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VIVE: Sales Force Realignment Appears To Be Paying Dividends As Q2 U.S. Systems Sales Crush Prior Record

By Brian Marckx, CFA



Q2 Results: Sales Force Realignment Appears To Be Paying Dividends As U.S. Systems Sales Crush Prior Record

Viveve (VIVE) reported Q2 2018 financial results and provided a business update. Relative to the financials, revenue was very strong, well-ahead of our estimate and better than the prior record by more than 8%. While international sales faltered, falling 18% from the prior year, that overseas weakness was much more than offset by extraordinarily robust domestic sales.

Strength of the U.S. business, which also saw big gains on treatment tip ASPs and resultant widening of related margins, was attributed to increased production following the sales force realignment. While that caused a disruption to domestic sales activity in the first quarter, it appears that the hoped-for benefits may have already begun to materialize. The 69 U.S. system sales in Q2 was more than 2.5x that in the prior year period and 21% more than VIVE had sold in any previous quarter. Unfortunately, sales of consumables were not nearly as robust and actually rather disappointing – although the weakness may be at least partially a result of manufacturing delays.

As aesthetic procedure volume is typically seasonally softer in Q3, we think sales may dip sequentially into next quarter but continue to look for a strong finish to the year. Importantly, management reiterated FY’18 revenue guidance of $22M - $24M. While we have only slightly increased our full-year revenue estimates (from $21.2M to $21.5M), we may be erring on the side of too-conservative given the (more) rapid (than previously expected) reintegration of the sales force and the recent addition of Aesthetic Management Partners (AMP) as a complementary sales channel.

The major news on the operational front includes FDA green-lighting VIVEVE II next-phase enrollment (i.e. safety looks good), positive results of the second U.S. SUI pilot study (which should bolster the LIBERATE U.S. SUI RCT IDE – filing of which is expected any day now), initiation of LIBERATE International (for SUI), and FDA’s warning letter to several energy-based device manufacturers (Viveve was not one of them) to stop (illegally) marketing for off-label use in vaginal procedures including vaginal rejuvenation, sexual function and SUI.

Q2 total revenue was $5.5M, up 80% yoy, up 49% sequentially and 15% higher than our $4.8M estimate. Console placements totaled 85 units (vs. 64 E) including 69 U.S. (43 E) and 16 OUS (21 E). Treatment tips shipped totaled 2,750 (6,059 E), approximately 125 (5%) of which were provided free as a result of the launch of the practice management team (which commenced in Q1).

Revenue (proportional contribution) per geographic territory:

View Exhibit I

North America not only continues to represent the most significant contributor to total revenue but it’s overall contribution also continues to grow. Accounting for 72% of total revenue through FY’17, North America contributed 82% in Q2 and 78% in 1H ’18. Despite VIVE’s regular expanding international reach (the Viveve System is now cleared for sale in 66 countries) and the relatively recent launch in the U.S. (Q4 ’16 was the first period of U.S. revenue), the domestic market has quickly become the major driver of, and contributor to, total revenue. .

The 69 U.S. console placements is up 155% from 27 in Q2 ’17. Through 1H’18, 107 systems have been sold in the U.S., compared to 56 (+91%) from the prior year period. VIVE noted on the call that their sales force currently consists of 49 total sales team members (up from 27 on Jan 1, 2018) which includes; 23 capital reps, 10 associate sales reps, 10 practice development managers, 3 regional sales directors and 1 practice development strategic partnership director – all report to a V.P. of sales.

The capital rep count remained approximately flat from May 2018 (n=24) This implies average sales production of 1 console placement per rep per month (PPM) in Q2, which is significantly improved from the 0.6 (or less) during Q1 of this year. PPM averaged approximately 0.7 through 1H’18. So, while PPM is improving and reached what is often considered a minimum production goal of 1 PPM in Q2, we would hope to see this continue to increase over time.

In July VIVE announced a capital sales partnership with Aesthetic Management Partners, Inc., which provides aesthetic device manufacturers with a complementary domestic sales channel. Under the agreement, the Viveve System will be added to AMP’s product offerings and, through their 20 capital reps, provide the opportunity to bundle sales with that of other (unrelated) aesthetic devices marketed by AMP. Management indicated that this channel is geared mostly to providers that are new to the aesthetic market, want to purchase more than one modality and can benefit from bundling one or more simultaneous system purchases. Launch via AMP is expected in early Q4.

As it relates to consumables, 2,750 were recognized as sales, although ~125 were given away free as VIVE’s practice managers made their field introductions. Management also noted that they had expected to book another ~1k treatment tips in Q2 but that, due to the large order in the previous quarter, that these were back-logged. Q2 consumable sales implies a utilization rate, with and without the backlog and excluding the 125 freebies, of 2.1 and 1.5 treatment tips per system per month. Through 1H’18 utilization averaged approximately 2.9, compared to ~3.2 in 1H’17. While we think this is an informative metric, particularly with trend-analysis over longer periods of time, as we have noted in the past, ‘utilization’ calculation is not necessarily indicative of spot-related demand given variability in ordering patterns and inherent skew from significant growth in the installed base. We continue to look for this utilization rate to stabilize (over time) to close 3.0.

So while treatment tip unit sales were not at the level we had hoped in Q2, it appears that consumables pricing was much better than we had modeled. In fact management noted ASP on treatment tips was up 2.5x – which was attributed sales efforts of the newly launched practice management team. The ASP benefit showed up in gross margin, which at 50.9% was 1060 bps better than the prior year period and well ahead of our estimate. Gross margin, per comments on the call, are expected to remain near these levels through the remainder of 2018 (although we continue expect some short-term fluctuations).

We are maintaining our $7.75/share price target. See above for free access to our updated report on VIVE which includes our operational review, financial model and valuation methodology.

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