Good afternoon. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome everyone to the Nevro Second Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

[Operator Instructions] Thank you. Juliet Cunningham, Vice President of Investor Relations, you may begin your conference..

Thank you. Good afternoon. Joining me today are Keith Grossman, Chairman, CEO and President; and Andrew Galligan, Chief Financial Officer. Keith will review the company's progress over the second quarter, and Andrew will provide detailed financial results and guidance.

Earlier today, Nevro released its financial results for the second quarter, which ended on June 30, 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 trends and expectations of future financial performance, as well as full year 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 expect to file 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, August 8, 2019.

And now, I'd like to turn the call over to Keith Grossman..

Thank you, Juliet, and good afternoon, everyone. Today we reported second quarter 2019 revenue of $93.6 million worldwide. That compares to our previous guidance for the quarter $87 million to $89 million, and this reflects a 14% sequential growth over the first quarter.

Last quarter I spent a fair amount of time going through my initial assessment of what led us to the position we were in, and the general areas of my focus going forward, particularly that of improved commercial execution and revenue growth. So let's start with that topic today, though I'll do so a bit more briefly than last quarter.

In my first four months here at Nevro, I've been focused largely on trying to understand and optimize our existing sales and marketing structure, issues and priorities.

While we suggest that you should anticipate that many of these initiatives that arise from this process will take a few quarters to bear fruit, let me start by saying that I've been pleasantly surprised with our sales organization's early responsiveness to change and what we're seeing thus far in the early stages of change and improvements.

We're beginning to take action to improve our sales force structure, territory productivity, compensation, product pricing strategies and policies, messaging and training, performance visibility and accountability, the sales force stability and just general process and priorities.

Of course, these initiatives are designed to grow revenue and pave the way to profitability over time by way of a more efficient and scalable commercial model.

As you recall, we removed the burden of company-initiated high-volume ordering practices that we had placed on our sales force through most of last year, and asked them to refocus their efforts on growing patient trials. As I mentioned on our Q1 call, patient trials are a really important one to two-quarter predictor of future implant revenue.

Patient trial volumes were flat in the second half of 2018 and most of Q1 of this year. So in late Q1, we reengaged our field team to focus on trials, and we began to see immediate improvement. And that improvement has, thus far, been sustained.

To provide some context for the full second quarter, trial procedures were up 15% year-over-year and permanent implant procedures increased by 10%.

While I'm not going to promise that we'll be sharing these metrics every quarter, we wanted to provide some clarity behind this quarter's reported revenue number regarding the early progress that I think we're already starting to make.

Of course, one quarter doesn't make a trend and these are still early days, but we're encouraged by the early impact of some of these changes. It's important to remind you that this was not driven by territory additions to our sales organization.

In fact, we finished the quarter with actually just slightly fewer sales territories than we had at the end of 2018. We're also refining territories and helping reps to be more productive with support from more clinical specialists to help with post-procedure patient support.

This optimization process will be one that continues throughout this year and into next, of course. I told you last quarter that we were not going to continue to give turnover metrics on a regular basis either.

However, given the trends over the last year or so, it's important for you to know that voluntary turnover was very low, by historical standards. And more importantly, that portion of the voluntary turnover in our U.S. sales organization that we would consider regrettable or unwanted, was in the very low single digits in the second quarter.

I think our sales organization is excited not only by the new products and data coming into our pipeline, but by the early signs of responsiveness and support in addressing their needs for success and the consistency of leadership and direction.

Like most of us, I guess when sales team members feel they are representing a great product, have good prospects for growth and feel properly supported and led, reduction in turnover should be the expected result, in my experience. Now we have more work to do on this front for sure, but progress is already visible.

We're also now much of the way through a very large qualitative and quantitative study of our market.

This is the important work I mentioned last quarter that will continue to inform a greater understanding of market segments, market growth opportunities and specific company growth and market share drivers, and will direct our market strategies going forward.

While I won't be discussing the details of the study today, we have been really encouraged by the engagement of our customer base and their assumptions about their future utilization growth in SCS therapy, the untapped market potential ahead of us and the significant interest in the products and therapies that we offer now or those that we will be offering soon.

In short, both in terms of future market growth and Nevro market share, I'm actually more persuaded than ever that this is still a business with plenty of runway ahead of it. And a key part of laying that foundation is consistently evaluating and developing our team.

We've recently appointed to senior executives; Niamh Pellegrini as Chief Commercial Officer, and Lori Ciano as Chief Human Resources Officer. Both Niamh and Lori have worked with me previously, and they were instrumental in helping lead those particular organizations to greater growth and value creation.

