Cutera Inc (CUTR) 2020 Q3 法說會逐字稿

Thank you for joining Cutera's Third Quarter 2020 Earnings Conference Call. (Operator Instructions)

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 current information that is, by its nature, dynamic and subject to change. Forward-looking statements include, among others, statements regarding financial guidance, regulatory approvals, productivity improvements and plans to introduce new products and expand into additional geographies.

For words that may identify forward-looking statements, we encourage you to refer to the safe harbor statement in our press release earlier today. All forward-looking statements are subject to risks and uncertainties, including those risk factors described in the section entitled Risk Factors in our Form 10-K, as filed with 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 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 Cutera's ongoing results of operations, particularly when comparing underlying results from period to period. Please refer to the reconciliation from GAAP to non-GAAP measures in our earnings release. These non-GAAP financial measures should be considered along with, but not as alternatives to, the operating performance measures prescribed by GAAP.

With that, I would like to turn the call over to our CEO, Dave Mowry.

Thank you, operator. Today, I'm joined on the call by Jason Richey, President and Chief Operating Officer; as well as Rohan Seth, our Chief Financial Officer. I will begin today's call by providing a brief overview of our third quarter 2020 business results, highlighting our efforts, improving our top and bottom line performances as customers continue to ramp treatment volumes. Rohan will then provide more detail around our third quarter financial results and then turn the call over to Jason, who will provide an operational update. Before opening the call to questions, I will provide some insights into our longer-term initiatives as we work to put fiscal year 2020 behind us.

Turning now to the third quarter. I am pleased with our third quarter results and proud of the way in which Cutera's team has responded to the challenges presented by the global pandemic over the course of 2020. In the third quarter of fiscal 2020, we built upon our previous efforts to increase our account level interactions, engaging customers through increased service and support and working more collaboratively with practices to drive patient traffic to the Cutera-specific treatments they offer. These efforts delivered near-term improvement to the business and drove sequential growth over second quarter across all revenue categories. Additionally, these efforts have helped to strengthen our relationship with our high-value customers running dedicated aesthetic practices.

As we mentioned on our second quarter earnings call, energy-based treatment volumes were running at approximately 70% of pre-COVID levels exiting June. Despite excess treatment demand from patients, practices faced constraints on the procedure volumes as they implemented social distancing and disinfecting protocols to mitigate the risks of COVID-19 within their practice. As we anticipated, practice efficiencies continue to improve over the course of third quarter, and most practices were able to expand their capacity with extended hours or treatment room expansions. These improvements enabled practices to further ramp energy-based treatment volumes, exiting the period between 90% to 95% of their pre-COVID volumes for these treatment types.

Pent-up patient demand has diminished slightly, but remains a strong positive leading indicator of the recovery with many aesthetic practices booked several months out into the future. While recovery trends varied across regions, we witnessed steady progress over the course of third quarter among aesthetic practices in North America, Japan and several geographies in Europe. Along with the treatment volume improvement, we also saw an improving appetite for capital spending across many of the distributor markets we serve as practices in these regions continue to reopen and ramp patient treatment volumes.

Across Europe, some regions such as France, Spain, U.K. and Germany remain slightly less predictable with the increased travel and treatment restrictions coming back into play as the impact of the virus runs its course. Australia also experienced a temporary setback in the Melbourne region as the spike in COVID cases caused the government to reissue temporary localized restrictions.

Despite these challenges, our sales teams around the world continue to adapt and deliver results across the portfolio. Within the period, we saw particular strength in a couple of areas of note. One area of significant year-over-year growth is in our skincare line offered in Japan, which reached triple-digit growth for a second consecutive quarter. This performance exceeded our expectations and was driven by further expansion of the customer base and the continued loyalty of our existing users. While these results are very positive for the business, we do expect a more normalized level of growth on this new base going into fiscal 2021.

Performance across other recurring revenue categories, service and consumable products was also solid during the period, tracking in line with the increased energy-based treatment volumes we anticipated across global aesthetic practices in the third quarter of 2020. Global service revenues were up 27% sequentially with second quarter 2020 and have returned to pre-COVID levels. Within the third quarter of 2020, service revenue was driven by strong field service call volumes and an increased revenue from the sale of extended warranties and field service contracts.

