Q3 2021 Cutera Inc Earnings Call
Ladies and gentlemen, please standby today's presentation will begin and parents.
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Okay.
Thank you for joining to care third quarter 2021 earnings conference call. After the prepared remarks, there'll 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 statements regarding financial guidance regulatory approvals productivity improvements and plans to introduce new products and expand into additional geographies for work.
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 Qs.
Clinton lifestyle.
Tara also cautions you not to place undue reliance on forward looking statements, which only speak as of the date they are made.
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 <unk>.
Adjusted basis, we believe these financial measures can facilitate a more complete analysis and greater transparency.
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 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 Murray. Please proceed.
Thank you operator.
Today I am joined on the call by Ross <unk>, our Chief Financial Officer.
On today's call I will provide a brief overview of our third quarter 2021 business results.
Operational highlights and some commercial insights from the period.
Ron will then provide details of our financial results as well as share our updated outlook for performance over the remainder of 2021 before turning the call back to me for some final comments I will then open the call to your questions.
During the third quarter of 2021, our business continued to perform well delivering solid results across each category over the period, we did not see the negative impact from the Delta variant that many other businesses within the health care sector experienced as a static procedure volumes and customer interest in capital equipment purchases.
Remains strong and well above prior year levels.
As we anticipated many physician customers took well earn vacations in North America, and Europe over the course of the quarter, while physician vacations and family holidays had only a minimal impact on treatment volumes within the period. We note that demand for treatment in the fourth quarter of 2021 remains strong likely absorbing.
Any pent up demand from the third quarter.
The physician vacations and associated treatment flow disruptions demonstrated a return to more normal routines and predictable patterns confirming the overall strength that continues across static practices. This is further confirmed by informal surveys of aesthetic practices, which are reporting fully book scheduled through the end of the year.
Turning now to our performance for third quarter 2021, total revenue for third quarter 'twenty, one was $57 4 million an increase of 47% over prior year results and 24% above our pre Covid third quarter 2019 performance.
Notably capital equipment sales continued to trend favorably during the quarter with capital equipment revenues of $32 2 million, representing an increase of 33% over prior year levels.
She terrorist capital equipment sales were driven by particularly strong performances from our direct sales teams in North America, and Europe as well as from strength in our distributor markets.
In North America are capital equipment performance sequentially improved over second quarter 2021 during the period, we were able to expand our capital equipment sales force, taking increased sales coverage into fourth quarter, 2021 and beyond.
Our new North American sales reps are coming along very nicely and doing the work necessary to build robust deal pipelines in advance of 2022.
While we have yet to completely close the gap on pre Covid 2019 capital revenue levels in North America. We are pleased with the sales team's pace of improvement and excited to see how the newer sales reps will add to the collective.
We consider third quarter 2021 performance to be a positive leading indicator for future capital systems revenue growth as we fuel North American capital equipment sales with increased sales force coverage.
Despite an increasingly competitive energy based aesthetic equipment market, our sales teams across the U S and Canada have steadily delivered sequential growth selling through competitive challenges by highlighting the features and benefits and economic value that acute care portfolio offers our customers.
The revitalization and expansion of our North American sales force remains a positive driver of our business and coupled with investments in our key account managers, we are building strong and sustained momentum providing differentiated service and support to our customers.
In Europe during the third quarter 'twenty 'twenty. One we saw continued improvement of our capital sales, allowing us to overcome headwinds typically associated with the seasonality of Europe third quarter volumes are.
Our investments in recruiting and upgrading our sales talent, along with increasing our robust and our experienced European leadership team have delivered the desired results of accelerating our capital equipment growth.
And all indicators point towards continued expansion of energy based equipment sales as we continue to cultivate deals and expand further into key European regions, such as Germany.
As for our capital equipment sales in the direct markets of Australia, New Zealand and Japan.
There were some impacts from the Covid travel restrictions and reduced patient treatment volumes due to lower vaccination rates respectively.