I look forward to benefiting from Niamh and Lori's leadership here at Nevro. I know they'll be a great fit, given our mission-critical focus on enhancing our commercial success and also on attracting, retaining and supporting top talent in all areas of the company.

In particular, Niamh will be playing a very central role on our commercial strategy going forward and in unifying all of our customer-facing initiatives into a single coordinated effort. To truly position the commercial team for success, we need to put the right products in their hands at the right time.

Last quarter we discussed the importance of the Omnia product platform launch planned for later this year. Omnia will be the only product that can deliver HF10, the most effective SCS therapy available, as well as offer the flexibility of multiple waveforms for those doctors who are interested in different or even combination therapies.

Omnia offers us a unique opportunity to reengage with nearly all segments of our customer base with a new multiple waveform platform. And in many ways, the Omnia launch represents nothing less than the opportunity to relaunch Nevro to much of our customer base. I'm pleased to report that this project continues to track well.

We received the first of what will be a series of FDA approvals for the Omnia platform a couple weeks ago, and we remain on track for the expected fourth quarter product launch.

On the clinical front, I'm pleased to report that we're just a few patients away from completing enrollment in our SENZA-PDN study, a randomized controlled trial, or RCT, to evaluate the treatment of chronic pain for patients who suffer from painful diabetic neuropathy, or PDN.

This is an important step in the evaluation of Nevro's Senza HF 10 therapy for this very large and often untreated patient population. Diabetes affects nearly one in 10 adults in the U.S., and can damage peripheral nerves resulting in severe neuropathic pain and numbness in the hands and feet.

According to the literature, approximately 4 million patients are suffering from moderate to severe pain due to painful diabetic neuropathy, and are currently seeking treatment. And we also believe approximately half of these patients are refractory to conventional medical management, or CMM.

The study, which is being led by principal investigator and neurosurgeon Dr. Erika Petersen, compares HF 10 therapy plus CMM to CMM alone in 216 of these very patients at 18 centers in the United States.

We expect to see the release of the first primary endpoint efficacy data from this cohort in early 2020, and this data will help us further define the PDN patient population and the addressable market for SCS in these patients.

Of course, there's a lot of market development work to be done in the meantime to create referral pathways for this new set of physicians and call points. We'll be in a position, we think in early 2020, to discuss our going-forward plans to develop this particular market opportunity. PDN is one of two large studies we're conducting.

The second ongoing RCT is one for nonsurgical refractory back pain, or NSRBP. We currently expect to complete enrollment in the NSRBP trial sometime in 2020. The populations from both of these RCTs offer opportunities to greatly expand the addressable market for SCS, we believe over the next few years.

Regarding our submission for upper limb and neck pain label indication, which was based on the results of both our U.S. and Australian studies, the FDA denied our submission and has proposed that a new RCT is required prior to approval.

We believe regulatory precedents as well as our existing data strongly support approval for the neck pain indication, and we're right now working with the FDA to better understand and allay their concerns.

If we're not successful, we'll need to evaluate at that time our options to make sure this important clinical advancement in treating neck pain becomes available to patients. And as a reminder, upper limb pain is included in our current labeling.

Additionally, CMS last week issued its proposed rule on the outpatient prospective payment system, or OPPS. CMS has proposed increased payments to hospitals and surgical centers for SCS procedures under the existing codes. The proposed facility payment increases range from 3% to 5%, and will become effective on January 1 of 2020.

As part of this annual review, CMS evaluated the need for economic incentives for non-opioid alternatives for pain management therapies used in outpatient settings as directed by both the Administration and is authorized by the Support Act.

Our team provided significant scientific evidence of the benefit of SCS as a non-opioid treatment option for patients with chronic pain and we honestly were disappointed CMS did not propose specific additional changes related to any non-opioid therapies.

For now, the proposed increased payment is a step in the right direction, and we'll continue to provide our input during the 60-day comment period and beyond, with a goal of eliminating disincentives entirely for proven non-opioid therapies in the future.

On the legal side, we were pleased that the Delaware court granted our request for a preliminary injunction against Stimwave's commercial use of high-frequency waveforms to treat SCS patients.

This rather extraordinary outcome was a result of our continued commitment to protect our intellectual property as well as the strength of our patent portfolio itself. So with that, I'll now turn the call over to Andrew, who will provide more detail on our Q2 financial results and our full year 2019 guidance..

