Q2 2024 Cutera Inc Earnings Call

Speaker Change: [music]

Operator: Thank you for standing by. This is the conference operator.

Operator: Thank you for standing by. This is the conference operator. Welcome to the Cutera Inc. second quarter 2024 results conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then zero. I would now like to turn the call over to Shelby Eckerman, Vice President of Finance. Please go ahead.

Operator: Welcome to the Cutera Inc. Second quarter, 2024 results conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded.

Speaker Change: Thank you for standing by. This is the conference operator. Welcome to the Cutera Inc. second quarter 2024 results conference call.

Speaker Change: As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad.

Operator: After the presentations, there'll be an opportunity to ask questions. To join the question queue, you may press star, then one on your telephone keypad. Should you need assistance during the conference call, you may signal unoperated by pressing star, then zero.

Speaker Change: Should you need assistance during the conference call, you may signal an operator by pressing star then zero.

Operator: I would now like to turn the call on for silver to show the echoment Vice President of Finance. Please go ahead.

Speaker Change: I would now like to turn the call over to Shelby Eckerman, Vice President of Finance. Please go ahead.

Shelby Eckerman: Thank you, Operator, and thank you, everyone, for joining us today. With me today is Taylor Harris, Cutera's Chief Executive Officer, and Stuart Drummond, Interim CFO. Following our prepared remarks, we will take your questions. Before we get started, I'll note that 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.

Shelby: Thank you, operator, and thank you for everyone for joining us today. With me today is Taylor Harris, Cutera's chief executive officer, and Stuart Drummond, interim CFO. Following our prepared remark, we'll take your questions.

Shelby Eckerman: Board Licking Statements are based on information available to us at the time those statements are made, which by its nature is dynamic and subject to change, or management's good faith belief at that time with respect to future events. Board Licking Statements include, among others, statements regarding financial guidance, regulatory approvals, productivity improvements, and plans to introduce new products and expand into additional geography. For words that may identify forward-looking statements, we encourage you to refer to the safe harbor statement in our press release earlier today.

Shelby Eckerman: Thank you, Operator, and thank you everyone for joining us today. With me today is Taylor Harris, Cutera's Chief Executive Officer, and Stuart Drummond, Interim CFO . Following our prepared remarks, we will take your questions.

Shelby: Before we get started, I'll note that the discussion today includes forward-looking statements. These forward-looking statements reflect management's current forecast or expectation of certain aspects of the company's future business, including but not limited to any financial guidance provided for modeling purposes. Forward looking statements are based on information available to us at the time those statements are made, which by its nature is dynamic and subject to change, or management's good faith belief of that time with respect to future events. Forward looking statements include, among others, statements regarding financial guidance, regulatory approval, productivity improvements, and plans to introduce new products and expand into additional geographies.

Shelby Eckerman: All forward-looking statements are subject to risk and uncertainties, including those risk factors described in the section entitled Risk Factors in our Form 10-K as filed with the Securities and Exchange Commission and updated in our Form 10-Qs subsequently filed. Cutera also cautioned 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.

Speaker Change: Before we get started, I'll note that the discussion today includes forward-looking statements.

Speaker Change: 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.

Speaker Change: Board looking statements are based on information available to us at the time those statements are made, which by its nature is dynamic and subject to change, or management's good faith belief of that time with respect to future events.

Speaker 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.

Shelby: For words that may identify forward-looking statements, we encourage you to refer to the Safe Harbour 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 the Securities and Exchange Commission and updated in our Form 10-Qs subsequently filed. Cutera also cautioned 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.

Speaker Change: For words that may identify forward-looking statements, we encourage you to refer to the Safe Harbor Statement in our press release earlier today.

Speaker Change: All forward linking statements are subject to risk and uncertainties including those risk factors described in the section entitled Risk Factors in our Form 10-K as filed with the Securities and Exchange Commission and updated in our Form 10-Qs subsequently filed.

Speaker Change: Katera also cautioned you not to place undue reliance on forward-looking statements, which speak only as of the date they are made.

Speaker Change: 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.

Shelby: Future results may differ materially from management's current expectations.

Shelby: In addition, we'll 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 Kera's ongoing results of operations, particularly when comparing underlying results from period to period. Please refer to the reconciliation of GAAP to non-GAAP measures in our earnings release. These non-GAAP financial measures should be considered along with, but not as an alternative to the operating performance measures prescribed by GAAP.

Shelby Eckerman: Future results may differ materially from management's current expectations. In addition, we'll discuss non-gap 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 of Gap to Non-Gap Measures in our earnings release. These non-GAAP financial measures should be considered along with, but not as an alternative to, the operating performance measures prescribed by GAAP.

Speaker Change: 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.

Speaker Change: Please refer to the reconciliation of GAAP to non-GAAP measures in our earnings release. These non-GAAP financial measures should be considered along with, but not as an alternative to, the operating performance measures prescribed by GAAP.

Taylor Harris: With that, it is my pleasure to turn the call over to our CEO, Taylor Harris. Thank you, Shelby.

Shelby Eckerman: With that said, it is my pleasure to turn the call over to our CEO, Taylor Harris.

Speaker Change: With that, it is my pleasure to turn the call over to our CEO , Taylor Harris.

Taylor Harris: Thank you, Shelby. I'll start by acknowledging that we're reporting a disappointing second quarter performance and a four-year outlook. Historically, our business and our industry have seen increased capital purchase activity as we move sequentially into the second quarter. This year, that trend didn't hold, primarily, we believe, due to continued macroeconomic pressure, which we're assuming will persist through the balance of the year.

Taylor Harris: I'll start by acknowledging that we're reporting a disappointing second quarter performance and four-year outlook. Historically, our business and our industry have seen increased capital purchase activity as we move sequentially into the second quarter. This year, that trend didn't hold. Primarily, we believe due to continued macroeconomic pressure, which we're assuming will persist through the balance of the year. We are marching forward with new commercial leadership in North America, additional cost reduction, and we're building it on the strong momentum that we're generating with Avi Clear. I'm proud of the resilience that our team at Cutera is demonstrating and of the foundational changes we continue to pursue to position the company well for future growth.

Taylor Harris: Thank you, Shelby. I'll start by acknowledging that we're reporting a disappointing second quarter performance and four-year outlook. Historically, our business and our industry has seen increased capital purchase activity as we move sequentially into the second quarter.

Speaker Change: This year that trend didn't hold, primarily, we believe, due to continued macroeconomic pressure, which we're assuming will persist through the balance of the year.

Taylor Harris: We are marching forward with new commercial leadership in North America, additional cost reductions, and we're building upon the strong momentum that we're generating with AviClear. I'm proud of the resilience that our team at Cutera is demonstrating and of the foundational changes we continue to pursue to position the company well for future growth. There were some important bright spots in our second quarter performance, and I want to highlight those. First, the international launch of AviClear is proceeding exceedingly well. We've sold over 70 AviClear systems outside of North America, and for the approximately 50 customers that have had systems in place for at least 2 months, utilization is averaging over 10 treatments per month.

Speaker Change: We are marching forward with new commercial leadership in North America, additional cost reductions, and we're building upon the strong momentum that we're generating with AviClear.

QTERA: I'm proud of the resilience that our team at Cutera is demonstrating and of the foundational changes we continue to pursue to position the company well for future growth.

