Cutera Q2 2024 Earnings Call Transcript

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August 8, 2024

There are 8 speakers on the call.

Operator

you for standing by. This is the conference operator. Welcome to the Cutera Inc. 2nd Quarter 2024 Results Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded.

Operator

After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Shelby Eckerman, Vice President of Finance. Please go ahead.

Speaker 1

Thank you, operator, and thank you for everyone for joining us today. With me today is Taylor Harris, Cutera's Chief Executive Officer and Stuart Drummond, Interim CFO. Following our prepared remarks, we will take your questions. Before we get started, I'll note that the discussion today includes forward looking statements. These forward looking statements reflect management's current forecast or expectation of certain aspects of the company's future business, including, but not limited to, any financial guidance provided for modeling purposes.

Speaker 1

Forward looking statements are based on information available to us at the time those statements are made, which by its nature is dynamic and subject to change or management's good faith belief of that time with respect to future events. Forward looking statements include, among others, statements regarding financial guidance, regulatory approvals, productivity improvements and plans to introduce new 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 in 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.

Speaker 1

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. 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 Keyera's ongoing results of operations, particularly when comparing underlying results from period to period. Please refer to the reconciliation of GAAP to non GAAP measures in our earnings release.

Speaker 1

These non GAAP financial measures should be considered along with, but not as an alternative to, the operating performance measures prescribed by GAAP. With that, it is my pleasure to turn the call over to our CEO, Taylor Harris.

Speaker 2

Thank you, Shelby. I'll start by acknowledging that we're reporting a disappointing second quarter performance and full year outlook. Historically, our business and our industry have seen increased capital purchase activity as we move sequentially into the 2nd quarter. This year that trend didn't hold, primarily we believe due to continued macroeconomic pressure, which we're assuming will persist through the balance of the year. We are marching forward with new commercial leadership in North America, additional cost reductions and we're building upon the strong momentum that we're generating with AviClear.

Speaker 2

I'm proud of the resilience that our team at Cutera is demonstrating and of the foundational changes we continue to pursue to position the company well for future growth. There were some important bright spots in our 2nd quarter performance and I want to highlight those. 1st, the international launch of AviClear is proceeding exceedingly well. We've sold over 70 AviClear systems outside of North America. And for the approximately 50 customers that have had systems in place for at least 2 months, utilization is averaging over 10 treatments per month.

Speaker 2

Now we're very early in the launch, so it wouldn't be appropriate to extrapolate that performance, but it is still quite encouraging. 2nd, we've had highly positive feedback from the launch of ZioPlus in North America and we're exceeding our expectations there. ZioPlus offers tremendous flexibility and customization with over 25 applications from Cutera's signature laser Genesis procedure to hair removal to pigment reduction and more. We believe that ZioPlus can be a great upgrade option for our installed base of legacy Zio accounts over time. But in the Q2, we actually sold more Zio Plus systems into accounts that are new to Cutera, which we view as a positive indicator of the long term opportunity.

Speaker 2

3rd, we've strengthened our North American sales force over the quarter. In July, we promoted Steve Kreider to SVP of North America with full responsibility for a unified commercial organization, including capital sales, practice development, marketing and customer excellence. Steve is a mission driven leader and he has tremendous passion for building great teams, training and developing people and for providing clarity and focus on priorities. All of those attributes as well as his deep experience in both dermatology and aesthetics will serve Cutera well. Steve and his leadership team are focused on driving consistent execution and improved productivity.

Speaker 2

To this end, we've restructured our capital sales organization under the leadership of 2 new directors and a team of regional managers. Across both capital and practice development, our leaders are focused on team management, collaboration, training and process improvements, including utilization of the sales force platform to improve execution and forecasting. Our current North American team represents a solid mix of Cutera veterans and new talent. In recent months, we have attracted a number of proven capital sales people and practice development managers with deep industry experience. We've also had a fair amount of turnover, much through performance management.

Speaker 2

Turnover detracts from revenue in the short term as it takes new reps, even experienced ones, some time to build their territories. But we believe that the overall transition has strengthened our team for higher levels of performance over the medium and long term. Turning to our overall financial performance in the 2nd quarter. Revenue was below our expectation due to a combination of macro pressure and the aforementioned sales force transition. Overall, Capital Systems revenue increased sequentially in international markets due to the strength of the Avi Clear launch, but it declined sequentially in North America.

