Cutera Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 9 speakers on the call.

Operator

Welcome to the Cutera Inc. 2nd Quarter 2023 Results Conference Call. The discussion today includes forward looking statements. These forward looking statements reflect management's current forecast or expectations of certain aspects of the company's future business, including, but not limited to, any financial guidance provided for modeling purposes. Forward looking statements are based on information available will be at the time those statements are made, which by its nature is dynamic and subject to change or management's good faith belief as of that time with respect to future events.

Operator

Forward looking statements include, among others, statements regarding financial guidance, regulatory approvals, productivity improvements and plans to introduce new products and expand into additional geographies. For words that may identify forward looking statements, we encourage you to refer to the Safe Harbor statement in our press release earlier today. All forward looking statements are subject to risks and uncertainties, including those risk factors described in the section entitled Risk Factors in our Form 10 ks as filed with the Securities and Exchange Commission and updated on our Form 10 Qs subsequently filed. Cutera also cautions you not to place undue reliance on forward looking statements, which speak only as of the date they are made. Cutera undertakes no obligation to update publicly any forward looking statements to reflect new information, events or circumstances or to reflect the occurrence of unanticipated events.

Operator

Future results may differ materially from management's current expectations. In addition, we will discuss non GAAP financial measures, including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency into Cutera's ongoing results of operations, particularly when comparing underlying results from period to period. Please refer to the reconciliation from GAAP to non GAAP measures in our earnings release. These non GAAP financial measures should be considered along with, but not as alternatives to the operating performance measures prescribed by GAAP.

Operator

With that, I would like to turn the conference over to Sheila Hopkins, former Interim CEO of Cutera. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon and welcome to Cutera's Q2 2023 earnings call. With me on the call are Stuart Drummond, Interim CFO Greg Barker, Vice President of Financial Planning and Investor Relations Since I stepped in as Interim CEO, our Board has worked with a clear mandate, find the best person to serve as the permanent CEO of Cutera. We committed to bringing in a world class operating executive to execute the company's strategy. Taylor Harris more than delivers against these specs.

Speaker 1

His appointment follows a comprehensive search process led by Russell Reynolds that included input from some of our largest investors. I speak on behalf of the entire Board when I say that we could not be more excited to have Taylor at the helm. And we are confident that the company and our shareholders are in good hands going forward. For those of you who don't know Taylor, let me share a bit more about why the Board and I believe he is the right person for the job. Taylor is a proven executive with over 20 years of experience and a track record of driving growth in the medical and aesthetic device landscape.

Speaker 1

Most recently, he served as Senior Vice President and CFO of MyoKardia, a biopharmaceutical company. Prior to that, he was SVP and CFO of Zeltiq Aesthetics. Taylor played a key role in building CoolSculpting into a formative competitor. He also served as Vice President and Chief Financial Officer at Thoritec Corporation. And prior to that, he worked at JPMorgan Chase for over a decade with a focus on the medical device industry.

Speaker 1

Taylor joined our Board in June and also served as a consultant for us and we have been able to see that he has a deep seated sense of integrity, Taylor also shares the Board's conviction that there is a tremendous opportunity to unlock and create value at Cutera. And if there's a common thread woven throughout Taylor's experience, it is in fact his ability to drive value creation. So when you add it up, there is no doubt that he is the right person for this job. And I'm delighted that he is here his 2nd day in the seat for this call. And you will hear from him in a few minutes.

Speaker 1

But first, let me walk you through the highlights of our 2nd quarter performance. Then I'll pass things over to Stuart to provide greater details on the financials. We'll conclude with Taylor sharing his initial thoughts on the way forward for the company. He will wrap up the call and open it up for questions. And with that, I'd like From a Board perspective, in June, we welcomed 4 new directors, Kevin Cameron, Nick Lewin, Keith Sullivan and Taylor, and they each bring relevant skills and experiences to the table and are adding significant value already.

