MZOR Q3 2014 notes - all's well here!

Hi all,

Below are my notes from the Q3 2014 conference call, which took places a few days back. Overall, they seem to be executing well. I have some discussion towards the bottom of the post about valuation and possibilities looking 5-years out. You can review the earlier detailed post as well, see link below.

Annual report review (20F):…

If you have questions, I 'm happy to try to answer them.


Press release:…


  • Three analysts on the call:
    Jeffrey Cohen – Ladenburg Thalmann & Co. Inc.
    Young Xuyang Li – Barclays Capital, Inc.
    Mike Matson – Needham & Company
  • In Q2, there were 5 analysts. Missing this time:
  • Kathleen McGrath – WallachBeth Capital LLC
  • Jose Haresco – JMP Securities, LLC

System Sales
5 systems sales in the quarter (all in the US). Best ever quarterly performance in the US. One system included the Brain Module which was launched in April 2014. Additionally, two brain modules sold for existing systems. Some details on the systems sales for this quarter:

  1. St. Mary’s Medical Center, San Francisco: 400 private rooms, longest continually running hospital in SF
  2. Spine Specialist of Michigan
  3. OakBend Medical Center, Greater Houston metropolitan area
    There are now 5 Renaissance systems in the Houston area, and management claimed this shows the effectiveness of the cluster strategy where hospitals in the region purchase systems to stay competitive.
  4. Forest Park Medical Centre, Dallas. Now two systems in Dallas and 10 in Texas.
  5. Morton Plant Hospital, Clearwater, Florida. This is a 700-bed hospital and this sale brings the number of Renaissance systems in Florida to nine.

Brain Module sales were to:

  1. Baptist Medical Centre, Jacksonville, Florida. It’s one of three hospitals in the US with two Renaissance systems. It was also one of the test sites for the Brain Module.
  2. Littleton Adventist Hospital, Denver metropolitan area.

From the Q2 2014 call:
Brain module was launched in April 2014. First sale achieved in Q2 2014. Here’s some additional interesting bits:
"Deep Brain Stimulation or DBS. DBS procedures are currently used mainly to treat movement disorders associated with Parkinsons’ division. But the indication for DBS continue to expand steadily widening the pool of patients.”
I like the way they priced this module. It’s addition bring the cost of the base spine system from $849,000 to $978,000.

Revenues, recurring revenues, and utilisation
Revenues came in at $6.1M, roughly double of the $3.1M reported in Q3 2013.
The recurring component of the revenues (disposables, services, etc) accounted for $2.5M, about 67% more than Q3 2013.
This is good as it indicates healthy utilisation of the systems. Note that management doesn’t have direct view of utilisation etc in international markets as they sell though distributors, but they have this data for the US, which they provide on an annual basis.

As a further point of comparison, we can note that recurring revenue came in at $2.1M in Q2 2014, so this represents about a 14% sequential increase in the recurring revenue component.

As of Q3 2014, Renaissance has been used in over 9,000 cases placing over 60,000 implants. As a comparison point, management had noted over 8000 surgeries as of Q2 2014, and about 7000 cases at Q4 2013. The run rate appears to be around 1000 cases per quarter, which would gradually ramp up with increases in system sales and increased utilisation.

Other financial data points:

  • Non-GAAP EPS of ($0.08)
  • Cash used in operating activities increased to $4M versus $2M in Q3 13 because of increased efforts to raise awareness of their systems and increase in R&D.
  • As of September 30, 2014, cash, cash equivalents, marketable securities and long-term investments totaled $54.2 million. The company has enough cash to see it though to cash flow positive position, assuming the business continues to expand at the current rate.

Market Opportunity and Growth Strategy

They closed the quarter with 77 systems installed globally, with 44 in the US, versus 30 systems installed in the US in Q3 2013, representing a 46% YoY growth. They estimate opportunity in about 2200 hospitals. Even if the opportunity is half, at 1100 hospital, there’s a long runway for growth.

In the last call as well as this call, management talked about the long approval time for large capital expenses in the US healthcare system. They noted the following this time around:
As we discussed on the last call – on the last conference call in August, the decision making process on the part of the hospital administration has become longer for Mazor and other capital equipment purchases. Despite these challenge we have a strong pipeline and to convert these into system sales, we recently implemented a number of strategies to meet these objectives.
This looks pretty bullish to me. They appear to be getting better with their sales strategy and may be they are more confident of the sales over the next few quarters.

Management indicated the following five pronged growth strategy:

  • Increasing interaction with hospital administrators to assess the sales prospects early on during the discussion phase.
  • Entering new major metropolitan area markets. Management believes their entry into the Detroit and SF market demonstrates this commitment.
  • Leveraging existing users (hospital admin, surgeons) to identify new avenues for sales.
  • Expansion of capital sales team.
  • Increasing presence at national and international conferences and getting surgeons to give invited lectures
    I sense some adjustments in their marketing approach, which is may be expected of early stage companies.