Speaker 2

Customers across multiple geographies continue to struggle with access to capital and financing terms, which are limiting their ability to invest in new capital. Our gross margin was also below expectations primarily due to lower sales volume, but also attributable to a mix shift and some continued charges related to the remediation of our operational challenges. The mix shift is important to understand. In the first half of the year, we had a meaningful shift toward international revenue, which comes at a reduced gross margin. Relative to our forecast, we also had lower sales of our RF energy platforms, TruBody and Secret.

Speaker 2

These platforms have higher margin profiles than our standalone lasers and we also have inventory of these systems that we're attempting to work down. So a shift away from these platforms hits gross margin and changes the timing of our working capital benefit. Our operating expenses were well controlled in the 2nd quarter, which offset some of the reduction in revenue and gross margin. I'll now provide an update on how we're responding to some of these challenges and on our focus areas moving forward. 1st, operational excellence, all in support of our customers.

Speaker 2

We continue to make great progress in all of the key areas that we identified last year: product reliability, field service, inventory control, supply demand planning and cost of operations. The overarching goal of these improvements is to support our customers. That is the mindset with which we're approaching the business. And that's the same goal as we have with our North American commercial leadership change and restructuring. 2nd, our cost structure.

Speaker 2

During the Q4 of last year, we initiated a restructuring that reduced headcount by 25% and our expense base by approximately $20,000,000 In response to the reduced revenue outlook for 2024, we've identified additional cost savings that should annualize at approximately $10,000,000 in 2025. 3rd, Avi clear, we continue to be encouraged by international launch dynamics, including the uptake by thought leading KOLs in major markets, as well as the strong utilization of the installed base that we are seeing. This gives us the confidence that Avicleer can become a main state platform in aesthetic dermatology across the globe with utilization opportunity expanding over time as we add indications like sebaceous hyperplasia to the already significant opportunity in acne. In North America, we're still working through the transition from the initial lease business model. As of the end of the second quarter, there were approximately 9 25 systems operating under the leased model, down from 1050 last quarter with approximately 270 more on a list to be returned in the coming quarters.

Speaker 2

We continue to expect that more than half of the original leased installed base of systems will be returned. Now this process requires a significant amount of attention both from our field team and our internal customer support and operations teams, but it's critical work to allow us to continue the rebuilding process. In parallel with this winnowing activity, we are seeing our growth oriented investments start to bear fruit. Utilization of our cooperative marketing program increased to over 40% in the Q2 and our Cutera Academy initiative continues to receive rave reviews. We've now hosted 4 Academy events with 98% of participants saying that it had a significant impact on their confidence with Avicleer.

Speaker 2

Buoyed by these early proof points alongside the momentum we're generating internationally, we continue to see a bright future for Avicleer and we remain focused organizationally on driving toward that vision. And last, working capital. Due to the reduced revenue outlook and product mix shift, our ability to realize an inventory work down benefit has been delayed from the second half of this year into 2025, and we're focused intently on positioning the company to benefit from a material reduction of inventory next year. We currently anticipate a year over year improvement in cash burn of over $50,000,000 as we move from 2024 to 2025 and that's related to working capital alone even in the absence of revenue growth or gross margin improvement or the expense reductions that have already been identified. So digging into this a bit more.

Speaker 2

In 2024, we anticipate an outflow of cash of over $25,000,000 related to working capital, primarily from a build in inventory in the first half of the year. In 2025 though, even if revenue were to stay flat at 2024 levels, we should recognize a cash benefit from inventory reduction of approximately $25,000,000 In addition to that working capital reversal, we have identified $10,000,000 of expense reductions and we're positioning both our North American and international businesses for growth next year led by Avicleer. We're comfortable that our current cash balance and capital structure provides sufficient liquidity and runway for the near term. That said, at the same time that we're strengthening our business operationally, we constantly evaluate our liquidity and capital structure needs and options and we expect to address both of those when conditions are right. We see opportunity to reduce the debt the company is currently carrying bringing in additional capital would allow us to fund our growth initiatives as we return the business to profitability.

Speaker 2

Before I turn the call over to Stuart, I would like to highlight our new partnership with L'Oreal's SkinCeuticals business in Japan. We're very excited about this partnership. We've been successful with skincare in Japan in the past and with SkinCeuticals, we will now be representing the global leader in physician distanced skincare in the Japanese market. Our team will focus on introducing the SkinCeuticals portfolio into physician offices, primarily aesthetic dermatology, while L'Oreal will provide comprehensive marketing support. We plan to launch in the Q4 of 2024 and as such, we expect an immaterial financial impact this year.

