Earnings Transcript for CUTR - Q4 Fiscal Year 2023

Operator: Thank you for standing by. This is the conference operator. Welcome to the Cutera, Inc. Fourth Quarter 2023 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I will now turn the call over to Greg Barker, Vice President of Finance and Investor Relations. Please go ahead.

Greg Barker: Thank you, operator, and thank you, everyone, for joining us. With me today is Taylor Harris, Cutera's Chief Executive Officer; and Stuart Drummond, Interim CFO. Following our prepared remarks, we'll 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. Forward-looking statements are based on information available to us at the time those statements are made, which by its nature as 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 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 released 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-K as filed with the Securities and Exchange Commission and updated in our Form 10-Q 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 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 in 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 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.

Taylor Harris: Thank you, Greg. Good afternoon, and welcome to Cutera's Fourth Quarter 2023 Earnings Call. I'll provide some summary comments regarding our fourth quarter financial results and then highlight our areas of focus and excitement for 2024. But first, I want to thank the whole team at Cutera who have been performing so admirably amid a challenging set of circumstances. Because of our team's focus and dedication, we finished 2023 with fourth quarter results that were better than anticipated, both for revenue and cash burn. We've also been working hard to resolve a number of time-consuming projects, including the transition of our distributed skincare line in Japan as well as bringing our manufacturing AviClear and excel V+ back in-house so that we can now turn our attention more fully to the future. And on that note, over the last few months, we have introduced a new corporate brand tagline, vision, mission statement and set of core values. Our mission is to improve lives through medical aesthetic technologies that are driven by science and powered through partnership. This mission book unites us as a team and energizes us because of the ability we have by supporting our customers to see the life-changing impact that our technologies and service can have on people on a daily basis. What a gift that is. We've also redefined our core values, which you can remember through an acronym that is well suited for Cutera, PICO

Stuart Drummond: Thank you, Taylor. This afternoon, I will discuss our Q4 GAAP 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. Total revenue for the fourth quarter was $49.5 million, compared to $67.4 million for the same period in 2022 and compared to $46.5 million in Q3 of 2023. Our Q4 revenue compared favorably to Q3 2023, increasing by $3.1 million, mainly due to strong capital equipment sales in our international markets as well as strength in skincare. The $17.8 million or 26% decrease from the fourth quarter of 2022 was due mainly to a $14 million decline in capital equipment revenue. This decrease in capital equipment revenue resulted from continued macroeconomic pressures and a challenging financing environment, particularly for our North American customers. AviClear revenue for the fourth quarter of 2023 was $3.9 million. In our 10-Q for the September quarter, we announced that we were no longer considering AviClear as a separate reporting segment following our AviClear business model change and corporate restructuring. Accordingly, we have included AviClear lease fees and direct sales as part of systems revenue and AviClear treatment revenue is reported in consumables revenue, comparative periods have been adjusted accordingly. Non-GAAP gross profit for the fourth quarter of 2023 was $9.9 million with a gross margin rate of 20%, compared to a gross margin rate of 59.4% and for the fourth quarter of 2022. The primary driver of this 39 percentage point decrease is a 19 percentage point impact from the increase in our reserve for excessive inventory reflecting the decline in our capital equipment sales forecasts and a provision for AviClear materials and finished goods. Other contributors to this gross margin decrease included an approximate 10 percentage point impact from lower manufacturing and sales volume, as well as inventory variances identified through our annual physical count and write-offs of demo equipment and skin care product. Non-GAAP operating expenses for the third quarter of 2023 were $36 million, compared to $39.7 million for the same period last year. This $3.7 million decrease mainly reflects personnel savings resulting from the restructuring we announced in November 2023, as well as lower sales commissions. For the fourth quarter of 2023, we incurred a non-GAAP operating loss of $26.1 million, compared to an operating income of $0.2 million in the prior year period and a loss of $28.7 million in the third quarter of 2023. Turning to our balance sheet. We ended the quarter with $143.6 million of cash and cash equivalents compared to $179.5 million at September 30, 2023. This $36 million quarterly sequential decrease was primarily driven by a net loss after adding back non-cash items of $28 million and other working capital changes. In our 10-Q for the September quarter filed on March 6 of this year, we disclosed that a change in our AviClear strategy from a lease model to a direct sales model would result in the reclassification from property, plant and equipment to inventories of all AviClear devices that had not been leased, as well as AviClear parts. Accordingly, the AviClear inventory materials, net of reserves has been recorded as long-term inventories at December 31, and 2023. Before we open the call for questions, I would like to provide you with our outlook for 2024. We are issuing revenue guidance of $160 million to $170 million, including $4 million of skincare revenue earned through the transition in the first quarter. We expect to continue to consume cash, more heavily weighted towards the first-half of 2024 as we close out certain supply obligations, primarily related to AviClear. Our expected cash and cash equivalents balance at December 31, 2024, is in the range of $55 million to $60 million. Operator, we are now ready to begin the question-and-answer session.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from George Sellers of Stephens. Please go ahead.