Speaker 1

From an organization perspective, the retention bonuses we implemented in April have worked. We've only lost one person among the targeted group of people. So our employee base has remained engaged. Turning to the business, our results for the Q2 are frankly disappointing and reflect that the business faces more challenges than were apparent when I first stepped into this seat in April. Total revenue for the Q2 was $61,200,000 down 5% versus a year ago on a reported basis and down 2% in constant currency.

Speaker 1

We did see sequential growth versus the prior quarter, conference, but not as much as expected. And the decline versus a year ago traces primarily to capital equipment and cuts across most geographies. Adjusted EBITDA was a loss of $11,600,000 versus a $1,600,000 loss in the year ago period. Now this reflects decreased gross profits and increased OpEx spend behind AviClear. Stuart will provide more detail.

Speaker 1

But let me provide a bit more perspective on revenue performance. Our core capital business was down minus 13% as reported and 11% in constant currency. Now some of the declines reflect challenging year over year comparisons as our Q222 2022 revenues were a high watermark. However, a clear eyed assessment of this business shows that it also faces Our capital business is also challenged by the tightening credit environment, which has made it more difficult for some customers to find financing. This has impacted deal closures and placed pressure on our ASPs.

Speaker 1

Med spas have been the most affected and we are investigating new approaches to help these customers find financing. Now there are shoots of green on the core capital business. First, the shift to a more measured booking pace for Avicleer addressed the problem that we had faced from October through March conference call. We will now begin the call to discuss the financial results of the company's financial results. We will now begin the call to with more new product news on Core Capital in 2024.

Speaker 1

So Annette, getting our capital business back Turning to Avicleer, we have more work to do here also, but the biggest challenge being increasing utilization and the percent of installed offices that are contributing. Key to success will be practice business development and more effectively holding utilization rates in existing offices as new offices are onboarded. We are working expeditiously on the playbook to achieve stronger results here and Taylor brings invaluable industry experience to the task at hand. Now, I'm encouraged by the progress that we made in the quarter on Avi and we're also progressing development of new handpieces for Avicleer that will expand treatment areas. And finally, AviClear became the 1st acne therapy to obtain FDA clearance as a long and the challenges that we face are greater than I initially realized.

Speaker 1

I am confident that with Taylor's leadership, These challenges will be addressed and the business will return to sustainable growth. And with that, I'd like to turn the call over to Stuart for a financial update. Stuart?

Speaker 2

Thank you, Sheila. Today, I'll be discussing our reported Q2 results as well as some non GAAP results. A reconciliation of GAAP to non GAAP gross margin and operating loss is included in our earnings release. We encourage listeners and readers to review our non GAAP results in conjunction with the GAAP results contained in this earnings release. Turning to our Q2 results.

Speaker 2

Total revenue for the Q1 was $61,200,000 The $3,000,000 or 5% decrease from the comparative period represents a 2% decrease on a constant currency basis. This decrease reflects a decline in capital equipment revenue, partially offset by Avicleer revenue recorded in Q2 of this year. As a reminder, we began a limited commercial launch of IV Clear in April 2022 and a full commercial release in November 2022. 2nd quarter consolidated capital equipment revenue of $37,900,000 decreased by $5,800,000 or 13 percent from the prior year period. North American capital equipment revenue of $22,200,000 decreased by $3,000,000 or 12% from the prior year period.

Speaker 2

This decrease included a $1,000,000 increase in our sales return reserve. I would like to highlight that Q2 2023 North American system revenue represented a $4,200,000 improvement over Q1 2023, reflecting our sales force's refocus on core capital. International Equipment revenue of $15,700,000 represents a $2,800,000 or 15% decrease from Q2 2022. Recurring revenue defined as our consumables, global service, skincare and IV Clear revenue was $23,300,000 in the quarter, up $2,800,000 or 13 percent over the comparative period. The increase over the prior year was mainly driven by Avicle revenue of 4,000,000 partially offset by a $900,000 decrease in consumable revenue resulting from a promotion we offered in Q2 2022.