Thanks, Keith. I'll begin with worldwide revenue for the three months ended June 30, 2019. Our second quarter revenue was $93.6 million compared to $96.1 million in the prior year period. This was a 3% decrease year-over-year but a 14% sequential improvement.

ASP declines were an approximate 3% drag on worldwide revenue, or a 2% decrease on a constant currency basis. This is a function of pricing and customer mix, which can fluctuate from quarter to quarter. U.S. revenue in the second quarter was $78.1 million, a 2% decrease from $79.9 million during the prior year period. The year-over-year decrease in U.S.

revenue was primarily driven by our decision to reduce the impact of high-volume orders, as we discussed last quarter.

High-volume orders continue to be a healthy and important part of our business, but the changes we made were designed to better match quarterly shipments to quarterly usage, diminishing their impact on sequential or year-over-year trends.

The impact of net destocking in the second quarter was roughly equivalent to the first quarter 2019 levels, which was less than we had originally anticipated. Therefore, we expect to have some destocking carryover into Q3, but expect it to be smaller than Q2 and immaterial after that.

I'd note that less destocking in Q2 was not just a reflection of utilization, but also some growth in customer segment that carry their own inventory of our product. International revenue was $15.5 million, a decrease of 4% compared to $16.2 million during the same period last year; though on a constant currency basis, a growth rate of 2%.

We were pleased by European growth in the low double digits on a constant currency basis, but this was offset by weakness in Australia. Gross profit for the second quarter of 2019 was $63.9 million or 68% gross margin compared to $67.9 million or 71% gross margin in the prior year period.

The year-over-year decrease was primarily driven by higher product costs and lower average selling prices. Total operating expenses for the second quarter of 2019 were $90.5 million, an increase of 19% year-over-year, compared to $76.1 million in the prior year period and a $5 million sequential improvement.

The year-over-year increase in operating expenses was primarily driven by U.S. sales and marketing personnel costs associated with the strategic improvements we are making in our commercial execution as well as clinical trial related expenses.

Legal expenses associated with patent litigation were $3.9 million for the second quarter of 2019, compared to $5.8 million in the prior year period. Regarding the ongoing Stimwave litigation, the Delaware court recently granted our motion for preliminary injunction.

As Keith mentioned, this bars Stimwave Technologies and its affiliates from infringing our patent claims for high-frequency paresthesia-free SCS therapy. A trial date has been set for May of 2021. Turning back to our second quarter results. Net loss from operations was $26.6 million compared to an $8.2 million loss for the second quarter of 2018.

The balance of cash, cash equivalents and short-term investments was $233.9 million as of June 30, 2019. Net cash used in the second quarter of 2019 was $5.7 million and $30.6 million for the six months ended June 30, 2019.

Beginning in the third quarter, in addition to GAAP results, we will begin reporting adjusted EBITDA, a non-GAAP measure that will exclude litigation expenses, interest, taxes and non-cash items such as stock-based compensation, and depreciation and amortization.

We think this additional visibility will help investors measure our underlying business results and progress. And now for full year 2019 guidance. Based on our current business outlook, we expect worldwide 2019 revenue to be in the $368 million to $374 million range, and gross margins to be in the high 60s as a percentage of revenue.

I'd note that Q3 and Q4 tend to be highly variable, with Q3 seasonally slower in both trial rates and procedures during the summer months, and Q4 being the seasonally strongest quarter of the year. Rapid growth in previous years may have masked this typical seasonality, but we do expect to see this pattern in 2019.

Also we have assumed no contribution from the upcoming Omnia product launch in our 2019 guidance. We will, of course, factor Omnia into our 2020 guidance. And as a reminder, we expect to have a headwind to year-over-year revenue comparables in the second half of 2019, due to altering our practice on high-volume orders.

We expect this issue to anniversary in Q1 of 2020. And that concludes our prepared remarks. Operator, please open the line for questions..

[Operator Instructions] Your first question comes from the line of Larry Biegelsen from Wells Fargo. Your line is open..

Good afternoon, thanks for taking the questions, and Keith, congratulations on a nice quarter out of the gate here. So Keith, just first I wanted to ask about the quarter and then I wanted to ask about the guidance. So on a sequential basis you did very well relative to your competitors.

You also did relatively well versus what we've seen in the past couple years. So my question is what drove the rapid improvement here? You talked upfront, Keith, about a lot of changes. But maybe if you could give us a little bit more color which of those changes you made really drove this relatively rapid improvement here. And I have one follow-up..

Yes. So Larry, I tried to in my remarks list a number of categories of things we're focused on. And I don't want to get into a lot more detail on that, for reasons we've discussed in the past.