George Sellers: Hey, good afternoon and thanks for taking the question. Maybe just to start on guidance. Could you just parse out what that revenue guidance assumes from systems consumable and then also have a clear contribution throughout the year? Thank you.

Taylor Harris: Sure. Hey George, good to hear from you. So as we -- just a couple of thoughts on our revenue guidance. As we looked at 2024, and we were assuming that we have a similar macroeconomic backdrop as what we faced in the second half and particularly the fourth quarter of last year. And as you saw in our results in the second-half of last year, we did have more of -- more pressure on the capital equipment portion of our business than in other parts. And so we've assumed that where we were exiting 2023 is where things pick up in 2024 on capital. The -- for a couple of specifics for skincare, we're assuming $4 million of revenue. That's what's embedded in our range. And that's what we recorded in the months of January and February, and we've now transitioned to that business, so there's no more skin care revenue. In aggregate, we would have our systems and our consumables slightly down year-over-year on a full-year basis from 2023 to 2024, and that's because we have tough comps in the first-half of the year. We are assuming as we move through the year that we perform better and that as we disseminate more best practices with AviClear and training that we're going to start to see a pickup sequentially in our AviClear business.

George Sellers: Okay. That's really helpful. I appreciate that color. And then maybe on the cash burn piece of it. You mentioned a few puts and takes with inventory building in the first-half of the year, but there's also some cost saves. How should we think about just the cadence and the progression of cash burn? Is there sort of a step function improvement we should expect in the second-half of this year? Or how should we be thinking about that cash position specifically?

Taylor Harris: Yes. You're absolutely right, George. So of the burn that we're anticipating in 2024, about 70% of it should be incurred in the first-half of the year and that will be more heavily weighted towards the first quarter. And the reason for that, as we've talked about in the back half of last year is we still have purchase commitments related to inventory, particularly with AviClear. And we've gotten a fair amount of that behind us with -- by wrapping up our agreement with Jabil. So in the first quarter, a lot of that is occurring. In fact, Q1 burn will probably be a little higher than we had in Q4. These are working capital movements. And we'll still have some of that in the second quarter. But by the second half of the year, we should be in a much more favorable position with respect to our burn profile. And in fact, we should have inventory at a level that we're able to start working it down, having that become a source of cash for us, offsetting some of the other elements of burn.

George Sellers: Okay, great. That's really helpful. Thank you all for the time.

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

Joe Federico: Hey, guys. This is Joe Federico on for John. Thanks for taking the questions. I guess just to start maybe on AviClear, revenue stable sequentially. And but it included that lower procedural revenue. I was just curious maybe what the thought was for the recurring revenue aspect to kind of turn the corner. Are some of those productive accounts that you mentioned that are already dormant? Is there more to come? And then I also just wanted to ask if there were any learnings maybe from the early international launch with AviClear so far.

