Q4 2020 Cutera Inc Earnings Call
Okay.
Thank you for joining Q terrorists fourth quarter, 'twenty and 'twenty earnings Conference call.
After the prepared remarks, there will be a question and answer session.
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, others statements regarding financial guidance regulatory approvals and 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 and our press release earlier today.
All forward looking statements are subject to risks and uncertainties, including those risk factors described in his section entitled risk factors in our form 10-K as filed with the Securities and Exchange Commission and update it and our form 10 Qs.
Subsequently filed.
<unk> also cautions you not to place undue reliance on forward looking statements, which speak only as of the day. They are made.
<unk> 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 and.
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 <unk> terrorists ongoing results of operations, particularly when comparing underlying results from period to period.
Please refer to the reconciliation from GAAP to non-GAAP measures and our earnings release.
These non-GAAP financial measures should be considered along with but not as alternatives to the operating performance and measures prescribed by GAAP.
With that I'd like to turn the call over to our CEO, Dave Mary. Please go ahead Sir.
Operator.
And I am joined on the call by Jason Richey, President and Chief operating officer, as well as Rohit, Seth <unk>, our Chief Financial Officer.
I will begin today's call by providing a brief overview of our fourth quarter and full year, 'twenty and 'twenty business results Jason.
Jason will then provide operational highlights and commercial updates on the business and then turn the call over to roll on who will provide more detail around our fourth quarter and full year financial results as well as the near term outlook.
Before opening the call to questions I will then highlight progress on our long term initiatives.
Now I'd like to turn to the fourth quarter highlights.
I am pleased with our overall performance during the fourth quarter of 'twenty and 'twenty, while the Covid pandemic continued to impact our end markets, particularly on the capital equipment side of the business. We continued to execute our plans and made significant sequential improvement in both our topline and bottom line performances and.
And I have discussed in the past I'm very proud of the way the entire Futura team has responded to the challenges presented by COVID-19 to us and to the market and home.
I believe our strong results are the direct reflection of the hard work commitment and creativity shown by our team and supporting our customers through this challenging time.
During the quarter, we continued to see and overall improvement and our demand environment as the COVID-19 recovery progressed, the pace and extent of this recovery continues to vary by region and the magnitude of the impact of the virus remains localized and state and local governments impose restrictions on varying degrees.
As you know since the early days of COVID-19, we have worked with our core customers to track patient traffic and specific treatment volumes as a leading indicator of the recovery.
While the fourth quarter trends reflected sequential improvements in both body sculpting and skin and facial rejuvenation procedures and patient tests on facial rejuvenation treatments in particular.
This increased patient trend appears to be driven by the increased volume of video conferencing being conducted during the pandemic.
In total and core customers are sharing data that suggest total procedure volumes exiting the fourth quarter of 'twenty and 'twenty is approaching or exceeding those in the same period of 2019.
More specifically the most impacted regions within North America, whereas Canada, Southern and Northern California.
Illinois, and the New York Metropolitan area.
Each of these areas were at various times highly impacted by limited access.
Regarding the international markets treatment volumes appear to be most highly impacted in the U K Western Europe, and the middle Eastern markets.
Looking ahead, we expect that the pace of recovery will continue to vary on a regional basis due to localized impact of COVID-19 and.
While we believe the introduction of vaccines has provided a source of optimism for patients and scheduling procedures. Some practitioners and the U S have expressed concern that with the known timeline to vaccination patients who were previously unwilling to delay procedures now maybe willing to delay their treatment until the vaccine has created a more safe.
Environment.
We will continue to attract volumes treatment tight and customer as well as patient trends. So that we may continue to adjust our course and our processes accordingly.
Revenue for the fourth quarter of 2020 was $49 9 million, a 4% decline compared to the prior year, but up 28% sequentially revenue for the full year was 147.7 million and 19% decline from 2019.
Fourth quarter capital equipment revenue was down 26% compared to prior year, the posted a 25% sequential improvement over the third quarter of 2020.
North American capital revenue was down versus prior year, but showed strong sequential improvement posting 35% growth over the third quarter of 'twenty and 'twenty.
I am pleased that our capital sales continue to trend and the right direction and process improvements and future staffing increases will drive continued improvement and this category as the effects of COVID-19 and begin to subside.
Meanwhile, as Jason will discuss in more detail our North American sales leadership team has continued to focus on making improvements to our sales process, our client support capabilities and our ability to generate and leverage high quality capital sales leads.
These durable efficiency improvements will help us establish a strong foundation from which we can expand our team through the addition of high quality reps.
I am encouraged by our North American results and optimistic with the progress and this team has made on their initiatives during the fourth quarter. As this will continue to be and area of management focus heading into 'twenty and 'twenty one.
On the international sales front, Japan, and Australia, New Zealand and continue to be bright spots Ricky Terra as both teams posted year over year systems revenue growth for the fourth quarter.
Our fourth quarter recurring revenue was exceptionally strong providing 80% growth over prior year period, and a 32% sequential growth over the third quarter of 2020 accounting for approximately 40% of our fourth quarter 'twenty and 'twenty revenues.