Consumable revenue achieved sequential growth of 62% over second quarter 2020, nearly closing the gap to pre-COVID energy-based treatment volumes. Given constrained practice capacities, customers were drawn to truSculpt iD, truSculpt flex and Secret RF procedures as these treatments offer practices greater treatment profitability on competitively shorter procedure times. During the third quarter of 2020, our consumable product revenue benefited from the growing partnership between the company and aesthetic practices in promoting these treatments to their existing customer base.

As expected in the period, capital sales remain challenged. Nevertheless, the Cutera sales organization made meaningful improvements on a sequential basis, delivering 55% improvement over second quarter 2020 and on global systems revenue, largely driven by an increase of 67% in North American systems revenue over the second quarter of 2020.

Many core customers remain hesitant to make significant capital commitments with the uncertainty associated with the possible COVID resurgence as we move into the colder months. Considering the uncertainty surrounding the virus, we continue to expect pressure in the capital equipment demand environment as system sales will continue to track under pre-COVID levels. Nevertheless, we anticipate sequential improvement in the fourth quarter of 2020 as we continue to expand our sales coverage in advance of the full market recovery.

Before turning the call over to Rohan, I would like to highlight the results of our operating discipline during the third quarter of 2020. As I shared previously, we've made several difficult decisions to reduce headcount and rightsize our business in the face of the unknown. While many of these programs were rolled out in the second quarter, we saw the full effect of these cost reduction initiatives reflected in both our gross margin performance and operating expense controls. These reductions in combination with our above-expectation revenue performance provided an accelerated pathway to positive cash generation, a quarter earlier than we had previously committed. We remain committed to maintaining this discipline going forward and intend to keep operating expenses in line with business volumes.

I will now turn the call over to Rohan to review specific financial performance results from the third quarter and year-to-date.

Thank you, Dave. Before I begin, I wanted to share my personal excitement and enthusiasm in joining the team at Cutera. In my short time here, it is clear to me that there hasn't been a better time to join Cutera in its 22-year history. Dave and his leadership team are in the process of reimagining and creating the future of medical aesthetics, and I am delighted and humbled to play a role in it.

As I review my prepared remarks, I want to note that I will primarily focus on non-GAAP results unless otherwise stated. A complete reconciliation of GAAP to non-GAAP is included in the earnings release. We encourage listeners and readers to review our non-GAAP metrics in conjunction with the GAAP results as contained in our earnings release.

Total revenue for the third quarter was $39.1 million compared to $46.1 million for the same period in 2019, representing a decline of approximately 15%. The decline is attributed to reduced treatment volumes and lower levels of capital equipment purchases due to COVID disruptions around the world.

North American capital equipment revenue was $13.7 million compared to $24.1 million for the same period last year. While international capital equipment revenue for the third quarter was $10.4 million as compared to $10.8 million in third quarter 2019, a 4% decline. The year-over-year performance of our international capital sales benefited from our European direct sales team, driving a growth of 68%, and our Australia and New Zealand team delivering 16% growth over the same period prior year. These areas of growth were offset by weakness in distribution markets within the Middle East as well as the Asia Pacific markets. Our expectations are that these international distribution markets will continue to improve in subsequent quarters as customers and regional distributors continue their recovery efforts post-COVID disruptions.

Recurring revenue, defined as consumables, global service and skincare revenue was $15 million compared to $11.2 million for the same period last year, representing 35% growth over prior year. Decline in energy-based treatment volumes over prior year had a limited impact on both service and consumables revenue.

Gross profit declined over prior year but improved sequentially and over the second quarter as a result of increased revenue in combination of the full quarter of overhead savings. Reasonable product mix had a slight negative impact during the quarter. GAAP gross profit for third quarter of fiscal 2020 was $21.7 million.

Another bright spot in our financial performance for third quarter 2020 was our gross margin performance. In the third quarter of 2020, GAAP gross margin was 56% versus 57% for the same period last year, holding relatively flat despite the year-over-year decline in revenue. This performance was the result of improved production efficiencies and substantially lower overhead costs being absorbed across lower planned production volumes associated with COVID volumes and planned finished goods inventory reductions.