Another significant milestone was the approval to sell systems in China. They seem to pay attention to the Asia-Pacific market, as they have sales/distributors in Taiwan, India, Australia, Singapore, Vietnam and Hong Kong. Addition of China to the mix is great. Many of the economies in this region are expanding quickly and there is a growing middle class which wants access the very best in medical practice.

In the question & answer part of the session, I found the following nuggets interesting:

  1. Management was asked about the sales pipeline for Q4. While they don’t provide guidance on system sales, management’s response was IMO very bullish. It appears their refined sales process is working for them and they now have much better insight into the sales pipeline in the US.
  2. There was a question about the longer sales cycles for expensive capital equipment. So, Ori Hadomi (CEO) effectively said that the sales cycle seemed to have shortened but he didn’t want to call this a trend. Makes sense, as one quarter and 5 system sales don’t make a trend. Here’s what he said:
    I would say that anecdotally, I think that this quarter found sales – the sale cycle was much shorter than in the past. However, from out of the sales deals we were working on this more than a year. So if I need to give you a kind of a general guideline, I wouldn’t think the sales cycle being significantly shortened. That’s what I can say.
  3. With reference to the lack of international sales. Hadomi said that he expected sales to come through in the quarters ahead and that he spent some time in India and was deeply encouraged by the prospects there. With respect to China, he said that they are happy with the approval but he was reluctant to set any expectations of system sales there.

Concluding Remarks

MZOR is still very early in its game. They have a leading edge technology in robot assisted surgery for Spine and Brain. They are pretty much unchallenged in this area. They have a very very large runway ahead. Success now depends on how well management can execute, maintaining cutting edge lead via R&D, while growing sales and creating a network effort by getting more and more hospitals and surgeons to use their systems. They do aim to become the standard of care for Minimally Invasive spine and brain surgery and thus far appear to be making good progress.

Some caution is of course in order. This is a small cap, highly volatile, stock. It’s not yet Cash Flow positive (although cash burn is not very large and they have enough cash in hand to ride them to cash flow stage, at least it appears so!). Position sizing is important when investing in a story like this, but I really like what they are doing and how they are going about their business.

Valuing such an early startup is an academic exercise, but its fun so let’s try. First off, the non-GAAP gross profit margins are very high, about 80% for 9-months ending Q3 2014. If the business, in particular the sales & marketing and general admin components of the costs don’t linearly go up with increases in revenue than we should see profits soon enough. Let’s revisit OPEX components as a function of revenue, similar to what I did for my 20-F review.

9-months ending 09/2013                    09/2014
Revenue         $14,259                    $15,463

R&D             $2,975                       $4,526
Sales            $11,253                     $15,828
Admin           $1,843                       $3,181
Total OPEX      $16,071                     $23,523
OPEX (%Revenue)     113%                      152%

In 2012 & 2013, the total OPEX was around 110% of the total revenue. In 2014, it looks like OPEX has increased, I suppose because of the push to sell more and more systems in the US. I would like to keep watching this number to see where it is headed. I would worry if it kept going up. Something to watch.

Let’s look at system sales growth. Note the last column shows systems as of Q3 2014.

 12/31/2010     12/31/2011     12/31/2012     12/31/2013     09/30/2014
US        4            8           19           34              44
Int      14           19           22           29              33
Total    18           27           41           63              77

I was hoping to see around 15 system sales in 2014. I think we will get more than 15 as they have sold 14 systems as of Q3 2014. From the management’s commentary in the call, they appeared bullish with respect to prospects in Q4 2014 and Q1 2015. I ‘m thinking they will end 2014 with at least 80 installed systems, representing about 27% growth rate for system adds.

I think they can achieve 25 - 30% system adds each year over the long-term. Assuming, we have 80 systems as of 12/31/2014, let’s look out 5 years (i.e., 12/31/2019). I assume systems to sell for $1M each and assume the revenue to be split 65 - 35 between system sales and recurring revenues (kits, service, disposables). See Table below for revenue expectations at year end 2019.

Add Rate                 20%          25%          30%
Installed base           199         244           297     
System sales/yr (FY19)    34          49            69
Revenue (FY19)           $52M       $75M      $106M

Each of the above scenarios still leave a very very big runway for growth, even if we assume that the total opportunity is half as large as what management says it is. ISRG commands roughly a 8x multiple of sales, so a growth story like MZOR could potentially command a 10x multiple of sales. A 10x sales multiple would put MZOR’s market cap anywhere between $520M and $1B, corresponding to the scenarios considered above.

I like the technology.The technology has immense promise, the market opportunity is very large, and Mazor has a first mover advantage. These are all great signs of a first mover, rule breaker. I am happy with their execution thus far. MZOR is one of my bigger positions but beware this position has a ton of volatility and its a high risk, high reward position.