Cutera Inc (CUTR) 2024 Q3 法說會逐字稿

Thank you for standing by to the conference operator. Welcome to the Q3 2024 Results Conference Call. [Operators Instructors]

I would now like to turn the call over to Shelby Ackerman, Vice President of Finance. Please go ahead.

Thank you, operator, and thank you, everyone, for joining us. With me today is Taylor Harris Cutera 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 today's discussion includes forward-looking statements.

These forward-looking statements reflect 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 is dynamic and subject to change or management's good faith belief 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 international additional geographies forwards 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 and our Form 10 K 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're made.

Care undertakes no obligation to update publicly any forward 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 and compares 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 alternatives to the operating performance measures prescribed by GAAP. With that is my pleasure to turn the call over to our CEO. Taylor Harris.

Thank you, Shelby. We will continue to face challenging business conditions. We remain on track with the 2024 plans that we outlined last quarter, both operationally and financially. All the clear revenue continued to grow on a year-over-year basis, driven by our international launch. Core capital sales, while down year over year increased modestly on a sequential basis.

And we saw underlying improvements in gross margin than controlled operating expenses, including some non-cash accounting charges. At the same time, we're building the foundation through our team of culture and customer focus, service mindset to support long-term growth for our company. Nowhere or was that more evident to me than last weekend at the Cutera university clinical forum or senior CDOs, which is our annual educational, is designed to disseminate best practices for utilization of our technology at.

So you see us I spoke with numerous customers who love their Q2 devices, and we're starting to provide me with more and more positive feedback on the team that is supporting them across the board from sales to service to marketing and post sales practice development. I remain proud of the resilience that our team at Cutera has been demonstrating the end of the foundational tumor well for future growth.

Turning to Q3, the international launch of RV clear continues to proceed exceedingly well. We've now sold over all100 the clearest systems outside of North America, and we've expanded into approximately 25 countries as we brought online a number of distributor markets during the third quarter. Utilization remained strong with our direct markets averaging over nine treatments per device per month and increase versus prior quarters.

We're still early in the launch, so it wouldn't be appropriate to extrapolate that performance. But utilization trends are clearly encouraging and customers are reporting to us that they are achieving impressive clinical results, which is the most important indicator of future growth in North America, we saw a typical seasonality across most components of our business, although our core capital revenue was relatively stable in the third quarter compared to the second quarter, with quarter revenue contribution across our field team than we had last quarter, we are focused intensely on hiring, will cultivating a winning culture and providing industry leading training and development opportunities for the team.

For example, we brought the entire field organization together for training during the first week of October, including a new sales reps certification process. Yes. For all of it clear, we believe that increased productivity over time begins here with the right team processes and training for North America team continues to execute well on the launch of zero plus.

As a reminder, zero plus offers tremendous flexibility and customization with over 25 applications from Cutera's signature laser Genesis skin revitalization procedure to hair removal to pigment reduction and more with a larger spot size, enhanced contact cooling and redesigned handpieces zero plus provides faster treatments and improved comfort.

Additionally, the team drove a nice sequential uptick in our sales of the secret portfolio of RF Micro noodling devices. And we also saw a modest uptick in TRUE Flex. The true body platform, in fact, was one of the highlights at. So, you see us this year panel, I spoke about the potential for indication expansion, which would involve studying the integration of scope and flex into regimens with GLP ones.

Painless also spoke about a potential for studies to flex our multidirectional RF energy device for muscle stimulation in indications outside of aesthetics, for example, functional strengths and physical rehabilitation. Since we are inspired to do more work clinically to understand how to flex could potentially be deployed to assist patients in these areas.

I'll now provide an update on our top near-term business priorities, which are one of the pursuits of operational excellence across a range of functions to fully developing the opportunity for office, clear and three, improving our financial health through an efficient cost structure and reductions in working capital. I will elaborate on all of these first operational excellence.

We continue to make progress in all of the key areas that we identified last year, product reliability, field service supply, demand planning and inventory control. And I'd like to highlight field service in Peru, particular, where during the third quarter we reduced service backlog in all geographies across the globe. In North America.

We've continued to improve our service response times earlier this year, we crossed the industry gold standard for separately to our response time of 80%, and we've actually achieved 90% to 100% in more recent weeks and months, which we believe puts us into an industry leading position. It's truly remarkable to see how far we've come in just over a year.

We now believe that our service capability to provide a competitive advantage, and it demonstrates clearly to our customer base, the type of partner that Q2 will be in the type of support we will provide. Second, I'll be clear. We continue to be encouraged by international launch dynamics, including the uptake by thought leading KOLs in major direct markets.

