Beauty Health Q1 2024 Earnings Call Transcript

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May 9, 2024

There are 11 speakers on the call.

Operator

Hello, and welcome to the Beauty Health First Quarter 20 24 Earnings Conference Call. At this time, all participants will be in a listen only mode. Later, we will conduct a question and answer session. I will now turn the call over to your host, Roberto Aja, Investor Relations. Please go ahead.

Speaker 1

Thank you, operator, and good afternoon, everyone. Welcome to Beauty Health Company's 2024 First Quarter Conference Call. We will start in just a minute with management's comments and your questions. But before doing so, let me take a minute to read the Safe Harbor language. Management may make forward looking statements, including guidance and underlying assumptions.

Speaker 1

Forward looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. Listeners are cautioned not to place undue reliance on any forward looking statements. For further discussion of risks related to our business, see the company's filings with the SEC. This call will present non GAAP financial measures. Reconciliation of these non GAAP measures to the most comparable GAAP measures are to be found in the earnings press release furnished to the SEC and available on our website.

Speaker 1

Joining me on the call today is Beauty Health's Chief Executive Officer, Marla Beck along with Chief Financial Officer, Mike Monahan. Following management's prepared remarks, we will open the call for a question and answer session. With that, I would now like to turn the call over to our CEO, Marla Beck. Please go ahead, Marla.

Speaker 2

Thank you, Norberto. Good afternoon, everyone, and thank you for joining us. We are pleased to be with you today to review Beauty Health's Q1 results and the progress we are making on our business transformation. As discussed on our last call, we continue to drive towards rebuilding and restoring confidence with a focus on laying the foundation for future growth. While this transformation will take time, I am encouraged by the progress we are making towards our 3 strategic priorities: sales excellence, operational excellence and financial discipline.

Speaker 2

Our teams are driven and focused and I'm excited by the long term potential of DUTI Health. Turning to our Q1 results. We had a solid start to 2024. 1st quarter revenues came in above our guidance midpoint with healthy consumable sales. Profitability was also well ahead of expectations, driven by continued cost rationalization.

Speaker 2

While we are encouraged by our progress, there is still more work to be done, particularly on the device side of the business. We've addressed the core issues that impacted earlier versions of our Syndeo system with the release of Syndeos 3.0 last July. The quality has improved significantly. However, our field teams and customer service teams are finding some technical issues, most of which are resolvable by phone or an in field technical visit. In the last 30 days, we have brought in a seasoned operations leader who has decades of experience to rapidly bring our quality processes and our global production and supply chain processes up to superior levels.

Speaker 2

We will get this right over the next couple of quarters. Our number one priority is to make sure our providers have the devices they need to serve their customers and maximize their revenue stream. We are committed to this every day. We remain acutely focused on improving our financial results and addressing our near term operational challenges, while building the foundation necessary to capture these significant long term growth opportunities for our hero brand HydraFacial. For providers and consumers alike, HydraFacial is beloved for its instant skin health results, scientifically proven clinical efficacy and strong brand recognition.

Speaker 2

Investing in HydraFacial treatment devices offers providers the potential for a new revenue stream, increased traffic and ongoing support by our business development and training teams. It is a treatment asked for by name across doctors' offices, med spas, single room aestheticians as well as retail and hospitality locations for healthy, glowing results every time. On our last earnings call, we introduced 3 key strategic priorities for 2024, including sales excellence, operational excellence and financial discipline. While early in this transformation, I am encouraged by our progress. Regarding our first priority, sales excellence, our field team has been successful in elevating our strong provider relationships through best in class customer service and engagement.

Speaker 2

The treatment room is the center of our business and providers and our sales teams are the face of the brand. We believe consistent personal connection between our experienced and tenured sales team and our providers is a unique differentiator for the HydraFacial brand. In putting the provider first, we've also allocated additional resources to support them. We've refined our training programs, giving our providers more accessible and convenient education opportunities to hone their craft and effectively grow their businesses. We've also expanded our technical and customer service teams, including the addition of 20 fourseven technical support in the U.