But essentially, I think what we're seeing this quarter in some of the underlying activity that you've mentioned, is just the ability to reengage with our customer base on the things that actually drive growth in our business on defining patients, on finding patients, on getting trial activity that leads to perms, on setting up a sales organization, those people know what their objectives are, where they're to go, where their territory is, who's going to support them, providing some accountability and visibility to the things that really matter, just a whole lot of blocking and tackling.

Now going forward, there will be I think some larger strokes that come out of our target, the portions of the markets that we target; the messaging, of course, the new products that we bring to the market later this year. For now it's been really kind of a number of things to improve our day-to-day execution.

And the good news is, those things can be implemented, many of them, at least, relatively quickly. And I think a change of tone and leadership has been part of that as well. And I don't necessarily mean my own. But some of the changes we made in sales and commercial management, I think have had a visible and early impact.

So Larry, I think it's a combination of lots of things..

That's helpful. And then actually, I wanted asked one on Omnia. Keith, what additional approvals are needed before launch? And are you still on track for a limited launch in Q3? I think that was your prior guidance. Thanks for taking the questions..

Yes. The whole program plan is intact and on plan at the moment, Larry, including the timing for a small limited market release. And that I don't think we've been very granular on which product approvals come in what order. There's either two or three that need to come that make up the whole system.

I would say there's no greater risk in the approvals we have ahead of us than those we've already gotten. So I think we’re on track. And at this point, we expect to be launching before the end of the year..

Thanks a lot..

Your next question comes from the line of Margaret Kaczor from William Blair. Your line is open..

This is Anna on for Margaret. I first wanted to ask about the sales force. You've mentioned it's been stable.

Do you feel confident in the existing numbers today, without needing to add any additional hires in the near term? And how far along are you in the process of reenergizing the sales force and restructuring some of those strategies? And then just to add on to that, I guess, what selling activities are they primarily focused on right now? Thanks..

Well, in terms of numbers, many of you know that we've added a lot of people to our field organization throughout particularly the second half of 2018. So I think just as we communicated last quarter, I think we continue to believe that we have a footprint in the field that's adequate to drive near, maybe even to mid-term growth for the company.

So I don't think we feel like we need a change in the size of the field organization. I think over time we probably envision that we'll change the makeup of the organization as we take the opportunity here, we want to add technical and clinical consultants to support our selling organization.

In terms of -- I don't know if I wrote down all three aspects of your question. But in terms of those things necessary and the timing to kind of re-energize the sales organization, I think the sales organization is pretty energized, actually.

I think they're seeing some of the changes maybe that if you asked many of them, they would have liked to have seen before. I think they're feeling like the direction is clear, leadership is present on a day-to-day basis in the field.

And I feel like they're getting the support they need to be successful in the field in terms of data information, clarity, guidance, support, et cetera. So I think our field organization is doing well, and I think that shows up in the numbers. I think it shows up in some of the turnover data.

And it's our job to continue to help them to be successful and effective and target them in the right way. And I think there was a fourth element that I've forgotten. Maybe you can remind me..

Yes. Thank you.

It was just in relation to some of the strategies they've been working on to reinvigorate the trialing, and what selling activities are they focused on right now?.

Well, just that. And again, we're the only standalone public pure play company among the big four in this business. So I know I keep saying that. But I want to be careful not to be too granular, particularly when they're things that may not be material to your assessment of how things are going, at least in our view.

But we've directed them, I think broadly speaking, back to the fundamentals and focusing them and providing great clarity on the fundamentals of this business. And they start with patient trials.

I mean that's the leading part of the treatment algorithm for this therapy and it's the leading indicator for our business going forward for a quarter or two. So we've been very clear on what needs to be done by territory, very granular in terms of numbers and goals, where to go to get them, giving them tools to get those trials to be successful.

And I think I won't go into any more detail than that..

Okay. Thanks. And then as one quick follow-up. Gross margin is expected in the high 60s for this year.

Is this the range we should expect long term?.

At this point, we're not talking longer term. We'll give guidance in 2020, when that's more appropriate. We're giving guidance just this year at present..

The only thing I would add to that is, is we have said that we would expect to see on a marked sampling, you would expect to see not only growth rates but also pricing change throughout product lifecycles. In this case I think we're at the end of product lifecycles for most of the market, for most of our competitors.

And I certainly think that affects not only our pricing, but market pricing in general. So as we get back into a new product cadence, I think that will hopefully help underline pricing, which is going to drive margins..

Your next question comes from the line of Bob Hopkins from Bank of America. Your line is open..