Speaker 2

Non GAAP gross profit for the Q1 of 2023 was $30,800,000 with a gross margin of 50.3%, representing a decrease of 5.30 basis points compared to the same period last year and an increase of 120 basis points compared to Q1 of 2023. Regarding the comparative quarterly decrease, Geographic and product revenue mix and increased pressure on ASPs affected gross margin by 270 basis points and continued foreign exchange headwinds adversely impacted gross margin by a further 120 basis points. The remaining factors impacting the comparative decline in our gross margin cost increases for certain parts, which had 170 basis point impact and an increase in our inventory obsolescence reserve, which had 100 basis point impact. Aviclea revenue in the Q2 of 2023 positively impacted our gross margin compared to the Q2 of 2022 by 130 basis points. Non GAAP operating expenses for the Q2 of 2023 were CHF 42,400,000 compared to CHF 37,300,000 for the same period last year.

Speaker 2

This $5,000,000 increase was mainly driven by the continued expansion of our arbitrage sales force and promotional activities, which represents around $3,100,000 of this increase as well as the charge we took in the Q2 as we increased our allowance for doubtful accounts by $2,000,000 For the Q2 of 2023, Our non GAAP operating income, which we refer to as adjusted EBITDA, was a loss of $11,600,000 compared to a loss of $1,600,000 in the prior year period and compared to a loss of $14,500,000 in the Q1 of 2023. The increase in loss compared to Q2 2022 was due to the decrease in gross profit and increase in operating expenses. Turning to our balance sheet. We ended the quarter with $222,600,000 of in the conference call. And Michael Securities compared to $267,700,000 at March 31, 2023.

Speaker 2

Driving this $45,000,000 sequential decrease of $25,000,000 used in the IV Clear business and $18,000,000 from core losses, of which $8,000,000 relates to Board of Directors legal and advisory fees incurred in support of the recent Board governance matters. The Aviclea use of cash results from $17,000,000 spent on devices and parts and $7,000,000 in cash losses. Our cash consumed in the Q1 of this year was $49,700,000 Our expectation is that our cash consumption will continue to trend downwards throughout 2023, driven by a decline in Board of Directors legal advisory fees, As we're expecting the Q3 amount to be about half of Q2, a reduction in core inventory, an improvement in cash collection and a slower pace of Aviclea placements. I I will now pass the call back to Sheila.

Speaker 1

Thanks, Stuart. Before I turn the call over to Taylor to talk about the future, I want to say that it has been a privilege to serve as Cutera's Interim CEO. In the time I have been in this conference call. I've gained even deeper insight into the company's business, people and strategy. Getting to know Cutera people up close has been a joy.

Speaker 1

I am grateful for their unwavering dedication and commitment. And while there is a lot of work to be done, I am confident upon returning to my position as an independent director on the Board. Now let me turn this over to Taylor.

Speaker 3

Conference. Thank you so much, Sheila. It's an honor to join you today as Cutera's new CEO. This year Cutera celebrates its 25th anniversary, 25 years of pioneering innovation and leadership within the medical aesthetics industry. This company founded by accomplished engineers has We've developed amazing products and we've partnered with our customers with dedicated sales, service, clinical and marketing support to help them best utilize our technology and our products to serve the needs of patients around the globe.

Speaker 3

The next 25 years can be even better. And that's the reason that I'm here at Cutera. We have an opportunity to make Cutera stronger, FedEx industry, second to none. We will speak to this longer term vision in the quarters to come. For now, Let me talk about 3 near term priorities that are intended to address the speed bumps, which we've hit in recent quarters.

Speaker 3

1st and foremost, we must improve our product reliability and service levels, where we've seen a disappointing degradation in performance and once again assume a position of recognized industry leadership, not just in the innovation we bring, but also in the quality and in our commitment to customer service. 2nd, Avicleer, what an impressive new technology for the treatment of acne. AviClear truly has the ability to change people's lives. It's a privilege to work at a company with this opportunity and the mission The patient interest in an alternative to systemic drug therapy is clear and the results and patient satisfaction are increasingly impressive. AviClear was one of the most exciting features that attracted me to Cutera and this therapy will play a vital role in our future, But we need to slow down before we speed back up.