Speaker 2

S. And Canada to swiftly address the needs of our customers. In a study conducted in February, Hydrofacial has the highest NPS among branded capital equipment in med spas and traditional spas. Additionally, Hydrofacial was recently named Aesthetics Vendor of the Year by our corporate partner RelivHealth at their franchisee conference. This recognition is a testament to both the clinical efficacy of our treatment system and the world class support of our field team.

Speaker 2

Our providers continue to recognize the unmatched results of our treatment and the power of the HydraFacial brand to not only bring consumers through their doors, but also to serve as a revenue multiplier for their business. As we look further ahead, we are more confident than ever in HydraFacial's potential both in its current form and through innovation. Moving to our second area of focus, operational excellence. As I mentioned on our last call, my focus from day 1 has been to streamline our operations, concentrating on our most promising growth avenues and instituting added rigor, accountability and oversight throughout our supply chain. A comprehensive evaluation of our entire manufacturing and operational framework is underway.

Speaker 2

I look forward to updating everyone upon its completion later this year. To this end, we recently made additional strategic leadership changes. In April, we appointed Sherri Lewis to the newly created position of Chief Supply Chain and Operations Officer. Sherri is a talented and deeply experienced executive who brings decades of relevant expertise across global supply chain and operations, including at Medtronic. She will serve as an important she will serve an important role in advancing our strategic objectives in this area.

Speaker 2

She is currently leading a comprehensive global supply chain review to drive continuous quality improvements. Regarding our 3rd priority, financial discipline. Our goal is to be cost conscious in everything we do, balancing our cost structure with revenue and opportunity. Operationally, this means tighter expense management and a reallocation of resources to high impact areas of the business. Looking ahead, we see a number of compelling opportunities to drive long term profitable growth by leveraging the tremendous power of the HydraFacial brand and our clinically proven treatments.

Speaker 2

We see an attractive opportunity around consumables to drive further penetration. We'll be working through our long term innovation pipeline. We will look at how we expand our offering to increase the efficacy and longevity of our results. We see a clear opportunity to grow our device installed base by further segmenting our provider channels and offering unique value. We have exclusive offerings in our medical channel currently, such as our wet diamond tip and our medical grade peel.

Speaker 2

We see an opportunity to expand our offerings treating each segment in a unique way. Additionally, we have meaningful clinical studies related to the efficacy of HydraFacial treatments both historic and underway that we will leverage in all of our stakeholder channels. We also see the opportunity to increase penetration in our existing markets to drive scale. We are looking at how we increase our investments in our direct markets to drive both provider and consumer adoption and retention. Of course, none of these opportunities would be possible without our entire team's unwavering focus on delivering the highest levels of support and service to our providers and end consumers.

Speaker 2

Our past and future success is predicated on this ironclad commitment. What gives me the most confidence in our ability to drive further improvements in growth while creating added value for our partners and shareholders is the quality of our team, including the recent additions we have made. While we remain cautious in the short term as we work through the remaining headwinds, believe the long term outlook and opportunity for Beauty Health has never been more promising. I look forward to engaging with you over the coming quarters to discuss our progress. With that, I will turn the call over to Mike.

Speaker 3

Thank you, Marla. I will begin with a detailed review of our Q1 financial results and then provide an update on our financial guidance for 2024. Revenue came in above the midpoint of our guidance at 81 $400,000 representing a 5.7 percent year over year decline. This was primarily driven by a slowdown in capital equipment sales across all regions, substantially offset by an increase in consumables. Gross margin was 59.4% versus 62.7% in the prior year period on a GAAP basis and 63.4% versus 70% respectively adjusting for non cash expenses and certain add backs.