Despite the regional headwinds from government imposed restrictions limiting people from venturing beyond five kilometers of their home in larger metropolitan centers of Australia, our team pushed through and delivered several deals in a very slow third quarter 2021 market.
Looking forward restrictions are lifting across Australia, and we anticipate that our team will be active and aggressive closing out the year. Additionally, we are seeing increasing vaccination rates across Japan supporting our outlook for capital equipment revenue recoveries in both regions starting in the fourth quarter of 2021.
And carrying well into 2022.
As I previously noted we remain confident that the global capital systems spending environment is strong and still improving customer interest for capital equipment purchases continues to decline and we anticipate a solid fourth quarter to close out the year carrying this strength into 2022.
Now moving to the recurring revenue this business maintained the positive momentum coming off the prior quarter delivering $25 2 million in third quarter of 2021, representing a growth of 68% over prior year.
During the quarter, all three recurring revenue categories skincare consumable products and services contributed to our improved recurring revenue mix and the robust year over year growth.
During the third quarter of 2021 our skin care business delivered revenue of $14 $8 million up 117% over prior year period.
This performance was ahead of expectations driven by greater volumes from physician customer restocking in advance of an announced price increase needless to say we are pleased by the continued success our skin care team in Japan has delivered.
Expanding active account basis.
An increasing penetration within the existing accounts.
Going forward, we anticipate that our normalized run rate for skincare well settled in below the third quarter levels as pre price increased inventories worked down and patients resume their routine skincare and aesthetic treatment patterns once run rates settle in we expect to maintain revenues at <unk>.
Growth rates for this category.
With regard to consumables third quarter of 2021 revenue was $3 $7 million, representing a growth of 60% over the same period in prior year Rev.
Revenue growth in this category was driven by continued strength of patient traffic. Despite the seasonal disruption from summer holidays and physician vacations.
Notwithstanding the seasonality North American performance was solid and steady driven by revenue generating activities carried out at practices like two tears, new and expanding key account manager presence over.
Over the third quarter, we continued to expand our key account manager team and have aggressively on boarded these new reps.
Customer sentiment for these resources have been strong and we expect to see increasing consumer revenues for the business in the later part of fourth quarter 'twenty, one and carrying into 2022 as the impact of our cam activities flow through our customers' practices.
The third and final category within recurring revenue is our global services.
This category includes income associated with time and material repair fees as well as the sale of service agreements to owners of our energy based aesthetic systems.
Global service revenue was $6 $7 million in the period, representing a growth of 14% over the prior year period, driven by increased volumes of service agreements covering our growing installed base of systems.
We expect that global service revenues will continue to grow at a steady rate above capital as service agreement attach rates improve in addition to the growing volume of our active installed base of systems.
Before turning the call over to Ron I would like to recognize the continued progress. Our team has made on one of our vital few initiatives gross margin expansion.
During the period like so many other businesses, we experienced some specific headwinds from increasing cost of critical components and high demand materials.
Additionally, inbound and outbound freight expenses have increased more recently.
Nevertheless, our supply chain and engineering teams have continued to identify improvements to offset much of the impact of these costs being passed along.
Meanwhile, our sales teams have been exceptionally strong and holding price in the face of competition, enabling us to not only maintain our margins, but to expand from our other cost improvement efforts.
With that I'd like to turn the call over to Ron.
Ron.
Thank you Dave.
As I review my prepared remarks, I want to note that I will primarily focus on non-GAAP results unless otherwise stated a.
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 release.
Total revenue for the third quarter was $57 4 million compared to $39 1 million for the same period in 2020.
Presenting a growth of approximately 47%.
North American capital equipment revenue was $20 7 million compared to $13 7 million for the same period last year, representing growth of 51% over <unk> 2020.
International capital equipment revenue for the third quarter was 11 5 million as compared to $10 4 million in the third quarter of 2020 representing growth of 10%.