Speaker 3

In the coming weeks, I will be meeting with the team to look at ways to optimize AviClear. We'll look at everything from our clinical training and practice development support to our billing systems and our business model. With over 1,000 AviClear devices in physician offices, We need to focus our team on educating our customers on how to drive utilization within their practices. This will include training the physician staff on how best to speak to their patients about the benefits of Avi and ultimately to get them in for treatment. We know that we need to deploy AviClear Capital strategically, but more importantly, we need to assist our physician partners on how to get the best results for their patients suffering from acne.

Speaker 3

Fundamentally, we need to put ourselves into our customers' shoes and do everything we can to support them as they deliver this game changing therapy for patients. The team at Cutera is hard at work thinking through these plans. And in the meantime, we're focused on improving service levels, building our practice development capabilities and continuing to drive awareness through our consumer and professional marketing activities. 3rd, we will focus on growth in our core business, which has lagged our expectations in recent quarters. With an exciting new product like Avi Clear, it was easy for organizational attention to become diverted away from the core product line upon which Cutera has been built.

Speaker 3

We're thrilled with the industry's excitement regarding Avi and the level of demand that we experienced and we will build a world class franchise supporting patients with acne over time. However, this initial demand stretched the organization too far in some areas to the detriment of our core business. Earlier this year, we began to slow the pace of new Avi Clear bookings and we're now focusing our capital organization's priority squarely on the core business as we develop the tools to drive greater treatment session utilization with Avicleer. The broader company has a significant role to play in supporting our field most importantly through product support and new product innovation. But with this focused effort from our capital organization and the support from our service and innovation functions, I believe we can continue the legacy of product leadership and growth at Cutera.

Speaker 3

Underpinning all of this work is the foundation of our people, our purpose and our mindset. And I think our logo highlights the most important building block in our coming journey Our teammates, our customers and patients. This core value is part of the DNA here at Cutera. I've seen it firsthand in these early days and I truly believe that it's only through this cultural mindset that we will have the fortitude and resilience to weather the journey to greatness. So we as an organization are recommitting to supporting each other and to pursuing excellence for our customers.

Speaker 3

On the people front, we have some key holes to fill in the near term and we need to make sure that we're allocating our time and resources toward the right set of priorities. But I am confident that we have the team and the will to win. Now let me turn to our outlook for the balance of 2023. With today being my 2nd day on the job, there's a degree of uncertainty that must be recognized. So I'll walk you through the way we formulated our revenue guidance.

Speaker 3

In the first half of the year, our core capital and consumables product lines declined year over year. We will be redirecting more attention Our guidance assumes that these factors will weigh more heavily in the second half than they did in the first. We will also be committed to winning business based on our technology and our service, while maintaining higher margins. For Avicleer, we expect the installed base to continue to grow with scheduled installations, bringing a higher level of revenue contribution in the second half of the year and that we need to work with all of our practices on developing sustainable engines for generating patient flow and utilization. As I mentioned earlier, we are committed to building AviClear into a mainstay treatment for patients with moderate to severe acne.

Speaker 3

But in the near term, We need to optimize our go to market approach and make sure that we have the reliability and processes to support our customers before reaccelerating. Last, as it relates to our skin care line in Japan, we have been informed by our partner Zio that they do not intend to We expect our revenue in the second half of twenty twenty three to be down compared to the first half. We are still working through the details of the transition process and will provide more color at a later date on how revenue will trend leading up through the middle of 2024. I would note that this product line currently has a gross margin profile slightly below corporate average with relatively low associated operating expense. So all of those considerations informed our thoughts around the revenue guidance range of $220,000,000 to $230,000,000 While we don't give specific quarterly guidance, the phasing should reflect seasonal softness in the Q3.