Taylor Harris: Sure. Thanks, Joe. So yes, let's start with AviClear procedures. You're absolutely right that the primary factor affecting our procedure with AviClear has just been that we went to a large number of accounts early in the launch. It was well over 1,200, and many of those they may have tried AviClear, but have decided that it's probably not going to be an ongoing part of their practice or they're still waiting. So in -- by the fourth quarter, we had approximately 55% of the account base that did not do a procedure. So that's what caused the procedure slowdown as we move from the initial launch phase into the second-half of last year, Q3 and Q4. So what we're doing right now, we're in a period as we're going back out to market and having conversations with these -- with accounts you have AviClear of really helping diagnose well, what some of the learnings and what some of the challenges are. And I think the good news is that we're not hearing anything that's surprising to us. And in fact, we hear from a lot of accounts that they want to be in the business of treating acne and they want to make AviClear work, but they need our help in that. So that's exactly what we're doing. And a lot of what I talked about in my prepared remarks is what are our initiatives that we're kicking off here. We've already kicked much of it off in Q1, some to come in Q2, what are we doing to help support growth of utilization across the AviClear account base. And so I think there are a number of accounts who are taking some time to try to make that work. And that's the good news. But it will take some time for us to work the account base help identify the ones that are going to commit to AviClear and then start rebuilding that procedure base. International, learnings are that it's great to start a launch in markets in a disciplined, methodical way. And that's exactly what we're doing internationally. So we're now in approximately 10 markets outside of the U.S. or outside of North America. And we are in most of these markets, one, maybe two KOL centers, and there's been a lot of enthusiasm for the technology. There are other offices, other practices who have absolutely expressed interest in becoming an AviClear site but we're taking our time, and we're making sure we support this initial wave of customers so that they can get great outcomes and they can become champions for the product. So I think the learnings internationally are that so far, and it is early, it's just showing us that when we do it right and partner with great AviClear accounts, we can build successful AviClear practices.

Joe Federico: Okay, great. That's really helpful. And then maybe just a quick follow-up. I know you had mentioned the expanded indications for AviClear, I wanted to ask maybe about just new products in the core business. Are there any introductions planned for this year? I think a while back, we had heard about maybe some existing system refreshers, could we see that this year? Or is that more of a '25 event? Thank you.

Taylor Harris: Sure. Yes. We are planning on new product introduction. It is a refresh of one of our successful product lines. And so we're excited about that. We're not ready to talk specific but we are currently on track around and maybe even before the midyear time frame to bring that to market. So that will be first, and our product development team is working on other initiatives in the background, but those are not 2024 events.

Joe Federico: Okay, great. Thank you.

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

Margaret Kaczor: Hey guys, good afternoon. Thanks for taking the questions. I wanted to maybe start with the cash burn and cash position at year end. Just trying to do the math on my end and even if I assume kind of 30% of the burn in the second-half in 2024, I think it still gets me maybe the kind of the $26 million burn in the second-half. So annualized is at $52 million. I pushed that into 2025 and still seem there's a bit of cash dynamic there. So how do we think about that? And as we think about 2025 inventory be maybe, a tailwind in a cash generator, could that be $10 million plus just give me some sense of how '25 should look like as well. Thank you.

Taylor Harris: Sure. Thanks, Margaret. So yes, we're obviously not ready to give specific 2025 guidance, but you're in the ballpark as we get into the second-half of 2024, and that's obviously a much favorable position from a cash burn perspective to what we experienced in 2023 and to where we'll be in the first-half of 2024. And then as you think about launching off point into 2025 and beyond, the -- what we're working on is building an AviClear franchise that would have a higher margin consumable stream associated with it. And so to the extent that we're successful with our initiatives as we build momentum through 2024 that should help us as we go into 2025. And I'd say similarly on the gross margin front, that's an area of high focus for us. We're planning on improvements in 2024, but we still won't be back to levels that the company had achieved in previous years. And so we're not stopping with where we're going to be in '24 or even in the second-half of 2024. And then the last comment I would make in terms of trajectory. We're obviously not assuming any improvement in the macro backdrop here in 2024. We're hopeful on that front, but we're not going to plan for it. But the further into the future that we get, we would assume that conditions can start to normalize and we can have a more favorable environment. That's, of course, speculative. Like I said, it's not built into the way we're planning for this year. So those are just a few thoughts on that kind of give us optimism in the overall trajectory.