The initial uptake we're seeing in newly launched distributor territories, well as the strong and growing utilization across our installed base in North America, we're still working through the transition from the initial leased business model. As of the end of the third quarter, there were approximately 785 systems operating under the lease model, down from 925 last quarter, a reduction of approximately 140 during the quarter with approximately 200 on a list to be returned in the coming quarters.

We continue to expect that more than half of the original installed base of systems will be returned, and we're now working on moving efficiently through this return process. In addition, we are focusing our efforts squarely on a group of around 150 of the most committed already clear accounts where we believe leave our PDMs can help drive increases in utilization.

We'll also continue to use Cutera Academy programs to help accounts to relaunch of the clear successfully in their practices. And third cost structure and working capital. We saw underlying improvement in our gross margin operating expense profiles in the third quarter on a normalized basis.

That is if we exclude our standard non-GAAP adjustments as well as non-cash charges for excess and obsolete inventory. Our gross margin was 42% in Q3 compared to 35% in Q2 and 40% in Q1. Our non-GAAP operating expenses were $35 million, but that included a bad debt charge of $5.4 million. So that march to quarters in a row of operating expenses below $30 million, excluding our standard non-GAAP adjustments as well as bad debt expense on a go-forward basis, we're likely to have some ongoing E&O and bad debt, but we believe that it will be significantly reduced from the levels we've recorded in recent quarters. On an underlying basis.

The progress we're making in our cost structure reflects operational efficiencies and service freight packaging, as well as the impact of the reductions in force and other cost containment programs that we have implemented.

On the working capital front, as we mentioned last quarter, our ability to realize an inventory work-down benefit has been delayed due to the reduced revenue environment. As a reminder, due to a variety of factors, we have built a gross inventory balance of approximately $135 million, excluding our field-based inventory like demo units or service loaners, this balance is approximately $120 million over coming years. We plan to reduce this inventory significantly beginning in the fourth quarter and into a greater degree in 2025.

In fact, we continue to anticipate a year-over-year improvement in cash burn of over $50 million as we move from 2024 to 2025 related to working capital alone, even in the absence of revenue growth. Additionally, we should recognize a full year of benefit from the third quarter. As such, we anticipate reducing our cash burn by over 50% in 2010 five before factoring the opportunities for revenue growth for gross margin improvement.

Before I turn the call over to Stuart, I would like to mention that we have now begun selling under our distribution partnership with L'Oreal SkinCeuticals business in Japan. Following a well-attended launch event with leading dermatologists. We don't expect a material revenue contribution in the fourth quarter, but we remain excited about the potential for this partnership longer-term.

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

Thank you, Taylor. This afternoon, I will discuss our Q3 results as well as from non-GAAP results. A reconciliation of GAAP to non-GAAP gross margin loss from operations is included in our earnings release. Total revenue for the third quarter was $32.5 million compared to $46.5 million for the same period in 2023. Excluding skincare review, simply $1 million recorded in Q3 of 2023 to Q3 revenue decrease of $6.8 million on a year-over-year basis, mainly briefly decreases in North American capital equipment revenue and consumables revenue.

We terminated a skin care distribution agreement in March 2024, and a decrease in North American capital equipment revenue resulted primarily from continued macro-economic pressures as well as sales rep turnover. Non-GAAP gross profit for the third quarter of 2024 was $3.7 million for the gross margin rate of 11.5% compared to gross margin rate of 19.3% for the third quarter of 2023 to 7.7% decrease in gross margin rate was driven primarily by an increase in our reserve for excess inventory.

The charge for excess and obsolete inventory recorded in Q3 of 2024 of $10.1 million represented 31% points of gross margin. non-GAAP operating expenses for the third quarter of 2024 for with $34.7 million compared to $39.8 million for the same period last year. $5.1 million decrease mainly reflects personnel savings resulting from the restructuring announced in November 2023 in June 2024, and lower sales commissions, partially offset by higher bad debt expense. In the quarter, we recorded bad debt expense of $5.4 million, reflecting the aging receivables likely related to the challenging macroeconomic conditions that customers are facing.

Turning to a balance sheet. We ended the quarter was $59.0 million of cash equivalents and restricted cash compared to $84.3 million at June 2024. Full year. Moving to guidance, we are reaffirming our full year revenue guidance range of $140million to $145 million with an expected cash, cash equivalents and restricted cash balance on December 31st, 2024, of approximately $40 million.

With that, I'll turn the call over to Taylor for closing remarks.

Thanks, Stuart. And we're pleased to be maintaining our guidance range for the balance of 2024 because that reflects our team's resilience amidst a challenging environment. We have not yet seen an easing of credit available availability for our customers for an improvement in inpatient demand, both of which are contributing to the dampened appetite for capital equipment purchases were not expecting these conditions to change in the near term.