GAAP total operating expenses for the third quarter of 2020 were $23 million compared to $28.6 million for the same period last year, a 20% decrease that delivered 300 basis points of improved leverage. Our results reflect lower variable compensation expenses as well as the thoughtful and durable cost reduction measures implemented by the company in face of the business disruptions associated with COVID-19 headwinds. Sales and marketing expense for the third quarter of 2020 was $12.3 million compared to $17.7 million for the same period last year, a 31% reduction. The lower expense was primarily a direct result of our cost reduction measures, and to a lesser extent, lower variable compensation expenses from lower revenue.

R&D expenses for the third quarter of 2020 were $3.4 million compared to $3.6 million for the same period last year as a result of project timing. Finally, G&A expenses for the third quarter of 2020 were $7.2 million compared to $7.3 million in the same period last year, driven by improved internal efficiencies and offset by some onetime legal expenses incurred in the period.

I'd like to take a moment to discuss our G&A outlook going forward. During the third quarter of 2020, we had some onetime charges relating to completion of our rightsizing activities and resolving open legal matters. Going forward, with these issues behind us, and in conjunction with the cost-cutting measures implemented in the second quarter, we expect to see continued improvement in our cost run rate in the fourth quarter as we benefit from a full quarter at the reduced run rates.

For the third quarter of 2020, our non-GAAP operating income, also called adjusted EBITDA, was a profit of $2.4 million compared to a profit of $2.4 million for the same period last year. While we exceeded expectations, we recognize the importance of holding the line and delivering sustained profitability coming out of the COVID environment. There were no material or significant changes to our tax positions.

Turning now to our balance sheet. We ended the quarter with approximately $42.4 million of cash and equivalents compared to $29.4 million at the same time last year and $46.6 million at the end of second quarter 2020. Regardless of this renewed strength, we are paying particularly close attention to working capital management in the current environment. As highlighted previously, we effectively worked with our vendor partners to conserve cash but have been able to come current during the third quarter time period, ensuring no interruption of material parts or services.

I'm pleased to report that the goals we outlined at the onset of the COVID-19 pandemic are bearing fruit. We ended the quarter with $29.3 million of inventory, down $7.6 million from the high watermark coming out of Q1 2020. We expect to continue this effort monetizing our inventory through the end of 2020. Additionally, we have remained diligent on collections, recognizing business challenges being faced by distribution partners and customers while bringing down the accounts receivable exposure. We believe that our approach has been fair yet firm, and built on good commercial processes to qualify customers in the current environment. Our balance sheet is in excellent shape and remains capable of supporting our growth initiatives going forward.

With that, I will now pass it over to Jason for his comments.

Thanks, Rohan. As the speed of recovery in the global aesthetics space continues to be highly dependent on regional restrictions, I am proud of our commercial team's resilience and agility as they navigate this complex business environment. Since the return of electric procedures post lockdown, we are encouraged by the continued backlog of patient demand for aesthetic procedures and that the vast majority of practices have reopened. However, most practices continue to enforce strict precautions, limiting the number of people allowed in a clinic at any given time.

These conditions, along with our priority of maintaining the health and safety of our employees and customers have made face-to-face commercial interactions challenging. As a result, our team continues to utilize a combination of creative methods to augment face-to-face visits with key decision-makers to navigate the sales process. These new methods include virtual meetings, social media direct messaging, video conferences and off-site demonstrations and interactions to communicate the unique long-term value proposition of Cutera's innovative portfolio of aesthetic devices.

Our commercial team remains highly focused on our flagship body sculpting franchise comprised of our award-winning truSculpt iD and truSculpt flex platforms in both North America and international markets. We have recently launched our truBody program promoting the use of our iD and flex platforms in combination. We believe this 360-degree approach to body sculpting will deliver unmatched clinical results for patients by removing fat, renewing skin and building muscle. The truSculpt iD and flex combination equips clinicians with the most robust on suite of tools to stay ahead of their competition in the field of body sculpting.

