, but they're still extremely doable. I took on the leadership role here at Nevro because I believed that and, as we sit here today, I still do.

We've got some heavy lifting to do in the next couple of quarters to get back on track, but we have an enormous underpenetrated market in front of us and I believe we are a company with a meaningful amount of currently untapped shareholder value to create as well.

We believe the outlook for our market is very positive and that with better execution, new products and new data, we will participate fully in that market growth. And I see no reason why Nevro can't be an attractive growth story for years to come. Of course, it's our job to deliver all that and I believe we will.

With that, I'll now turn the call over to Andrew to review our Q1 financial results and our Q2 guidance.

Andrew?.

Thanks, Keith. I'll begin with revenue for the 3 months ended March 31, 2019, which was $82.1 million, a decrease of 6% compared to $87.6 million in the prior-year period on a reported basis. U.S. revenue in the first quarter was $65.8 million, down 7% from $70.6 million during the prior-year period. The decrease in U.S.

revenue was primarily due to the moderation of high-volume orders, as Keith mentioned earlier. Absent that decision, we believe our results would have been approximately in line with the prior year and consensus. International revenue was $16.3 million, a decrease of 4% compared to $17 million during the same period last year.

This represents a constant-currency growth rate of 4%. European growth in the high-single digits was offset by weakness in Australia. Gross profit for the first quarter of 2019 was $53.2 million or 64.8% gross margin compared to $62 million or 70.7% gross margin in the prior-year period.

During the quarter, we took a $3.6 million charge related to Senza I raw materials, which had an unfavorable impact to margin of 430 basis points versus the prior year. Excluding the raw materials charge, gross margin would have been 69.1% reflecting small contributions from lower volumes and reduced average selling price.

Operating expenses for the first quarter of 2019 were $95.5 million, an increase of 23% year-over-year compared to $77.7 million in the prior-year period.

The increase in operating expense was driven primarily by increased headcount and corresponding personnel costs as well as expenses related to our management transition and advisor fees associated with shareholder activism related activities. The total one-time expenses for these events totaled $5.6 million.

Legal expenses associated with IP litigation were $1.3 million for the first quarter of 2019. To provide an update on litigation matters, the Boston Scientific litigation will wrap up the submission process for both sides' written briefs in the second quarter of 2019. We currently anticipate having a hearing at the appellate court at the end of 2019.

Regarding the Stimwave litigation, we filed a lawsuit in anticipation of Stimwave's U.S. commercial launch. Last month, we filed a preliminary injunction motion seeking to keep their high-frequency product off the market while the litigation proceeds to trial. We expect a ruling on the motion in late June or July.

Although preliminary injunctions are difficult to obtain in the current legal landscape, we are taking every opportunity to protect our intellectual property. Turning back to our performance, net loss from operations was $42.3 million, an increase of 169% compared to a $15.7 million loss for the first quarter of 2018.

The balance of cash, cash equivalents and short-term investments was $239.6 million as of March 31, 2019 compared to $264.5 million at the end of 2018. Cash used in operating activities was $21.7 million for the quarter.

This use of cash primarily resulted from the increase in operating loss, which was only partially offset by a reduction in working capital during the first quarter of 2019. I'd note that the level of cash used in Q1 was atypical and we expect to use less cash in the second quarter of 2019.

Turning now to second quarter 2019 guidance, based on our current business outlook we expect worldwide revenues in the second quarter of 2019 to be in the $87 million to $89 million range and gross margin to be in the high-60% range as we work through issues and prepare for our Omnia I product launch.

As Keith discussed, the operational changes we are currently implementing as well as our new product launch are likely to take a couple of quarters to yield results. Accordingly, we'd expect to see the benefit of these changes beginning in the fourth quarter of 2019 in terms of sales force productivity and trial to implant conversions.

I'd also remind you that the moderation of volume orders helped stabilize some of the more recent pricing pressures, but also sets us up for some difficult quarterly comps until we anniversary this issue in Q1 of 2020.

The good news, as Keith said, is that our market and underlying business remains strong and we have a number of catalysts beginning in late 2019 including the launch of Omnia and the expected completion of enrollment for PDN with clinical data coming out in early 2020.