Taylor Harris: There were some important bright spots in our second quarter performance, and I want to highlight those. First, the international launch of Avi Clear is proceeding exceedingly well. We've sold over 70 Avi Clear systems outside of North America, and for the approximately 50 customers that have had systems in place for at least two months, utilization is averaging over 10 treatments per month. Now we're very early in the launch, so it wouldn't be appropriate to extrapolate that performance, but it is still quite encouraging. Second, we've had highly positive feedback from the launch of ZO Plus in North America.

Speaker Change: There were some important bright spots in our second quarter performance, and I want to highlight those.

Speaker Change: First, the international launch of AviClear is proceeding exceedingly well. We've sold over 70 AviClear systems outside of North America.

Speaker Change: And for the approximately 50 customers that have had systems in place for at least 2 months, utilization is averaging over 10 treatments per month. Now, we're very early in the launch, so it wouldn't be appropriate to extrapolate that performance, but it is still quite encouraging.

Taylor Harris: Now, we're very early in the launch, so it wouldn't be appropriate to extrapolate that performance, but it is still quite encouraging. Second, we've had highly positive feedback from the launch of ZO Plus in North America, and we're exceeding our expectations there. XeoPlus offers tremendous flexibility and customization with over 25 applications, from Cutera's signature laser genesis procedure, to hair removal, to pigment reduction, and more.

Speaker Change: Second, we've had highly positive feedback from the launch of ZO Plus in North America, and we're exceeding our expectations there.

Taylor Harris: We're exceeding our expectations there. ZO Plus offers tremendous flexibility and customization with over 25 applications, from Cutera's signature laser genesis procedure to hair removal to pigment reduction and more. We believe that ZO Plus can be a great upgrade option for our installed base of legacy ZO accounts over time. But in the second quarter, we actually sold more ZO Plus systems into accounts that are new to Cutera, which we view as a positive indicator of the long-term opportunity.

Speaker Change: XeoPlus offers tremendous flexibility and customization with over 25 applications, from Cutera's signature laser genesis procedure, to hair removal, to pigment reduction, and more.

Speaker Change: We believe that Xeo Plus can be a great upgrade option for our installed base of legacy Xeo accounts over time. But in the second quarter, we actually sold more Xeo Plus systems into accounts that are new to Cutera, which we view as a positive indicator of the long-term opportunity.

Taylor Harris: We believe that Xeo Plus can be a great upgrade option for our installed base of legacy Xeo accounts over time. But in the second quarter, we actually sold more ZO Plus systems into accounts that are new to Cutera, which we view as a positive indicator of the long-term opportunity. Third, we've strengthened our North American sales force over the past quarter. In July, we promoted Steve Kreider to SVP of North America, with full responsibility for a unified commercial organization, including capital sales, practice development, marketing, and customer excellence.

Taylor Harris: Third, we've strengthened our North American sales force over the past quarter. In July, we promoted Steve Criter to SVP of North America with full responsibility for a unified commercial organization, including capital sales, practice development, marketing, and customer excellence. Steve is a mission-driven leader, and he has tremendous passion for building great teams, training and developing people, and for providing clarity and focus on priorities. All of those attributes, as well as his deep experience in both dermatology and aesthetics, will serve Cutera well. Steve and his leadership team are focused on driving consistent execution and improved productivity. To this end, we've restructured our capital sales organization under the leadership of two new directors and a team of regional managers across both capital and practice development.

Speaker Change: Third, we've strengthened our North American sales force over the past quarter. In July, we promoted Steve Criter to SVP of North America with full responsibility for a unified commercial organization, including capital sales, practice development, marketing, and customer excellence.

Taylor Harris: Steve is a mission-driven leader, and he has tremendous passion for building great teams, training and developing people, and for providing clarity and focus on priorities. All of those attributes, as well as his deep experience in both dermatology and aesthetics, will serve Cutera well.

Speaker Change: Steve is a mission-driven leader, and he has tremendous passion for building great teams, training and developing people, and for providing clarity and focus on priorities. All of those attributes, as well as his deep experience in both dermatology and aesthetics, will serve Cutera well.

Taylor Harris: Steve and his leadership team are focused on driving consistent execution and improved productivity. To this end, we've restructured our capital sales organization under the leadership of two new directors and a team of regional managers. Across both capital and practice development, our leaders are focused on team management, collaboration, training, and process improvements, including utilization of the Salesforce platform to improve execution and forecast. Our current North American team represents a solid mix of Cutera veterans and new talent.

Speaker Change: Steve and his leadership team are focused on driving consistent execution and improved productivity.

Speaker Change: To this end we've restructured our capital sales organization under the leadership of two new directors and a team of regional managers.

Taylor Harris: Our leaders are focused on team management, collaboration, training, and process improvements, including utilization of the Sales Force platform to improve execution and forecasting. Our current North American team represents a solid mix of Cutera veterans and new talent. In recent months, we have attracted a number of proven capital sales people and practice development managers with deep industry experience. We've also had a fair amount of turnover, much through performance management. Turnover detracts from revenue in the short term as it takes new reps, even experienced ones, some time to build their territories. But we believe that the overall transition has strengthened our team for higher levels of performance over the medium and long term.

Speaker Change: Across both capital and practice development, our leaders are focused on team management, collaboration, training, and process improvements, including utilization of the Salesforce platform to improve execution and forecasting.

Speaker Change: Our current North American team represents a solid mix of Cutera veterans and new talent. In recent months, we have attracted a number of proven capital salespeople and practice development managers with deep industry experience.

Taylor Harris: In recent months, we have attracted a number of proven capital salespeople and practice development managers with deep industry experience. We've also had a fair amount of turnover, much through performance management. Turnover detracts from revenue in the short term, as it takes new reps, even experienced ones, some time to build their territories.

Speaker Change: We've also had a fair amount of turnover, much through performance management.

Speaker Change: Turnover detracts from revenue in the short term, as it takes new reps, even experienced ones, some time to build their territories. But we believe that the overall transition has strengthened our team for higher levels of performance over the medium and long term.

Taylor Harris: But we believe that the overall transition has strengthened our team for higher levels of performance over the medium and long term. Turning to our overall financial performance in the second quarter, revenue was below our expectation due to a combination of macro pressure and the aforementioned sales force transition. Overall capital systems revenue increased sequentially in international markets due to the strength of the AviClear launch, but it declined sequentially in North America. However, customers across multiple geographies continue to struggle with access to capital and financing terms, which are limiting their ability to invest in new capital.

Taylor Harris: Turning to our overall financial performance in the second quarter, revenue is below our expectation due to a combination of macro pressure and the aforementioned sales force transition. Overall, capital systems revenue increased sequentially in international markets due to the strength of the AviClear launch, but it declined sequentially in North America. Customers across multiple geographies continue to struggle with access to capital and financing terms, which are limiting their ability to invest in new capital. Our gross margin was also below expectations, primarily due to lower sales volume, but also attributable to a mixed shift, and some continued charges related to the remediation of our operational challenges.

Speaker Change: Turning to our overall financial performance in the second quarter, revenue was below our expectation due to a combination of macro pressure and the aforementioned sales force transition.

Speaker Change: Over all capital systems revenue, increase sequentially in international markets due to the strength of the obvious clear launch, but it declines sequentially in North America.

Speaker Change: Customers across multiple geographies continue to struggle with access to capital and financing terms which are limiting their ability to invest in new capital.