Late in the quarter, we launched Fraxis PRO in the United States, a platform designed to expand our microneedling offering. The Fraxis PRO delivers best-in-class microneedling capabilities along with the fractional ablative CO2 laser. This device provides a unique value to our core customers, combining powerful capabilities, a robust feature set and a small footprint. It is well suited to support the needs of our core customers in aesthetic dermatology and plastic surgery. Moving forward, we expect to expand this product launch into other geographies during fiscal year 2021.

Combined with new product launches, our 2020 commercial plan was designed to thoughtfully implement greater focus and structure on pricing discipline. Despite lockdowns, increasing global competition, economic certainty and substantial pricing headwinds, I'm proud of the commercial team's performance year-to-date as their efforts have enabled us to maintain our year-over-year average selling prices at historical levels.

Lastly, I would like to discuss our commercial outlook in the market environment for the remainder of the year. As Dave mentioned earlier, Many of our customers remain hesitant to make significant capital equipment purchase commitments due to remaining uncertainty to a possible COVID resurgence late in the year, and we continue to expect some pressure in the capital equipment demand environment in the fourth quarter. Despite this pressure, we expect companies with innovative new technology and strong balance sheets such as ours to continue to do well. As such, we are planning to make some thoughtful investments in expanding sales coverage by key geographies as well as deliver some indication expansion.

I am pleased with the strength, position and resilience of our North American commercial organization in particular. In the early days of the pandemic, with a tremendous amount of uncertainty around the outlook for demand over the remainder of the year, we made the difficult decision to scale back the size of our sales force in an effort to rightsize the team, preserve cash and retain operating flexibility.

Following our capital raise and the view to a pathway for recovery, we began cautiously bringing back reps throughout the third quarter of 2020. In addition to bringing back many reps, we were also able to recruit a number of high-quality competitive reps to the team. Based on their performance and the continued recovery we are seeing in the market, I am pleased to report that we will continue to invest and expand our North American commercial organization, balancing the expansion with the improved rep productivity we are seeing come about on our team.

Additionally, we will continue to make intelligent investments through our marketing efforts. In November, we will host the North American Cutera University Clinical Forum, or CUCF. This annual session is well known and highly regarded throughout the field of energy-based aesthetics. This is a forum where the community of aesthetic practitioners are able to come see Cutera's technology firsthand and discuss applications with top clinicians, scientists and researchers. In addition to best practice sharing, the forum also provides an opportunity for customers to use our devices on-site and purchase the products they feel will best complement their practices. As the environment continues to open, we will also run a series of regional clinical training workshops to allow for more specialized one-on-one education and demonstrations of our products. This platform will continue through the balance of the fiscal year, along with our webinars to support our customers through this ever-changing environment.

I want to reiterate how proud I am of our entire team as they continue to successfully navigate this complex business environment. I will now turn the call back to Dave for closing comments.

Thank you, Jason. While there remains several unknowns surrounding the disruptions from the pandemic and the impact of the U.S. elections that will need to play out over the next several months, we recognize that there is plenty of work ahead for the team at Cutera. Regardless of any underlying challenges, the management team and I remain focused on driving the transformation of our business by developing and introducing disruptive technology, driving operational efficiencies and delivering sustained profitability over the long term.

Regarding disruptive technologies, we are very excited about the early results from our acne solution and continue to work to accelerate our entry into the market. Currently, we are working to secure various regulatory approvals of this novel device and the associated procedure. While the acne team continues to address critical path activities to optimize the time line, we are also focused on expanding indications and enhancing the performance from our strong energy-based aesthetic device portfolio to drive growth of the core business in the near term as we advance our various disruptive technologies closer toward launch.

With respect to ongoing efforts to streamline operations and expand margins, we have made difficult cuts early in the year and have begun shifting energies towards optimizing these new leaner structures, improving our supply chain capabilities and building a sustainable sales footprint that enhances account management, improves rep productivity and provides adequate coverage going into 2021.