That concludes our prepared remarks and, operator, please open the line for questions..

[Operator Instructions]. Your first question comes from David Lewis with Morgan Stanley..

Keith, I thought maybe we could start with there are a lot different dynamics that could be impacting the business. I think you talked about the commercial ones in a pretty detailed fashion.

If we think about other dynamics investors are focused on as it relates to rep attrition, market growth or share, I just wondered if you could share with us how you think those dynamics adjusted for large clinical orders trended in the first quarter and what some of your assumptions are for the second quarter. And I've got a quick follow-up..

Yes. We're having a little bit of difficulty understanding you, David. But are you asking which one of those factors played the largest impact on first quarter demand? I'm not sure I understood the question.

Hello?.

Sorry, Keith, can you hear me now?.

Yes, it's a little better..

Sorry about that. So what I was asking is. You talked a lot about the commercial dynamics in the business or most of the dynamics in the business here and the strategy to improve them. What I was trying to get after is the focus for certain investors is on market growth climate, rep attrition and share.

And I wondered if you could just sort of talk about some of those dynamics of what you witnessed in the first quarter and what your assumptions are for those dynamics as you trend into the second quarter and/or what's embedded into guidance. And I had a quick follow-up..

Yes, okay. So I think I got that, David. So I think you've asked a few things that we're probably not in a position to give you really satisfying answers on. In terms of total market growth, look, there's - it's a little bit opaque. As you know, not everybody has announced yet and disclosed results.

I think we've gotten ourselves in a little bit in a bind in the past with trying to be the predictor of market growth and even share. So I think share will be better done retrospectively once we have everybody - everybody has announced their results and, at that point, I think you can probably do it just as well or as easily as we can.

We need to get to a point where we can project and forecast our own growth before we can worry about trying to forecast the growth of the entire business. So I'm not going to step into that just yet. And in terms of attrition, I'd take you back to my remarks a few moments ago.

I think we've been pretty granular about some of our sales force metrics; things like total people hired, people in the field, percent turnover, that kind of thing. I think the turnover, some of it is an industry issue. I think probably more of it was self-inflicted. And I think much of that we'll fix over time.

But look, businesses in this industry are going to have attrition. They're going to have turnover in the sales organization.

It's our job to set up a sales force designed such that we can bring people new on, that we have people new ready to go, who are trained, who can be productive and where we're not sitting here on a conference call with investors talking about percent attrition of our sales organization.

Further, it's not really something we're sitting and discussing with visibility to our competitors, and we don't really view it as something that ought to be a primary business driver. So we're going to try and focus on those things. I hope that helps a little..

Very clear. Yes, that's clear, Keith. I appreciate the commercial dynamics. The second question. I'll ask two quick follow-ups. The first is your view of the Omnia platform and your confidence in that platform.

And is that platform still on time for the back half of the year? And I think the interesting dynamic of your commentary was trial implants began to slip in the back half of '18.

I just wondered if you could walk us through why you believe those dynamics slipped in the back half of '18 and why you believe they began to improve here in the earlier part of the second quarter..

So first part of your question. Yes, I think at this point, look, I am most confident when we're actually launching a product and I'm able to look at inventory and know that we're beginning to ship product.

But having been through an awful lot of product launches and planning over the course of my career, I am pretty confident at this point that we're still trending to a late 2019 launch for the Omnia platform. And the second part of the question was--? I'm sorry..

As it relates to trial implants that began to slip [indiscernible] the back half of the year..

Trials, yes. Yes, I don't actually think it's very mysterious. I mean I think we were - we had our hands very full with lots of things.

We were, as you can see reflected in some of our operating expense numbers, we were trying to onboard an awful lot of new people last year without really the proper systems or infrastructure or level of sales operations sophistication necessary to do that. And I think trials got kind of lost in the noise. And we simply weren't focused on it.

And I think what is encouraging is that, as we have focused on it in very short order, we've seen very rapid and I think very important responsiveness to trial volume based on our results. I think that's an encouraging sign. It's also very early.

And so that's something that we've been focusing on for the better part of the last 2 months and we've seen a very quick response, but we need to better understand that. But I really think it was just for lack of focus. We weren't directing and incentivizing our sales force to do what they should have been doing, in my view, which was to grow trials..