Taylor Harris: Our gross margin was also below expectations, primarily due to lower sales volume, but also attributable to a mix shift and some continued charges related to the remediation of our operational challenges. In the first half of the year, we had a meaningful shift toward international revenue, which comes at a reduced gross margin. Relative to our forecast, we also had lower sales of our RF energy platforms, TrueBody and Secret. These platforms have higher margin profiles than our standalone lasers.

Speaker Change: Our gross margin was also below expectations, primarily due to lower sales volume, but also attributable to a mix shift and some continued charges related to the remediation of our operational challenges.

Taylor Harris: The mixed shift is important to understand. In the first half of the year, we had a meaningful shift toward international revenue, which comes at a reduced gross margin. Relative to our forecast, we also had lower sales of our RF energy platforms, True Body and Secret. These platforms have higher margin profiles than our standalone lasers, and we also have inventory of these systems that we're attempting to work down. So a shift away from these platforms hits gross margin and changes the timing of our working capital benefits. Our operating expenses were well controlled in the second quarter, which offset some of the reduction in revenue and gross margin.

Speaker Change: The mid-shift is important to understand. In the first half of the year, we had a meaningful shift toward international revenue, which comes at a reduced gross margin.

Speaker Change: Relative to our forecast, we also had lower sales of our RF energy platforms, TrueBody and Secret.

Speaker Change: These platforms have higher margin profiles than our standalone lasers, and we also have inventory of these systems that we're attempting to work down. So shift away from these platforms hits gross margin and changes the timing of our working capital benefits.

Taylor Harris: And we also have inventory of these systems that we're attempting to work down. So a shift away from these platforms hits gross margin and changes the timing of our working capital benefit. However, our operating expenses were well controlled in the second quarter, which offset some of the reduction in revenue and gross margins.

Speaker Change: Our operating expenses were well controlled in the second quarter, which offset some of the reduction in revenue and gross margin.

Taylor Harris: I'll now provide an update on how we're responding to some of these challenges, and on our focus areas moving forward. First, operational excellence, all in support of our customers. We continue to make great progress in all of the key areas that we identified last year. Product reliability, field service, inventory control, supply demand planning, and cost of operations. The overarching goal of these improvements is to support our customers. That is a mindset with which we're approaching the business, and that's the same goal as we have with our North American commercial leadership change and restructuring.

Taylor Harris: I'll now provide an update on how we're responding to some of these challenges and on our focus areas moving forward. First, operational excellence, all in support of our customers. We continue to make great progress in all of the key areas that we identified last year, such as product reliability, field service, inventory control, supply-demand planning, and cost of operation. The overarching goal of these improvements is to support our customers.

Speaker Change: I'll now provide an update on how we're responding to some of these challenges and on our focus areas moving forward first, operational excellence, all in support of our customers.

Speaker Change: We continue to make great progress in all the key areas that we identified last year. Product reliability, field service, inventory, control, supply to man planning and cost of operations.

Speaker Change: The overarching goal of these improvements is to support our customers. That is the mindset with which we're approaching the business, and that's the same goal as we have with our North American commercial leadership change and restructuring.

Taylor Harris: That is the mindset with which we're approaching the business. And that's the same goal as we have with our North American commercial leadership change and restructuring. Second, our cost structure. During the fourth quarter of last year, we initiated a restructuring that reduced head count by 25% and our expense base by approximately $20 million.

Taylor Harris: Second, our cost structure. During the fourth quarter of last year, we initiated a restructuring that reduced headcount by 25% and our expense base by approximately $20 million. In response to the reduced revenue outlook for 2024, we've identified additional cost savings that should annualize at approximately $10 million in 2025.

Speaker Change: Second, our cost structure. During the fourth quarter of last year, we initiated a restructuring that reduced headcount by 25% and our expense base by approximately $20 million.

Taylor Harris: In response to the reduced revenue outlook for 2024, we've identified additional cost savings that should annualize at approximately $10 million in 2025. Third, for Avi Clear, we continue to be encouraged by international launch dynamics, including the uptake by thought-leading KOLs in major markets, as well as the strong utilization of the installed base that we are seeing. This gives us the confidence that AviClear can become a mainstay platform in aesthetic dermatology across the globe, with utilization opportunities expanding over time as we add indications like sebaceous hyperplasia to the already significant opportunity in acne.

Speaker Change: In response to the reduced revenue outlook for 2024, we've identified additional cost savings that should utilize at approximately $10 million in 2025.

Taylor Harris: Third, obvious clear. We continue to be encouraged by international launch dynamics, including the uptake by thought-leading KOLs in major markets, as well as the strong utilization of the installed base that we are seeing. This gives us the confidence that Avi Clear can become a mainstay platform in aesthetic dermatology across the globe, with utilization opportunity expanding over time as we add indications like sebaceous hyperplasia to the already significant opportunity in acne. In North America, we're still working through the transition from the initial least business model. As of the end of the second quarter, there were approximately 925 systems operating under the least model, down from 1,050 last quarter, with approximately 270 more on a list to be returned in the coming quarters.

Speaker Change: Third, AviClear. We continue to be encouraged by international launch dynamics, including the uptake by thought-leading KOLs in major markets.

Speaker Change: as well as a strong utilization of the installed base that we are seeing.

Speaker Change: This gives us the confidence that AviClear can become a mainstay platform in aesthetic dermatology across the globe.

Speaker Change: With utilization opportunity expanding over time, as we add indications like sebaceous hyperplasia to the already significant opportunity in acne.

Taylor Harris: In North America, we're still working through the transition from the initial leased business model. As of the end of the second quarter, there were approximately 925 systems operating under the leased model, down from 1,050 last quarter, with approximately 270 more on a list to be returned in the coming quarters.

Speaker Change: In North America, we're still working through the transition from the initial leased business model.

Speaker Change: As of the end of the second quarter, they were approximately 925 systems operating under the least model. Down from a thousand and fifty last quarter, with approximately 270 more on a list to be returned in the coming quarters.

Taylor Harris: We continue to expect that more than half of the original least installed base of systems will be returned. This process requires a significant amount of attention, both from our field team and our internal customer support and operations teams, but it's critical work to allow us to continue the rebuilding process.

Taylor Harris: We continue to expect that more than half of the original least installed BASIS systems will be returned. Now this process requires a significant amount of attention, both from our field team and our internal customer support and operations teams, but it's critical work to allow us to continue the rebuilding process. In parallel with this winnowing activity, we are seeing our growth-oriented investments start to bear fruit. Utilization of our cooperative marketing program increased to over 40% in the second quarter, and our Cutera Academy initiative continues to receive rave reviews. We've now hosted four Academy events, with 98% of participants saying that it had a significant impact on their confidence with AviClear.

Speaker Change: We continue to expect that more than half of the original least installed base of systems will be returned.

Speaker Change: Now, this process requires a significant amount of attention, both from our field team and our internal customer support and operations teams, but it's critical work to allow us to continue the rebuilding process.

Taylor Harris: In parallel with this winnowing activity, we are seeing our growth-oriented investments start to bear fruit. Utilization of our cooperative marketing program increased to over 40% in the second quarter. And our Cutera Academy initiative continues to receive rave reviews. We've now hosted four Academy events, with 98% of participants saying that it had a significant impact on their confidence with Avi Clear. Bowie, by these early proof points, alongside the momentum we're generating internationally, we continue to see a bright future for Avi Clear, and we remain focused organizationally on driving toward that vision.