Since joining the business 5 quarters ago, we have executed on the foundational work we laid out to investors, and we have begun to shift our energies from the needed foundational investments to process optimization and top line growth acceleration. Our efforts are intended to deliver a sustainable aesthetic market winner with strong top line performance, continued margin expansion and increased leverage of our operating expenses that fuels the R&D engine that will drive our long-term growth.

With that, I'd like to open the call to questions. Operator?

(Operator Instructions) And our first question is from Matthew O'Brien with Piper Sandler.

I guess just for starters on the decision to go ahead and start adding reps back. Can you give us a sense for the cut that you've made, how many folks you're adding -- you've added back already and then the plans on the rep side going forward? I don't know how much you want to share. Just given competitive considerations there, but how significant are some of those additions as we think about things heading into Q4 and then more importantly, into '21?

Yes. It's great question, Matt, and thanks for asking. As we think about this, we looked at our core customers and the business that we have, which is really all noninvasive technology across the board. And as we thought about those businesses and many of those core customers, we recognized that they were probably going to be a little bit more conservative in building back their businesses because they have multiple revenue streams. So our thoughts were, let's make sure that we rightsize the business appropriately for the revenues that we expect with our portfolio. And so that's what guided the discussion.

Now we're not going to discuss or disclose the exact number of reps that we furloughed or released. But I will say, we obviously kept a significant portion in play during second quarter, and hence, we outperformed, I think, The Street's expectations on capital during that period. We were able to leverage that foundation and bring back -- I wouldn't say a doubling or anything like that. But I would say we brought back reps at a rate where we saw productivity improvement in 3Q, not just additive coverage. And I think as we think about that, the contributions going into Q4 will be similar. We expect that we'll see greater productivity as well as some additional coverage that will get us to the goal that we've set for ourselves based upon the market recovery.

I will say that we do believe the market has recovered slightly faster than we anticipated, and we are going to look towards dedicating those reps into some of the more aggressive practice patterns that are buying capital or having greater appetite for capital.

Got it. And then as a follow-up question, just on the capital side of things. I guess as we're looking at this potential second wave and you've talked about what's going on in Europe, other medical -- other surgical procedures, they're finding ways to just stay open or have capacity at 90% of -- you guys hear me?

Yes, we can hear you.

Sorry. Okay. So just through a second wave, maybe aesthetics could be a little bit more impacted than compared to kind of a surgical type company. So what are your customers doing as far as trying to maintain full operation even if we go through another wave, domestically, internationally? And then what kind of appetite do they have at this point on the capital side specifically?

Well, look, I think that's another very insightful question because there's still is quite a bit of unknown. And I think what we've learned through this process is that we still have a lot of opportunities to go out and prospect additional deals. There are some people that are a lot more aggressive in certain practice patterns. For example, we believe the plastic surgeons, in particular, are a little bit more aggressive than the dermatology practitioners because dermatologists have other revenue channels that they can leverage. So -- and a plastic surgeon, greater than 90% of their practice is on cosmetic treatments. So we'll continue to kind of make sure that we have the coverage we need to prospect the deals that are available to be out -- to be had.

Meanwhile, I think we need to continue to think about what we did exceptionally well in the second quarter, which was partnering with those folks to give them the tools and the training and the support they need to stay open and continue to move their practice forward. I think it's the fear of the unknown that we need to continue to deal with. And a lot of what we did in the second quarter and even in the early third quarter was working hand-in-hand with those physicians and practices in order to support them and help them address the unknowns.

So I think we have the playbook for that, Matt. I think we feel very good about it. And we're going to be very thoughtful to not get over our ski tips with investments and expenses that aren't justified in the business that we think can be had.

Our next question is from Jon Block with Stifel.

Dave, the first one for you, sort of a broad question on the equipment environment. Maybe if you can just discuss the customers' wants and are they very different, the wants and call it, the U.S. versus the international markets? And I guess as a follow-on to that, can you just also discuss the different capital outcomes you guys saw? North America was down around 40%, international was all the way back to flat. And so maybe just the dynamics with U.S. and international, those were -- results were somewhat surprising to you guys.