Your next question is from Bob Hopkins with Bank of America Merrill Lynch..

So very helpful outline. I appreciate that. I guess my first question is; I realize you are very bullish on the long-term opportunity for Nevro and for spinal cord stimulation.

But I was just curious, do you have any insights or thoughts from you or your team as to what's happened to the market over the last 2 quarters? And the reason I ask is that it's kind of gone from a global market that was growing mid-teens and even high-teens to one that's all the way down to flat to negative.

And I understand there's normal volatility in markets, but that seems like a big, big drop. And I'm just wondering if you've gotten any kind of insights from your team as to what might be going on. So it's a broader market question. Not asking you to forecast. Just asking you to look back. Any explanation as to what's been going on..

Yes. Well I think a couple of things maybe at kind of a high level based on a short time here. And that is market growth for an emerging market like this is no better than the sum of its parts. It's no better than the execution and growth of each of its participants.

And I think we've heard recently of at least one or more of the industry participants remarking on their own issues with execution. And we certainly have had ours. And so if you've got some portion of the market that's really not executing on market development, you're going to see it in total market growth. So I think that's one part of it.

I certainly have seen in almost every device market I've been over the last 30-plus years there have been anomalous periods where utilization goes up or down and doesn't seem to be related to any identifiable macro trend or company issue. It just seems to be variability. That may be, in part, what we're seeing here.

We're certainly - as I mentioned, we're certainly starting to see some encouraging directional trends as we enter the second quarter. And lastly, there really - this is a market like many that are - that is dependent upon new product introductions and we have seen a dearth of those over the last quarter or two.

And I think we'll see more, both from us and from our competitors, over the next 2 or 3 quarters. And I think that really matters in most device segments. I'm convinced it matters in this one..

Okay. That's helpful. Just curious to any perspective. And then just a quick follow-up is on that comment about some kind of early directional signs that are encouraging. I just want to understand the disconnect between that and the Q2 guidance, which guides to some pretty negative results.

So just help me understand the kind of a disconnect between the encouraging signs and the still very kind of conservative negative guidance for Q2..

Well I think it's an answer you could probably script for me, Bob. I mean they're early signs. I'm early here. And there is a fair amount of volatility in this business and has been in our performance. So the last thing, I think, in the world we're going to do is say, Hey, we got a couple of weeks of pretty interesting news.

Let's be aggressive on guidance. I don't think that would be a wise decision for anyone to make. So I think our guidance reflects an appropriate amount of conservatism based on the trend we have, we length of time we have with those trends and what we've seen..

Your next question is from Joanne Wuensch with BMO Capital Markets..

It looks like there are a number of things that need to sort of be worked through between now and the end of the year. But I wanted to take a moment to think about your commentary that it should get better in the fourth quarter because I think at this stage most people are just looking towards 2020.

So the question is; is what gets better in the fourth quarter? How is it being measured? And then how do you build from there into next year?.

Yes. Well some of that is internal. So some of that is just to give you a sense of what my expectations are for the productivity of our commercial execution and when I expect to see some improvement showing up in our ability to create and maintain growth in demand.

So as I think about things like consistently growing trials, consistently growing implants, our ability to be able to launch a new product effectively toward the end of the year, our ability to be able to ramp new sales territories. I mean lots and lots of internal things, many of them that won't be visible to you.

So I do think we - I expect to see some productivity improvements. Some of that will show up in our results. Frankly, we've got, based on the large order issue that we've discussed with you today, we've got a comparable issue that we'll have to contend with in Q4. That's separate from that.

But I guess I'm trying to give you some expectation as to when I think some of these changes we're making will begin to drive our productivity in the field..

And as a follow-up, could you just give us an update on what's going on in the international market?.

Yes. I think Andrew discussed the results. I mean we actually saw some constant-currency growth in our international markets that came, I think, principally from U.S. - or sorry - from the European markets where we saw some growth. And we saw a little bit of pressure in the Australian market.

I will say I think we've probably under-focused on the OUS markets. And admittedly I've spent in my first month here an awful lot of time focusing on what's happening in our U.S. commercial organization, but I can tell you that that will begin to change over time.