As a reminder, we define recurring as the combination of revenues received from service contracts and field service repairs.
Sales of our skincare products and the sale of our consumable products used in the delivery of acute care and energy based aesthetic treatments.
During the periods and skincare remained strong posting year over year growth of 363% driven by near equal parts of new account expansion and increased penetration or same store sales.
Also contributing to recurring revenue growth was consumables delivering year over year growth of 19%, which is reflective of increases and treatment volumes with our customers.
We were pleased to see the consumable product sales growth outpaced sequential treatment volume improvement.
The acute care of consumable performance was driven on greater secret RF chip sales and particular.
As mentioned earlier, we saw a marked increase in skin and facial rejuvenation procedures within the market.
Looking forward, we are bullish on body contouring procedures and expect to see increases throughout 2021, its patients and look to regain body image as they move into the new year.
Pair for long awaited summer vacations, and resume a greater volume of on site work and direct social interactions post vaccination.
Before turning the call over to Jason and I would like to point out the team's results and pushing towards sustained profitability.
As part of the company's vital few initiatives, we are actively working to expand the gross margin profile of our business.
Despite the drag that increased skincare volumes have on our overall gross margin performance our efforts to remove fixed overhead costs and improved manufacturing efficiencies and reduced material costs are showing the desired result.
During the period, we delivered non-GAAP gross margin of 56, 6%, which was on par with 2019 at $56 seven.
Regarding operating expenses like most other companies acute care have benefited from the reduced spending associated with restricted travel and trade show cancellations throughout 2020 on.
Unlike other companies, though we invested into our resources into improving our sales and marketing processes to deliver greater sales efficiencies and in turn on productivity.
Making more of our savings durable as reflected on our fourth quarter 'twenty and 'twenty results.
Research and development expenses during the quarter, reflecting the lumpiness of spend associated with the timing of engineering and clinical and regulatory events R&D remains a priority for the company and we will not constrain or delay any of our critical development projects, such as acne and anyway.
Now, let me turn the call over to Jason to cover some of our fourth quarter and full year, 'twenty and 'twenty operational highlights.
Thanks, James 2020 introduced many challenges and enforced our team drove all of our ways of doing business on multiple levels.
As we move into 'twenty and 'twenty, one I think we set a solid benchmark works and we can improve upon as markets continue to recover through the year.
And North America are fourth quarter sequential improvement was driven by the continued improvement and rep productivity.
This is encouraging given the challenges of the presence and selling environment and the necessity to continuously evolve and methods and ever changing landscape.
Through the calendar year, we've developed new processes and create a foundation and ICU will facilitate the scaling of our business going forward.
Heading into 2021, and we intend to continue driving sales expansion by adding additional high quality sales reps, while sharpening our efforts to generate high quality customer leads to fuel the growth.
We're also continuing to invest resources into our capital sales training program to accelerate the uptake of new Rep, and Honda skills and a recent edition.
We expect these improvements will help drive results and the back half of 'twenty 'twenty, one and customer appetite for capital continues to recover.
Internationally, our capital business underperformed versus prior year due to significant COVID-19 headwind and the EU and several distributor markets and.
And regards to the EU, we commenced a restructuring within our sales force, namely and southern Europe, as we improve our talent pool and consolidated sales leadership role to improve efficiencies across the region. Additionally, we have improved our connectivity and track and duplicate many of the changes we've made and the U K earlier, which have already begun to bear fruit.
We are optimistic we will achieve a similar result, and other key geographies within the EU over the course of 2021.
Despite continued lockdowns due to the global pandemic are Australia, New Zealand team and our Japanese team, both posting significant capital revenue growth year over year. These numbers reflect the depth and focus on leadership as well as the quality of sales representatives, we have in place.
Early investments in these regions continue to pay off and we're following a similar roadmap for our EU geography.
Our product marketing plans, where first half of 2021, well in many ways to continue the efforts we launched during the fourth quarter of 2020.
Our true scope portfolio remains our flagship product and the body sculpting market as we feel it gives us that and practitioners the competitive edge they need to drive best in class body sculpting results.
We will continue to leverage the marketing and efforts around the true body program, demonstrating the benefit of sequential utilization of RF fat reduction and direct muscle stimulation and the patient and pursuit of achieving their desired outcome.
Marketing efforts within the facial skin rejuvenation space will center around the continued support of our X there'll be plus vascular laser and our secret family of products. This includes our secret RF micro needling device as well as the secret Pro device, formerly known as practice pro.
As mentioned before and this product combines the capabilities of the secret RF device with the addition of a fractional ablative C O two laser to reduce thermal remodeling addressing skin tone and texture resurfacing.
<unk> and <unk> just to name a few.
The secret Pro device was launched and the third quarter of 2020, and it's still on the early innings of its availability and initial customer feedback for secret pro has been positive.
Back to see increasing demand from this product during the 2021 calendar year.
Lastly, we are focused on increasing the effectivity of our marketing spend through the back half of 2020 and intend to expand upon these learnings throughout 2021 one.
And one particular area, we are committed to investing and ease the acquisition qualification and deployment of high quality leads for our sales organization.