Thanks. I appreciate the opportunity to ask a question. I'll start with, Keith, some of your comments about the market. Just curious, what are you hearing from the field that gives you a little more comfort about the market? And I know you don't want to talk about specific projections for market growth.

But it definitely feels like you're more encouraged about the outlook for market growth in spinal cord stimulation. And I'm just curious if you could talk about that a little bit..

Yes. I think, Bob, if I have increasing comfort on market growth opportunities going forward, and I think it's safe to say that I do, it's coming mostly from the primary research that we've been doing over the last few months, which has been, as I've mentioned, has been a pretty broad and deep exercise on our part and is actually still ongoing.

And the fact that I haven't really seen anything on the anecdotal side either from customers or from our field source to contradict where people feel like the therapy is going.

I think people understand that there's a lull in growth now, and I think that's driven by some of the things we've talked about before, ordering patterns in recent quarters, end of lifecycle for all the companies with their product lines and, frankly, execution in at least some of the participants in the market, and I think we're included.

Markets are as healthy and robust as the participants in the market. And if you've got a couple saying that they've had some commercial execution problems over the last three or four quarters, that's going to affect market growth as well.

So as I take all those things into consideration and principally look at the market research project that we have ongoing, it seems to me there's a fair amount of reason for optimism going forward. And I think we've heard some of our competitors express the same thing..

Okay. And then just one other big picture question. Just curious, sounds like you made a lot of positive changes and obviously made great progress this quarter.

Can you just talk about the spending levels at the company right now and the levels of cash that you have on hand? I mean do you have what you need in that regard to kind of drive the improvement that you're expecting over the course of the next 18 months?.

Yes. The short answer is yes, we have what we need, and that's the good news part of the answer. I don't think that we feel like spending needs to ramp up from here, as I look at really any area of the company, the small puts and takes.

But I think we have built an organization not just in the field but in other areas to accommodate for a fair amount of growth here. So I don't think it's an issue of to get to the next leg we're going to need to spend a lot of money, we might have to raise capital, et cetera. I don't think any of those things are true.

Now that doesn't mean I think expenses are perfectly matched to where we are today or where we'll be in the near term, because I think they're not actually.

But I think what we want to do is really understand over the next few quarters, with new products, new indications, with putting a finer point on our commercial execution, I think we want to understand what that growth profile really looks like.

And then I think we'll be in a much better position to reevaluate our cost structure and begin communicating kind of a pathway to profitability based on some growth rate assumptions. But I don't think we have a big incremental spend we need from here. I think we have plenty of cash.

And once we've established growth rate expectations, I think we'll take a hard look at where we are in our current expense model..

Your next question comes from the line of Joanne Wuensch from BMO Capital Markets. Your line is open..

Good afternoon, everybody. I have two questions.

The first one, and I'll give them both at the same time, is really, what are the steps that it's going to take to bring the Omnia SCS device to market? How much of it that's left is more clinical development versus commercial preparation? And then the second question is, so many companies having products that are at the end of their lifecycle, what's happening in the general pricing environment for SCS devices? Thank you..

Thanks, Joanne. Look. On Omnia, I think as I said before, we haven't been really granular on what's included in which approval. The steps are really, I would say, less clinical at this point and more regulatory as we wait for one more approval, and really commercial preparation.

So the limited market release is to do some of the things that LMRs typically do to prepare us to roll the product out more broadly and make sure we're supporting that rollout in the proper ways.

But I would say most of what we're doing, aside from waiting for one more regulatory approval, most of what we're doing between now and a presumed Q4 launch is really commercial preparation, making sure we understand exactly how to face the customer with this particular product launch, what the messaging will be, the sales training, how we want to help our customers think about patient selection, how we want our sales force to begin thinking about competitive market share capture, that kind of thing.

We've got a lot of work to do between now and then, but I would say less of it is either in the bucket of clinical risk or even regulatory risk, though we have one approval ahead of us.

Does that help?.

It does. Thank you..

On the second question, which was pricing, I think high-level and anecdotally, I think there's no question that when you're in a market where all of the entrants are sort of in the later stages of their lifecycles from a product standpoint, especially in a market that's as competitive as this one, you do tend to see some impact on pricing.

I can't quantify the portion of our ASP erosion that we've seen in the last quarter or two. But it certainly has -- it has some contribution to it. And I think that that's not unusual. It's not unexpected. And I think that it will improve probably over time as more of us bring new products to market..

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

Good afternoon. Just a couple questions, and obviously a solid quarter here. Keith, just on high-frequency, you got an injunction against Stimwave. And you certainly believe physicians were using high-frequency on that system.