I do think we have opportunity and responsibility to focus on some of our OUS markets that maybe we haven't spent as much time on. But I think given that, I think we were actually reasonably pleased with the stability of the international markets.

I don't know, Andrew, do you want to add anything to that?.

Yes. We're reasonably pleased with the high-single digit growth in Europe in what is usually a weaker first quarter..

Your next question is from Larry Biegelsen with Wells Fargo..

Just two for me. One, Keith, can you elaborate on the Senza II pricing comment you made in the prepared remarks? And regarding the high-volume product orders, how much of the year-over-year decline in the Q2 guidance is due to that? I'm just trying to understand when that transition will be complete. And I had one follow-up..

Well let me take on the second issue first and then I'll ask Andrew to comment on this. So on the large-volume orders - and I suspect there are probably lots of questions on this so let me see if I can answer as many of them as possible in one answer.

I think if you look at the way our products normally move out into our customers, they usually come out of our sales reps' trunk stock a case at a time and a unit at a time. There is some portion of our business, some customers that want to order products more than one at a time in bulk and put them on the shelf. They're different kind of customers.

And so sometimes we do that to accommodate customers. Sometimes we do it to be responsive to competitors who, in some cases, like to offer bulk orders and bulk discounts. And occasionally it's used to manage pricing needs on the part of a customer and to be competitive with our competitors without overly impacting pricing elsewhere.

But these are all market-initiated. I like to think of them that way. They're in moderation. They're usually in amounts that are at or less than quarterly demand for any given quarter. And they don't make up a tremendous amount of our overall business.

I think when it begins to transition to company-initiated orders; in other words, we're approaching customers about ordering larger quantities in return for some nominal discount when those quantities might even exceed their annual - or rather their quarterly utilization, then I think you begin to have a problem with demand for the next quarter.

And it creates the need to do it on a quarter-over-quarter basis. It takes a lot of rep time, which is very unproductive. It obviously creates some comparable problems as a public company, which we've already described. And in an extreme, can create some pricing problems as well.

So when I arrived, it was a week-and-a-half, I think, before the end of the quarter. We made decisions to allow some of these orders to ship in early Q2. That certainly helps us going forward in general as a business practice and for the last 3 quarters. But obviously it had an impact on Q1.

And as we've said, if we had made a different decision, we would have hit our expectations number and our year-over-year flat guidance that we kind of gave for the first quarter number.

We have guidelines in place now with our executive and sales management teams to make sure that we're recognizing the difference between kind of the good and the bad in these multi-unit orders. And I'm comfortable that that's the right decision and that we'll be able to implement it effectively..

And just to say that there is some inventory in the channel that will work itself out and has worked itself out in Q1 and there will be some carryover into Q2. And we've taken that into account in our guidance..

Andrew, just to be clear, so Q3 and Q4 you think will be clean? And then I'll just ask my follow-up question. Keith, you've been pretty close to the vest on Omnia.

Is there anything you can share with us regarding the new high-frequency waveforms? My question is really; will it just offer waveforms that others have? Or is there going to some other novel waveforms on that platform?.

Yes. I think what I'd rather do is wait on that until we get a little bit closer to product launch, if you don't mind.

I think the bigger point is here is it's a very meaningful product version of the message change that we're beginning to make now, which is that customers can start their patient with the most effective treatment regimen, which is HF10 therapy, but they have the ability, without having to consider a different device, of using other waveforms either separately or in conjunction with HF10.

But we'll talk more about that as we get closer..

And then, Andrew, just on the Q3, 4?.

Yes. So I was going to go in there. So yes, Q3 and 4 won't have the excess inventory or inventory in the channel issue, but there will be more difficult comps when comparing to the previous year, which will have had a higher level of these volume orders..

Your next question is from Robbie Marcus with JP Morgan..

Keith, when you came into the company, I'm sure you did a post mortem over what happened and drove the substantial growth in the market the past 2 years. And it's a follow-up on Bob's question here a little bit.

