Mazor Robotics (MZOR: $23)
Company Description:
Mazor Robotics is an Israeli-based medical device company engaged in the development of miniature semi-robotic, bone-mounted positioning systems for orthopedic procedures. Mazor's flagship product, Renaissance Surgical Guidance System, transforms spine surgery from a freehand procedure to a robotic-guided procedure. The company's core technologies and clinical pipeline include surgical robotics, robotic-guided implants, new procedures using these technologies, and medical 3D imaging for surgery.
Earnings Summary:
Mazor announced 4Q16 results, with system unit sales in line with levels announced on January 4th. Revenue for the quarter came in at $14.0 million, ahead of consensus of $12.7 million. Gross margin was down meaningfully from last year, as expected, driven primarily by lower pricing to Medtronic. EPS of $0.09 beat the consensus of -$0.12 on lower G&A and R&D expenditures.
The big news was incremental Mazor X orders that surprised to the upside which bodes well for the future. The company received orders for 21 systems in the quarter, including 16 Mazor X orders and recognized revenue on 18 of the 21. Exiting the quarter, there were 21 system orders in backlog, including 18 for Mazor X (with six of those from Medtronic). The company officially launched the Mazor X system in October, and recent results appear to support an ongoing increase in surgeon interest. All of the above indicates future revenue growth realization will be strong.
Earnings Takeaways:
1) Mazor is at a key inflection point having generated record sales in the quarter. The 21 systems ordered during the quarter illustrate strong ongoing demand (there were 25 system orders the previous quarter, including a 15-system initial order from Medtronics). To put this in perspective, the company sold 25 systems worldwide in 2015.
2) The Mazor X platform expands the field of spine surgery by assisting surgeons with a total patient treatment strategy. Following their recently formed partnership with Medtronic and the increased market access it provides them, the launch of the Mazor X positions them for accelerated growth and long term leadership in the spine market.
There is a clear and significant shift toward orders for the Mazor X system. Importantly, of the 21 systems currently in backlog, 18 are for Mazor X and only six of those are from Medtronic, indicating significant bottom-up demand from surgeons.
3) Until this quarter, Mazor had never received an initial multi-system order. It received two of these this quarter, each for three systems which signals that these customers have high confidence in the value of the technology.
4) Medtronic ordered 15 Mazor X systems during 3Q16. Last quarter, four were delivered. Importantly, the 3Q16 systems were all training systems that sell roughly at cost, which impacted last quarter's revenue and earnings, but was part of the plan for fully developing the Medtronic partnership. This quarter, five systems were delivered, leaving six in backlog.
5) The installed base increased to 149, from 108 in the prior year, up 38%. The majority of growth was driven by the U.S., where the installed base of 94 systems grew 47% from last year from 64 systems in 4Q15. The international installed base grew 27%, to 56 systems.
6) Utilization continues to increase; recurring revenue grew by 30%, with increasing system usage cited by management as a key driver, with systems in the field for 12+ months averaging 85 procedures per system vs. 80 a year ago.
7) Sales force update: Mazor ended the quarter with 20 capital sales reps, up from 16 at the end of 3Q16 and plans to continue adding more during 2017 to support the ongoing commercialization of the Mazor X system. Recall, during phase 1 of the agreement with Medtronic, that Medtronic’s reps are only responsible for generating awareness of Mazor X and then handing off leads to the Mazor team. In addition, the Mazor team is responsible for generating its own leads and supporting Mazor X cases.
BMR Take:
We are surprised that Mazor shares are basically unchanged from the January 4th earnings announcement, especially after seeing the strength in Mazor X this quarter. We see the current situation to be a buying opportunity.