Speaker Change: In parallel with this winnowing activity, we are seeing our growth-oriented investments start to bear fruit.

Speaker Change: Utilization of our Cooperative Marketing Program increased to over 40% in the second quarter. And our Cutera Academy Initiative continues to receive rave reviews.

Speaker Change: We've now hosted four Academy events, with 98% of participants saying that it had a significant impact on their confidence with obvious clear.

Taylor Harris: Buoyed by these early proof points, alongside the momentum we're generating internationally, we continue to see a bright future for AviClear, and we remain focused organizationally on driving toward that vision. Due to the reduced revenue outlook and product mix shift, our ability to realize an inventory workdown benefit has been delayed from the second half of this year into 2025, and we're focused intently on positioning the company to benefit from a material reduction in inventory next year.

Speaker Change: Buoyed by these early proof points, alongside the momentum we're generating internationally, we continue to see a bright future for AviClear, and we remain focused organizationally on driving toward that vision.

Taylor Harris: And last, working capital. Due to the reduced revenue outlook and product mix shift, our ability to realize an inventory work-down benefit has been delayed from the second half of this year into 2025. And we're focused intently on positioning the company to benefit from a material reduction of inventory next year. We currently anticipate a year-over-year improvement in cash burn of over $50 million. As we move from 2024 to 2025, that's related to working capital alone, even in the absence of revenue growth or gross margin improvement, or the expense reductions that have already been identified. So digging into this a bit more.

Speaker Change: And last, Working Capital.

Speaker Change: Due to the reduced revenue outlook and product makeshift,

Speaker Change: Our ability to realize an inventory worked down benefit.

Speaker Change: has been delayed from the second half of this year into 2025. And we're focused intently on positioning the company to benefit from a material reduction of inventory next year.

Taylor Harris: We currently anticipate a year-over-year improvement in cash burn of over $50 million as we move from 2024 to 2025, and that's related to working capital alone, even in the absence of revenue growth or gross margin improvement or the expense reductions that have already been identified. So digging into this a bit more, in 2024, we anticipate an outflow of cash of over $25 million related to working capital, primarily from a build-up of inventory in the first half of the year. In 2025, though, even if revenue were to stay flat at 2024 levels, we should recognize a cash benefit from inventory reduction of approximately $25 million.

Speaker Change: We currently anticipate a year-over-year improvement in cash burn.

Speaker Change: of over $50 million as we move from 2024 to 2025. And that's related to working capital alone, even in the absence of revenue growth, or gross margin improvement, or the expense reductions that have already been identified.

Taylor Harris: In 2024, we anticipate an outflow of cash of over $25 million related to working capital, primarily from a build in inventory in the first half of the year. In 2025, though, even if revenue were to stay flat at 2024 levels, we should recognize a cash benefit from inventory reduction of approximately $25 million. In addition to that working capital reversal, we have identified $10 million of expense reductions, and we're positioning both our North American and international businesses for growth next year led by Avi Clear. We're comfortable that our current cash balance and capital structure provides sufficient liquidity and runway for the near term.

Speaker Change: So digging into this a bit more, in 2024, we anticipate an outflow of cash of over $25 million related to working capital, primarily from a build in inventory in the first half of the year.

Speaker Change: In 2025, though, even if revenue were to stay flat at 2024 levels, we should recognize a cash benefit from inventory reduction of approximately $25 million.

Taylor Harris: In addition to that working capital reversal, we have identified $10 million of expense reductions, and we're positioning both our North American and international businesses for growth next year, led by Avi Clear. We're comfortable that our current cash balance and capital structure provide sufficient liquidity and runway for the near term. That said, at the same time that we're strengthening our business operationally, we constantly evaluate our liquidity and capital structure needs and options.

Speaker Change: In addition to that working capital reversal, we have identified $10 million of expense reductions and we're positioning both our North American and international businesses for growth next year led by AviClear.

Speaker Change: We're comfortable that our current cash balance and capital structure provides sufficient liquidity and runway for the near term.

Taylor Harris: That said, at the same time that we're strengthening our business operationally, we constantly evaluate our liquidity and capital structure needs and options, and we expect to address both of those when conditions are right. We see opportunity to reduce the debt the company is currently carrying, and bringing in additional capital will allow us to fund our growth initiatives as we return the business to profitability.

Speaker Change: That said, at the same time that we're strengthening our business operationally, we constantly evaluate our liquidity and capital structure needs and options, and we expect to address both of those when conditions are right.

Taylor Harris: And we expect to address both of those when conditions are right. We see opportunity to reduce the debt the company is currently carrying, and bringing in additional capital will allow us to fund our growth initiatives as we return the business to profitability. Before I turn the call over to Stuart, I would like to highlight our new partnership with L'Oreal's SkinCeuticals business in Japan. We're very excited about this partnership. We've been successful with skin care in Japan in the past, and with SkinCeuticals, we will now be representing the global leader in physician-dispensed skin care in the Japanese market.

Speaker Change: We see opportunity to reduce the debt the company is currently carrying, and bringing in additional capital will allow us to fund our growth initiatives as we return the business to profitability.

Taylor Harris: Before I turn the call over to Stewart, I would like to highlight our new partnership with Laurie Al's skin suitable business in Japan. We're very excited about this partnership. We've been successful with skin care in Japan in the past, and with skin suitable, we will now be representing the global leader in position to spend skin care in the Japanese market. Our team will focus on introducing the skin suitable portfolio into physician offices, primarily aesthetic dermatology, while Laurie Al will provide comprehensive marketing support. We planned a launch in the fourth quarter of 2024, and as such, we expect an immaterial financial impact this year.

Speaker Change: Before I turn the call over to Stuart, I would like to highlight our new partnership with L'Oreal's SkinCeuticals business in Japan.

Stuart: We're very excited about this partnership. We've been successful with skin care in Japan in the past and with skin suitacles, we will now be representing the global leader in physician dispensed skin care in the Japanese market.

Taylor Harris: Our team will focus on introducing the SkinCeuticals portfolio into physician offices, primarily aesthetic dermatology, while L'Oreal will provide comprehensive marketing support. We plan to launch in the fourth quarter of 2024. And as such, we expect an immaterial financial impact this year. With that, I'll turn the call over to Stuart.

Speaker Change: Our team will focus on introducing the skin-sutical sport folio in the physician offices. Primarily aesthetic dermatology. Well, Laurie now will provide comprehensive marketing support.

Speaker Change: We plan to launch in the fourth quarter of 2024, and as such, we expect an immaterial financial impact this year. With that, I'll turn the call over to Stuart.

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

Stuart Drummond: Thank you, Taylor. This afternoon, I will discuss our Q2 gap results as well as some long gap results. A reconciliation of GAAP to non-GAAP growth margin and loss from operations is included in our earnings release. Total revenue for the second quarter was 34.4 million compared to 61.8 million for the same period in 2023 and compared to 38.8 million in Q1 of 2024. Our Q2 revenue decrease of 4.4 million compared to Q1 of 2024 mainly reflected Q1 skincare distribution revenue of 4.2 million.