Speaker 3

The primary drivers behind the decline on a GAAP basis were higher indirect product costs along with an increase in inventory related charges. This led to an adjusted EBITDA of $400,000 or 0.4 percent of revenue versus $500,000 loss or negative 0.6 percent of revenue in the Q1 of 2023. During the quarter, we saw growth in overall consumable sales across all regions, offset by lower capital equipment sales. Global equipment revenue declined 21.1% as we saw pressure across most of our end markets. While we continue to see strong interest in both our brand and products, we are seeing tightening credit and longer lags between lead generation and closing.

Speaker 3

During the quarter, we sold 14 17 systems at an average selling price of $25,253 This brings the total active machines in the field to 32,530 units versus 27,406 units at the end of Q1 2023. Consumable sales grew 11.5 percent $45,600,000 continuing to demonstrate the growing interest and appeal of HydraFacial from end consumers. From a geographical perspective, revenue in the Americas declined 5%, primarily driven by soft capital equipment sales due to credit tightening and customer caution. For the quarter, APAC revenue declined 12.1 percent to $12,000,000 while China accounted for $7,200,000 of the region's revenue, a decline of 3.1% year over year. The decline in China reflects an 11.9% drop in new system sales, partially offset by an increase in consumables growth.

Speaker 3

We believe there is a large opportunity for growth in China. However, we remain cautious in the near term. We are focused on developing a strong stable sales force and equipping them with the tools needed to grow the business. EMEA's Q1 revenue declined 2.9% to $19,100,000 with strength coming from consumables offset by lower new capital equipment sales. We delivered consolidated GAAP gross profit of $48,400,000 resulting in a GAAP gross margin of 59.4%.

Speaker 3

Adjusting for non cash charges such as depreciation, amortization and stock based compensation, adjusted gross profit of $51,600,000 for a 63.4% adjusted gross margin. We expect adjusted gross margin to be relatively consistent with Q1 levels for the balance of 2024 as we continue to work to evaluate and optimize our supply chain strategy. As it relates to operating expenses, I am pleased to report a decline of 6 $100,000 down 8.5 percent year over year as we continue to have success in more strategically managing expenses across the globe. Selling and marketing expense was down approximately 13% to $33,700,000 reflecting a lower marketing spend as well as lower compensation and sales commissions. R and D expense was $2,800,000 up $500,000 while G and A expense was $28,900,000 down $1,500,000 with savings primarily driven by lower compensation and outside services expense.

Speaker 3

This resulted in a net loss of $700,000 Normalizing for non cash items and certain discrete charges, our adjusted EBITDA was $400,000 favorably comparing to a net income of 20,300,000 dollars and an adjusted EBITDA loss of $500,000 in Q1 2023. Moving to the balance sheet. We ended the quarter with approximately $444,600,000 in cash. Through May 8, we repurchased $192,300,000 of our convertible debt. As of March 31, we have had approximately we have approximately $70,000,000 remaining on our existing share repurchase authorization.

Speaker 3

We feel comfortable with our current liquidity position and together with our Board, we will continue to evaluate the best allocation of capital. Taking a look at inventory, we ended the quarter approximately $95,700,000 an increase compared to $91,300,000 in December 2023. The increase was primarily driven by additional inventory needed to build and deliver replacement 3.0 units to our provider base. We remain on track regarding our Syndeo replacement program during the Q2. As of the end of March, we estimate we will replace approximately 1,000 more systems for customers globally who qualify, but have yet to receive their replacement Zendayo 3.0 system.

Speaker 3

Our March quarter end accrual for the Zendeo replacement program was $8,300,000 down from approximately $21,000,000 at the end of December 2023. Our warranty accrual of approximately $7,000,000 as of March 2024 is in place to cover our total global systems, inclusive of extended Zendaya warranties we issued to support our providers during 2023. I would like to take a moment to reiterate the revenue cadence and seasonality of our business. Revenue is typically highest in the second and fourth quarters of the year. This is due to two factors.