Yes. I think the way I'm going to tee it up here and maybe Jason can give you some specifics around certain practice patterns and we're seeing it. I think in the U.S., from our perspective, our kind of focus has been on the core customers, and I'd say probably more heavily on the derm-type practices or the dedicated aesthetic med spas that are led by physicians, which are essentially derm aesthetic-type practices. We've also -- we also go after some plastic surgeons in certain regions and certainly where we think that makes sense.

But I think a lot of times, the plastic surgeons are looking to basically downsell people that have sticker shock and they use a combination of minimally invasive and noninvasive products to serve those customers. And our portfolio doesn't really line up exactly to that, and I think we're aware of that. Ours are all noninvasive by nature. So I think we need to understand that and make sure that we're leveraging our portfolio for the right customers and presenting it as a value to their practice where it makes sense.

As we think about the international versus the U.S., I do think that this could be a little bit more kind of the law of small numbers in some cases. We saw some very nice recovery in a couple of geographies, in particular, where we had some real stud sales leaders come in versus last year where we maybe weren't doing so well. And as a result, we saw a really nice pickup. That and then in combination, we saw a very nice benefit in Australia with a recent launch of the flex.

Jason, I don't know if you have anything you want to add to that.

Yes. I don't think that there's a dramatic shift in terms of desire by region. I think one of the things that's been interesting for us is there's really 4 things that the clinicians are looking for that they're able to sell to the patient is cost, treatment time, access and then for the clinician is the return on an investment. And so I'd say that navigating through a COVID environment is certainly beneficial to have a robust portfolio that we can really customize the tool set that the clinician needs in order to maximize their return on investment.

What we have seen is moving into sort of the Zoom environment where a lot of video chatting, a lot of people have spent a lot of time and focused on fast-pace procedures, things like microneedling or laser genesis. And some of the body stuff has some of the -- somewhat of a seasonal approach as well. So as people have been in their Zoom meetings, they're really focused on face and appearance at this point in time.

But then when you shift to seasonality, we see in Australia, right now, body's getting super hot because it's getting ready for summer. So you see some of that regionally. But I think, I guess, the take home would be having a portfolio makes us fairly nimble during this time, and we can sort of play to the strengths of whatever the market is yielding at that time.

Got it. Very helpful color. And Dave, in normal times, market share has -- can be challenging just because it's sort of all over the map and market share can sometimes be heavily dictated by who's got the new toy. But just curious on your thoughts on that in terms of how you guys are shaking out market share-wise maybe North America and abroad? And maybe to your earlier comments, do you feel like you're punching above your weight in derm and maybe slightly below in plastic? And then I've got one more.

Yes. I think that's a fair way to look at it. And it's really about how our products appeal to the certain practice patterns that you see there. Like I said, I think the derms are a little bit more conservative in their capital purchases right now, whereas I think the plastics are being a little bit more aggressive. And then I think when the plastics are looking at portfolios, they're looking at what they can downsell those customers that come in looking for surgical outcomes or surgical procedures and have a little sticker shock what they can provide them. And I think a minimally invasive combination with noninvasive is probably the package that they're looking at.

Okay. Great. And last one for me. I think we all know what the story is about going forward, but that skincare line was, gosh, I mean, maybe 17% of sales versus 6% a year ago. It was the second consecutive quarter of really strong results with revenue growth over 100%. So can you just give us some more color on that? What's the margin profile of skincare roughly at the gross margin line? And then I know you talked about it moderating, but just to be clear, moderating growth year-over-year or moderating on an absolute basis off a new jump-off point?

Yes. Let me go in reverse order. Look, I think we've established a new foundational basis for that sale level. And as you would imagine, we've been very close with our international sales team, specifically that in Japan, and we feel very good about that. Now that's a distributed product. So as a result, we're kind of leveraging our relationship with the distributor to continue to provide that. And I really like the line. I think the customers really like the line. But I think most importantly, the patients really like to line. And that's given us a lot more stability than I think we had anticipated coming out of Q2, and we pressure test that a little bit. So I think this is the new base that we should be thinking about going forward in terms of the base of the business.

And I would tell you that, that has come about through 2 things in particular. We've seen some improvement in same-store sales, and people have promoted it more to other customers or other patients in their practice. But we've seen a significant portion of this growth come from new store sales. And those seem to be reordering at a rate that makes us very comfortable that this is the new basis.