This focus and investment is actively underway as we are committed to having the structure and process in place and advance of the recovering capital equipment appetite from our customer base.
Before I turn the call over to Rohit and I would like to share my appreciation for the hard work and dedication we have witnessed from our operational and commercial teams around the world their hard work and dedication irrespective of market conditions is inspiring and formed a strong foundation from which to build our long term scalable organization.
And with that I'll turn the call over to row hands to discuss our financials.
Uh huh.
Okay.
Thank you Jason as I review my prepared remarks, I want to clarify that I will be sharing both GAAP and non-GAAP metrics as relevant.
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 is contained in our earnings.
Total revenue for the fourth quarter was $49 9 million compared to $51 8 million from the same period and 2019, representing a decline of approximately 4%.
And as solely attributed to reduced treatment volume and lower levels of capital equipment purchases due to COVID-19 disruptions.
For the full year revenue was $147 7 million compared to $181 7.002 million 19.
Fourth quarter, North American capital equipment revenue was $18 4 million compared to $28 5 million from the same period last year, while international and capital equipment revenue and the fourth quarter was $11 7 million, a 4% decline declines and our European and distributor driven businesses were offset by gains and loss.
Pretty unusual and in Japan.
For the full year, 'twenty and 'twenty, North American capital equipment revenue.
It was $50 7 million compared to $96 7.002 million 19.
And all your international capital equipment was $40 million compared to $43 8 million and clean and 19.
I'm, especially pleased to report that recurring revenue defined as consumables Global service and skincare revenue was $19 8 million and the fourth quarter compared to 11 million for the same period last year, representing and 80% growth over prior year for the full year recurring revenue was 56.
One 9 million compared to $41 2 million and play and 19.
GAAP gross profit from fourth quarter of fiscal 'twenty, and 'twenty was $28 1 million, representing a 60 basis point gross margin improvement.
Compared to the same period last year.
The negative impact of our mix shift was offset by increased savings and our manufacturing and service operating.
GAAP gross profit for 'twenty, and 'twenty was $75 8 million, a 22, 8% decline compared to 2019.
Total GAAP operating expenses for the fourth quarter of 'twenty, and 'twenty were $26 6 million compared to $30 7 million from the same period last year, and 13% decrease that allowed us to deliver improved leverage.
Our results reflect the strong efforts made by our team to drive operational discipline and rigor and our day to day operations.
Operating expenses for the full year, 'twenty, and 'twenty were $98 6 million compared to $110 2 million and planning team.
Sales and marketing expense for the fourth quarter of 'twenty, and 'twenty was $14 7 million compared to $20 3 million from the same period last year.
Lower expenses were primarily the result of lower commissions due to lower sales and process adjustments to our sales and marketing activities.
Such as shifting from likes of online events, while we do expect that some of these expenses may come back and Covid related restrictions ease and we are confident that many of the changes implemented during 'twenty and 'twenty will be more permanent in nature and allow us to have more efficient sales and marketing spending as we returned to them to a more normalized environment.
Sales and marketing expense for the full year, 'twenty and 'twenty was $52 8 million compared to $71 1.002 million 19.
R&D expenses for the fourth quarter of 'twenty, and 'twenty was $4 million compared to $4 5 million for the same period last year.
R&D expenses and full year, 'twenty, and 'twenty was $14 3 million compared to $15 1.002 million 19.
Finally, G&A expense for the fourth quarter appoint Wayne was $7 9 million compared to $5 9 million and the same period last year, driven by legal fees and settlements for the effort of resolving cases as well as increased bad debt.
G&A expenses for the full year, 'twenty and 'twenty was $31 5 million compared to 24.002 million 19.
2020 proved to be a very challenging environment, which showed up and costs such as bad debt legal expenses and and the fees associated with it and term CFO all of which drove the growth of our G&A expense looking into 'twenty and 'twenty. One we expect these items and Margaret and though there may be some lumpiness, we do not view this increase.
And recurring in nature.
For the fourth quarter of claims and 'twenty, our non-GAAP operating income also known as adjusted EBITDA.
It was a profit of $4 7 million compared to a profit of coupon and one millions on the same period last year due to lower operating expenses.
Adjusted EBITDA for the full year, 'twenty and 'twenty was a loss of $4 8 million compared to a gain of $4 3.002 million 19.
There were no material or significant changes to our tax position.
However, as part of our ongoing euro and processes, we did have a onetime true up on certain tax provisions.
Turning now to our balance sheet.
We ended the quarter with approximately $47 million of cash cash equivalents and marketable investments.
Back to $33 9 million at the same time last year, and $42 4 million and at the end of third quarter Duane Duane.
We ended the quarter with $28 5 million of inventory down 0.8 million from third quarter. As we continued our effort to monetize our inventories through the end of 'twenty and 'twenty I'm very pleased to report that the goals, we outlined and that be onset of COVID-19 pandemic continues to bear fruit.
We continue to be diligent and on cash management and routine strengthen our balance sheet to continue to fund our upcoming growth and methods.
Lastly, turning to guidance.
Given the continued uncertainty surrounding the magnitude and duration of the COVID-19, pandemic and the wide range of outcomes for impact on both capital sales and procedure volumes over the course of the year, we will not be providing formal guidance at this time however.