They continue to present uncertainty in our outlook, but we are working hard to manage through them. Moreover, our team is still conducting a turnaround in multiple areas were improving service and reliability, cleaning up inventory, rebuilding and retraining our North America field organization and winnowing.

The out be clear installed base while at the same time, we're driving our business forward with the launch of both RV and SkinCeuticals internationally, the refocusing of our RV clear business in North America, launching zero plus and continuing to identify efficiencies across the board.

Now this would be possible without a committed and passionate team, which were fortunate to have in times of trial that we grow stronger. And I believe we're experiencing that at Cutera right now. So, I'm thankful to our whole team, and I'm excited about where we can go from here.

Operator, we're now ready to begin the question-and-answer session.

Thank you. [Operator Instructions]

Our first question is from Jonathan Block with Stifel Europe. Please go ahead.

Great, thanks and good afternoon. Maybe just to kick things off, you know, last quarter I believe you had some changes to the North American sales force leadership. Just would love any feedback or able to share. And maybe just to tack onto that first question you can provide maybe just a broader update in the North American sales force.

You had some new adds, I believe also key call it maybe some intentional churn, some opportunity to pick up some good solid rocket motor companies. So maybe where you sit with that initiative to strengthen the overall North American sales force?

Hey, John. Yes, thanks for the question. And I feel really good about the progress that we've made in North America over the last quarter. So, you're right, we have we made some changes at the beginning of the quarter. Steve Kreider took over the full commercial leadership in North America. We have two directors on the capital side, some new regional managers in place.

And that team I have to say has come together and a really productive way over the last few months have big, big focus on training, big focus on hiring and big focus on productivity. And we're actually starting to see the benefits of that. You know, if you look at core capital sales in the third quarter, this was our best quarter this year of core capital or right.

And the we actually had fewer sales reps in North America. And it's not like the macro conditions have gotten better. So, we're starting to see contribution more broadly across the team, pleased with the ramp of some of the new team members that have come on board really just pleased with the culture that's developing, and that productivity is going to be the focus as we go forward. So, I think we've got the right tools in place. I feel good about the team that we have and that we're building and looking forward to where we go from here.

Great. That's helpful.

Thank you. And maybe just a quick second question. Your overall gross margin numbers about some charges and some noise. But as you called out, the underlying gross margin had some improvement and I believe it was in the low 40s. John, what was missing from really getting that higher or when you look back over to Tara and above 50 are well above 50. Is it just a volume argument to be made there?

Is there also mix more favorable mix that is needed? We need to be more patient and wait for the consumables, high margin consumables from Bobby clears a key lever. When we think about the cash flows, I just would love some more color on the gross margins. Thank you.

You got it? Yes. So, it really, John, everything that you mentioned is going to be part of the pathway towards driving gross margin higher. I do think it's fair to look at us right now on a normalized basis in that 40%, low, 40% range, excluding these, these large non-cash inventory charges. And so how do we get it back higher? Will I do think volume is the at the top of the list. And so that's what we're going to be focused on over the coming year and beyond.

The other factors that we can work on mix for sure, is one. And so there we've because of what's happened in the body contouring market and our business, that's one of our higher margin products, which were at a depressed level of sales this year, although we did do better in our body franchise in the third quarter than we had in the first half of the year, but a rebound in that portion of the business would certainly help on the margin front, developing the RV clear consumables business.

That's absolutely going to help on the mix front. And then the other thing we're focused squarely, as you heard me talk about on efficiencies. I think the team and operations in service is doing a good job of identifying those. I think there's still more room to run on that front, and that will be part of the improvement over time as well.

Perfect. Thanks for the color.

Next question is from Anthony Vendetti with Maxim Group. Please go ahead.

Thank you. So, on the inventory adjustment and knows non-cash, but it sounds like it can be dosed with your rig count risk quarter in this write-down this quarter between at the inventory as far as you can count is going minimum.

Hi, Anthony, it's Stuart here. Is that cubic meters of net inventory turn different related to a slight change in methodology and the refurbished going to be clear units from the returns from the lease space around 460 lives to date, and we anticipate another couple of hundred coming in.

And so, we actually took a reserve on these units for the first phase mentioned there's about three quarters of [inaudible] [$2.1 million] insurance. As we look forward, we still do expect some inventory reserve charges that nothing to this work bookings for this was this was the bulk of it on.

And then and then just as we look at on the R&D pipeline innovation, the view, is there anything that is on the new term horizon or anything in the pipeline other than mill upgrades or tweaks to current products by?

Yes, we do have programs in the R&D pipeline. We won't give specificity with most of what we're working on. But I will say that that's just for competitive reasons.

I will say that we're definitely excited about the indication expansion work that we're doing with the clear we've gotten a lot of feedback from customers that about areas that they think are the clear could be useful, and we're starting to gear up for sale of those studies.