Speaker 3

As for the bottom line impact, I would just reiterate Stuart's comments regarding the moderation of our cash burn as we progress through the next two quarters. Conference call. Our performance year to date and our near term outlook does not reflect the type of profile that we aspire to, But it's important to acknowledge the facts on the ground while we retool to support sustainable long term growth, profitability and leadership. The future at Cutera is bright. With that, I'll turn it over to the operator for questions.

Operator

You will hear a tone acknowledging your request. Our first question comes from George sellers of Stephens Inc. Please go ahead.

Speaker 4

Good afternoon and thanks for taking the question. I I guess starting with Avicleer, I'm just curious if you could give a little bit more detail on the utilization trends, how the physicians who maybe got the device at the end of last year, what utilization looks like for those doctors versus

Speaker 3

Happy to talk about what we've seen with Avi clear. And I won't give specific comments On some of the topics, but I'll try to give you some directional color. And maybe more broadly, I'll just start with where we are From a placement front, we've obviously been really successful in placing AviClear out into the field and that just indicates A lot of demand, a lot of interest, and it gives us a good degree of optimism about the future of Avi. So we've now got over 12 50 devices in the field as of the end of the second quarter. Our training programs have ramped as well.

Speaker 3

So the vast majority of those units have been placed. As we think about utilization, I think it's important to think about both How many devices out in the field are contributing active as well as what types of utilization rates we're seeing there. So The good news is that the number of devices that are contributing has increased. However, the percentage as our installed base has increased, the Percentage that are contributing and we think about contribution really as how many devices are doing a treatment during a month. So the percentage that is contributing has declined and that reflects the really the large increase in our installed base.

Speaker 3

Consequently, utilization rates have declined. And we've really seen that across the user base. I think some of that in recent months has been attributed to just seasonality in the business. We're learning more about way this business works, seasonally, but we're also looking into all of the other factors. Clearly, the number one focus of the organization needs to be supporting the customers, who have this device and helping them build great practices.

Speaker 3

So that's what we're planning on doing. I think there's a playbook here. We saw it at Zeltiq. We had a similar challenge, Not when I was there, but in earlier days with respect to having a large installed base and needing to really refocus on driving utilization and that's what we're going to do here.

Speaker 4

Okay. That's really helpful. And then Maybe switching to the core aesthetic business. I'm just curious if you could sort of level set, has there been a structural change in that business As it relates to profitability or in terms of demand or is this more something that can be corrected with some of the initiatives and things that you're working on.

Speaker 3

So what I'd say, I do think that As you've noticed, our and Stuart alluded to, our selling prices have declined in the first half of the year and we've had an overall volume decline as well. And I think what that reflects A couple of pressures. One is a macroeconomic pressure and the second is more company specific. So on the macro front, the financing environment is more challenging and we're seeing that reflected in our conversations with customers and we're looking for ways to support them. So I would say that that's a structural issue that we need to address.

Speaker 3

The company specific factor has, in large part to do with some of the service Challenges, the reliability challenges that Sheila spoke to. And so there, we need to When machines go down, getting them back up online quickly. That is not structural. That is something that we control And we are focusing a lot of attention there.

Speaker 4

Okay. That's really helpful color. I'll leave it at 2 and thank you again for the time.

Operator

Our next question comes from Jon Block of Stifel. Please go ahead.

Speaker 5

Thanks, guys. Good afternoon. I'll start with AviClear. So Box is higher Q over Q, Obviously, revenue lower Q over Q. So obviously, utilization not very good.

Speaker 5

Tyler, I think you mentioned the percent has declined. That's weighing on utilization. And I know it's your 2nd day on the job, but I want to press you

Speaker 6

a little bit. Is this

Speaker 5

the right business model in terms of placing the box essentially for free and then Cutera getting outsized economics in the consumable? You've got, as you mentioned, over 1200 boxes out there. Where do you dispatch sales guys? Who's serious about Adopting the technology. So maybe just talk to us on your thoughts on that business model.

Speaker 5

I know Zeltiq was a little different. I mean, you charge for the box and then you still got the recurring. But is this the right one where it essentially goes out for free and then the 50% shared economics or is there more of a middle ground that might be a better fit?