Ever we are providing the following direction commentary and help our investors think about the drivers of performance and 2021.
We expect debt capital equipment sales will continue to be driven by our crew sculpt body, helping platforms crude sculpt flex and crude sculpt IV as well as the secret from micro needling product.
While we expect our first half sales will be driven by recurring revenue, we anticipate a continued recovery and on capital equipment sales both in the U S and internationally.
Particularly as we move into the second half of the year.
We are remaining measured and our outlook for the year for a number of reasons, including the unknown impact of newer and more contagious variance of the Corona virus as well and so yet to be seen rule on vaccines and their impact on consumer behavior as we move through the year.
We expect recurring revenues to continue growing at a healthy clip throughout the Europe, driven by our skin care line and the continued expansion of our products that go on attached with the consumable.
At the gross margin line, we expect continued improvements and full year 'twenty and 'twenty one.
Driven by the natural expansion of margin as our capital equipment returns to more normal levels.
Moving cost absorption of a smaller manufacturing cost base.
We expect continued discipline at the operating expense line in 'twenty and 'twenty, one with continued leverage on general and administrative costs. However, please note that we will be making meaningful investments since you've ever had and the launch of our acting products.
Which will cause increased spending on research and development and to a lesser extent sales and marketing as we move throughout the year.
From a cash flows we expect to be neutral or better on an adjusted EBITDA basis.
With that I will now pass it back to day for closing remarks.
Thank you Ryan.
Before opening up for Q&A I would like to provide a brief progress report reviewing the strides we've made against our key initiatives.
Six quarters ago upon joining key tariff, we turned our attention to building a plan to unlock value and create sustainability.
I shared our approach shortly after on.
My arrival and state of the acute care was an execution story in the making.
Our plan required that we set the foundation from which we could build the future couture a foundation or phase one required that we tackled three key elements number one improve the reliability of performance at key tear by increasing the mix of contribution coming from recurring revenue categories and deliver strong consistent results.
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Number two shift the balance of our resource investments to fund game changing differentiated products and programs aligned to our core customers and third align our business to clear financial performance standards to include achieving sustained profitability executing on our vital few initiatives that serve our phone.
And accelerating the transformation of our business.
Regarding our goal of improving the reliability of our revenue performance, we focused on closing the gap to a more balanced split of recurring to capital revenue aiming for a 50 50 mix.
Over the last 18 months, we've taken and held the position that all new products must have a consumable stream.
Committed commercial resources, specifically to accelerating each of our recurring revenue streams, and providing better service and support to our customers inclusive of local promotional marketing procedures, helping practices better positioned to tear treatments and improving regional support for skincare, including promotional.
<unk> directly to patients.
Over the past six quarters, we've been able to increase the percentage of recurring revenue over total revenue from the low twenty's.
And the second quarter of 2019 to the upper thirties entering 2021.
On a second element of the plan and shifting our investment strategy. We've made some critical internal investment decisions back in the back half of 2019 to allocate more resources to higher impact programs, specifically targeting unmet clinical needs of our core customers.
We began and have continued to allocate greater than one third of our R&D spend to these first mover type product development programs.
Despite financial pressures of a market uniquely challenged by the COVID-19 pandemic, we held fast to our belief and these critical investments and in doing so unleashed a remarkable group of scientists engineers and designers that embraced the challenge of changing the way energy based aesthetics is delivered.
First and most meaningful of the price coming through this high impact product pipeline will be our solution to acne.
And our prioritization strategy accelerated the development process and aligned our organization around a product, which we believe will provide practitioners with a durable solution to acting without the side effects associated with current pharma solutions.
Finally is the third element of our foundation and that is developing a culture of financial rigor and a pathway to sustained profitability.
We have made significant progress overall on improving the financial performance of the business during the last six quarters by narrowing our focus and ensuring alignment of the various functional areas to a single set of vital few initiatives, we have reduced redundancy, eliminating distractions and streamlined our business.
One recognized benefit of focus is our ability to move key programs and projects faster and more efficiently.
This includes our gross margin expansion programs, which has already removed considerable cost from the fixed overhead pool and is actively carving cost out of material labor and warranty expenses.
Our right sizing activities executed during the Covid pandemic, we're done and the strategic manner, we identified and removed operating expenses from not a central functions by consolidating roles and releasing redundant positions concurrently we identified key processes to improve within sales and marketing as well as G&A to provide additional.
<unk> near term savings, while creating the scalability, we need for our future.
The impact of our improvements provide durable improvement to the P&L, while enabling the company to generate cash and the third quarter. Aside from one time adjustments and generated approximately four and a half million and cash in the fourth quarter irrespective of any adjustment.
I believe that 'twenty 'twenty, one will be a bit of a transition year as we close out the phase one programs I just spoke of and start to identify and initiate some of the phase two projects that will lead us to the future.
While phase one was a return to basic blocking and tackling phase two will be a much more exciting time marked by notable product launches and commercial expansions that deliver growth as.
As we embark on the next segment of our journey I am extremely thankful for the hard work and dedication shown by the entire <unk> team to get US where we are today ahead of plan.