So has that become a bit of a tailwind into the second half of the year? And as you think about Omnia, are you now more confident, given that you're back to the only high-frequency player in the market, that Omnia could be a significant share catalyst? And then I got a quick follow-up..

Yes. Well, the answer to the second question is certainly yes. I expect -- it's interesting, when you think about Omnia, the opportunity is the opportunity to offer a broad array of waveforms, and, yet, that's underpinned by the fact that HF10 is lead among them.

So I think that that'll continue to be critical the way we position the company and the therapy and our outcomes, while at the same time being able to offer other waveforms and being the only one who can offer all of them. As for the Stimwave injunction, I don't know that I would consider that a very large tailwind.

They're early stage and still a relatively small participant in the market. I think for us, this was more about protecting our intellectual property in what we thought was a pretty clear case. And we've invested, of course, a lot in our IP and in our technology, and it demonstrates our ability and willingness to defend it.

But I don't know that we would consider, David, a huge commercial tailwind, at least not in the near term..

Okay. Very clear. And just two quick ones for me. I'll ask them both. But Andrew, for you, you grew two extra competitors sequentially in the U.S. this quarter, obviously suggests some share capture, but obviously not definitive, pretty early.

Guidance in the back half of the year, does it seem to suggest share capture? So any thoughts on back half of the year? Any reason why share capture wouldn't continue from here? And then, Keith, for you, you've now talked two quarters about your enthusiasm for PDN.

Have you started to think about the commercial strategy necessary to deliver that product in light of the need to service the endocrine community and perhaps primary care community? Thanks so much..

On share capture, I mean we can really just talk about how we think we're going to do, and that's encompassed in our guidance. The answer to a share capture involves my taking a position of what our competitors are going to do, and I'm not sure we're in a position to do that. So you'll take….

Yes. Look. On the first question, I agree with what Andrew said. Although I certainly will tell you, as an organization, it's our goal and it's our expectation that whatever the market growth rate turns out to be over the next 12 to 24 months, our goal would certainly be to grow faster than that.

We're under indexed, we think, relative to our competitors from a market share standpoint with a technology that we think is best-in-class. And we think that's something that we ought to be able to fix. Fixing that implies a pickup in market share. So we can't forecast that. We can't put it into our guidance.

But I'll tell you from my standpoint, I certainly expect it. The question on PDN is a good one. My inclination is to be very positive on PDN, and pretty excited. But I want to restrain that a little bit until we have more information about exactly how that market will segment and what it means for us and how we'll recruit patients.

The reasons I think to be enthusiastic are obvious. It's a big market. It's a very untreated portion of the patient population that's pretty severely affected by this particular form of chronic pain. And it's a patient population that tends to be very tuned in, tuned into their disease, to therapy options, intends to respond rather quickly.

And it's a very, very large patient population. Those are the things that give me great optimism. The reason I want to restrain that optimism is that for now is I think we have a little bit to learn as we see the data as to what it means from a patient segmentation standpoint and exactly how we go about recruiting these patients.

And so you're asking the right question. I don't think we have the totality of the answer yet. We've got some time here. But I think by early 2020, we ought to be able to give you a much clearer view on where we're going to go, how we're going to get there and what our expectations will be..

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

Hi, Keith and Andrew, thanks for the questions. Keith, congratulations on the sequential improvement.

Curious if you would be willing to give your thoughts on sequential improvement in the third and fourth quarters as it relates to those metrics that you were proud of in this quarter, the growth in trialing and the growth in permanent implants, which are somewhat agnostic to the stocking that you face difficult comps, as Andrew mentioned, in the third quarter.

Does your guidance assume that those rates or something similar will be evident in the second half of the year?.

Well, we have some internal assumptions behind the guidance we've given, of course, in both trial and perm rates, and it obviously assumes some continued rate of growth. In terms of, we haven't given guidance on those metrics, of course, so I won't give them here.

But we will likely, I don't want to commit to it, but I think we're likely to want to provide a similar level of transparency in Q3, because the reported revenue will have the disadvantage of the year-over-year comp issue from the multiunit order.

So it'll be a little bit contaminated, as Andrew said, until we anniversary that issue at the end of the year. So I think we'll probably give some visibility on trial and perm unit rates through the balance of the year.

We obviously, if we're going to expect growth in the underlying business, we would expect growth in those metrics, it's where we're directing our commercial organization and we're actually pretty upbeat about that at the moment. But we haven't included it in our guidance..