Stuart Drummond: Thank you, Taylor. This afternoon, I will discuss our Q2 GAAP results as well as some non-GAAP results. A reconciliation of GAAP to non-GAAP gross margin and loss from operations is included in our earnings release. Total revenue for the second quarter was $34.4 million, compared to $61.8 million for the same period in 2023 and compared to $38.8 million in Q1 of 2024. Our Q2 revenue decrease of $4.4 million compared to Q1 of 2024 mainly reflected Q1 skincare distribution revenue of $4.2 million. We terminated our skincare distribution agreement in March 2024.

Operator: Thank you for standing by. This is the conference operator. Welcome to the Cutera Inc.

Stuart: Thank you, Taylor. This afternoon I will discuss our Q2 GAAP results as well as some non-GAAP results. A reconciliation of GAAP to non-GAAP growth margin and loss from operations is included in our earnings release.

Operator: Second quarter, 2024 results conference call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentations, there'll be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal unoperated by pressing star then zero.

Stuart: Total revenue for the second quarter was $34.4 million, compared to $61.8 million for the same period in 2023, and compared to $38.8 million in Q1 of 2024.

Speaker Change: A Q2 revenue decrease of 4.4 million compared to Q1 of 2024, mainly reflected Q1 skin care distribution revenue of 4.2 million. We terminated our skin care distribution agreement in March 2024.

Shelby: I would now like to turn the call on for silver to show the echoment vice president of finance. Please go ahead. Thank you operator, and thank you for everyone for joining us today. With me today is Taylor Harris, Cutera's Chief Executive Officer, and Stuart Drummond, interim CFO. Following our prepared remark, we'll take your questions.

Stuart Drummond: We terminated our skincare distribution agreement on March 2024. The 27.4 million or 44% decrease in revenue compared to the second quarter of 2023 was due mainly to a 13.8 million decline in North American capital equipment revenue, a 9.4 million decline in skincare revenue, and a 3 million decline in consumables revenue. This decrease in North American capital equipment revenue resulted primarily from continued macroeconomic pressures, as well as the sales force dynamic that Taylor referenced. Non-GAAP growth profit for the second quarter of 2024 was 9.6 million, with a growth margin rate of 28.0 percent compared to a growth margin rate of 46.6 percent for the second quarter of 2023.

Stuart Drummond: The $27.4 million, or 44%, decrease in revenue compared to the second quarter of 2023 was due mainly to a $13.8 million decline in North American capital equipment revenue, a $9.4 million decline in skin care revenue, and a $3 million decline in consumables revenue. This decrease in North American capital equipment revenue resulted primarily from continued macroeconomic pressures, as well as the sales force dynamic that Taylor referenced. Long gap gross profit for the second quarter of 2024 was $9.6 million, with a gross margin rate of 28.0%, compared to a gross margin rate of 46.6% for the second quarter of 2023.

Speaker Change: The $27.4 million, or 44% decrease in revenue, compared to the second quarter of 2023 was due mainly to a $13.8 million decline in North American capital equipment revenue, a $9.4 million decline in skin care revenue, and a $3 million decline in consumables revenue.

Shelby: Before we get started, I'll note that the discussion today includes forward looking statements. These forward looking statements reflect management's current forecast or expectation of certain aspects of the company's future business, including but not limited to any financial guidance provided for modeling purposes. Forward looking statements are based on information available to us at the time those statements are made, which by its nature is dynamic and subject to change, or management's good faith belief of that time with respect to future events.

Taylor Harris: This decrease in North American capital equipment revenue resulted primarily from continued macroeconomic pressures as well as the sales force dynamic that Taylor referenced.

Speaker Change: Longgap Gross Profit for the second quarter of 2024 was 9.6 million with a gross margin rate of 28.2% compared to a gross margin rate of 46.6% for the second quarter of 2023.

Stuart Drummond: The 18.6 percentage point decrease in growth margin rate was grown primarily by decreased sales volume and a change in sales mix, with a shift in sales in North America, two sales in Europe, and an increase in a reserve for excess inventory.

Shelby: Forward looking statements include, among others, statements regarding financial guidance, regulatory approval, 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 Harbour Statement in our press release earlier today. All forward looking statements are subject to risk and uncertainties, including those risk factors described in the section entitled risk factors in our form 10K as files of the Securities and Exchange Commission and updated in our form 10Qs subsequently filed.

Stuart Drummond: The 18.6 percentage point decrease in gross margin rate was driven primarily by decreased sales volume and a change in sales mix, with a shift from sales in North America to sales in Europe and an increase in our reserve for excess inventory. On a normalized basis, excluding imagery reserves, our long-at-gross margin would have been approximately 35%. Non-GAAP operating expenses for the second quarter of 2024 were $30.9 million, compared to $42.1 million for the same period last year.

Speaker Change: The 18.6% point decrease in gross margin rate was grown primarily by decreased sales volume and a change in sales mix With a shift in sales in North America to sales in Europe and an increase in a reserve for excess inventory

Stuart Drummond: On a normalized basis, excluding imagery reserves, our non-GAAP growth margin would be approximately 35%. Non-GAAP operating expenses for the second quarter of 2024 were 30.9 million compared to 42.1 million for the same period last year. This 11.2 million decrease mainly reflects personnel savings resulting from the restructuring announced in November 2023 and lower sales commissions. In Q2 of 2024, we received close to 5.8 million of litigation proceeds. This amount was included as income within general administrative expense and was excluded from our non-GAAP results. For the second quarter of 2024, we incurred a non-GAAP loss from operations of 21.3 million compared to a loss from operations of 13.2 million in the prior year period.

Speaker Change: On a normalised basis, excluding imagery reserves, and long get gross margin would be approximately 35%.

Speaker Change: Non-gap operating expenses for the second quarter of 2024 were $30.9 million compared to $42.1 million for the same period last year. This $11.2 million decrease mainly reflects personnel savings resulting from the restructuring announced in November 2023 and lower sales commissions.

Stuart Drummond: This $11.2 million decrease mainly reflects personnel savings resulting from the restructuring announced in November 2023 and lower sales commissions. In Q2 of 2024, we received close to $5.8 million of litigation proceeds. This amount was included as income within general and administrative expense and was excluded from our non-GAAP results.

Shelby: Cutera also cautioned you not to place undue reliance on forward looking statement, 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.

Speaker Change: In Q2 of 2024, we received close to $5.8 million of litigation proceeds. This amount was included as income within general and administrative expense and was excluded from our non-GAAP results.

Stuart Drummond: For the second quarter of 2024, we incurred a non-gap loss from operations of $21.3 million, compared to a loss from operations of $13.2 million in the prior year period. Turning to our balance sheet, we ended the quarter with $84.3 million of cash, cash equivalents, and restricted cash, compared to $105.4 million on March 31, 2024. The $21.1 million quarterly sequential decrease was driven mainly by a $16.7 million net cash loss for the quarter, as well as inventory purchase commitments.

Shelby: In addition, we'll 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 Kera's ongoing results of operations, particularly when comparing underlying results from period to period. Please refer to the reconciliation of GAAP to non-GAAP measures in our earnings release. These non-GAAP financial measures should be considered along with, but not as an alternative to the operating performance measures prescribed by GAAP.

Speaker Change: For the second quarter of 2024, we incurred a non-gap loss from operations of $21.3 million, compared to a loss from operations of $13.2 million in the prior year period.