From the challenges, we have faced and overcome we emerged a stronger and more focused organization with momentum from our fourth quarter's performance.
I could not be more fired up moving into 'twenty and 'twenty one knowing that we are better positioned as a company fully aligned to the critical tasks ahead and highly motivated as a team to continue our journey towards realizing our vision of creating the future of medical aesthetics.
With that I'd like to open the call to questions operator.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.
And if you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is and the question queue you.
You May press Star two if you would like to remove your question from the Q.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the starkey.
Our first question comes from the line of Jon Block with Stifel. Please proceed with your question.
Thanks, guys good afternoon.
And maybe what I'll do is I'll zoom in first and then I'll sort of zoom out to wrap up the questions, but first one David on your last quarter, you said, hey, the new baseline for skin care and that was around 7 million and obviously, you're a really big quarter here and <unk>. So how do we think about this going forward is it 10 million the new new base, it's a big number but you're.
Did mentioned the success call. It the contribution of new accounts as well as utilization of current accounts and just want a little bit more color on how we think about that going forward.
Yeah, John Thanks for the question I think we've continued to be quite.
Excited about the skincare line and how that's how that's continued to grow.
I do believe that there was some artificial inflation from fourth quarter, just due to some timing associated with and anticipation of price increases or what have you.
And that I think our customers anticipated, but you know.
Obviously, it was not rolled out.
So I do think there was a little bit of a pull into fourth quarter, just naturally from customer behavior.
I do believe that the base that I spoke of earlier of seven and seven 5 million is still the base that we expect and anticipate for this business going into 2021 and.
And I think there will be some lumpiness from time to time as people anticipate you know pricing.
Pricing increases or there was some stocking of new customers or expansion of customers, but I think you know what I spoke of I think it's really I think.
I'd like to kind of.
And believe the baseline is going forward got it.
And then just to shift over to gross margins and Ron maybe just one for you, but they were really good and the quarter again, non-GAAP sort of around that 56%, 57% and the back half of 2020, I think and your commentary you talked about gross margin is up I believe year over year, but and we just even isolate and ones that normalized two wage environment Kinder.
Gross margin sustain at that level into 'twenty, one even if skin care acts of bid as a as a mix headwind and then I've got one more yeah. So no great question and thanks for that so you don't look we've taken some really significant actions and the middle of the pandemic and and.
And significantly right size, our fixed cost base and we do expect these gains to be very durable and in nature. As you rightly pointed out our margin this quarter actually grew and spa.
The slower sales and mix headwinds.
I'd expect our margin to ramp up and continue to ramp up as volumes come back online and our expectation would be to get to the lower sixty's.
And we exit the year and this further growth and our margin will be driven by continued right sizing and our services business. Our long term target for margin continues to be in the mid sixties.
Oh, great Great numbers, and then and I said I'll zoom out and they're just getting some questions and I guess I've got questions as well just that $30 million and the fourth quarter were on Capitol Hill normalized environment, and I guess, it's sort of unfair to ask normalize and a COVID-19 environment, but I look to your <unk> and paas non COVID-19 years and capital sometimes down.
25% plus sequentially was that 30 million.
Did you think its real and is that sort of the right jump off point into <unk> as much granularity you're willing to give thank you yes.
Multifaceted question, John because we had a number of different variables that we were working through I.
And I think it's a great question. So let me kind of take you through a few components. Obviously as we had indicated we expected some sequential growth as we started to make.
Investments in our sales force and North America in particular.
I think we continue to upgrade and talent during the quarter and.
We saw a great lift from from their capabilities and their productivity.
That said, we do believe we still have a number of positions to fill for North America.
And it takes a time once you fill those positions for those people to make contributions as they build their deal pipelines and so I think debt from a head count perspective.
And kind of thinking about it from a normalized perspective for Q1, Q similar I think to the ups and downs of shutdowns restrictions et cetera, we're very mixed from a regional perspective, and we all know that elective procedures fell off for certain markets. We didn't see a whole lot of <unk>.
<unk> or falloff in treatment volumes, but certainly we were fighting very very difficult very cantona tell if you will for deals and trying to find a way to as many deals as we possibly could find it.
On the quarter. So I think from that perspective, it's probably gonna be similar quarter to quarter growth changed <unk> to <unk>.
I think the one thing that may be working in our favor is the vaccines and the off to the optimism. If you will that's out there that you know.
And then the cure if you will is just around the corner and Thats rolling out and I do think that it has opened the doors and created a little bit of excess.
The excitement or momentum for the buying customers around capital, which might be slightly improved from Q4 to Q1. However, I still think that you know.
We've got a lot of uphill work to do there. So I don't know if those three elements help you kind of bracket.
Bracket, what what we think around the first quarter, but yeah I'd.
I'd say, it's mostly simple seasonal.
<unk> with maybe a little bit of additional optimism from vaccine.
That's great color, thanks, guys alright.
Our next question comes from the line of Matthew O'brien with Piper Sandler. Please proceed with your question.
Thank you afternoon, and thanks for taking the questions. Just a couple from me first one on a couple.
Parts here, but just just to follow up on John's question on the skin care business. Dave are you seeing any other pull through.