Margaret Kaczor: Okay, perfect. I appreciate that. And then I guess a different way of looking at guidance and it does seem like the guidance is achievable based on historical sequential progression and so on off of the depressed numbers out of the second-half of '23. But maybe a different way of looking at it is also kind of looking at estimated rep productivity. So we don't have those numbers, but we know there was a reduction in force from a rep perspective last year? What are you seeing in terms of reps since then and productivity metrics since then. And then if you can, just give us some context for what's baked into 2024 guidance on about productivity versus either last year or whether you'd like to look at? Thank you.

Taylor Harris: So we have seen relatively consistent over time rep productivity. And that I would make that comment for last year. Now we obviously had -- we did do a reduction in force because we were seeing that it was just a more challenging environment. So I think if we had kept the same number of reps we would not have seen the same level of rep productivity. So we've tried to rightsize the organization based on the conditions on the ground. As we've looked at 2024, though, we were entering the year with -- or we're currently here in the first quarter, in the low 40s in terms of our capital field organization, and we're in the mid- to upper-teens in terms of our CAM organization. And we do have plans to increase those numbers, that field team force, both on the capital and the CAM front. So our budget and guidance do assume that we're adding reps, we factored in the operating expense associated with that. So we've got room to add 15 or more reps on the capital equipment front, and we're planning on getting to about 25 in our CAM organization. And so that's part of the guidance, and it is also part of the reason that we would expect sequentially to be stronger as we're -- as we get to the back half of the year relative to the first half of the year and that also gives us confidence in what we were talking about previously to your question, Margaret, about trajectory as we're heading out of 2024. And then the last comment I'd say is especially on the CAM front, we think that number getting into the mid-20s based on where we're at right now or where we expect our AviClear installed base to be this year, we think that's a good coverage level that's going to allow us to support well the AviClear customers who commit to growing their overall utilization.

Margaret Kaczor: Okay, perfect. Really appreciate it, Taylor. Thanks, guys.

Taylor Harris: Sure.

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

Anthony Vendetti: Thanks. Yes. So I was just wondering, Taylor, if you just could talk about the transition from Jabil over to your in-house. How long is that going to take to transition or you set up to start manufacturing and AviClear? Or is that going to be a couple of month process or so?

Taylor Harris: Thanks, Anthony. Yes, so good news is we have already made that transition from a manufacturing perspective. In fact, we never fully shutdown our capability with those product lines. So we were -- although the plan had been to fully transition, but we retained capability, and we've been able to ramp that back up. So the main transition now is simply going to be bringing back the inventory that Jabil had purchased. So we had to purchase that and then we're going to restock our warehouses. That's going to be a -- it's a big project for our distribution organization. But from a production line perspective, we're in good shape already.

Anthony Vendetti: Okay. And then just looking at international sales, obviously, it's always been a big portion mostly in most cases, a majority of your revenues. Is it going to be, as you move into '24 as far as you can tell, about 55% or so of your revenue and if it's going to change how come? Or how do you look at it for '24?

Taylor Harris: So for 2024, the big change is that our skincare business, which was Japan exclusively is now gone. That was a distributed lower-margin distributed product line. And so we will only have $4 million of skin care revenue this year compared to something in the mid-30s in 2023. So that will bring down the percent contribution from international. And then otherwise, we have similar dynamics in North America and international in terms of the market backdrop. We are launching AviClear for the first time in international, and so that's creating some new enthusiasm, which is great for the organization. But I think if you adjust for the skin care, you'll get to the right ballpark.

Anthony Vendetti: Okay. And then just in terms of internationally, direct and indirect or direct and distributors, any change for that '24?

Taylor Harris: No. We're in a similar position in 2024. We have direct businesses in some of the major markets in Europe as well as in Japan and Australia. And in other areas, we're working through distributors and so by and large, that's the same as we transition from '23 to '24.