What do you think it was exactly? Was there some element of pricing? Was it all de novo patient growth? Was there some going back by the other companies and re-implanting existing patients with new products? So maybe trying to dig into a little future and look at what maybe 2019-2020 underlying market growth could look like on a patient basis.

How much of some of the activities, maybe new product launches drove the exaggerated growth the past few years? And is that a crazy way to look at it going forward? Or do you think it will be some sort of subdued level of patient growth in the future?.

Well as I said, I'm going to stay away from market growth rates for now. And look, we may come back to that. We may feel comfortable opining on total market growth rates going forward at some point. We're just not now. And I think we've gotten a little bit over our skis on that matter in the past. So I'm just not going to do it for now.

But I will say, as I look back, it's very hard to separate those issues from each other. If you look at some of the growth rates in the market during the time Nevro was first commercializing, it seems pretty clear to me that we were driving some portion of the growth in that market as we emerged onto the scene.

And I think that was maybe the largest product impact on overall market growth that we've seen in the last few years. But there have been a number of other products launched by our competitors over the last couple of years and I think those make a difference.

And as I pointed out, I think - but that doesn't mean it's new product going onto shelves or anything like that. I think it stimulates actual product treatment growth and trialing growth on the part of our customers.

So I just think that new product introduction is an important part of not only capturing share, but driving real market, real patient treatment growth, and we haven't seen much of that in the last couple of quarters. At least that is our view, as we look back over the last couple of quarters and couple of years, at this moment..

Great. And then maybe turning to the pipeline. When you came in, Nevro had several different trials ongoing looking at expanding the market into new opportunities.

What's the latest update on each of those pipeline opportunities? And are there any that you say, Maybe we could put our R&D dollars elsewhere? Or do you still believe in all of the opportunities with fresh eyes coming in?.

Yes. Well I think, for the most part, if there's an indication trial that we have mentioned in the past, if not mentioned today, they're all generally on track and continuing to move forward.

The one we called out separately that I think is particularly important and that is doing well from a pace standpoint is the PDN trial and the timeline to data disclosure. And I think that is going well. It's going on pace or ahead of pace. And it's one that I think is impactful and that I'm interested in.

In terms of other new products, I would say it's too early for me to pass judgement on something in the product queue that I think is not appropriate or should be deemphasized.

We're going to be spending a lot of time looking at our product and clinical data road map over the next quarter-or-so and rationalizing where we should be really spending our time focusing on the density of product and indication, product and data releases cadence, that kind of thing, and doing some prioritizing.

So in the next quarter or 2 I'll have, I think, a little bit more granular guidance for you there..

Your next question is from Jason Mills with Canaccord Genuity..

I guess kind of a philosophical question really pulling from your experience building and running sales forces at two different companies. And we all know what those are. But Thoratec was quite a bit different. You didn't need the size sales force that is evident in SCS. In Conceptus you needed a little bit bigger one, but it was different, too.

Could you maybe talk a little bit about the commercial organization at Nevro and what you believe is, at least early days, whether you believe the structure of what SCS companies have done to build sales forces since, what, 15 years ago, if you were to build the first one, if you would build it this way? Or do you think that there are other various commercial options for Nevro to compete perhaps more favorably, thinking about the problem differently?.

Yes. Well, I think I'd like a little bit more time on that one, Jason. I think it's a really good question and one that I feel like I absolutely have to answer here.

I would say, based on what I've seen where I am right now, if we were designing this from the ground up, we would probably consider having a little higher ratio, maybe, out of the gate of some of the technical consultants and clinical support people relative to our sales territories, which would probably, right from the get go, allow our sales reps to be more productive for a longer ramp period and provide a more seamless way to add territories as you grow.

That's something that we did, and rightly so, but we did a bit later into our evolution. And I think trying to figure out that coverage and how many of which later in the game is pretty difficult to do. But I think a lot of this is how you make your existing resource productive. You're right; Thoratec is a bad comparable for this particular issue.

Conceptus, which was the other company, is actually a better comparable. And you may recall that one of the realizations we came to fairly early is that we could drive a lot more growth with fewer actual territories. I don't think that's the case here.

What I do think is the case is that we can drive growth without adding the territories that we were planning to add here. So we were certainly planning before 6 weeks ago to expand, and rather significantly, our field force presence to drive some of the growth we had in mind. I don't think that is necessary.