And those accounts outside of just the traditional skincare products are you getting them to buy other technologies I know as far as the Japan, but and.
And secondly, as you look at the U S. On the consumable side and you kind of talked about some of the strength that you're seeing there.
Overall, just just talk about what youre seeing there and how durable and zoom faced and this phenomenon and and the rest of the consumable component to the business as we look into 'twenty one.
Well first of all of them and I have to give you credit I haven't heard the coin phase and then growing.
And trade zoom face, but.
I will probably start stealing shamelessly.
In terms of your first question skincare, and the durability and the pull through from it.
Like we said there is some account expansion and Theres also penetration.
Which makes it and our minds a durable business.
And and one that's probably less susceptible to kind of shrink back or creep right.
But.
By the same drug and we don't necessarily see it as a significant contributor to pull through it.
It does get us into new accounts on to get it does allow us to expand our base of <unk>.
Sales of our distribution of that product however, and in many cases, those are not necessarily transferring to capital purchases and any way shape or form right now.
We do believe that over longer term periods that may be the case, but certainly not the current case.
As we think a little bit more about.
On the zoom based phenomenon and and what we think will continue there we do think that there's probably a higher degree.
<unk> rejuvenation programs that are going to play out over the first part of 2021, but as I said, we remain exceptionally bullish on on the true body and and the body contour and lines coming back as people get more freedom more independence and lower restrictions, we know that folks have been waiting long for <unk>.
Summer vacations, we think as people have greater social interactions and in many cases start returning to work on some basis of a few days a week or what have you I think they're going to feel that they.
And the need to kind of lose day, the couch potato attitude and kind of adopt a little bit more of a a healthy look and feel and I think that's going to drive a little bit more volume into the body contouring procedures. So at least that's our insight talking with our customers and understanding what theyre seeing and hearing.
So I believe that that's fairly well calibrated.
Got it Okay, and then flipping over to phase two Dave.
I know it sounds like you know with these investments here and R&D on the asked me side this year.
Since you know that this is still probably more of a development type of year for Acme, but I think I think rod mentioned, some sales and marketing investments. This year. So I don't want to get too far ahead of ourselves with any of this but it feels like acne as something that could roll out in 'twenty. Two is that the right way to think about it and then just just talk maybe a little bit more about line.
Confidence that you've seen over the last couple of months and that program.
Yes, Matt I. Appreciate the question, we have not we have decided to kind of sit on our hands a little bit in terms of what we release, we noticed this and competitive product out there and we don't intend to do anything to give them any advantage that we've been able to gain through our own learning. So we've been kind of sitting back a little bit and not providing as much day.
Ada and and I appreciate our investors patience with us as we move through that that being said, our bullishness for the product its ability to treat and and solve the medical condition known as acne and and it has been remarkable and we have not come off that position I think from a timing perspective, and we will.
And your position maybe later.
In the first half early.
Second half of the year, where we can announce a little bit more around the timing and provide a little more insight to the results, we're seeing and why we're so bullish on this technology.
And those things said.
We do believe that this is a transformative product for the company and we also believe that there are some things that we can do behind this that will also maybe not be quite the same market size, but would be of interest and significance and helping us continue to transform this company from a fast follower to a first mover and I couldn't be more proud of.
Our R&D team of scientists engineers and designers over there and the clinicians that are helping us drive these programs.
Very fair. Thank you so much.
Okay.
Yeah.
Our next question comes from the line of Chris Cooley with Stephens. Please proceed with your question.
Yes.
Good evening, everyone and congrats on a great fourth quarter.
Just quickly can be if I could.
And so we think a little bit about how the cadence as we go through the year and on the initiatives that you already have something in place.
And you just started upgrading the sales force and the third quarter and and expanded it further and the fourth quarter.
How do we think about the sales force expansion and most of those.
On the marketing and nuances there for the capital side as you start to face from competition.
From other indications, which are out there and the first half. So we all know we have cellulite treatments coming out which are.
Pretty well heralded as well as some wrinkles therapies.
Just kind of curious kind of how you are working on addressing kind of a finite demand for incremental capital for the first half of the you're not going on.
A follow up.
Yes, Chris that's a great question first of all thanks for the comprehensive.
We certainly appreciate that regarding the fourth quarter results in terms of your question and there's no doubt that the competition for wallet share is continuing to kind of grow and expand if you will.
And we're well aware of the technologies that are out there and I think our view in these markets is debt.
We believe that we have been somewhat constrained by our own staff and as the markets have been somewhat limited, but as the markets continue to open up we will continue to add reps and expand our footprint and we believe that there's plenty of room for that to happen and growth.
That said, we do believe that the 2021 is probably more of a back half story on capital and capital equipment growth and we think that will be kind of modulate it a little bit on the first half of the year as these new reps come up to speed build their deal pipeline and then kind of learn the processes and gain some efficiency and productivity.
We do believe though and the first half of the year it'll be a little bit more of a recurring revenue.
Growth story, and and and something that I think could be a positive contributor to kind of get us to the second half.
Hum.
I think we're well aware of that.
