EQUITY RESEARCH

COMPANY UPDATE
April 2, 2019 HEALTHCARE/MEDICAL DEVICES

Stock Rating:
Conformis, Inc.
OUTPERFORM
12-18 mo. Price Target $3.50
New Drivers Led by Hip Launch
CFMS - NASDAQ $2.73 SUMMARY
A number of positives are coming together to improve the visibility and outlook for
3-5 Yr. EPS Gr. Rate NA CFMS including a building pipeline, salesforce investments, and a more proactive
52-Wk Range $2.95-$0.36 position outside of the US (management looking to expand in countries outside of
Shares Outstanding 58.9M Germany). Near-term, the biggest new product launch is Conformis Hip, in the midst
Float 32.0M of a limited launch that began 3Q18 (will go full launch 2H19). Surgeon interest in
Market Capitalization $185.4M CFMS's new hip system was high around the booth at last month's AAOS meeting.
Avg. Daily Trading Volume 1,121,764 Rollout into hips could have positive pull-through effects for CFMS's knees we believe.
Dividend/Div Yield NA/NM Below the top line, management has internally validated detailed plans to drive further
Book Value $1.58 gross margin leverage and its cost reduction efforts exiting '18 should significantly
Fiscal Year Ends Dec reduce cash burn in '19.
2019E ROE NA KEY POINTS
LT Debt $15.0M ■ Hip. Management believes the ability to reduce leg-length discrepancy and
Preferred $0.0M dislocations with its hip system will be the key patient benefits. Importantly, the
Common Equity $68M system provides a number of surgeon/institution advantages including improved
Convertible Available No efficiency and less time to prepare the acetabulum (given its pre-planning). We
EPS believe CFMS's hip could provide pull-through benefits for the knee business
Q1 Q2 Q3 Q4 Year Mult. down the line as well.
Diluted
2018A (0.22) (0.24) (0.15) (0.16) (0.77) NM ■ Knee pipeline. CFMS has a steady cadence of knee line improvements over
2019E (0.13) (0.12) (0.10) (0.10) (0.46) NM
the next couple of years. The next generation core system—Identity—will go
2020E -- -- -- -- (0.32) NM
3Q18 excl. 1x royalty payment from SNN of $10.5M
into limited launch in 2H19 with expected instrumentation improvements and an
(subtracted $0.17) and excl. 1x non-cash write-offs extension for high BMI patients. CFMS's entry into the growing cementless knee
for unused manufacturing equipment and impairment market will begin with limited launch of cementless femur beginning 1H20.
of goodwill (added $0.14).
■ Margin drivers. Management has validated >10 discrete cost savings initiatives
to drive meaningful gross margin expansion over the next several years including
moving certain manufacturing production (software design manufacturing)
offshore. Targeted long-term GM is ~65%. Ongoing GM leverage, combined
with operating expense cuts in 2019, is expected to drive significant cash burn
improvement (goal of <$4M in '19 versus ~$10M in '18).
■ International. In addition to new product development, CFMS will actively expand
into other OUS markets in an effort to diversify and mitigate the declines in sales
in Germany, which began late '16/early '17 due to reimbursement challenges.
New country rollouts as well as improvements in Germany would be upside to our
estimates.
■ Raising PT. On peer multiple expansion since our last price target adjustment on
11/1/18 and as we shift our valuation to 2020 from 2019 on improving visibility, our
price target rises to $3.50 from $2.50. We have modest hip contribution built-in for
2019 and further acceleration in 2020 led by the pipeline.

Stock Price Performance Company Description

1 Year Price History for CFMS
Conformis, Inc. is a medical
3.5 device company that designs and
3 manufactures custom-made joint
2.5
replacement implants using its
2
1.5
proprietary iFit technology.
1

Steven Lichtman
0.5

212-667-8160 04/18 07/18 09/18 12/18 04/19

Steven.Lichtman@opco.com
For analyst certification and important disclosures, see the Disclosure
Disseminated: April 2, 2019 05:07 EDT; Produced: April 2, 2019 05:07 EDT Appendix.

Oppenheimer & Co Inc. 85 Broad Street, New York, NY 10004 Tel: 800-221-5588 Fax: 212-667-8229
 Conformis, Inc. CFMS (OUTPERFORM) - $3.50

5-YEAR PRICE PERFORMANCE INVESTMENT THESIS

30 CFMS is making investments in the salesforce and pipeline to

25 drive accelerated growth ahead. The pipeline is led by a limited
20
hip launch in 2H18, next-generation knee implant in 2H19E and
cementless knee 1H20E. Reimbursement issues in Germany
15
remain a near-term headwind. On salesforce investments and
10
the pipeline, we look for improved growth ahead. In the
5 meantime, the company is driving improved margin leverage and
CFMS
0 reduced cash burn
Jan-16 Jan-17 Jan-18 Jan-19