I think that we can make our existing field organization much more effective and productive and given them the tools to drive a lot more growth without having to add people. And we've got to find a way, Jason, to find that kind of productivity because that's our single biggest operating expense line item..

Right. That's helpful, Keith, and I look forward to how you answer that going forward, too. It sounds like there's a lot of meat on that bone. Second question is, you sort of alluded to it, you agreed back in a previous life with what Nevro did with respect to the randomized clinical study that they ran, which was the first of its kind at the time.

And it was clearly a differentiator as was, and maybe currently is, high-frequency.

Do you think that the street knows about or the public knows about what Nevro's differentiator will be a year or 2 years from now? Or do you think there will be a differentiator that we don't know about? If not, then it seems to me competing with the same waveforms everyone else has in addition to HF10 may be a little bit more challenging to differentiate oneself that way.

But correct me if I'm wrong..

Well, look, there is a lot of ways to differentiate ourselves from a technology standpoint. And I'm not going to go through them today and we're not going to discuss the rest of our road map for the next few years.

But when you say it might be difficult to differentiate your product with the other waveforms and HF10, I think that probably sells short that particular product offering. I mean we've got, I think, a very easily differentiatable technology in HF10. But there is a segment of the market that wants options and our suspicion is it's a pretty big segment.

To be able to offer HF10, which nobody else can offer, and still offer the other ways of treating these patients in one device is pretty meaningful. And I don't think anybody should discount it. I think its impact will be limited only by our ability to really roll it out, roll it out effectively, and tell that story.

But I think it's more meaningful than you think. We're not asking customers with this product to make a choice and to make a tradeoff. We're giving them basically everything and we're doing something that we don't have a competitor right now that can do that..

Your next question is from Margaret Kaczor with William Blair..

Maybe the first one for me is some of the commentary you had earlier, which is this focus on next-gen products driving growth within the marketplace.

So as we look at that and Nevro's view of that, could that mean more frequent updates than what we've seen historically from the company? How quickly could a process like that be stimulated? I guess just bigger picture, outside of those changes to commercial strategy, what other changes are you considering, whether it's pipeline, payer relationships, and so on?.

Yes. Okay, Margaret, I want to make sure I understand the question.

I mean I think in terms of - are you asking in terms of frequency of updates? Or are you asking for us to articulate what else we're planning to change other than just what we've listed today?.

Yes. So frequency of product updates because historically Nevro has been kind of an HF10 company alone and some of that has been changed with Omnia coming out.

But should we assume more frequency in terms of those updates, more waveforms than we've seen in the past, so just more consistency in that? And are you considering anything else outside of some of the commercial strategy that you've outlined today?.

Yes. Yes, so on the second question, yes, we're considering - I mean I don't think there's anything that we've done or not done here that isn't currently up for consideration. So we're evaluating and reevaluating just about everything and I think that's the fresh look that needs to be taken and everybody wants to be taken.

And when things emerge from that fresh look that we think are material, we're going to discuss them with you.

In terms of the road map, and this is what I mentioned in a previous remark about density and cadence, I think we recognize that we and the market would benefit from a product road map that has an increase in both, that we have more things coming out more regularly to our customers. And that is something that we're looking at right now.

There are some of those things that we can impact in the next 12 months. There are many of those things that take longer than that to do. Obviously, you don't move a product from conception to the market in a couple of quarters in this business or any medical device business. But certainly, there are ways to do that. We're focused on that.

I think it's necessary. And so my hope is that, over time, the answer to that question is, yes, we will plan to bring more things out with more regularity and more rapid cadence..

Okay, that's helpful. And then just to follow up on the large-volume orders. Andrew, you had referenced changes to comps in the fourth quarter of last year relative to the fourth quarter of this year.

So maybe not necessarily looking for guidance, but if we think about the business improvements that you're referencing, should we be looking at relatively stable improvement or linear improvement from Q2, 3, 4? Or should we be looking at still those year-over-year growth comps?.