The year over year performance of our international capital sales benefited from our European sales team driving growth of 52% are Australia unusual and team delivering 16% growth in our middle East and Asia Pacific distributor markets, delivering a growth of 11% over the prior year period.
Our teams within these markets continue to lay a strong foundation for sustainable growth over the next several years.
Recurring revenue defined as consumables global service and skincare revenue was $25 2 million compared to 15 million for the same period last year, representing 68% growth over prior year.
As Dave mentioned earlier, a source of pride for third quarter 2021 was our gross margin performance in.
In the face of several economic headwinds within the third quarter of 2021 GAAP gross margin was 58, 2% versus 55, 6% for the same period last year and non-GAAP gross margin finished at 58, 3% versus 57, 2% in Q3 'twenty 'twenty.
These improvements were driven by continued leverage on our fixed overhead cost base and consistent execution against our vital few initiatives.
Total non-GAAP operating expenses for the third quarter of 2021 were $28 4 million compared to 20 million for the same period last year.
Our results reflect higher variable compensation expenses as well as increased investments to continue to drive our topline growth.
Sales and marketing expenses for the third quarter of 2021 were $17 9 million compared to $10 9 million for the same period last year.
The higher expense was primarily driven by higher sales and investments in sales force expansion and optimization across multiple geographies.
R&D expenses for the third quarter of 2021 were $4 7 million compared to $3 1 million for the same period last year, driven by research and clinical investments in new technologies.
Finally.
G&A expenses for the third quarter of 2021 were $5 7 million compared to $6 1 million from the prior year driven by reductions in administration expenses.
For the third quarter of 2021, our non-GAAP adjusted EBITDA was $5 1 million compared to $2 4 million for the same period last year.
This continued improvement in our profitability is the direct result for our global teams working in concert and bringing a laser focus on driving growth with a view to our bottom line.
There were no material or significant changes to our tax positions turning now to our balance sheet. We ended the quarter with approximately $162 5 million of cash and equivalents compared to $42 4 million at the same time last year.
And $169 2 million at the end of second quarter, 2020 one.
The reduction in cash in the second quarter of 2021 is largely driven by our expansion due to revenue mix and timing as well as investments in our ERP program.
We ended the quarter with $35 5 million of inventory up 0.9 million for Q2, 2021.
We expect our inventories will increase through your end driven by our efforts to continue to secure our supply chain.
As you May have picked up from my prepared remarks, a key word that I have used over and over is investments and I'd like to take a moment to provide some further details on this front.
We continue to prepare our company for the next phase of our growth one area, where we have been increasing our investment in our information technology infrastructure more specifically, our new ERP system with.
With strong momentum in our core business and some pivotal growth initiatives on the horizon.
We are at a stage in our company's lifecycle, where it's important to build a truly scalable architecture to support the next phase of our growth.
We continue to chip away at this area, which is one of our vital few initiatives and we plan to have the system in place in advance of some of our new product launches in the next year.
Finally, moving back to our topline performance and outlook given our strong performance in the quarter and solid outlook, we are increasing our guidance.
We are raising full year 2021 total revenue guidance to a range of 224 million to $228 million representing year over year adjusted revenue growth of 52% to 54%.
With that I will turn the call back over to Dave for some closing remarks, Dave.
Thanks, Ron.
As we look ahead to the next several quarters, we are well positioned to execute our plans to accelerate growth through our re engineered and revitalize global direct sales force. We have made critical investments in expanding our capital sales coverage as well as improving our sales leadership in each of our global direct sales organizations.
Additionally, we have made investments in repositioning our business relationship with their customer through investments in our key account managers. These field based resources are tasked with driving activities, which increased practice revenues for our customers as well as drive two tera consumable revenue, we believe that our customers will recognize the.
The benefit of our key account managers being fully aligned to the financial performance of their practice and elect to adopt other terra energy based equipment into their practices.
Our sales force optimization and expansion investments set the stage for a strong finish to the year as well as building momentum going into 2022.