So as you think about '21 or 2021, I think what you saw in the last 2 quarters is probably that foundational basis that we should be thinking about. But I think we're going to get back to something that's more in line with kind of a normal growth pattern off of that basis.

And our next question is from Anthony Vendetti with Maxim Group.

Anthony, I don't know if you're muted.

Oh no, sorry about that. Just an update on the trends. I know you mentioned on the call, Dave, about -- 90% to 95%, it appears patients returning to the offices. Is that based on patient volume or procedure numbers?

Yes. That's treatment volumes, not patients, right? So there's been some really good reports out there from a number of folks kind of tracking this. And I think our numbers in pulling our own customers kind of track likewise to those numbers. Obviously, a lot of the derms are doing the kind of the quick noncontact or limited contact type procedures as people come back. We're seeing that kind of reflected in injectables and other things.

As you get into the energy-based treatments, I think what we're seeing is that in the derm practices in particular, you're seeing facial treatments, rejuvenation of the face. And then you've been seeing some body a little bit lower But we think we're probably getting a little bit more share of those treatment volumes in the body just because of the profitability that those procedures offer the physician on shorter times. So it's a little bit of a multifactorial problem to solve. But I think 90% to 95% is treatment volumes of energy-based business.

Treatment volumes of energy-based. Okay. And then you mentioned in '20, you were doing the Cutera membership program for capital-constrained customers. Is that -- was that a significant part of your third quarter? Or is that less a factor in your third quarter numbers? And do you expect to continue that program?

Yes. Look, we knew that so many of these customers could not afford a down payment when they had completely eradicated their cash reserves in their practice. We also knew that they needed to have competitive treatment options to provide their customers where they would lose their customers or their patients. So it was a courtesy program. I would say that it was not a material factor in our revenues overall. And I think it was just our way of making sure that we were partnering with those practices that couldn't afford the down payment.

Likely, it's not a long-term contributor to the business here. But it's an option that we have, and we'll keep it kind of topped in our pocket here as we think about potential resurgence. But the reality is that the vast majority of customers that can afford a down payment would rather own the equipment and control the procedure and not have kind of that rental arrangement established. So it was kind of an opportunity for a convenient arrangement that allowed them to build their practice, but it's not something I would expect to be a building block of the future.

Okay. And then any stats on the rollout of the Fraxis PRO, the dermal remodeling product?

We launched it very late in the quarter. Jason, I don't know if you want to give a view to what we saw the uptake to be. We're not going to reduce -- give you numbers, obviously. But it was a very late in the quarter launch.

Yes. I mean this is something that, like Dave said, we trained to this thing in the last month of the quarter and then it came out literally with about 2 weeks to go. I would say that we're pleased with the traction of it thus far. And I think the timing of this launch is good because it pairs well with aesthetic dermatology as well as plastics. And I think it complements the success that we've had with Secret RF. That's sort of been the sweetheart of our portfolio, and we've sold a group of them over the course of the last several years.

And I think being able to add in Fraxis PRO and add that fractional -- to add that fractional ablative CO2 laser to the on-suite of products puts us in a nice spot. It fortifies the vertical, and it also creates this element that we didn't necessarily have in our existing portfolio that I think will complement the clinicians that we're really trying to court with this. So more to come on it, but so far, so good. It's a nice box. People -- it's had really warm receptivity. And I look forward to see what we can do with it in the back half of the year.

Okay. And then just lastly on the acne product you're developing. Any updates on the time line there, how that's going? And any facts?

Yes. Great question, and we've talked about it. I want to be really clear. We're probably going to go into a little bit of a quiet period as we're working very closely with the regulatory agencies on securing kind of the pathway to approval. Probably the next big note you'll see will be when we get to the point of enrolling patients, right? So at some point in time, we'll give you a little bit more insight. But we have a legacy product portfolio that we need to continue to invest in and drive growth on. And we're going to be focusing our efforts internally on that, while we let the researchers, the engineers and the clinicians kind of drive the next stages of acne.