Thank you for that color. And then, Andrew, you mentioned your plans for the metric of adjusted EBITDA and giving that going forward.

Could you talk about the first half adjusted EBITDA and what you're expecting in the second half? And therefore, sort of what levels of adjusted EBITDA we should expect for the full year 2019? And any commentary about direction? I assume it gets better in 2020. But any qualitative commentary would be helpful..

No. We just wanted to give advance notice at this point of where we're headed and one of the metrics that we're going to be talking about going into the future..

I think we'd like to report it for a couple of quarters, a quarter or two. And I think the ideal state, Jason, would be that when we guide for 2020, that, first of all, we're hopefully able getting comfort in guiding for the whole year.

And I think the ideal would be that we're comfortable guiding not only the top line, but on the bottom line, maybe even both net income and adjusted EBITDA. We've got, I think some work to do between here and there to gain that comfort. But that would be the position we would like to be in.

In the meantime, we'll start reporting the adjusted EBITDA number, and just wanted to give you some clarity as to what we were doing and why we were doing it..

Your next question comes from the line of Danielle Antalffy from SVB Leerink. Your line is open..

Good afternoon, everyone. Thanks so much for taking the question. Congrats on a solid quarter. Keith, you touched on this a little bit already to David's question. But just curious how we should be, and it sounds like it's a little bit early to be asking this.

But how should we be thinking about the new indications coming online? So I'm specifically looking at PDN and upper limb and neck. And specifically upper limb and neck, since you mentioned that is already actually on label.

Are these the types of new indications that can drive market growth inflection? Or is this going to be more of a type of slow-and-steady ramp into these new indications? And I have one follow-up..

Yes. Well, my sense is that until we have a chance, I think to learn a little bit more on PDN, my sense is that they are kind of slow-and-steady drivers for the business in the coming quarters and years going forward, which I don't view that as a bad thing. In the case of upper limb and neck, they are not both on label. Neck is not on label.

Upper limbs are on label. So there is a potential label claim addition to be had, despite the fact that FDA wants us to do a, or at least at present is saying they want us to do a longer RCT. So we've got that negotiation ahead of us with RCT -- or with FDA. And then want to decide if we don't prevail, whether or not that's the course we want to take.

In the case of PDN, I think certainly there's a colorable argument on both sides. If you're a payer it's to whether or not that's on label or not. Our view is that it is technically on label.

But clearly as we go to a different call point, we would like to have that on label and we'd like to have a compelling case for payers, so that that's a little bit more clear. So depending on the data, we'll make a submission, try to get some of those claims on label. That will take some time. That will be followed by some effort with payers.

All the while, we'll be working on market segmentation and recruiting patients and beginning to understand how we grow that market. So I would say in both those cases, it is an ongoing steady effort, not an overnight flip the switch..

Got it. Okay. Understood. My follow-up is on virgin back or pre-back surgery.

And curious what you guys are thinking needs to be done there to longer term change the infrastructure of how treatment is given, because that's a situation where the spine surgeon's involved and are you screwing with your referral chain? So I'm just curious how you're thinking about approaching that potentially very large market, particularly given the opioid epidemic.

Thank you so much..

Yes. Well, we've got some time to figure that out. Once again, you're talking about a population of patients that already make up a portion of the patients that we treat; not a majority portion by a long shot, but we do treat these patients today.

Again, we would I think argue pretty effectively that these patients are on label now, although, we do get pushback occasionally from payers on nonsurgical back pain patients. We have some time. What I mean by that is, it will take us some good portion of 2020 to complete recruiting that trial.

We then need to take patients to endpoint and submit data for publication and for regulatory filings, et cetera. So this is a little bit longer term than the other two indications we've been talking about. We've got some time to figure out the marketing.

My sense is that the call point issues you're describing just from a high level are going to be relatively straightforward to work out. There's an awful lot of overlap now between our surgical call points and our pain doctor call points in terms of who's doing trials, who's doing perms, who's doing both trials and perms.

And I think there's lots of ground for us to work that out. I don't personally see that as a huge call point conflict. But as I said, we've got a little bit of time here..

Your next question comes from the line of Robbie Marcus from JPMorgan. Your line is open..

Great. And thanks for taking the question. One for Keith and one for Andrew. Keith, maybe we could start off and just follow up on Bob's question on market growth. And maybe instead of looking forward, take a look backwards in time.

And I guess my question to you is, we saw on several new product launch waves from competitors, along with the great growth that Nevro put out, the market grew around 20%. And that great growth fell off spectacularly starting in fourth quarter, first quarter.