Internally, we have moved efficiently and effectively in the development of new and novel products, representing first mover advantages as new products come together with a revitalized and fully scaled sales organizations, we have the strength and capabilities to deliver amazing results. Our future is extremely bright as we.
To execute our plans and deliver strong sustainable results.
With that I'd like to open the call to questions operator.
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Uh huh.
Our first question is from Matt O'brien with Piper Sandler. Please proceed with your question.
Hi, Good afternoon, guys. This is Jim Ryan on for Matt. Thank you for taking the question.
So first I want to start on skincare again really solid performance here I think you guys mentioned that the run rate going forward will be lower than obviously, but implied right here.
On previous calls that kind of run rate are you also mentioned wasn't really maintainable, but it continues to outperform so how do we think about this franchise going forward and is $15 million then you bet.
And then also if you could expand on any of the trends that you might be saying, but.
Is that the kind of growth is sustainable and maybe even in markets outside of Japan.
Yeah.
Thank you so much for the color and give our best to Matt Hey, Thanks.
Thanks for the question on Skincare you you know during the prepared remarks, we mentioned a little bit of a pull forward due to an announced price increase that we delivered during the period. You know, it's it's hard to kind of estimate what that really is but we do believe that the run rate for this business on a more normalized.
Rate is somewhere between 12 or were around 12 million not certainly not 15, and certainly not 14.8, which which you saw in the period.
So we think that there's probably going to be a knock on effect in the fourth quarter.
Of of some kind of pullback because people bought ahead and and so we're kind of still working through that.
The things we track on this and the reason why we do believe that there is some sustainability to this growth is the fact that we see growth coming from two elements here, we see new accounts or account expansion. We also continue to see penetration within accounts.
Where existing accounts are doing more altogether. So like all in we think that there's some sustainability. There comes from further expansion to new accounts. We also think there's an ability to continue to penetrate newer accounts that haven't been fully penetrated yet.
And that gives us kind of the hope for the sustainability.
But that run rate does need to come back down to something that doesn't reflect a pull forward or a customer behavior, that's not consistent with our run rate closer to kind of like a $12 million.
Okay, Okay, perfect and then a real quick on the capital environment, you know, we see North America saw a.
Sequential step up which you mentioned was really driven by the sales force here. So from that standpoint, why how do you expect the momentum to carry forward into Q4, and then you know 2022.
I think what's important for everyone on the call to understand and it's another great question is that North America has continued to have sequential improvement actually starting from from third quarter last year to fourth to the first quarter of this year second and then third and they have continued to step forward.
Some of this is the result of a focused on process and some of this is our focus on expanding the sales force itself, which has been obviously beneficial but more recently, we've hired a number of new territory managers, I know territory managers or the entry level positions within our sales organization.
And they do require a little bit longer time for training and development as well as building their pipeline, but we do think that this will continue to move forward and in North America and have another kind of projection of sequential improvement as these folks continue to deliver greater kind.
Kind of Rep productivity.
Okay got it thanks Deb on just if I could squeeze a quick one in here are asking do we have any update there or you know timing of when we can see any data or when we will get an update.
So sir I'm going to give you credit for not asking that this is the first question.
Uh huh.
I just wanted to point out to everybody. We've remained very tight lipped on acne for for obvious reasons around protecting our competitive advantages that we believe that we are building internally to the business. So we're not really talking about timing, we're not talking about technology and we're certainly not talking about the data I would share with with everyone's listening that we.
You need to have an increasing level of confidence as we build experience inside the building with the product the technology and kind of you know what we see from kind of engagements with clinicians once we reach a point that we believe that it's appropriate for us to share with the market, we will but for now.
We're going to just say that our we're making good steady progress and the things remain on track per our internal plans.
Mid 20, twenty-two we're hitting our stride with this sales organization in North America, and we're delivering on kind of our expectations. So.
We will continue to add reps as opportunities exist, but I think going into it really part of 2022 I think we have the right people, we just need to move them through the development process.
Got it perfect.
