SI-BONE, Inc. (SIBN) Earnings Call Transcript

Good morning. My name is Craig Bijou, I'm a medical device analyst here at BofA. And it's a pleasure to have SI-BONE with us and, from the company, Laura Francis, the CEO; and Anshul Maheshwari, CFO. So welcome. Thank you.

Thank you.

Thank you.

And I know it's a bit of an abbreviated fireside chat, but we'll try to hit the most relevant topics here. So I want to start with your excellent performance in Q1. And maybe just kind of touch on what kind of drove that performance. I know it was a culmination of a lot of things, but love to hear exactly what drove that.

Yes, happy to provide more info and thanks to each of you for joining and listening in. We're really excited about where we're at as a business. SI-BONE has been a public company since 2018, and we started out developing the minimally-invasive SI joint fusion space. We're the market leader in that space. Our best estimate is we have around 70% market share. And the biggest challenge early on in the business was reimbursement. And at this point, we have pretty much universal coverage in the United States. There's actually exclusive coverage with a lot of commercial payers. And we believe the health economics of this are very attractive to our surgeons. We typically work with orthopedic and neuro spine surgeons. So what we've seen is coming out of the pandemic, we started out last year in Q1. We had around 10% growth in Q1 of 2022. If you look year-over-year, over those last 5 quarters, we were accelerating. And in Q1 of 2023, our revenue grew by 46% worldwide. If you look at the U.S., it actually grew 50%. And we did see that build -- that momentum build throughout the quarter. So our belief is that these weren't necessarily macro factors that were driving what was going on with our business. It was specific to SI-BONE. It was our core business that drove a good amount of revenue growth. And we actually saw a 30% increase in the facility fee and hospital outpatient as well as in surgery centers at the beginning of this year. So we think that, that was partly a driver. But then we also have a new product that is really inflecting at this point called Granite. It's used in pelvic fixation cases. It has a breakthrough device designation. We have a new technology add-on payment for the next 3 years that's specific to us. And so all of those things drove the growth of the business. And we have continued to see that momentum going into the second quarter as well. So it's not just a 1 quarter phenomenon. We are continuing to see the business accelerate. So very excited about where we're at. I've been with the company for 8 years. I've been the CEO for 2 years. And this past quarter was -- I would describe it as fun.

That's great. And I equally agree that the quarter, it was great to see after all the work you guys have put in. I do have to ask, though. So you guys beat The Street by 12%. When you look at growth on a comp-adjusted basis, it even accelerated 800 basis points versus Q4. You raised guidance, but it was only by the Q1 beat. So obviously, the question is, is it conservatism? Is there anything else to think about?

Yes. We love how we're set up for the year. We had a great quarter, 46% growth, as I said. The guidance for this year was growth of 20% to 23%. And if I do a comparison to last year, last year, given COVID, I think most of us felt that maybe COVID would be in the rearview mirror a little sooner than it actually was. We were kind of digging ourselves out of a hole all year. We started out at 10% growth. We ultimately finished the year with approximately 18% growth with 27% in the fourth quarter. And so this year, we're in this opposite situation where I feel that we've set expectations in a way that really sets us up for success. We think we're going to continue to see strong performance, but we want for the performance to speak for itself.

Okay. Understood. Operating leverage has been something else that has been very impressive over the last several quarters. It's fallen from -- OpEx growth has fallen from 22% in the first half of last year to, I believe, it's 9%, then 7% and then 5% in Q1. Guidance, you kept out -- initial guidance was for 5% OpEx or mid-single-digits OpEx growth for the full year. And OpEx growth in the first quarter was still in that range despite the big revenue beat. So I guess, looking at what's driven that over the last several quarters. And then ideally, how do you maintain that while still trying to grow the top line at a healthy level?

Yes. So the way that we looked at the business is COVID was a pretty jarring situation initially, but it became clear to us after we were 6 to 12 months into it, what it was and what it wasn't. And so what we did was we took the opportunity to really invest in the business over the last couple of years. We made some significant investments in our field force, in particular. We made investment in product. I talked about Granite in 2022. That was an important investment. We have focused on having high-quality clinical data. So the company has been in an investment mode for the last couple of years. And in 2023, we're really at this point of inflection, not just from a revenue perspective, but also our ability to attain operating leverage. And let me use an example. We have 87 quota-bearing reps that are out there. They grew their annual sales on average from $1 million a year ago to $1.3 million in the trailing 12 months. And we know that we have the ability to grow their rep productivity up to around $2 million. So we're able to get leverage on all of these investments that we've made in the business. So it's not an accident that we grew 46% in revenue in the first quarter and only grew operating expenses by 5% in the quarter. And if you look at what that meant, we use adjusted EBITDA as the measure that we speak to. That measure was around $11 million loss in the first quarter of 2022. It was a $3.9 million operating loss in the first quarter of 2023. So we're seeing that benefit very quickly. We're driving toward breakeven. It's very important to us to do that. And quite frankly, we're just in a position to do that while still seeing outsized revenue growth.

And then, Craig, to your question on where do we see it go, we expect operating leverage to continue to improve year-over-year as we progress through the year for the factors that Laura said. These are structural investments that we made, and our platform has the scale to support much higher levels of revenue. So we feel really good about how the setup is there from a leverage perspective.

Got it. Helpful. Let me touch on -- you guys raised capital recently. So with the business, the top line growing as it is, the operating leverage that you're seeing. The question is the need for capital, why now? Why was now the right time? Does that change kind of how we should think about the expectations for whether it's operating leverage or even top line growth? How does that capital raise? Like what does it do for you? How does it position you for the future?

Yes. We thought very hard about the capital raise because as I said, we're driving very rapidly toward breakeven. We don't change -- we're not changing what we're doing from an operating expense perspective. However, what we did see is in our business, given how rapidly the business is growing, we didn't want to dampen that growth. And let me use an example with our Granite product. There are daily discussions between our commercial team and our operations team to make sure that we have the implants that we need and the trays that we need. And we're deploying every single day, every single week, every single month, but the demand is outstripping the supply still to this point. And so what we wanted to do is make sure that at least on the margin, we have the ability to invest in working capital in order to continue to see that acceleration in the growth of the business. And so that was the reason why we did the capital raise. We also did hear from a lot of investors that there was a liquidity overhang with the stock. There was an expectation that we were going to raise capital. We did have the ability to raise capital. And so we felt it was prudent to do that at this point in time. So glad it's behind us, and now we're really just focused on execution.