And based on the numbers we've seen to date, unless Medtronic puts up some crazy good number, it's going to be down again in the second quarter here. And I don't think inventory stocking and last year could explain the whole difference.

So maybe as you look back, just what do you think happened? And what do you think the underlying new patient volume is in the market maybe over the past year or so?.

Well, I don't think there's much in the new way of new color that I can add to the answer. I know that you've been thinking about this, and we certainly talked about this. I think that it's probably a combination of things. I think our sense is that probably the most compelling contributor has been the lifecycle issue.

I just think it's a market that is one where we are competing for other modalities of care with very, very busy clinicians.

And I think having a steady stream of, a steady cadence of new products coming into the market brings a lot of attention, a lot of energy, a lot of opportunities for training and refocusing and patient recruitment and it drives, visibly I think drives growth in the therapy. We've seen it before. I think we'll see it in the future.

I don't think we're seeing it at present. And I think if you look at a market that becomes arguably and by definition more mature as it gets larger, those things probably become more important to driving growth. So I think that's probably the largest contributor.

The order pattern issue, I can't really speak to that, because I don't have any visibility into the rate or quantity in which our competitors have practiced that particular strategy. So I just don't know how much of a contributor that's been. I do think there is something to the execution.

I think that the excitement around our company and our technology drove a lot of growth for some period of time. And I think as we began to hit some issues with commercial execution, and at least one of our larger competitors have said they did the same thing over the 2017, '18 timeframe, I think that affects market growth.

So I would say those are the three things I think are probably by and large the most important. And our assumption is that most of those will get some relief going forward with both the execution issue and maybe, more importantly, the new product introductions..

Okay. And maybe for Andrew. I just want to make sure I got the numbers right on the inventory destocking that played out in second quarter. In first quarter you said sales in the U.S. would have been around flat, implying about $5 million headwind.

Is that the right amount to think about in second quarter here?.

Just a little bit short of that, but directionally correct. And then there'll be a little bit carried over into the current quarter, third quarter, couple of million..

Your next question comes from the line of Matt Taylor from UBS. Your line is open..

Hi, thank you for taking the question. I appreciate you reiterating the timeline for the Omnia launch.

I guess I was just wondering when it launches here in Q4, how quickly will it start to ramp into next year? Is the first quarter or so going to be a slower ramp as you train folks? Or should you be able to kind of execute right away, given it's similar to the older product, then we'll see a quicker pace of sales ramp?.

I think the contribution is actually relatively quick, and they're never immediate. Obviously there is things to be learned as you have a sales force the size of ours who launch a new product, we learn things over time. But I don't think there's much about this that would be a predetermined delay.

In other words, I think the impact of this new product will be one that we see pretty quickly. I would say within the first quarter or two, we're going to see a pretty reasonable impact on our growth rate. That's certainly our expectation. Now we've got to make that happen.

But I wouldn't expect it to take two or three or four quarters for something to happen in the patient pipeline to allow us to see that kind of growth..

Okay. Thanks. And then I noticed in the opening comments you mentioned you had some technical and clinical support staff as you rejigger how you're going to market.

I guess I was wondering on your headcount comments for reps, when you're talking about not really needing to grow the organization, do you just mean the reps? Or do you mean the overall organization? And can you talk a little bit about how the mix of those folks could change?.

Yes. So I think the mix, if you look out over the last three or four months, I think the mix already has changed from sales territories to clinical support staff. And I think if you look at that over time, it'll probably change some more. So I think just think of it this way.

There's been I think a general philosophy in the past that to grow sales requires growing quota carrying territories and reps to manage those territories. And I think going forward, the way we look at it is, we should have a fair amount of capacity for growth built into our current sales rep structure and headcount.

But part of that is the underlying assumption that as we grow, that we'll continue to give them tools and capabilities to be able to continue to grow their territory while managing a growing number of patients in the field.

And one of the ways we'll do that will be what we call technical consultants, in other words clinical support people in the field. But there are other ways that we can do that as well. But I would expect to see the ratio of reps to support people in the field continue to change going forward..

There are no further questions at this time. I turn the call over to Nevro's CEO, Keith Grossman, for closing comments..

Thank you.

Well, listen, while we're still in the early process here, I hope you're sensing that there's a growing sense of optimism here at Nevro as we move closer to 2020, and our ability to revitalize growth rates and reengage existing customers and new customers in a more meaningful way as we combine new products and clinical data with a much finer point, as I said, on our commercial strategy and execution.

So thank you everyone for your time and your questions today. We look forward to updating you next quarter..

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