Stuart Drummond: Turning to our balance sheet, we ended the quarter with 84.3 million of cash, cash equivalence, and restricted cash compared to 105.4 million in March 31, 2024.

Speaker Change: Turning to our balance sheet, we ended the quarter with $84.3 million of cash, cash equivalents and restricted cash, compared to $105.4 million in March 31, 2024.

Stuart Drummond: Then 21.1 million quarterly sequential decrease was driven mainly by a 16.7 million net cash loss for the quarter, as well as inventory purchase commitments. Now turning to our guidance, we are revising four-year revenue guidance to a range of 140 to 145 million, compared to previous revenue guidance of 160 to 170 million. We are also revising our expected cash, cash equivalence, and restricted cash balance at December 31, 2024, to be approximately 40 million.

Speaker Change: The $21.1 million quarterly sequential decrease was driven mainly by a $16.7 million net cash loss for the quarter, as well as inventory purchase commitments.

Stuart Drummond: Now turning to our guidance, we are revising our four-year revenue guidance to a range of $140 to $145 million compared to previous revenue guidance of $160 to $170 million. We are also revising our expected cash, cash equivalents, and restricted cash balance at December 31, 2024 to be approximately $40 million. Our previous guidance was a range of $55 to $60 million. Operator, we are now ready to begin the question and answer session.

Taylor Harris: With that, it is my pleasure to turn the call over to our CEO, Taylor Harris. Thank you, Shelby. I'll start by acknowledging that we're reporting a disappointing second quarter performance and four-year outlook. Historically, our business and our industry have seen increased capital purchase activity as we move sequentially into the second quarter. This year, that trend didn't hold. Primarily, we believe due to continued macroeconomic pressure, which we're assuming will persist through the balance of the year. We are marching forward with new commercial leadership in North America, additional cost reduction and we're building it on the strong momentum that we're generating with Avi Clear.

Speaker Change: Now turning to our guidance, we are revising 4-year revenue guidance to a range of $140 to $145 million compared to previous revenue guidance of $160 to $170 million.

Speaker Change: We are also revising our expected cash, cash equivalents and restricted cash balance at December 31, 2024 to be approximately $40 million. Our previous guidance was a range of $55 to $60 million.

Stuart Drummond: Our previous guidance was a range of 55 to 60 million dollars.

Stuart Drummond: Offer it out; we are now ready to begin the question-and-answer session.

Speaker Change: Operator, we are now ready to begin the question and answer session.

Anthony: Anthony, we'll now begin the question and answer session. To join the question queue, you may press star, then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speaker phone, please pick up your handset before pressing any keys.

Operator: We'll now begin the question and answer session. To join the question queue, press star then 1 on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, press star then 2. The first question is from John Bullock on Stifo. Please go ahead.

Speaker Change: Well now I'll begin the question and answer session. To join the question queue you may press star then one on your telephone keypad. You'll hear a tone acknowledging your request.

Taylor Harris: I'm proud of the resilience that our team at Cutera is demonstrating and of the foundational changes we continue to pursue to position the company well for future growth. There were some important bright spots in our second quarter performance and I want to highlight those. First, the international launch of Avi Clear is proceeding exceedingly well. We've sold over 70 Avi Clear systems outside of North America and for the approximately 50 customers that have had systems in place for at least two months, utilization is averaging over 10 treatments per month.

Speaker Change: If you're using a speakerphone, please pick up your handset before pressing any keys.

Anthony: If you will, draw your question, press star, then two.

Speaker Change: who will draw your question, press star, then too.

Jordan Bernstein: The first question is from John Block, with Steve. Please go ahead. Great. Thanks for taking the question.

Speaker Change: The first question is from John Bullock with Stifo. Please go ahead.

Unknown Attendee: Great. Thanks for taking the question. It's actually Jordan Bernstein on for John.

Taylor Harris: It's actually Jordan Bernstein on for John. I just wanted to pick up on the international obvious clear line. Now, our checks have seemed to pick up on some very strong momentum there throughout the first half of the year. Sounds like the rollout's been progressing. In any additional color on additional markets that are coming in quarters would be appreciated. Any specifications on the cadence there would be helpful. Thanks, and then I have a follow-up as well. Sure, Jordan, yeah. I think your checks are accurate. That's exactly what we're seeing. We've really had an almost flawless launch of Obvious Clear internationally.

Speaker Change: Great, thanks for taking the question. It's actually Jordan Bernstein on for John . I just wanted to pick up on the international obvious clear line. Now our checks have seemed to pick up on some very strong momentum there throughout the first half of the year. Sounds like the rollout's been progressing. You know, any additional color on additional markets?

Unknown Attendee: I just wanted to pick up on the International Hobby Clear line. Now, our checks have seemed to pick up some very strong momentum there throughout the first half of the year. Sounds like the rollout's been progressing. You know, any additional color on additional markets that are coming in the coming quarters would be appreciated. And, you know, any specifications on the cadence there would be helpful. Thanks. And then I have a follow-up appointment as well.

Taylor Harris: Now we're very early in the launch so it wouldn't be appropriate to extrapolate that performance but it is still quite encouraging. Second, we've had highly positive feedback from the launch of ZO Plus in North America. We're exceeding our expectations there. ZO Plus offers tremendous flexibility and customization with over 25 applications from Cutera's signature laser genesis procedure to hair removal to pigment reduction and more. We believe that ZO Plus can be a great upgrade option for our installed base of legacy ZO accounts over time.

Speaker Change: that are coming in coming quarters would be appreciated. And, you know, any specifications on the cadence there would be helpful. Thanks, and then I have a follow-up as well.

Taylor Harris: But in the second quarter, we actually sold more ZO Plus systems into accounts that are new to Cutera, which we view as a positive indicator of the long-term opportunity. Third, we've strengthened our North American sales force over the past quarter. In July, we promoted Steve Criter to SVP of North America with full responsibility for a unified commercial organization including capital sales, practice development, marketing and customer excellence. Steve is a mission-driven leader and he has tremendous passion for building great teams, training and developing people and for providing clarity and focus on priorities.

Taylor Harris: Sure, Jordan. Yeah, we I think your checks are accurate. That's exactly what we're seeing. We've really had an almost flawless launch of AviClear internationally. It's proceeding at or above the levels that we had anticipated. In the second quarter, we were up in terms of revenue versus the first quarter of the launch, even though we didn't really go to too many new markets. So we're just seeing good traction in existing markets.

Speaker Change: Sure, Jordan. Yeah, we I think your checks are accurate. That's exactly what we're seeing. We've really had a

Taylor Harris: It's proceeding at or above the levels that we had anticipated. In the second quarter, we were up in terms of revenue versus the first quarter of the launch, even though we didn't really go to too many new markets. So we're just seeing good traction in existing markets. We were at a couple of more markets in the second quarter compared to the first. But really what we're doing is just solidifying the base of installed customers, giving them great support, starting to expand within those territories. And you see that with the utilization numbers that I talked about.

Speaker Change: Almost flawless launch of AviClear internationally. It's proceeding at or above the levels that we had anticipated.

Speaker Change: In the second quarter, we were up in terms of revenue versus the first quarter of the launch. Even though we didn't really go to too many new markets, so we're just seeing good traction in existing markets, we were at a couple of more markets in the second quarter compared to the first.