Okay. And then just to get back real quickly to the Fraxis PRO. Is there a consumable on that? Or is that just capital equipment?

Yes, there is a consumable. Just like -- it's the same consumable that we have in our Secret RF microneedling device.

Yes. We had committed, and I wanted to make sure that everyone kind of hears me say this. We have committed that we will not launch another product out of the Cutera portfolio that doesn't have a consumable component to it.

And our next question is from Chris Cooley with Stephens Inc.

Congratulations on the strong quarter there. I apologize if I missed this at the outset. I'm certain in a couple here this morning. Of course, it's afternoon. I guess that speaks to today. But could you maybe provide some additional clarity around the strength -- relative strength that you saw there in consumables? When you think about the decline in North American systems, when I compare that to overall consumables, really seems to speak to better utilization trends there.

I'm just curious if you could help us parse that out. Is that broad-based? Is that system specific? But just any kind of clarity or I should say, platform specific there would be appreciated. And I've got one other quick follow-up.

Great. Well, it's good to hear you, Chris, and thanks for the question. I would say that it's kind of more of the same. And we commented on a product very, very briefly in the prepared remarks. But listen, we have our flagship product, truSculpt flex and iD, which we're seeing greater and greater usage of those in combination as a result of promoting them under our truBody approach. And I think that, that's led to a lot of uptake on the consumable side of the business. Additionally, we have Secret RF, which has become a good standard profitable procedure for a lot of the practices that have it. It's got shorter times and good outcomes.

So when you look at the way that we're thinking about truSculpt both iD and flex and with Secret, it's about driving profitability for the practices with competitively shorter times and a good result or a great result that they can charge for. And I think you see more of that in this quarter as you have in previous. But I think you're right, with less boxes being sold, you're seeing -- when you get a recovery like we saw, you're seeing kind of utilization go up in some regards. So generally speaking, we're pleased with the way that, that's laid out on the consumables.

On the service, I have to tell you that we have a really quite an amazing service organization that has hustled through a number of restrictions, travel restrictions, quarantine challenges, et cetera, to deliver these numbers. And I'm exceptionally proud of what they've done. The surveys that we get back from customers regarding our service and our service team are very strong, and they do great work for us. And I think that's evident by the quick and aggressive recovery that they've been able to create on the revenue side, which is at pre-COVID levels.

Understood. I appreciate the additional color there. And then lastly for me, I think it was just towards on the prior question there. But when we think about the acne product, I just want to be clear in terms of our expectations there. I know you're giving that data when appropriate. But is that expected to follow a 510(k) pathway? Are you looking for a specific indication? I just want to make sure how we think about their parts when it comes to market. Is this something that's a very reimbursable code? Or is this more of a consumer off-the-shelf type of price point?

Well, you've hit a lot of the topics, Chris, that we're still wrestling with to optimize the outcome from this investment. And obviously, the regulatory pathway is something that we're obviously not willing to disclose at this point as we're working through with the U.S. FDA and even some foreign regulatory bodies to secure regulatory approvals for those jurisdictions. As that becomes a reality or we become kind of committed to a pathway, we'll make sure that, that's shared appropriately in advance, right, at the time that it happened, I should say.

In regards to kind of the way we're thinking about that business, we continue to see great results and the durability of the results continue to be exceptionally impressive to us. Because of the studies that we did over a year ago, we're still following up those patients. So we remain exceptionally bullish on the option or on the procedure and the device. We remain exceptionally committed to it because of the -- just the math of what that means to this business and how transformative it could be.

But I want to remind the folks on the call that we've got a legacy business that is really strong as well. And the last thing we want to do right now is get diverted from the value that we can create with this legacy business. And hence, we're trying to keep the right people on our team focused on moving as quickly as possible to a launch on the acne. Meanwhile, the rest of the team needs to focus on optimizing what we have in the legacy and core businesses we talked about.

We have reached the end of the question-and-answer session, and I'll now turn the call over to Dave Mowry, CEO, for closing remarks.

Thank you, operator. On behalf of the Cutera team, I want to thank you for attending our third quarter 2020 earnings call. We look forward to updating you in subsequent quarters. Until then, please stay safe. Thanks.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.