As Keith has said, we're only really prepared at this point to give guidance for Q2 and we've done that because our models give some near-term visibility. This gives us the confidence to say what we believe is going to happen in Q2. And we're reserving judgement on the future quarters..

Your next question is from Suraj Kalia with Northland Securities..

So Keith, it's great to have you at the helm. Congrats. Keith, let me start out first, in your prepared commentary, you mentioned about the unacceptable level of turnover in the field. So just help me just reconcile this, Keith, the comment about the turnover.

Was it because of poor hires or the inability of the sales reps to meet expectations? And if you could tie that to your comment about, we don't need to add any more reps this year. And also, SG&A took a step up. Help me understand, if you could, what's going on behind the scenes specifically on the sales force part of the equation..

Yes. Well on the turnover part of it, I think there's some portion of turnover in any company in any sales organization. That's normal, to be expected. It's not even maybe even always unhealthy if you're prepared to deal with it.

I think in - I think my comment was meant to reflect that there was some portion of our turnover in prior periods that was maybe a little bit more of a self-inflicted wound.

In other words, if a sales rep comes into an environment where they feel they don't have a real territory to manage, they don't have support, they don't really get to see or work with their manager because their manager has too many people reporting to them, they don't have a comp plan that's designed to make it interesting for them to really ramp up and launch their territory.

Their territory may not even be well defined. There may be confusion as to which accounts are in their territory or not. If you start to imagine this basket of issues, it's not difficult to understand why you might see turnover in a sales organization and why you might not reasonably conclude that those things are fixable.

And so I guess that's what I meant when I was talking about the turnover being due, in large part, to a lack of process, a lack of management oversight and, frankly, just leadership. So in terms of what's been happening in the sales - the company clearly did make an investment in increasing the field presence over the course of last year.

You see that showing up in our operating expenses this quarter.

And we're in the process right now of really fixing process, management, sales operations, territory alignments, compensation; making these people productive, period, and growing on a by-account, by-territory basis, doing things the right way and all those tactical things I mentioned that make up good sales force execution and that move the needle.

I mean that's what sales force execution is, frankly. And that's what we were missing. But we do have the people. I think because of that increase last year, we have the people on hand, I think, that we need now, in terms of just sheer numbers, to drive a fair amount of growth.

So what I don't believe is that we need to continue to just keep hiring and hiring and hiring more people, throwing them in the field, as our only mechanism of driving growth. I don't think so. And it certainly isn't a pathway to profitability. So those were sort of some of the messages, Suraj, that I wanted to convey.

I don't know if I've answered all of your question. But you tell me if I haven't..

No, fair enough. I'm just trying to get a flavor. And Keith, forgive me if this is an unfair question. If I were to use a point of a timeframe, let's say T is equal to zero is now.

When I look at T is equal to minus 1, minus 2, whatever, and you see, okay, same-store sales versus new store sales where this was the ratio; now I'm the CEO at T is equal to zero and moving forward, T is equal to plus 1, 2, 3, whatever, this is where I anticipate this metric should be.

Have you guys mapped out how you think this business - and the reason I ask this is I guess what I'm trying to understand is; what is the sustainable level of base business? It doesn't matter what the turnover in the sales force is. That's just bread and butter. It will come in quarter after quarter.

But then you have to manage all this hunting for new fish versus milking the existing ones..

Yes. Well I don't want to get into individual territory sizing and metrics and that kind of thing. That's more, I think, than we want to disclose with a variety of different ears on the phone.

I will say that I have been exposed to a pretty detailed analysis of our sales organization and we have a combination of very good people with very large territories who simply don't have the time to continue to drive growth.

We have other people that we've hired, new people that are very good, have received a lot of training and have been given very, very small territories. I mean literally, in some cases, non-existent territories. That's not how you grow business.

If you feel the need to increase field representation, that's not how you implement it and expect to drive growth. And there is ways to do it differently and make sure people are - all your good people are incentivized to do very well by growing their business. So I think those are simple things to fix.

It doesn't mean they're easy or take a week or two, but they're relatively straightforward to fix. In terms of same-store versus new-store sales, that's one of the things that we need to get after, I think.