Speaker 3

John, I think it's a great question and it's the right question to ask. And before I get to that, let me just talk to the Q2 and the patient dynamic. Revenue was down as you noted. We did treat more patients in the Q2 than we did in the Q1. Now it was modestly more, but it was more.

Speaker 3

We had we did have a revenue adjustment, an accounting adjustment that we needed to take. Without that, you would have seen a revenue trend more reflective of the underlying patients treated trend. But the broader point remains in that what we saw as we progressed through the first half of the year and even into the start of the Q3 is utilization rates not where we want them to be. So, your question is the right one. It is one that I asked when I started doing my work, looking at Cutera as an opportunity personally.

Speaker 3

And I think one thing that the work and I'll tell you this, the organization is looking at it for sure. One thing we're committed to is meeting customers where they are. And so the question you're asking is one that some customers have asked as well. And I think we need to be really thoughtful and Responsive on that front. Different business models, each can work.

Speaker 3

And we just want to find the right setup for our particular situation. So for now, we need to leave it at that. But it is something that we're looking hard at. And John, I'd also say that's part of the reason that We're slowing down here on the capital front is we want to reassess are we doing this the right way from a number of different angles.

Speaker 5

Okay, great. That was very helpful. Thanks for that color. And maybe just to shift gears for the second question and I'll also just keep it to 2. But I've been monitoring you guys for a while.

Speaker 5

And this company is always led with quality and that's really resonated with your customer base. Yes, I find that's a surprise. How pervasive are these issues across the portfolio? Maybe you can talk a little bit to that. Really, what's unfolded in the past 3 to 6 months in terms of why this is coming front and center now?

Speaker 5

And then maybe most importantly, how long does that take to turn around? Thanks for your time.

Speaker 3

Sure. John, I'll start and then if Sheila wants to add anything, then she can hop I think that what we're seeing here is part of the fact that we really flooded the engines with And the so we saw a lot of capital go out, a lot of production volume through our link some of the challenge we're having directly to that or full proof of that, but the timing Would indicate that that had a meaningful role to play. And so I fully agree with Your assessment of the company over its history. And I also believe that we can and will get back to being known quality and service. But the fact is we've got a lot more devices out in the field across the core as well as with Avi.

Speaker 3

And so it stretched the organization. So I think what we need to do is and this is we talked about this, but we're bringing the new deployments I'll be clear effectively to a halt as we pause here. Now we do have scheduled installations. We've made commitments to customers. We're going to service levels and on quality across the entire portfolio.

Speaker 3

That won't be easy. How long is it going to take? I can't give you a promise What I can tell you is that it's the organization's top priority right now and there is a clear commitment.

Operator

Our next question comes from Matthew O'Brien of Piper Sandler. Please go ahead.

Speaker 7

Hey, this is Phil on for Matt. Thanks for taking our questions. My first one is for Taylor. Congrats on the new role. I was just wondering if you could expand on what you saw At Cutera that ultimately prompted you in taking this role despite some of these near term headwinds that you outlined what might be needed from a resource or technology perspective that the company might not have at this And any guide rails in terms of how long this might take to get your strategic plan in place?

Speaker 3

Hey, Phil. Thanks for the question. So I've been familiar with Cutera for a number of years. I remember Back to when I was at JPMorgan and the company went public and they were at our healthcare conference and I thought, wow, this is a really cool company and then just having been in the aesthetics business was familiar with the reputation of the company for being A product innovator, a leader and a company that stood behind its products. So I felt reputationally it's the kind of company That it appeals to me and that I want to be a part of.

Speaker 3

I think AviClear was another big draw So there aren't too many times that you have an opportunity to launch an exciting new therapy like this. I do think the market needs is ready for, hungry for an alternative to drug therapy. And I think Avi has the potential to be a really meaningful impactful new product launch. And then the other couple of things I'd say is that I've had the opportunity over the last couple of months to be involved with team, as a consultant, on the Board and I've just been super impressed with the commitment level of the I've been at companies before where you go through hard stretches and I think it's in those times that teams come together and that you end up looking back and those are the times you remember and it makes coming out of those time periods All the more sweet. And I think that's what's going to happen here at Cutera.