And the competition and we understand what's out there we understand and fighting for wallet share, but we also know that we have a very differentiated and very complete product portfolio that allows us to be engaged in almost any deal going on anywhere and we believe that that portfolio is.
And is really what allows our reps to have access to almost any deal that's available.
We also know that we've been able to command, our asps and get into deals.
And because of the quality and all of our product the flexibility and the broad breadth of capabilities our products have and.
And we will continue to leverage that as you know new markets new people come to the market.
We know that we are a known entity we have good product reliable robust capabilities and we'll continue to ride that on our legacy line.
Great I appreciate all that color and then maybe just a quick clarifying questions on the when looked down to the P&L growth.
Really strong results and only closer I guess, it's a little bit.
And to the downside was on the service component.
And especially with capital being more in line with our expectations and the quarters debt.
Just curious if you could provide any color there about what what you saw on the fourth quarter as it pertains to the service on a line on them.
Typically yes.
And there's a.
A couple of elements to that on the service side on the.
First time and I would share with you is first of all I think we saw a very strong service line and comparative last.
Last year with some distributor sales.
And as distributors typically stock up on parts and service parts at the end of the year and many of our distributors as you can tell from the markets have not been as active and selling products. This year or many of those markets have suffered through restrictions I think secondly, we had some restrictions that were kind of come and go cameras catch catch as catch cash.
And if you will within some of the different territories and I think that was also somewhat.
Restrictive as well so we were not disappointed at all frankly, and our service performance. We were actually pretty pleased that we were able to kind of pull it together with the restrictions that they faced on both travel and access to accounts.
And.
That's great and if I could just squeeze one last one and I'll jump back and chemo equivalents of roll on.
Great second half cash flow improvement sequentially, there driven by the leverage and the P&L. So just kind of curious I realize it's going to be lumpy as we go through the first half of the year it sounds like.
From an R&D spend and perspective and some other items, but should we anticipate continued sequential improvement and adjusted EBITDA or cash flow and so we think about the business going forward or is it more skewed to the second half of the year as you really start to get some leverage with stronger capital sales.
Yeah No I appreciate the question and and look as you May have noted we've chosen not to guide. The one thing I will reiterate is that we do expect to be a cash EBITDA on new.
And so or better from there.
We will continue to manage our P&L as responsibly as we can while keeping our eye on growth investments to drive our future.
Thank you.
Yeah.
Yeah.
Our next question comes from the line of Anthony Vendetti from Maxim Group. Please proceed with your question.
Thanks.
So it's just most of my questions have been answered, but just in terms of the capital equipment products that are driving growth now I know true body to scope it.
It's one of your main products and.
As you mentioned you know facial rejuvenation right now is it is still one of the the main.
Products and in terms of capital equipment sales and then if you could also comment on on Excel V.
Just in terms of.
And are those products stand and.
And in terms of contribution to revenues and go forward.
Yeah, we don't break those out specifically, but let me give you a little bit of color Anthony.
From our perspective zero and <unk>, our core products on their part of our legacy products, but they're also high performing and.
And and on the higher volume side of the legacy laser products that we offer.
We've seen a pick up just because of the facial and rejuvenation.
Rejuvenation on the facial programs that are going on and our customers' accounts and we've also seen that the <unk> because it's a workhorse product for a lot of our derm core customers. If you will we've seen and kind of a refreshing of that and.
And that comes from a couple of things we've done some upgrades to that product portfolio over the last couple of years and <unk> is really I think a top line probably the highest performer our best performing product within the vascular laser offerings that are out there and the field and we believe people are seeing the value that it creates on the zero.
There's a great deal of flexibility on that that offers so new practices or expansion of practices and are great applications for bringing zero into a to a practice enjoyed clinic. If you will and both of those had been I think.
A higher percentage of sales in 2020, just because of the nature of procedures and focus on facial rejuvenation or facial procedures.
Okay. That's very helpful. David and then and then maybe just on the obviously skincare and and you went through the <unk>.
And now behind that outperformance this quarter, but that in and the revenue line at the hand piece and.
And peace refills and skin care.
In terms of hand piece, we felt that it used to be for the tightened product is there anything else and there are.
And is the number for the fourth quarter, 90% plus skin care or what how how should we look at that.
Yeah, the vast majority of that number.
And I'm, even hedging when I say that I would say that this is really a skincare and number.
As reported by skincare and it comes out of Japan, and the really the that the growth is all from that product.
And tightened replacements on our per year over year basis are probably declining slightly if you will as new technology is out there and available into the marketplace. So.
And as new regulatory approvals are gained that will continue to decline and will see pick up elsewhere within the products and systems. If you will.
But that's a skin care number and and that's where that's the predominant growth contributor.
Yeah.
Okay and then just the last question on that on the skincare line.
Gross margin on that is that is that is that stable is there room for improvement there or is the gross margin improvement that Ron mentioned and the goal is that is that going to be driven by by new products, which have to meet a certain threshold.
In order to be released.
Yeah.
I would tell you that you know we have a contract in place that gives us assurance and support and it's good for both of us and and and the manufacturer and the product on.
And we've fortified that room that relationship and we'll continue to do so.