Source: Bloomberg
BASE CASE ASSUMPTION
■ Mid-single-digit sales growth in 2019 including conservative Hip
assumption and assumed continued headwind in Germany
■ Minimal risk-adjusted hip revenue beginning in 2H18
■ Gross margin reaches 51% in 2019 and ~65% long term
CATALYSTS
■ Full launch of Conformis Hip (2H19E)
■ Limited launch of Identity next-gen knee system (2H19E)
■ Contribution from new sales leadership/sales representatives
■ Gross margin ramp led by new initiatives

UPSIDE SCENARIO DOWNSIDE SCENARIO

■ International expansion ■ New sales initiatives fail to take hold.
■ Quicker impact of new sales adds ■ Failure to drive GM to goal
■ Stabilization of Germany business ■ Pipeline failures

PRICE TARGET CALCULATION

Our $3.50 price target is derived via discounted cash flow and assumes a WACC (weighted average cost of capital) of 8.8%, terminal growth
rate of 4% and estimated 2026 EBITDA of $24M. Our price target implies a 2.4x 2020E EV/sales multiple, up from 1.9x 2019E previously.
Since our last PT update on 11/1/2018, CFMS peer multiple has expanded from 3x to 3.2x 2020 EV/Sales.

KEY RISKS
Key risks to our price target include: 1) stiff competition from entrenched competitors, 2) failure to drive margin expansion, 3) regulatory
approval delays.
Note: We see CFMS, as a stock trading under $5, as speculative and appropriate for risk-tolerant investors.

Steven Lichtman: 212-667-8160

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CFMS (OUTPERFORM) - $3.50 Conformis, Inc.

ConforMIS Quarterly Earnings

Income Statement (All values in '000's, except per share)
Mar-18 Jun-18 Sep-18 Dec-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Dec-19 Dec-20
1Q18 2Q18 3Q18 (a)(b) 4Q18 FY2018 1Q19E 2Q19E 3Q19E 4Q19E FY2019E FY2020E
Total Revenue 19,656 19,100 18,486 22,049 79,292 19,939 19,861 19,527 22,911 82,238 90,135
Product Revenue 19,483 18,908 18,332 21,904 78,627 19,794 19,716 19,382 22,766 81,658 89,555
Knees 19,483 18,908 18,116 21,305 77,811 19,123 18,938 18,334 21,445 77,840 81,661
Hips - - 219 600 818 671 779 1,047 1,321 3,818 7,894
Royalty Revenue 173 192 152 145 662 145 145 145 145 580 580
COGS 10,869 9,989 9,265 11,181 41,304 10,169 10,129 9,373 10,768 40,439 39,479
Gross Profit $8,787 $9,111 $9,221 $10,868 $37,988 $9,770 $9,732 $10,154 $12,143 $41,799 $50,656

Sales & Marketing 10,411 9,809 9,053 9,682 38,955 8,295 7,746 7,615 8,179 31,835 32,139
Research & Development 4,694 4,850 3,867 3,458 16,869 3,888 3,873 3,808 4,124 15,693 16,201
General & Administrative 6,140 5,802 4,682 6,098 22,722 5,583 5,164 4,882 5,499 21,127 21,233
Operating Income (GAAP) ($12,458) ($11,350) ($8,381) ($8,370) ($40,558) ($7,996) ($7,051) ($6,151) ($5,659) ($26,856) ($18,917)
Interest Income 140 171 164 184 659 184 184 184 184 736 736
Interest (Expense) (735) (766) (788) (1,067) (3,356) (394) (394) (394) (394) (1,576) (1,576)
Other income (expense) 1,085 (2,098) (272) (630) (1,915) - -
Pretax Income (GAAP) ($11,968) ($14,043) ($9,277) ($9,883) ($45,170) ($8,206) ($7,261) ($6,361) ($5,869) ($27,696) ($19,757)

Tax Provision 33 14 27 (13) 61 - - - - - -

Tax Rate NM NM NM NM NM NM NM NM NM NM NM
Net Income (GAAP) ($12,001) ($14,057) ($9,304) ($9,870) ($45,231) ($8,206) ($7,261) ($6,361) ($5,869) ($27,696) ($19,757)

EPS (GAAP) ($0.22) ($0.24) ($0.15) ($0.16) ($0.77) ($0.13) ($0.12) ($0.10) ($0.10) ($0.46) ($0.32)
Diluted Shares ('000s) 54,742 59,763 60,226 60,849 58,895 60,849 60,849 60,849 60,849 61,849 62,349

Margin Analysis
COGS 55% 52% 50% 51% 52% 51% 51% 48% 47% 49% 44%
Gross Margin 45% 48% 50% 49% 48% 49% 49% 52% 53% 51% 56%
Sales & Marketing (% of Prod Rev) 53% 51% 49% 44% 50% 42% 39% 39% 36% 39% 36%
R&D (% of Prod Rev) 24% 25% 21% 16% 21% 20% 20% 20% 18% 19% 18%
G&A (% of Prod Rev) 31% 30% 25% 28% 29% 28% 26% 25% 24% 26% 24%
Operating Margin NM NM NM NM NM NM NM NM NM NM NM
Tax Rate NM NM NM NM NM NM NM NM NM NM NM
Net Margin NM NM NM NM NM NM NM NM NM NM NM