Taylor Harris: We were in a couple of more markets in the second quarter compared to the first. But really, what we're doing is just solidifying the base of installed customers, giving them great support, and starting to expand within those territories. And you see that with the utilization numbers that I talked about. So that's really critical.

Speaker Change: But really what we're doing is...

Speaker Change: Just solidifying the base of installed customers, giving them great support.

Speaker Change: Starting to expand within those territories.

Taylor Harris: So that's really critical. These are, I think, excellent utilization numbers, and they're at levels that are going to show other customers that they can really integrate and make obvious clear a mainstay in their practices. Now, as we look at the second half of the year, we expect the launch to continue to trend in that upward direction. We are in the third and fourth quarter, starting to go to a broader range of distributor territories.

Speaker Change: and you see that with the utilization numbers that I talked about so that's

Taylor Harris: These are, I think, excellent utilization numbers, and they're at levels that are going to show other customers that they can really integrate and make AviClear a mainstay in their practices. Now, as we look at the second half of the year, we expect the launch to continue to trend in that upward direction. We are, in the third and fourth quarters, starting to go to a broader range of distributor territories. However, there are some markets like Japan where we may not, from a regulatory perspective, launch this year. So we'll still have good new market opportunities internationally beyond 2024. Again, though, I think the most important indicator of launch health is utilization, and we're feeling really good on that front.

Speaker Change: That's really critical. These are, I think...

Speaker Change: Excellent utilization numbers and they're at levels.

Taylor Harris: All of those attributes as well as his deep experience in both dermatology and aesthetics will serve Cutera well. Steve and his leadership team are focused on driving consistent execution and improved productivity. To this end, we've restructured our capital sales organization under the leadership of two new directors and a team of regional managers across both capital and practice development. Our leaders are focused on team management, collaboration, training and process improvements, including utilization of the sales force platform to improve execution and forecasting.

Speaker Change: that are going to show other customers that they can really integrate and make AVI clear a mainstay in their practices. Now, as we look at the second half of the year, we expect the launch to continue to trend in that upward direction.

Speaker Change: We are in the third and fourth quarter starting to go to a broader range of distributor territories.

Jordan Bernstein: However, there are some markets, like Japan, where we may not, from a regulatory perspective, launch this year. So we'll still have good new market opportunity internationally beyond 2024. Again, though, I think the most important indicator of launch health is utilization. And we're feeling really good on that front. Great. That's helpful, Collar. Thanks.

Speaker Change: however there are some markets like Japan where we may not from a regulatory perspective launch this year so we'll still have...

Speaker Change: good new market opportunity internationally beyond 2024. Again though, I think the most important indicator of launch health is utilization and we're feeling really good on that front.

Taylor Harris: Our current North American team represents a solid mix of Cutera veterans and new talent. In recent months, we have attracted a number of proven capital sales people and practice development managers with deep industry experience. We've also had a fair amount of turnover, much through performance management. Turnover detracts from revenue in the short term as it takes new reps, even experienced ones, some time to build their territories. But we believe that the overall transition has strengthened our team for higher levels of performance over the medium and long term.

Taylor Harris: Great. That's helpful, Culler.

Taylor Harris: And then my follow-up is on the skincare room at Lauriel, the Skin Surgical line. Your prior skincare distribution agreement had hovered around at 20% of total company sales. Do you think this product line has the potential to approach that, or any color on quantifying the new agreement would be helpful? Sure. Yeah. What I would say is we have all the building blocks in place to make this a very important product line for Qtera. So we have the infrastructure. We have the relationships. We know how to sell and distribute skincare. And we're taking on what we view as the best global physician-dispensed skincare line in the world.

Taylor Harris: Thanks. And then my follow-up is on the skincare group with L'Oreal, the SkinCeuticals line. Your prior skincare distribution agreement hovered around 20% of total company sales. Do you think this product line has the potential to approach that, or any color on quantifying the new agreement would be helpful? Sure. Yeah, what I would say is

Speaker Change: Great, that's all for color, thanks, and then...

Speaker Change: My follow-up is on the Skin Care Agreement with L'Oreal, the SkinCeuticals line.

Speaker Change: Your prior skincare distribution agreement had hovered around 20% of total company sales. Do you think this product line has the potential to approach that, or any color on quantifying the new agreement would be helpful?

Taylor Harris: Sure, yeah, what I would say is we have all the building blocks in place to make this a very important product line for Cutera. So we have the infrastructure, we have the relationships, we know how to sell and distribute skin care, and we're taking on what we view as the best global physician-dispensed skin care line in the world. So as we thought about replacing this business in Japan, it obviously took us a few quarters to reach an agreement with someone, but we could not have landed on a better partner and a better option than SkinCeuticals and L'Oreal, so we're really excited about it.

Taylor Harris: Turning to our overall financial performance in the second quarter, revenue is below our expectation due to a combination of macro pressure and the aforementioned sales force transition. Overall, capital systems revenue increased sequentially in international markets due to the strength of the Avi Clear launch, but it declined sequentially in North America. Customers across multiple geographies continue to struggle with access to capital and financing terms, which are limiting their ability to invest in new capital.

Speaker Change: Sure, yeah, what I, what I would say is...

Speaker Change: We have all the building blocks in place to make this a very important product line for you to tear us. So we have the infrastructure, we have the relationships.

Speaker Change: We know how to sell and distribute skin care.

Speaker Change: And we're taking on what we view as...

Speaker Change: the best global physician dispensed skincare line in the world. So, as we thought about replacing this business in Japan,

Taylor Harris: So as we thought about replacing this business in Japan, it obviously took us a few quarters to reach an agreement with someone. But we could not have landed on a better partner and a better option than Skin Suitable with Lauriel. So we're really excited about it. And we do think that there's a ton of potential over time. We had; I wouldn't expect that over the next two years or so, that we're going to be approaching the peak levels that we got to with the Zio Skin Health line just because it takes a while to build to that level.

Taylor Harris: Our gross margin was also below expectations, primarily due to lower sales volume, but also attributable to a mixed shift, and some continued charges related to the remediation of our operational challenges. The mixed shift is important to understand. In the first half of the year, we had a meaningful shift toward international revenue, which comes at a reduced gross margin. Relative to our forecast, we also had lower sales of our RF energy platforms, true body and secret.

Speaker Change: It obviously took us a few quarters.

Speaker Change: to reach an agreement with someone, but we could not have landed on a better partner and a better option than SkinCeuticals with L'Oreal. So we're really excited about it. And we do think that there's a ton of potential over time.

Taylor Harris: And we do think that there's a ton of potential over time. But I wouldn't expect that over the next two years or so, we're going to be approaching the peak levels that we got to with the ZO skin health line just because it takes a while to build to that level, and there were some COVID-related dynamics that I think helped that. But, as I said, the building blocks are in place for this to become really meaningful and really important over time.

Speaker Change: We had, I wouldn't expect that over the next two years or so that we're going to be Approaching the peak levels that we got to with the Zio skin health line Just because it takes a while to build to that level and there were some COVID related dynamics that I think helped that

Taylor Harris: These platforms have higher margin profiles than our standalone lasers, and we also have inventory of these systems that we're attempting to work down. So a shift away from these platforms hits gross margin and changes the timing of our working capital benefits. Our operating expenses were well controlled in the second quarter, which offset some of the reduction in revenue and gross margin.

Jordan Bernstein: And there were some COVID-related dynamics that I think helped that. But, as I said, the building blocks are in place for this to become really meaningful, really important over time. Great.