But I believe that skin care will continue to be a slight drag on margins and probably more so as we continue to grow and leverage on.
And the overhead absorption that will see with higher volumes next year that said we're.
We're very happy with that line and very happy with the contribution that makes overall and you know is there opportunity for improvement I would say the opportunity for improvement and it's probably more within our own products and the things that we can control so I'm not anticipating a significant contribution.
And margin front from the skincare frankly.
And frankly, I'm, just looking to to be able to manage it and maintain it and not have further declines from it.
Okay very helpful.
Okay.
If I could Andy I'm, sorry, I really meant to say one more thing.
I don't think it will prevent us from achieving our goal of leader and and and that's probably I think that's the point I think is important to make is we've targeted low to mid <unk> gross margin for this business.
And as we've modeled this we don't we don't believe this will block us from achieving that goal.
Okay excellent thanks very much.
Yeah.
Our next question comes from the line of Jim Sidoti with Sidoti and company. Please proceed with your question.
Hi, Good afternoon, and can you hear me.
We can Jim how are you.
I'm, well I'm well glad to it sounds like everybody is doing well, they're glad to hear everybody's healthy.
Two questions. One if you look at system sales down, 25% and North America, but only down 4% and the rest of the world.
Can you just give us a little more color why that is.
Yeah, I think it's a great question and I think you know first of all it's a little bit of the law of numbers, we had very small numbers and a few countries that we're able to really outperform so I think that's part of the story here, Jim Australia, New Zealand, and Japan, which have undergone significant makeover is in terms of.
The talent and the capabilities within those two regions.
We're still in the process of doing those type of upgrades here in the U S and I would tell you through the course of Covid, we'd have the opportunity to make over a significant portion of the sales organization in North America and I believe they will continue to improve grow stretch and will be able to add and scale. This business. So.
So I don't believe that's a long term.
The issue for us, but I think it's certainly a focus area for us to continue to accelerate debt recovery.
So and and I think if you look back on Q3 and look back on Q earlier periods. If you will within the year I think what you'll see is that some areas were less impacted.
By Covid and.
And other areas, where more impacted similar to like the Intercontinental region, and even Europe had more significant impact from Covid, then and some of the Asian direct markets that we play and those.
And those things said I also will tell you that I think the north American market is a competitive market and you know and.
And we've seen an increase and competitive nature of certain deals I think what is compelling and it gives me great optimism is the fact that we've been able to hold price and win the majority of the deals that were in so while I think more deals are competitive I do think that we've got a good product portfolio and and a good positioning if you will that allows us.
And the kind of the view that we will win more as we go forward.
And so for Australia, and New Zealand and Japan.
Did you say U and a distribution or did you change to a new distributor there no no no. We made these investments a couple of years ago and what we're seeing play out here is the quality of that leadership that we've put in place and the quality of talent that they have developed and continue to kind of investing.
Okay sorry.
Alright, and then the second question and I know you had.
And he did give guidance I don't blame you, but you did make a comment about R&D spending going up I think for the acne development can you just give us some sense on what that what that means is that clinical trial is that still on the development stage of regulatory approval costs can you just give us a little more color on what that is.
And maybe some magnitude.
Yeah, I'll give you some color as to the elements and maybe roll hunk and give you some magnitude.
But I don't think it's huge amounts but from my perspective.
Back to you know to make it to the finish line here not only in North America, but across the globe. We've got to obviously achieved the regulatory approvals that we need within those regions and this is really a medical condition and Jim and and I think as such the FDA is appropriately asked for appropriate.
Data and support and kind of giving a regulatory approval. We believe those same approvals are going to be necessary and other regions.
In terms of our CE, mark as well as approvals in major markets that we play and such as Japan, and Korea, and Asia, which are large and very predominant after the markets that we want to make sure. We continue to to two two access so as we look forward. We've got clinical work to do we're going to have a rollout.
If you will that's going to be responsible for developing the right data, which is inclusive of additional clinical trials not just for regulatory approval, but to understand the applications and and how to best train and teach and deliver on the knowledge needed to to work this device effectively and get the.
The outcomes that we know can be delivered.
So there's a lot that's going on from that perspective across R&D from prototype builds to clinical data collection to presenting and being able to kind of have a scientific dissemination plan. That's worthy of the size of market that this would address.
Okay and you wanted to give some just.
Color on benchmarking besides.
Yeah, So like Dave mentioned.
Theres some build out on the R&D front and depending on where we are and commercialization there could be some some spending on the sales and marketing side and a very light amount of spending on the matter of fact train side as well and and we expect that to be in the range of a $3 million to $4 million for for the year.
Al and got it.
Got it that's very helpful. Thank you very much.
Great.
Yeah.
Operator, I don't think Theres any more calls and the Q I just wanted to thank everyone for their attendance and attention on.
On this earnings call I think we've done a good job of executing on our game plan and we're exceptionally excited going into 2021, knowing the momentum that we've built well we look forward to updating you and future calls and giving you insight to the company's performance.
And along the way.
Executing our plan and continuing to realize our vision of creating the future of medical aesthetics. Thank you.
Yes.
Okay.
Yeah.
Yeah.