Speaker 3

1st, capital purchases historically are largest in the 4th quarter as our provider base often has clear visibility their annual capital spend allowance by that point in the year. 2nd, the second and fourth quarters, spring and fall, often have the highest consumer demand for HydraFacial treatments, which we support with our consumables promotions in May November. Given the size of our business, the seasonality has an impact on the cadence of our revenue. Regarding guidance, in the Q2, we expect net sales to be $96,000,000 to $102,000,000 and adjusted EBITDA of $4,000,000 to $7,000,000 We expect revenue to increase sequentially from Q1, but be down year over year in the Q2, primarily driven by near term global pressure for capital equipment. Additionally, in the Q2, we faced a challenging year over year comparison for system sales given our international Zendeo launch in the 2023 comparable period.

Speaker 3

For the full year 2024, we are projecting revenue growth to be flat to low single digits year over year. However, we expect to deliver adjusted EBITDA of $40,000,000 or greater. This guidance is consistent with what was communicated on our previous earnings call and implies a return to revenue growth in the second half of the year, reflecting improved provider confidence, a more favorable credit environment and accelerating consumable sales. In closing, our goal is to execute with a similar simpler structure while exceeding the expectations of our providers, consumers, partners and shareholders. Our action plan is clear.

Speaker 3

We will increase our footprint through new capital equipment sales. We plan to increase consumable sales, stabilize the business, complete our Syndeo 3.0 replacement program and drive profitability. I will now turn the call back to the operator for Q and A.

Operator

Perfect. Thank All right. Our first question comes from the line of Oliver Chen from TD Cowen. Regarding

Speaker 4

the current situation of the machines on the field, why are some problems fixable by phone versus in person? And what's your expectation on timing of having those issues resolved? And are they surprising you or not really this was in line with how you expected this to go? And on the revenue side, Mike, what drove what were the main drivers of the upside? And then a bigger picture question, you mentioned stabilizing the business.

Speaker 4

Just when you say stabilizing the business, Marla and Mike, like what are the key steps in terms of your thoughts on the overall stabilization plan? Thank you.

Speaker 2

I will start. On Zendaya, we continue to make progress. The core issues we have with earlier versions have been addressed. Recent issues are related to noise and consistent flow and cosmetic issues. And to address this, we have a full customer and technical service team who work quickly to diagnose and potentially solve the issues over the phone.

Speaker 2

Most are resolved over the phone. And if it's not resolved over the phone, we send a member of our field service team to visit the provider in person to resolve the issue. So and then regarding the future, we have recently brought in a seasoned operations leader who has decades of experience to really look at our global production and bring our processes up to the level we expect. We'll report on that in the next couple of quarters. She's just joined our team.

Speaker 2

Mike, I'm going to pass to you for the remaining questions Oliver had.

Speaker 3

Sure. So the second question you asked Oliver was around revenue, the main drivers of it. In the Q1 consumables was really a bright spot for us. We had nearly 12% growth on consumables on a consolidated basis, and we were able to deliver that across the regions. As we look throughout the rest of the year in terms of the guidance we provided, we further expect to continue to see that trend in terms of driving overall consumable sales.

Speaker 3

And we also expect to see improvement in new capital equipment sales, specifically in the Americas, as we get further along throughout the year. And those two factors, your third question around stabilizing the business, that along with really focusing on gross margin is where we're spending the majority of our time.

Operator

All right. Our next question comes from the line of Ashley Helgans from Jefferies. Please go ahead.

Speaker 5

Hi. This is Sydney on for Ashley. Can you share a bit more about the health of perception from providers and where that stands. It sounds like you guys have done a lot of work there, but just wondering what feedback you're hearing, where you feel like you are kind of in that recovery of those relationships? Thank you.

Speaker 2

Yes. I have been touring providers with our teams and talking with our teams every week. The provider is more confident than they've been in Zendaya and the progress that we're making. We even see that with our corporate accounts as they're continuing to invest in driving HydraFacial as a gateway treatment for their other aesthetic services. So the confidence is significantly up from before.