I mentioned that with some outside help we were doing a pretty deep dive into our space and into our customer base and into our market and attempting to segment the market and really understand where we want to send our salespeople, how they should be driving growth either share within existing customers, new customers, which category of customers where we should be going and we're not; that level of detail that I think we don't really have to give to our sales force in the past.

And that's just all part of good commercial execution and that's going to take a little bit of time. But certainly, it's within the timeline I've articulated..

Our last question comes from Danielle Antalffy with SVB Leerink..

Keith, just wanted to ask you, you've had a chance to take a fresh, seemingly somewhat unbiased, look at the spinal cord stimulation market since joining. And I'm curious about what you think matters to be successful in this market because when Nevro first launched, we all thought, Okay, it's clinical data, but I'm not sure that's true anymore.

I'm curious about your view. Is it sales force? Is it actual product features? Can you talk a little bit about what you think is most important in this market? And then I'll just ask my follow-up question now.

Looking long term at this market, not asking you to give your market growth assumptions, but are all the drivers still in place that we thought were in place before? i.e. I'm thinking of things like the opioid epidemic as being a potential tailwind.

Do you believe that that is the case? Potential new indications, things like that, that while we've seen a little bit of step-down on a market growth over the last few quarters, could reaccelerate market growth..

Yes. That's a good set of questions and it covers a lot of ground. I think in terms of what drives growth in this market, I mean my view is certainly evolving and I want to give it a little bit of time.

I think that when we introduced our technology a few years ago, it's very clear that the data made a huge difference and that the - I think it was more about the level of the improvement based on the existing practice was so markedly increased that it made a big difference.

And I think that was a timeframe where product differentiation and clinical data was a big enough gap that it drove a big outcome with or without, for example, great commercial execution. I think it's never black and white. Competitors, good competitors respond, and our competitors have responded.

And while they're not out there with HF10, they've made other changes to their product offering, to their clinical data, to their messaging.

And it's certainly, I think, in effect, even though we still have HF10 and they don't, whether the data or the clinical outcomes are really different than they were a few years ago, in effect, I think it has, in the minds of our customer base, narrowed the gap.

So certainly, that suggests that commercial execution and maybe more minor product attributes and market positioning do make a difference. And I do think it's clear in this market that they do. So I would never say that clinical data doesn't matter in this market. I have heard that. I think that's kind of silly. I think it absolutely matters.

I think maybe it's less of a single and sole driver of market adoption than maybe the company has wanted. And all that means is, as we get further penetrated in the market, we can't afford to be anything other than excellent in our commercial execution. And I think that's where we hit a little bit of a gap.

I think there was - and easy is really the wrong word - but let's call it the first easy leg of dramatic growth based on product differentiation came without maybe having a lot of pressure put on our commercial execution.

And there came a time where that ended and we weren't necessarily ready for that time with a different product differentiation story and we certainly weren't ready for that time with our level of commercial execution. So again, just some observations. I'm not sure if that 100% answers your question, Danielle, but hopefully it helps..

Yes. No, that's definitely helpful. And then just as far as the underlying fundamentals for potential long-term growth.

I mean is this a market that you do see long-term potential in expanded indications potentially reaccelerating growth? Again, not trying to pin down market growth assumptions from you, but just to get a sense of what you've learned about that since you've joined..

Yes. No, so the answer to that is yes. And I'm not maybe going to quantify the when and the how much. But yes, I think it would be very difficult to make a case for that not being how this will roll out.

I think if you look at the addressable markets, if you look at the kinds and types of patients that are not being considered for treatment now, some of whom we're targeting with some of the work we're doing clinically, if you look at some of the new products that we'll continue to roll out, I just can't imagine a case where there isn't continued growth in this segment for quite some time to come.

It may be a little bit lumpy at times. It may come in different segments first and other segments later. It may need continued improvements in technology and different kinds of products. But to me, this is a really large market. Probably most of the patients are still being untreated or certainly undertreated.

So the fundamentals usually kind of carry the day and I suspect they will here..

This concludes the Q&A portion of the call. I'll now turn it back over to Keith Grossman for any closing remarks..

Okay. Well thanks, everybody, for your time and your interest today and your good questions. It's appreciated. And we will look forward to giving you a fulsome update this time next quarter..

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