Speaker 2

With that, I'll turn the call over to Stuart.

Speaker 3

Thank you, Taylor. This afternoon, I will discuss our Q2 GAAP results as well as some non GAAP results. A reconciliation of GAAP to non GAAP gross margin and loss from operations is included in our earnings release. Total revenue for the 2nd quarter was 34,400,000 dollars compared to $61,800,000 for the same period in 2023 and compared to $38,800,000 in Q1 of 2024. Our Q2 revenue decrease of $4,400,000 compared to Q1 of 2024, mainly reflected Q1 skincare distribution revenue of 4,200,000 dollars We terminated our skincare distribution agreement in March 2024.

Speaker 3

The $27,400,000 or 44% decrease in revenue compared to the Q2 of 2023 was due mainly to a $13,800,000 decline in North American capital equipment revenue, a $9,400,000 decline in skincare revenue and a $3,000,000 decline in consumables revenue. This decrease in North American capital equipment revenue resulted primarily from continued macroeconomic pressures as well as the sales force dynamic that Taylor referenced. Non GAAP gross profit for the Q2 of 2024 was $9,600,000 with a gross margin rate of 28.0 percent compared to a gross margin rate of 46.6 percent for the Q2 of 2023. The 18.6 percentage point decrease in gross margin rate was driven primarily by decreased sales volume and a change in sales mix with a shift in sales in North America to sales in Europe and an increase in our reserve for excess inventory. On a normalized basis, excluding inventory reserves, our non GAAP gross margin would have been approximately 35%.

Speaker 3

Non GAAP operating expenses for the Q2 of 2024 were 30,900,000 dollars compared to $42,100,000 for the same period last year. This $11,200,000 decrease mainly reflects personnel savings resulting from the restructuring announced in November 2023 and lower sales commissions. In Q2 of 2024, we received close to $5,800,000 of litigation proceeds. This amount was included as income within general and administrative expense and was excluded from our non GAAP results. For the Q2 of 2024, we incurred a non GAAP loss from operations of $21,300,000 compared to a loss from operations of $13,200,000 in the prior year period.

Speaker 3

Turning to our balance sheet. We ended the quarter with $84,300,000 of cash, cash equivalents and restricted cash compared to $105,400,000 at March 31, 2024. The $21,100,000 quarterly sequential decrease was driven mainly by a $16,700,000 net cash loss for the quarter as well as inventory purchase commitments. Now turning to our guidance. We are revising full year revenue guidance to a range of 140 to £145,000,000 compared to previous revenue guidance of £160,000,000 to 170,000,000 We are also revising our expected cash, cash equivalents and restricted cash balance at December 31, 2024, to be approximately $40,000,000 Our previous guidance was a range of $55,000,000 to $60,000,000 Operator, we are now ready to begin the question and answer session.

Operator

The first question is from John Bullock with Stifel. Please go ahead.

Speaker 4

Thanks for taking the question. It's actually Jordan Bernstein on for John. I just wanted to pick up on the international Avi clear line. Now our checks have seemed to pick up some very strong momentum there throughout the first half of the year. It sounds like the rollout has been progressing.

Speaker 4

Any additional color on additional markets that are coming in coming quarters would be appreciated. And any specifications on the cadence there would

Speaker 5

be helpful? Thanks. And then I have a follow-up as well.

Speaker 2

Sure, Jordan. Yes, we I think your checks are accurate. That's exactly what we're seeing. We've really had a almost flawless launch of Avicleer internationally. It's proceeding at or above the levels that we had anticipated.

Speaker 2

In the Q2, we were up in terms of revenue versus the Q1 of the launch. Even though we didn't really go to too many new markets, so we're just seeing good traction in existing markets. We were at a couple of more markets in the Q2 compared to the first. But really what we're doing is just solidifying the base of installed customers, giving them great support, starting to expand within those territories. And you see that with the utilization numbers that I talked about.

Speaker 2

So that's really critical. These are, I think, excellent utilization numbers and they're at levels that are going to show other customers that they can really integrate and make AviClear a mainstay in their practices. Now as we look at the second half of the year, we expect the launch to continue to trend in that upward direction. We are in the 3rd Q4 starting to go to a broader range of distributor territories. However, there are some markets like Japan where we may not from a regulatory perspective launch this year.