Operator

All right. Our next question comes from the line of Alan Gung from JPMorgan. Please go ahead.

Speaker 6

Thanks. I'll just ask kind of both of my questions upfront. You mentioned tightening credit as being a challenge to capital, but also said that you expect that to get better over the course of the year. Are you we're only a month or so into the quarter, but are you starting to see any improvements on that so far in May? And then when I think about your guide, the $96,000,000 to $1,000,000 $2,000,000 for Q2 and then I think about your full year target for flat to up low single digits, that does put quite a bit of your sales into the back half of the year.

Speaker 6

And given some uncertainties around the trajectory Sure. This is Mike. I'll take

Speaker 3

Sure. This is Mike. I'll take both those questions. So on the tightening of the credit, we're actively looking for different financing alternatives for our providers to make sure they have access to capital. So we're not seeing significant changes in May.

Speaker 3

However, we are working with them to make sure that we can support them going forward and we expect to make some progress on that throughout the year. On the second question on the guidance and the revenue cadence, on a percentage basis, we expect Q4 to be a higher percentage of this year's revenue than the last couple of years. The launch of Zendeo in the U. S. In 2020 2 and internationally in 2023 along with some of the device challenges we had last year impacted the normal cadence of revenue in the business if you look at it historically.

Speaker 3

Historically, it has been very strong in the 4th quarter. That tends to be the largest quarter for this business prior to the last couple of years. And so we've modeled our guidance according to that. As we think that from a revenue cadence, we'll start to return back to the more normal basis than we have in 2022 and 2023.

Operator

All right. Our next question comes from the line of Susan Anderson from Canaccord Genuity. Please go ahead.

Speaker 7

Hi, good evening. Thanks for taking my question. On the system sales, I was curious, how much of the weakness you thought maybe was caused by the higher interest rates versus just a general pullback in I mean from general pullback in spending at med spas versus just concerns around the Cintaio issues and maybe just holding off? And then also I was curious if you had any thoughts on if providers were holding off from purchasing until the issues were fixed? Or are they going to another competitor or something like that?

Speaker 7

Thanks.

Speaker 3

I think it's a combination of both. We're seeing the higher interest rates are definitely having an overall impact on having our providers pause some of them and it's taking a little bit longer between the leads we generate and being able to close. I think the combination of that, we really don't know the specifics between interest rates and some of the equipment challenges we've had in the past. But one thing I will say is we're starting to see that less and we don't really believe that we've seen a significant impact on kind of competitors. We think the opportunity is very strong and that's as you look at our guidance for the rest of the year, when we look at our pipeline, we're really encouraged about what we believe we can deliver kind of over the near term.

Operator

All right. Our next question comes from the line of Olivia Tong from Raymond James. Please go ahead.

Speaker 8

Thanks. Good afternoon. I wanted to dig into the Q2 guide a little bit more. You mentioned the international Syndeo launch creating a tougher Q2 comp. Can you tell us how much of a contribution that was last year?

Speaker 8

And then you talked a little bit about your usual seasonality. This is a smaller sequential lift when we look at Q2 versus Q1 and implies that Q2 sales are lower even on a 2 year stack, whereas it did improve in Q1. So could you just talk a little bit more, peel back the layers of the onion on what's embedded in your expectations, perhaps any of the takeaways that you've had from the trade shows year to date that helped influence that Q2 view? Thank you.

Speaker 3

Sure. So last year, our total revenue was $117,000,000 on a consolidated basis in the Q2. We had really strong a really strong quarter in APAC and EMEA. They grew APAC overall equipment revenue grew substantially because of the launch and so did EMEA, which was largely impacted largely had an impact on the 2nd quarter. When you look at this year in terms of the guide, we're obviously comping that internationally.