Growth (y/y)
Revenue -3.9% 3.3% 0.3% 6.3% 1.5% 1.4% 4.0% 5.6% 3.9% 3.7% 9.6%
Product Revenue Growth -4.4% 4.8% 0.9% 6.9% 2.0% 1.6% 4.3% 5.7% 3.9% 3.9% 9.7%
COGS -22.1% -18.4% -16.6% -6.8% -16.2% -6.4% 1.4% 1.2% -3.7% -2.1% -2.4%
Gross Profit 35.3% 45.8% 26.1% 24.1% 31.8% 11.2% 6.8% 10.1% 11.7% 10.0% 21.2%
Sales & Marketing -3.7% 4.6% 3.6% -1.8% 0.4% -20.3% -21.0% -15.9% -15.5% -18.3% 1.0%
R&D 2.9% 11.9% -5.2% -16.9% -1.6% -17.2% -20.1% -1.5% 19.3% -7.0% 3.2%
G&A -27.4% -10.0% -36.7% -5.2% -20.9% -9.1% -11.0% 4.3% -9.8% -7.0% 0.5%
Operating Income (GAAP) NM NM NM NM NM NM NM NM NM NM NM
Net Income (GAAP) NM NM NM NM NM NM NM NM NM NM NM
EPS (GAAP) NM NM NM NM NM NM NM NM NM NM NM
Source: Oppenheimer Estimates, Company Reports
(a) 3Q18 excludes $1.9M non-cash write-off of unused manufacturing equipment and $6.7M non-cash write-off impairment of goodwill.
(b) 3Q18 excludes $10.5 royalty settlement from Smith & Nephew

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 Conformis, Inc. CFMS (OUTPERFORM) - $3.50

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Rating and Price Target History for: Conformis, Inc. (CFMS) as of 03-29-2019
02/12/16 05/13/16 08/09/16 02/16/17 02/22/17 04/21/17 08/04/17 02/08/18 11/01/18
O:$19 O:$12 O:$13 O:$9 O:$13 O:$9 O:$6 O:$4 O:$2.5
20

15

10

0
2016 2017 2018 2019

Created by: BlueMatrix

All price targets displayed in the chart above are for a 12- to- 18-month period. Prior to March 30, 2004, Oppenheimer & Co.
Inc. used 6-, 12-, 12- to 18-, and 12- to 24-month price targets and ranges. For more information about target price histories,
please write to Oppenheimer & Co. Inc., 85 Broad Street, New York, NY 10004, Attention: Equity Research Department,
Business Manager.

Oppenheimer & Co. Inc. Rating System as of January 14th, 2008:

Outperform(O) - Stock expected to outperform the S&P 500 within the next 12-18 months.
Perform (P) - Stock expected to perform in line with the S&P 500 within the next 12-18 months.
Underperform (U) - Stock expected to underperform the S&P 500 within the next 12-18 months.
Not Rated (NR) - Oppenheimer & Co. Inc. does not maintain coverage of the stock or is restricted from doing so due to a potential conflict
of interest.
Oppenheimer & Co. Inc. Rating System prior to January 14th, 2008:
Buy - anticipates appreciation of 10% or more within the next 12 months, and/or a total return of 10% including dividend payments, and/or
the ability of the shares to perform better than the leading stock market averages or stocks within its particular industry sector.

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CFMS (OUTPERFORM) - $3.50 Conformis, Inc.

Neutral - anticipates that the shares will trade at or near their current price and generally in line with the leading market averages due to a
perceived absence of strong dynamics that would cause volatility either to the upside or downside, and/or will perform less well than higher
rated companies within its peer group. Our readers should be aware that when a rating change occurs to Neutral from Buy, aggressive
trading accounts might decide to liquidate their positions to employ the funds elsewhere.
Sell - anticipates that the shares will depreciate 10% or more in price within the next 12 months, due to fundamental weakness perceived
in the company or for valuation reasons, or are expected to perform significantly worse than equities within the peer group.

Distribution of Ratings/IB Services Firmwide

IB Serv/Past 12 Mos.

Rating Count Percent Count Percent

OUTPERFORM [O] 369 65.19 170 46.07

PERFORM [P] 196 34.63 64 32.65
UNDERPERFORM [U] 1 0.18 0 0.00

Although the investment recommendations within the three-tiered, relative stock rating system utilized by Oppenheimer & Co. Inc. do not
correlate to buy, hold and sell recommendations, for the purposes of complying with FINRA rules, Oppenheimer & Co. Inc. has assigned
buy ratings to securities rated Outperform, hold ratings to securities rated Perform, and sell ratings to securities rated Underperform.
Note: Stocks trading under $5 can be considered speculative and appropriate for risk tolerant investors.

Company Specific Disclosures

Oppenheimer & Co. Inc. expects to receive or intends to seek compensation for investment banking services in the next 3
months from CFMS.

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 Conformis, Inc. CFMS (OUTPERFORM) - $3.50

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