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VIVE: Q1 Results: Disappointing But Not All Was Bad. Guidance Intact But That May Now Be More Challenging

05/17/2018
By Brian Marckx, CFA

NASDAQ:VIVE

Viveve (NASDAQ:VIVE) reported Q1 2018 financial results and provided a business update. Despite what we’d characterize as a pretty disappointing start to the year, management reiterated their previously issued 2018 revenue guidance in the range of $22M (+44%) to $24M (+57%). VIVE indicated that realignment of the sales force/territories and a national sales meeting (which sidelined the entire sales force for a week) significantly impacted Q1 domestic sales results. And relative weakness OUS, particularly in Latin America, was also a major contributor.

Given that Q1 revenue was up just 22%, the final three quarters need to average 49% (yoy) growth to hit the low end of that guidance. Q1 may have made that much more challenging. Certainly far from an impossibility, however, given the recent expansion of the sales force and, based on management’s comments, what appears to be growing interest in SUI use and anticipated strength in OUS markets which they said “continue to show tremendously strong growth potential through 2018”.

Other potential tailwinds and benefits include the fact that two of the three remaining quarters are typically seasonally stronger than Q1 (at least from a utilization standpoint), adoption growth from VIVE’s SUI ‘buy-one-get-one’ treatment tip program and awareness benefits from U.S. RCTs (in both SUI and vaginal laxity). And, assuming no more (or at least to a much lesser extent) BOGO’s and what also appeared to be some discounting on the consoles (or at least meaningful reduction in ASP) in Q1, revenue (as well as gross margin) in the remainder of 2018 should benefit from relatively higher pricing. And, with the national sales meeting and territorial rejiggering behind them, those disruptions should not repeat. Our back-of-the-envelope indicates the lost week alone (i.e. does not consider disruption from territory realignment) may have cost VIVE about $220k, or ~6%, of revenue in Q1. And, finally, OUS can be somewhat variable – assuming growth does materialize as VIVE expects, that could represent a significant portion of incremental topline.

And, to be fair, Q1 was far from a complete disappointment. There were some highlights – particularly on the operational front (discussed below), but also on the financial results side as well. Relative to the financial high(er)-points; of the treatment tips not BOGO’d, it appears (VIVE does not disclose enough info for exact calculation) pricing may have been relatively very strong. And while Q1 revenue missed big (-23% vs. our $4.8M E and -32% vs. $4.9M consensus) it was well ahead of both 1H ’17 quarters (Q1:+22%, Q2:+20%) – and Q2 is typically seasonally stronger. In addition, Q1 ’18 U.S. (i.e. via direct) revenue was up a much healthier 38% (which, again, presumably would have been even better if not for the sales team/territory issue).

So, while we now model a slight miss ($21.6M) to guidance, we think there’s reasonable reasons why (such as better pricing, bigger and non-idled sales force, BOGO-hooks set, RCT-awareness-halo, seasonal tides and OUS strength?) the remainder of 2018 could show a steep enough guidance-hitting revenue ramp. Q2’s numbers may provide a lot more insight in that regard. And while we have slightly less confidence in meeting guidance, management appears to be unwavered – noting on five different instances on the Q1 call that they are “confident” (or “very confident”) in meeting their 2018 revenue guidance.

Q1 total revenue was $3.7M, up 22% yoy, down 28% sequentially and 23% below our $4.8M estimate. Console placements totaled 53 units (vs. 61 E) including 38 U.S. (43 E) and 15 OUS (18 E). Treatment tips shipped totaled 5,400 (5,303 E), approximately 1,900 (35%) of which were included as part of the SUI BOGO program (i.e. free).

Revenue (proportional contribution) per geographic territory was:

Note that North America, while softer than what we had expected, still managed almost 40% growth. Pro forma for the lost (sales meeting) week, BOTE calculation ([$2.6M/12 weeks] x 13 weeks), puts direct sales at more than $2.8M (+49%). The BOGO SUI tip program may have cost additional revenue – although it is impossible to know, given that it may have been offset by higher console or incremental (sold) tips.

The 38 U.S. console placements is up 31% from 29 in Q1 ’17. VIVE launched in the U.S. in January 2017 and had 10 direct reps as of May 2017 (i.e. as of the reporting of Q1’17 results), 16 as of the end of 2017 and 24 as of today. Console placements per rep per month (PPM) averaged 1.0 in Q1 ’17. At-best (i.e. using 16 reps as the basis), PPM averaged ~0.8 in Q1 ’18. We don’t know the avg sales team size throughout 2017 but with 160 domestic placements, PPM for the full year 2017 averaged between 0.8 and 1.3 (management noted that it was above 1.0).
Management also noted that, given that the sales force training and rejiggering is done, that they expect productivity will improve (from that of Q1 ’18) through the remainder of 2018. So, with 16 reps starting the year, 24 on board now and assuming PPM of 1.0, we should see at least 48 domestic placements in Q2 and at least 72 per quarter by Q4.

On the OUS side, Latin America was blank in Q1 ’18, down $290k. We have no insight. But, VIVE mentioned on the call that awareness is building and that they expect momentum to continue through 2018. While we had hoped to see relatively strong uptake in certain parts of Latin America, particularly Brazil which for several years had lead the world in vaginal rejuvenation procedures (and in which Viveve System has been approved for treatment of sexual function since October 2016) that clearly has not materialized – at least not yet anyway.

As it relates to consumables, 5,400 went out the door, ~1,900 of which were BOGOs – and done in order to stimulate SUI use and system adoption. While the freebees likely cost some topline and margin, of the ~3,500 that were sold, it looks like (our rough calculations) pricing may have been at an almost 20% premium to historical. Clearly the hope is that BOGO=adoption=utilization. VIVE indicated SUI-related interest has blossomed and use in this indication is growing. That could accelerate with the start of the two related clinical studies as well as (possible) future introduction of an SUI-customized treatment tip.

With and without the BOGOs, tips/per-unit/month (using 2017YE installed base 444) was 4.1 and 2.6 in Q1 ‘18. These compare to 3.4 in Q1 ’17 and a 3.3 average throughout 2017. Q2 and Q4 are typically seasonally stronger so we could see utilization benefit as well.

Gross margin was one of the low-lights in Q1. The 36.4% GM is the weakest since Q2 ’16 (34.3% on $1.6M revenue) and compares to 46.8% in Q1 ’17 and 48.7% average in 2017. The BOGO certainly impacted margin but it looks like U.S. consoles (and perhaps OUS as well) ASP was also on the soft side – we have no insight and would hope to see ASP’s firm up. Narrowing GMs, BOGOs, soft ASPs and relatively low sales rep productivity do not lend themselves to the idea of brisk and growing demand. While we think the explanations are valid, given that GMs oftentimes provide lots of insight, the fact that it plummeted (yoy) 1,040 basis points is certainly interest-piquing, if not (yet) concerning.

We cover VIVE with a $8.00/share price target. See below for free access to our updated report on the company.

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