Speaker 2

So we'll still have good new market opportunity internationally beyond 2024. Again though, I think the most important indicator of launch health is utilization and we're feeling really good on that front.

Speaker 4

Great. That's helpful color. Thanks. And then my follow-up is on the skincare agreement with L'Oreal, the SkinCeuticals line. Your prior skincare distribution agreement had hovered around 20% of total company sales.

Speaker 4

Do you think this product line has the potential to approach that? Or any color on quantifying the new agreement would be helpful?

Speaker 2

Sure. Yes. What I would say is we have all the building blocks in place to make this a very important product line for Cutera. So we have the infrastructure, we have the relationships, we know how to sell and distribute skincare and we're taking on what we view as the best global physician dispensed skincare line in the world. So as we thought about replacing this business in Japan, it obviously took us a few quarters to reach an agreement someone, but we could not have landed on a better partner and a better option than SkinCeuticals with L'Oreal.

Speaker 2

So we're really excited about it. And we do think that there's a ton of potential over time. We had I wouldn't expect that over the next 2 years or so that we're going to be approaching the peak levels that we got to with the Zio Skin Health line, just because it takes a while to build to that level. And there were some COVID related dynamics that I think helped that. But as I said, the building blocks are in place for this to become really meaningful, really important over time.

Speaker 4

Great. Thanks for all.

Operator

The next question is from Harrison Parsons with Stephens. Please go ahead.

Speaker 6

Is Harrison on for George. Good afternoon and thanks for taking the questions.

Speaker 2

Sure.

Speaker 6

Yes. So I wanted to start on the reduction in revenue guidance for the full year. It sounds like that's due to systems. I wanted to see if you could kind of outline or breakdown the impact from the sales force turnover versus what you're seeing in the macro environment, sort of which one of those had more of an impact on the quarter?

Speaker 2

Sure. Yes. So I'll give you a little of additional color and hit on those questions that you're asking, Harrison. So of the reduction, the vast majority of that is North America. The only thing that's unchanged really is the international launch of AviClear where we're still tracking really, really well better than we thought at the beginning of the year in fact.

Speaker 2

And then so within North America both of those dynamics affected us. The macro pressures and the sales force restructuring and turnover. It's hard to parse those out, but I think they could have been almost equal contributors. Just to put a little bit of color around it, normally we have a sequential uptick. This time, we had a sequential downturn in North America.

Speaker 2

And so but we saw some of that hit our core capital internationally, which is why we know there's a feel confident there's a macro issue here. The turnover though is real. And like I said, this is going to be, I think, good for the long term because we've been able to attract some very strong new players and we've retained some our all stars, our superstars. So I feel really good about the composition of the team and what that's going to mean for productivity going forward. But we had approximately 40% turnover in the North America Capital Organization during the Q2.

Speaker 2

And so that is that's going to have an impact. It takes people time to ramp.

Speaker 6

Got it. Yes, that's helpful. And then I wanted to turn to the cash burn guidance for the full year. Is there any sort of cadence we should expect in the back half? And then I guess is that 4Q number, is that how we should think about 2025, at least in the Q1?

Speaker 2

Yes. So the back half of the year, it'll be lower burn than what we had in the first half of the year. It's just not as low as we had thought earlier and that's due primarily to the shift in timing of the working than we should have entering 2025. And than we should have entering 2025. And so really this is an important dynamic to consider.

Speaker 2

We have been at elevated inventory levels. We've talked about that and we are positioning ourselves to start working that inventory level down. We had thought we were going to get a benefit of that starting in the second half of the year, but because of revenue outlook, that has been pushed, but it's really been pushed to the start of 2025. So that's why I mentioned in our prepared remarks, we're anticipating right now, even if revenue were to stay the same, that we would have a reversal of cash burn in the range of $50,000,000 We had a $20 just due to working capital, we had a $25,000,000 hit this year, that's what we're experiencing. We think we're going to have a $25,000,000 benefit from inventory work down next year.

Speaker 2

And then you factor in the $10,000,000 of expense reductions that we've identified and some growth on top of that and you're starting to look at a pretty material change in cash burn. And on that growth point, we are already planning on growing on a year over year basis internationally in the footing. And then all the changes footing. And then all the changes we've described in our North America team should also position us for much better performance year. So that's there will be a change as we enter 2025.