Just to ship years over to you you know you talk about gross margins of 60%, 60% plus low to mid at 1.6 dollars and that of course skincare was ripping and so you sort of reconfigured that a little bit, but still talk to 60% blessed with what you're seeing with the supply chain and crate and obviously, it's not specific to you guys. It's so global.
Nature can we still get there over the next 12 to 24 months or just with what you're experiencing is there.
Enough slack in the system, where you're able to pull out cause some other parts of the equation, we still feel good on that low to mid 60 over time to be clear.
So I think that's a great question, John and thanks for kind of summarizing what we talked about in the past so first of all I'd say.
Pleased with the progress that we've made so far year to date, and Michael and regulations and thanks to our operations teams for all their efforts in getting us to the place that we are at.
We're not immune to the supply chain challenges that the rest of the world and the market is faith, but I would say that it hasn't affected or broke it.
It is not deterring us from that previously stated non-GAAP margin goal of of mid sixties.
I would say it impacts our timing a little bit.
I'm.
I continued to be very confident in our ability to get there I'd say over the next couple of years.
And there are several catalysts that that are still in our back to to continue to deliver further expansion I would add that we saw a step change in our margin in 2021.
And going forward, the the expansion and the changes would be more gradual.
Got it okay, great last one for me all sort of.
Quick third one so narrow onto your dog track you said paying particular attention to your word and you were calling on investments I was paying attention to what other one I thought you said product launches next year in 22 being plural not cingular's. So maybe if you guys gave you know if you could just talk to we're all so fixated on acting and I get.
From a timing perspective of what you're willing to disclose but just what we think about that pipeline are they're gonna be other offerings is it gonna be new platforms are outside of the Acme should we think of more maybe just refreshers across some of the other platforms at <unk> currently has thanks Scott.
It takes John Great question.
I am not going to give you an update on acne and and I'm not trying to be coy I do believe that there is reason to kind of be very tight to the vest that said R&D work continues to be ongoing with other projects. These are addressing other innovative spaces or markets that I think will be delivered.
As we continue to update our portfolio I think there's probably a mix of programs in that in our.
Polio right now of projects some of them being more innovative and others being kind of Ah.
Updates to existing systems, and our intent will be to kind of get through some.
Some of the development and activities, we have outstanding with acne, but also to follow that up with some additional products going into the core business that we have so.
We're anticipating.
Bringing some other things out and once we get into 2022, and we provide guidance will give a little bit more insight into what will be delivering and win.
Perfect. Thanks, guys appreciate it.
Thank you.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Chris Cooley with Steven. Please proceed with your question.
Good afternoon, and thank you so much for taking the questions.
Much as I'd like to ask about I mean, it sounds like I should.
I will I will spare you, maybe Dave, though I don't want it I really would appreciate if you could just give us a little bit of color or would you think about the domestic market and also when you look internationally.
Talk to us about maybe how you're seen the various channels exhibit growth and really kind of trying to look at the traditional cosmetic germ or midterm type channel relative to the mess Hall and how your portfolio place to that and then I have a quick follow up thanks, so much.
Thanks, Chris So first of all I think it's important for those on the call that maybe don't realize this as we look at our portfolio from a perspective of not only offering broad procedural coverage to the practitioner, but also doing so and what we think is an economic advantage procedure fee.
So our intent while the capital is expensive from a standpoint of features and benefits. We offer the covers a vast majority of procedures that can be done within the practice.
In addition, we look at things that allow us to do procedures and the less time.
Returning treatment rooms, and labor within the practice.
Back to the practitioner.
For them to use in other ways. So our intent is to be a very economically advantaged provider to the practice and we see that across both terms and med spas.
I think what we see in terms of growth as we see a continued evaluation and growth within the Durham practices into incorporating aesthetics.
More broadly we're seeing some of that.
Has some of the older.
Germs retire and younger germs come into the practice that they are incorporating smaller components into the practice that include cash pay procedures.
And so we continue to see that as a growth potential.