Speaker 3

And I'm just convinced we've got a team that wants that. So the challenges we have here, we're not going to sugarcoat them. We're going to talk about them. We're going to put numbers to them and we're going to deal with them methodically. But I think that For me, looking at them, I felt like they were issues that are fixable execution issues.

Speaker 3

And so we just need to focus on them. And so all of that made me feel excited. I'm here not for a couple of quarters, but for a long time and we're going to start working on it right now.

Speaker 7

Plans that were mentioned earlier, just because OpEx numbers were a little high, what did you have to commit there? How long is that duration and how can we get comfortable that when these commitments expire there's not going to be some type of exit Sometime next year or later.

Speaker 2

Yes. Hi, Phil. It's Stuart speaking. I'll speak to the first part of your question. So we announced in our subsequent events footnote that we're committing up to $13,000,000 The final number came in at 11,000,000 The retention plan is over 1 year and it's paid out in 4 installments, 2 this year and the bulk actually is weighted towards next year.

Speaker 2

And it covers around 50 employees, mainly in the sales and marketing area and a few key individuals in the G and A area as well.

Speaker 1

Yes. And this is Sheila. Just to follow-up that. The good news is that those retention bonuses have worked quite well. And for the management team, we've retained all but one.

Speaker 1

And As importantly, the team on the ground here remains, as Taylor mentioned, quite committed and engaged.

Operator

Our next question comes from Anthony Vendetti of Maxim Group. Please go ahead.

Speaker 6

Thanks. Yes. Taylor, I was wondering just to follow-up on the service issues. When were they identified? Was it with the commencement of the placement of the AviClear Systems or were service issues starting to crop up before that?

Speaker 6

And then just in terms of the core business, do you feel like some of the core systems that have been around, the legacy systems have been around for a while, were just naturally starting to decline Or would you attribute that more to the current credit environment, high interest rates? And if one of those are an issue, Is there really anything you could do to turn around that core business absent

Speaker 1

This is Sheila. Let me just start on the service and reliability issues and when did they begin to surface. And let me say this as some background perspective. On the timing to service front, the issue is actually parts availability. There are A number of parts that are on backlog, that reflect some supply chain issues.

Speaker 1

And that has gotten in the way of our FSCs, which are our service engineers being able to service offices in a timely manner. It is not a deficiency of that organization at all. It is The need for Cutera to find ways to close the gap on these parts and that is what the organization will be doing For a while, they began with COVID and they have persevered since then, but we really do need to, as Taylor said wrap our minds around this issue and solve it in a way that is systemic and very methodical. On the reliability front, those issues really did begin to surface as We ramped up Avi and I think it is fair to say that, as Taylor has mentioned, While Avi is an amazing technology that does have a brilliant future, The organization was a bit overwhelmed and stretched then. And as the manufacturing organization ramped up, Avi, reliability issues began to surface across the portfolio of products.

Speaker 1

It is not entirely broad scale, the reliability issues are focused on 3 to 4 systems. But once again, these are issues that we own and that we will be dealing with post And to that end, let me just talk a little about the steps the organization will be taking to better address the reliability issues and to a large degree, the primary way to address the reliability issues improved quality control measures, so that we're testing systems as they come off the line before they are shipped to make sure that they are meeting our quality standards.

Speaker 6

Okay. Yes, that was helpful, Sheila, on the Service reliability and quality front. Just on the second part of my question on the legacy of core products, Is there really much you can do to turn that around in this environment absent new product development?

Speaker 3

Yes, Anthony, I think on that front, there is a challenging macro environment, but there the capital organization squarely on the core product line. That will be one of the benefits of not looking to place So we've got some great products. We've got a broad product line. And there are parts of that that we feel like We've got a good opportunity to grow, but we need to be able to commit on the reliability in the conference. And that's what we're doing.