We've mentioned sebaceous hyperplasia, hydrogenated, this supportive of, but there are other indications that we'll be looking at as well. So that's not a new product. But the beauty is we have an existing product that we think we can have the opportunity to expand applicability. Sure.

Okay, great. And come back to be you mentioned about the burn rate, but I didn't catch that on the prepared remarks. In 2025, you think that's going to come down by how much would be?

Yes, yes. So, from what we said was that we expect at least a 50% reduction in our burn its next year. So that's pretty significant. And the biggest source of that is working capital where we've had an increase in working capital to a use of cash this year, but we're now at that turning point in our inventory balance where inventory is going to become an asset that we are converting into cash over the next few years.

And we actually think that's going to start in the fourth quarter, and it's going to grow in magnitude in 2024. So, we mentioned that even with our revenue growth, we think that that flip. [inaudible]

And are there any geographies that you still have to do either getting new distribution or were still needs to turnaround the?

Well, the we're in the middle of rolling are the clear out throughout our existing network of distributors. So, there are a number of markets to come and a lot of the markets we went to just hear very recently in the third quarter.

And so there should be opportunity for further development further penetration of RV clear in those markets. The probably the biggest opportunities where we're not in with are the clear right now, Korea and Japan, those can be meaningful markets for us. We have existing presence direct in Japan with an established distributor in Korea.

This is I think longer term, probably the single biggest market that we are underpenetrated in is China. The pathway for registration there for RV clear will be measured in years. So that's not a near-term opportunity, but it will be meaningful when we get there.

Okay. That's helpful. And on the do in terms of you've said that the probably 50% or a little over 50% of the adequate devices are coming back. We did you give an update on and how many of them has come back or and how many are still out there that you think will come back?

Yes. So just to just to reframe that we got to a peek under the lease business model of about 1,250 are the clear machines. And we now stand at 785 leased machines. So, we've had returns over the past few quarters.

We had about 140 return it in the third quarter. We've got a list of that. We know we're going to come back of another 200 roughly and there will be more than that. So that's what gets us down to that more than more than half. Now coming back, meaning we end up with less than half what we're really with most of those, they were doing very little in the way of utilization. So, we're turning our attention right now is to that committed core.

We know of about 150 accounts in North America, where we think there's a great opportunity to grow is just the right account dynamics. And so, we're allocating our PDM time and attention now more and more to helping those accounts grow. And we think it really starts with utilization on these accounts are two types of levels that we're seeing in international markets. The and I think that's going to create some real buzz around RV clear in North America and help with this this restart of our RV clear business under the new business model that we have.

Okay, great. That's excellent color. I appreciate it, and I'll hope back into queue.

Thank you, Anthony.

Once again, if you have a question, please press star then one. Your next question is from Margaret Kaczor Andrew with William Blair & Company. Please go ahead.

Hey, guys, this is Max on for Margaret. Just one quick one for me. I know you guys are obviously operating in a tough capital environment. I was just curious if you could touch on what you've seen this quarter and how that shapes your outlook heading into 2025.

And then just a follow-up to that, curious your thoughts on the achievability of returning to growth or maybe just some overall higher-level growth drivers that you really focusing on for 2025?

Thanks. Sure. Thanks, Max. And so, on the macro front, we haven't seen any change on it in the third quarter relative to the first half of the year. So, I would just characterize this as it's a tough, it's a challenging environment and it really comes down to financing availability for customers as well as a lot of our customers are just reporting slower consumer spend in their practices. So that's affecting that's dampening appetite for purchasing capital equipment.

And as I mentioned on the call, where we're not expecting that to improve in the fourth quarter. But what I'm proud of is that I feel like our team is learning how to adapt, learning how to manage through tough conditions. And that's just going to position us even better for women.

This leading becomes easier. And I think about growth, absent even without a change in the macro, what I'm what I'm feeling optimistic about is you look at our international business and we grew in the third quarter of 2024 are planning on growing internationally in the fourth quarter.

So, I think we're already on a trajectory for growth in total 2025. When you look at our international business and then in North America, as I mentioned in the in the giving the color on our field team dynamics, the underlying productivity of the team is firming up. It's starting to improve.

And between that and growing that North America field organization, we've had some turnover in the first few quarters of the year. We're looking to stabilize that build of audit that plus increased productivity plus getting is the clear onto a growth trajectory again in North America. That's the formula for growth in North America. Next here, and that's what we'll be driving to do.

Great. That's great color. Thank you for taking my question.

Sure. Thanks.

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

Okay. Thanks, Will. Thanks to everyone for joining us today. Thanks as always to the team here at Cutera and wish everyone a good evening.

This brings your close today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.