Into existing practices as well as new practices being setup in terms of the med spas, we think that they continue to.
The ones that survived.
The crisis and had good cash flows continue to invest broadly in doing more and greater procedures and they're looking for a low cost high profitability procedures to incorporate into the into their offerings as well. So I think in both cases, we have a portfolio that blends well into providing.
Good coverage across multiple procedures and with the med spas offering them certain products.
Such as our true scalp flex that now can do.
Kind of an an exercise in 15 minutes instead of what was 40 minutes. So those type of things that we can produce and provide to the marketplace that allows them to collect similar or higher fees and shorter periods of time gives us that economic advantage for procedure fees.
Super Thanks, and just just to maybe clarify there as well when you when you think about growth.
And each of those chance respective channels as you've defined him or you've seen it relatively balanced right now.
Growing faster and you know, they're just just just want to clarify that before do my follow.
Great question, I think we see a little bit more growth right now in our portfolio with the Durham practices and I think this is primarily driven by the investments, we're making with our key account managers.
Think they blend very well into a durham practice not that they don't provide great support to med spas as well.
But I think in particular, we've found greater uptake out of the gate with the key account managers due to the nature of those practices and how they've worked with other I'll say providers not capital providers, but with other providers on their key account managers and they know how to engage with US now to work to drive their revenues. So I think.
That's helping a great deal in particular and I think we also find that our portfolio lens two more clinical selling right and I think with our key account managers in particular being on board. We've hired people that have been in the aesthetic space, but understand the clinical value of what will provide.
And I think that indeed helps and kind of reinforces and supports our capital sales reps and what they're doing so I think we see slightly more growth of the German and the core business side. However, we do see strong growth in those med spas that are expanding extending and expanding their operations.
I appreciate that and then just lastly for me.
When you look at the business, you're extremely strong third corner guidance Reyes getting a favorable mixture there.
And as a result, you know profitability looks much improved as you're going forward and.
The company has a strong balance sheet as well.
When you look out into calendar twenty-two you're talking about launches plural.
I guess that includes acne, but you're not going to talk about that because it also may be include in licensing agreement Iraq musicians or should we think about.
You're deploying that capital just for continued Salesforce expansion D T C and investment internally, there and R&D, just just kind of curious how you're thinking about.
Other opportunities that may or may not yeah, and the marketplace today.
Let me, let me hit at a higher level on kind of the way we're looking at the business and then maybe Ron can talk about some of the other investments that we we want to continue to fund.
But.
From a growth perspective, we think that some of the best things that we could do is is from an R&D perspective is organic we have more ideas than we have the ability to deliver right. Now there are a great great people here in our R&D organization, our technical organization and I think we want to <unk>.
Untinged to fund.
Their ideas and their their development efforts.
And I think that will be well, we'll we'll have served in doing so I think the second thing is we believe that wall, there's plenty of opportunities out there to go out and pick something up and tuck it in it doesn't really represent our portfolio and what we've built here, we think we're building something.
Special and we want to continue to invest in that in particular not.
Not that we won't look at opportunities when they come across but I think right now we're not out shopping where out really focused on building and developing our own.
So do you have anything you want to add to the investment Yeah I think.
What I that Dave is that.
B, a nerd opportunity that's available at Terra we're still a big.
Growth mindset business right.
We're focused on the piano for sure, but our primary focus is investing for growth and that's how we're setting everything up trying to make everything scalable and really building a platform here to be able to to launch into our next phase in terms of infrastructure in terms of.
Structure and as Dave mentioned R&D obviously.
Thank you so much.
Thanks, Chris.
There are no further questions at this time I would like to turn the floor back over to date marry for clothing comments.
Thank you Maria for those of you on the call we want to thank you for your continued interest in Kuchera, we remain excited and excited and poised for growth and we look forward to providing you with an update to our full year 2021 result at our next update during the first quarter of 2022.
Till then take care. Thank you.
This.
<unk> today's teleconference. You may disconnect your lines at this time, thank you for your participation.
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