Speaker 3

And then for sure new product flow helps. And there's our team there has a number of different programs we're working on. We aren't sure right now the order in which we're going to be Bringing some of those to market, but there are plans to bring new product to market in 2024 and that should absolutely be helpful.

Speaker 1

The other thing I'd point out here is just one other point on the core business is that parts of our customer base. So as a for example, we are still seeing good growth on our business, on the core business amongst aesthetic dermatologists. So that is a point of strength that we can leverage going forward.

Operator

Our next question comes from Margaret Kaczor of William Blair. Please go ahead.

Speaker 8

Hey, good afternoon. Thanks for taking the questions. I wanted to start out on AviClaire and maybe a simple question or non simple question, but how much of the answer is pulling back some systems from the field that were maybe Not necessarily profitable for the company versus changing some of the pricing dynamics versus increasing investments such as PDMs or a more dedicated sales force, just because the product does seem like it's maybe a little bit different than the rest of the core.

Speaker 3

So I think it's hard to provide a percentage allocation of what we think will be impactful here. But I would take each one and say that we think there's opportunity. So for sure, there are some devices that are not being utilized or may not have real potential to grow at least in the near term and there we'll have a conversation. There's an opportunity potentially to bring that back and have that be a win win. So I do think that that will be part of the discussion in the coming weeks months.

Speaker 3

On the business model or pricing front, I think that that's we're hearing from customers. There is a desire for different options. And so we just need to We need to look at that. We want something that's going to be simple to understand, transparent, consistent, But we want to provide some flexibility. And then the last point is, I think The longer term, that's the answer for sure.

Speaker 3

With AviClear, We're a treatment company. We're interested in helping our customers treat their patients. And so that means having our team aligned in that direction, both from a practice development, practice marketing, clinical training perspective and then really working with our customers as well to help them be successful. So I think that there's probably an order of there's an order of operations here, But then ultimately the third point is the one that we're shooting for to make this a long term success.

Speaker 8

Okay. That's helpful. And then as we think about utilization trends this quarter, Anything that you can highlight were some systems up, some down? Was it pretty similar? I think the prior management team had kind of described this maybe as a little bit more of a scatterplot or maybe you're working through that data generation before taking a more definitive action.

Speaker 8

And that's on Avi. Thanks.

Speaker 3

Well, in the second quarter, while there are Absolutely bright spots, and there are also some systems that aren't performing at all. In fact, there's a Good percentage. Generally, 2nd quarter utilization was down compared to the previous couple of quarters. And I think that likely reflects a couple factors. One is just the seasonality in our business and the second is simply the number of machines out in the field, some of which aren't performing at all, but also that's Stretching our organization thin in terms of being able to support them.

Speaker 3

So that's generally what we saw in the second quarter, Also leading into the start of the third and that's the reason that we're doing what we're doing here in terms of retooling and focusing on identifying where are our most productive opportunities to step in on a quickly and start growing practices and then doing that more consistently across the base.

Speaker 1

One other piece of color there would be that, we added a lot of new devices in the second quarter. Conversation and by definition they pulled down the averages. And so as we pause even more on the number of devices that we place that really will enable the CAM organization to get into those offices and nurture them, Put some really high quality practice development plans in place and get those utilization numbers up. And once again, there is a playbook that we can use here and Taylor is well versed in the use of that playbook.

Speaker 8

Okay. Thank you both. Appreciate it.

Speaker 3

Thanks, Margaret.

Operator

Conference. This concludes the question and answer session. I would like to turn the conference back over to Taylor Hirsch for any closing remarks.

Speaker 3

Thanks, Ariel. Before we say goodbye for the day, I just want to thank Sheila, who has been a consummate professional. She stabilized the organization and she's been so thoughtful and supportive in on boarding me. So we're fortunate to have Sheila staying on our Board and we all thank her for everything she's done operationally over the past few months. We got a lot of work to do here at Cutera, but we've got a big opportunity ahead and the team and I are excited to get going.

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Earnings Conference Call
Cutera Q2 2023
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