Anthony Vendetti: Okay, great. Thanks so much. I'll hop back in the queue. Appreciate it.

Taylor Harris: Thanks, Anthony.

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

Unidentified Analyst: Hi, this is Samantha, on for Matt. Thank you for taking our question. I guess to start off with AviClear, could you talk to us about, I guess, the progress that happened with how many of these systems, particularly, I guess, the dormant ones have made it back from the field. And I guess, I'll just add more details on that?

Taylor Harris: Hi, Samantha. Yes, sure, happy to address. So year-end, we had an installed base of about 1,200 machines, 1,200 machines. We've been out. It's been great to be out and having conversations with our installed base about AviClear. And as I referenced earlier, what's been interesting is that there are a lot of accounts that are -- want to make AviClear work. And so even though we've had a significant number, who didn't do a procedure in the fourth quarter or in the third quarter. There have only been 125 so far, that have been returned. Now we do have a list of another 175 that will be returned. So that's 300 total out of the 1,200. Others, even if they hadn't done a procedure or a very low volume, we think that many of them likely will end up returning, but some of them are taking a wait-and-see approach. And so that's the nature of the conversations. I think that plays well for us, because we're ramping up our support initiatives for our customers through Q1 and Q2. Now on the other hand, we've rolled out a new business model. And that involves a capital purchase of the machine. And I think people are also taking their time to assess, well, are they ready to purchase? Do they want to purchase? Or are they comfortable with the lease model or do they want to return the machine. So it’s going to take a few quarters for this to play out. But the key, it really all comes back to, can we alongside our customers, identify the pathway for them to integrate AviClear successfully and make it a solid part of their business. And so that's what that exactly what we're focused on here in the first-half of the year, and we're feeling good about the conversations as well as our plans, I think our plans are on target with what we're hearing the express need from the customer base.

Unidentified Analyst: That's great. Thank you so much. I guess just one more follow-up. I know this year doesn't expect any improvement in the macro environment. I guess given that, are you -- what are you hearing from physicians on whether they do like the purchase model versus the rental model for those centers that already have for AviClear?

Taylor Harris: Well, I think that in general, accounts are more familiar with the purchase model. And for sure, over time, if they are able to ramp utilization, then it makes a lot of sense for them, and they get that. There are some -- this is not a universal sentiment. There are some who think that the -- actually, the rental model was innovative and maybe that works for them. So this is -- it's not all or nothing -- but I'd say the majority would express a preference for the purchase model. However, they -- the big question for them, especially for the ones who have been very low utilizers is hey, what's it going to take for me to make this a real part of my overall practice. And so that's why while the business level, I'd say is important and it's a necessary part of long-term success. It's most important right now that we're working hand-in-hand with the customers to help them figure out how to integrate AviClear and grow utilization. So that's what we're focused on primarily.

Unidentified Analyst: Got it. Thank you so much.

Operator: Our next question comes from Jennie Tsai of Gabelli Fund. Please go ahead.

Jennie Tsai: Hi, thanks for taking my question. What are your thoughts or plans to address the maturities on the converts that are coming up in 2026 and beyond?

Taylor Harris: Hi, Jenny. Good to hear from you. So yes, we -- just to speak up for a few minutes about our convertible debt. We have 3 tranches of convertible debt. The first one is about two years away, that's March of 2026. And then the others are 2028 and 2029. And the 2026 is the smallest. It's about $70 million of face value. So we don't have specific plans right now. We're focused primarily on running the business and all the priorities I talked about on the call. But we do want to address our capital structure, and we believe that we'll have options to do that. And so yes, I think that's something that we will be working on, especially after we get our -- all these important AviClear initiatives well underway.

Jennie Tsai: Great, thanks for the update.

Taylor Harris: Thanks, Jennie.

Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Taylor Harris for closing remarks.

Taylor Harris: Great. Thank you. In closing, I'll just reiterate our excitement for our mission and for the opportunity that we have to deliver on these priorities

Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.