Speaker 6

Understood. Thanks for the color.

Operator

The next question is from James Beers with William Blair. Please go ahead.

Speaker 7

Hey, guys. Thanks for taking the question. It's Jimmy on for Margaret. First, I wanted to maybe dive deeper a little bit on the macro weakness. If you could sort of maybe decipher it a little bit more.

Speaker 7

Are you seeing that weakness in the med spas? Volume weakness you've seen primarily med spas? And then is that spreading across other end markets such as derms and plastic surgeons?

Speaker 2

Hey, Jimmy. Yes, this is more concentrated in the Med derm community. And really it's an issue sorry, in the MedSpa community. It's really an issue of access to capital. So there is a segment of our customer base that financing has been shut off for.

Speaker 2

So it's not just a matter of rates or terms, which are definitely more onerous now than they have been in the past. It's actually for a segment of customers and inability to access capital at all. And that's generally for people who are earlier in their business venture or who don't have an MD beside the name on the office. It's just tougher to get financing. So we're not seeing it be that type of an issue in the medical community and the dermatology community, although the rates and terms are challenging there.

Speaker 2

So that's the real issue. I will say, I am hopeful, right, that we're going to start to see some rate relief here. Now that won't necessarily immediately transfer into financing opening up, but it's the start of a healing process. So that's the reason we haven't assumed that it's going to get easier in the second half of the year, but I think there's still room for some optimism.

Speaker 7

Okay. That's helpful. Maybe on that point of not assuming things get better in the second half, just did some quick math, but I think to get to maybe the middle to low end of the range, you're looking at maybe Q3 down sequentially and maybe back up again

Speaker 4

in Q4. Is that the

Speaker 7

right way to think about the cadence for the rest of the year?

Speaker 2

It is. Yes, that is traditionally the way that our industry and our business works. So in setting our guidance, we assumed Q2 is a new normal in terms of conditions. Those macro conditions don't change. And we just looked at the range of historically sequential movement as we go into Q3, Q4.

Speaker 2

Now what we'll obviously be the dermatology community, both internationally and in North America. And we are taking Avicleer into the dermatology community, both internationally and in North America, which should be a more resilient community. And so we're going to be driving toward that. We're going to be driving toward productivity enhancements across our North America team. And so but if you just look at what has played out from a sequential trend perspective for the industry over time, then that's what leads you into the guidance range.

Speaker 2

I think you've got the cadence you're thinking about that appropriately.

Speaker 4

Great. That's helpful. Thank

Speaker 2

you.

Operator

The next question is from Matthew O'Brien from Piper Sandler. Please go ahead.

Speaker 5

Hi, this is Samantha on for Matt. Thank you for taking our question. I guess first regarding Avoquelir in North America. You mentioned some expectations that AOCRE contribute or lead growth in North America next year. I'm wondering if you could provide any more color on that maybe in terms of timing or what could really drive some of that growth?

Speaker 2

Sure. So hi Samantha, thanks for the question. Yes, AviClear is it's a clear growth driver for us internationally right now. And we're in the process of transitioning our business model in North America from what we started with, which was a leased model and we went really broad to what we're moving to, which is an ownership model focused on the highest potential most productive users, which is largely aesthetic dermatology. We are I think reasons to believe that that's going to turn into a strong growth driver, there are a few.

Speaker 2

First is that's what we're seeing internationally and we're really in the process of repeating that playbook as we move into this new phase in North America. 2nd, we've already transitioned a number of accounts to an ownership model in North America. And if you look at the utilization of those owned devices, compared to the leased devices, even the leased devices that are active, it's over 2 times the utilization rates that we're seeing for those own devices. So they're more productive. We're seeing great feedback from our Cutera Academy, just focused on Avi clear sessions.

Speaker 2

So people are coming out energized. We think we've got the training down. We've got the cooperative marketing program and we now have an aligned practice development organization to focus on our target accounts. So we think with all of that, we're set up well to grow the AviClear franchise in North America. And yes, we're seeing the green shoots on that front.

Operator

This concludes the question and answer session. I'd like to turn the conference back over to Taylor Harris for closing remarks.

Speaker 2

Well, great. Well, thanks everyone for joining us today. And just one more time, I want to say thanks to the Cutera team for all of your support. Let's go get them in the second half of the year. Feel free to follow-up if you have any more questions.

Speaker 2

Thanks.

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