Speaker 3

In the Americas, what's putting a little bit of pressure is really on the capital equipment side. Again, the two things that we're seeing are take a little bit longer to close that sales pipeline. So the way we modeled it in was and our expectations are that we'll be able to close the pipeline a little bit later in the year and we'll still see a little bit of softness in the Q2. So we model capital equipment sales to be down year over year in the Americas and that's overall impacting the general guide.

Operator

All right. Our next question comes from the line of Margaret Kaczor from William Blair. Please go ahead.

Speaker 9

Hi, everyone. This is Macaulay on for Margaret. Thanks for taking our questions. So last quarter, you mentioned some ordering disruptions, especially associated with some of those international distributors. So I'm just wondering if we can get an update on how those ordering patterns have normalized, if they have normalized, specifically APAC as you called out.

Speaker 9

And did you see any change in the quarter? Or was there any catch up maybe this quarter compared to the last quarters, just as some of those Zendeo improvements were made over the course? Thanks.

Speaker 3

I think a large portion of the timing that we saw was in the on the distributor side of the business for consumables in Q4, specifically in APAC. We're starting to see that normalize in the Q1. So there wasn't anything significant that impacted kind of the Q1 in terms of overall timing.

Operator

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

Speaker 10

Hey, guys. This is Joe Federico on for Jon. Mike, I guess to start, maybe just following up on one of the previous questions on kind of the back half of the year that was on sales, but I'll try it from an EBITDA perspective. The 2Q guidance implies that the first half EBITDA margin is around 3%. Full year guidance implies that basically the second half shakes out around 16%.

Speaker 10

Can you give us any more color on kind of the ramp there on the EBITDA margin? It sounds like a lot for accelerating consumable sales. So any detail on some of the other moving parts would be helpful. Thanks.

Speaker 3

A lot of the expectation is as we grow revenue, we'll be able to manage the OpEx. And you saw we were able to do that in Q1. We're actively managing our operating expenses and expect to continue to do that and potentially improve throughout the year. And so what's really driving the EBITDA, if you as you grow revenues and hold or potentially slightly improve a little bit on the gross margin as we're able to manage the operating expenses, you'll see that our expectation is that drops down to adjusted EBITDA.

Operator

Our next question comes from the line of Karen Wolfmeyer from Piper Sandler. Please go ahead.

Speaker 5

Hey, good afternoon. Thanks for taking the question. I'd like to ask on the utilization. I know you had some positive commentary on consumables, but it does look like overall utilization was a bit weaker. We're also hearing about from some other peers that there's some might be some weaker end consumer demand in aesthetics.

Speaker 5

And then you're also it looks like the marketing spend is coming down. So what gives you confidence in the consumables being able to accelerate throughout the remainder of the year with all of these pressures? Thanks.

Speaker 2

Thank you for the question. So consumables grew nearly 12% in the Q1 year over year and our installed base has significantly grown. BrightSpot is really our corporate accounts. They're expanding and focusing on marketing HydraFacial, which is adding to our utilization. Additionally, we see a pretty long term opportunity as we expand our innovation pipeline for 2025 and 2026.

Speaker 2

The other thing is we do need to and will invest in additional support training and marketing activations to support our providers. We think we can be highly efficient in doing this. And we have the opportunity to focus on certain providers to support them in driving utilization. So as we dig into the back half of the year, we'll be investing deeply and really supporting our providers from a resource allocation perspective, and a time and attention perspective.

Operator

All right. Those are all of our questions in the queue. I would now like to turn the call back over to Marla Beck for closing remarks.

Speaker 2

Thank you all for joining us today. Our progress is being driven by our passionate team and community. I want to thank the employees of Beauty Health for their continued hard work and dedication, our providers for their loyalty and our partners for their trust and collaboration. I am incredibly confident and excited about the future of Beauty Health given our significant addressable market, compelling brand equity, deep provider partnerships and presence of the right team to execute and drive our success. Thank you.

Operator

This concludes today's call. Thank you for attending.

Speaker 2

The host has ended this call. Goodbye.

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