Speaker Change: But as I said, the building blocks are in place for this to become really meaningful, really important over time.

Jordan Bernstein: Thanks for all to me.

Speaker Change: Great, thanks for all the...

Operator: The next question is from Harrison Parson with Stevens. Please go ahead.

Taylor Harris: I'll now provide an update on how we're responding to some of these challenges, and on our focus areas moving forward. First, operational excellence, all in support of our customers. We continue to make great progress in all of the key areas that we identified last year. Product reliability, field service, inventory control, supply demand planning and cost of operations. The overarching goal of these improvements is to support our customers. That is a mindset with which we're approaching the business, and that's the same goal as we have with our North American commercial leadership change and restructuring.

Harrison Parson: The next question is from Harrison Parson with Stevens. Please go ahead. Hey, this is Harrison on for George. Good afternoon, and thanks for taking the questions. Sure. Yeah, so I wanted to start on the reduction and revenue guidance for the full year. Sounds like that's due to systems. I wanted to see if you could kind of outline or break down the impact from the Salesforce turnover versus what you're seeing in the macro environment, sort of which one of those had more of an impact on the quarter. Sure. Yeah, so I'll give you a little of additional color and hit on those questions that you're asking, Harrison.

Speaker Change: All right, me. The next question is from Harrison Parsons with Stevens. Please go ahead.

Unknown Attendee: Hey, this is Harrison. I'm for George.

Harrison Parsons: Hey, this is Harris number George, good afternoon and thanks for taking the questions.

Unknown Attendee: Good afternoon, and thanks for taking the question. Sure. Yeah, so I wanted to start on the reduction in revenue guidance for the full year sounds like that due to systems. I wanted to see if you could kind of outline or break down the impact from the Salesforce turnout turnover versus what you're seeing in the macro environment, sort of which one of those had more of an impact on the quarter.

Harrison Parsons: Sure. Yeah, so I wanted to start on the reduction in revenue guidance for the full year. Sounds like that's

Harrison Parsons: But due to systems, I wanted to see if you could kind of...

Speaker Change: outline or break down the impact from

Speaker Change: The Salesforce turnover versus what you're seeing in the macro environment, sort of which one of those had more of an impact on the quarter.

Taylor Harris: Second, our cost structure. During the fourth quarter of last year, we initiated a restructuring that reduced headcount by 25% and our expense base by approximately $20 million. In response to the reduced revenue outlook for 2024, we've identified additional cost savings that should annualize at approximately $10 million in 2025. Third, obvious clear. We continue to be encouraged by international launch dynamics, including the uptake by thought leading KOLs in major markets, as well as the strong utilization of the installed base that we are seeing.

Taylor Harris: Sure. Yeah, so I'll give you a little additional color and hit on those questions that you're asking Harrison. So of the reduction, the vast majority of that is for North America. The only thing that's unchanged, really, is the international launch of AviClear, where we're still tracking really, really well, better than we thought at the beginning of the year, in fact. And then, within North America, both of those dynamics affected us, the macro pressures and the sales force restructuring and turnover. It's hard to parse, sort those out.

Speaker Change: Sure. Yeah, so I'll give you a little of additional color and hit on those questions that you're asking, Harrison.

Taylor Harris: So the of the reduction, the vast majority of that is North America. The only thing that's unchanged really is the international launch of Avi Clear, where we're still tracking really, really well, better than we thought at the beginning of the year, in fact. And then so within North America, both of those dynamics affected us: the macro pressures and the Salesforce restructuring and turnover. It's hard to parse those out, but I think they could have been almost equal contributors, just to put a little bit of color around it. You know, normally we have a sequential uptick; this time we had a sequential downturn in North America.

Speaker Change: So, of the reduction, the vast majority of that is North America.

Speaker Change: The only thing that's unchanged really is the international launch of obvious clear where we're still tracking really really well better than we thought at the beginning of the year in fact.

Speaker Change: and then so within North America.

Taylor Harris: This gives us the confidence that Avi Clear can become a mainstay platform in aesthetic dermatology across the globe, with utilization opportunity expanding over time as we add indications like sebaceous hyperplasia to the already significant opportunity in acne. In North America, we're still working through the transition from the initial least business model. As of the end of the second quarter, there were approximately 925 systems operating under the least model, down from 1,050 last quarter, with approximately 270 more on a list to be returned in the coming quarters.

Speaker Change: Both of those dynamics affected us, the macro pressures and the sales force restructuring and turnover. It's hard to parse those out, but I think they could have been almost equal contributors.

Taylor Harris: But I think they could have been almost equal contributors. Just to put a little bit of color around it, you know, normally we have a sequential uptick; this time, we had a sequential downturn in North America. And so, but we saw some of that hit our core capital internationally, which is why we know there's a feel confident there's a macro issue here. The turnover, though, is real. And like I said, this is going to be, I think, good for the long term because we've been able to attract some very strong, new players, and we've retained some are all stars are superstars.

Speaker Change: Just to put a little bit of

Speaker Change: Color around it. Normally we have a sequential uptick this time we had a sequential downturn in North America. But we saw some of that hit our core capital internationally, which is why we know there's a fuel macro issue here.

Taylor Harris: And so, but we saw some of that hit our core capital internationally, which is why we know there's a, or feel confident there's a macro issue here. The turnover, though, is real. And like I said, this is going to be, I think, good for the long term, because we've been able to attract some very strong new players, and we've retained some of our all-stars, our superstars. So I feel really good about the composition of the team and what that's going to mean for productivity going forward.

Speaker Change: The turnover, though, is real, and like I said, this is...

Taylor Harris: We continue to expect that more than half of the original least installed base of systems will be returned. This process requires a significant amount of attention, both from our field team and our internal customer support and operations teams, but its critical work to allow us to continue the rebuilding process. In parallel with this winnowing activity, we are seeing our growth-oriented investments start to bear fruit. Utilization of our cooperative marketing program increased to over 40% in the second quarter. And our Cutera Academy initiative continues to receive rave reviews. We've now hosted four Academy events, with 98% of participants saying that it had a significant impact on their confidence with Avi Clear.

Speaker Change: I think good for the long-term because we've been able to attract very strong new players and we've retained our all-stars, our superstars, so I feel really good about the composition of the team and what that's going to mean for productivity going forward.

Taylor Harris: But we had approximately 40% turnover in the North America Capital organization during the second quarter. And so that is, that's going to have an impact. It takes people time to ramp. Got it. Yeah, that's helpful. And then I wanted to turn to the cash burn guidance for the full year. Is there sort in any sort of cadence we should expect in the back half? And then, you know, I guess is that 4Q number? Is that how we should think about for 2025, at least in the first quarter? Yeah, so the back half of the year, it'll be lower burn than what we had in the first half of the year.

Taylor Harris: So I feel really good about the composition of the team and what that's going to mean for productivity going forward. But we had approximately 40% turnover in the North America capital organization during the second quarter. And so that is, that's gonna have an impact. It takes people time to ramp up.

Speaker Change: But we had approximately 40% turnover in the North America capital organization during the second quarter. And so that is going to have an impact. It takes people time to ramp.

Taylor Harris: Got it. Yeah, that's helpful. And then I wanted to turn to the cash burn guidance for the full year. Is there any sort of cadence we should expect in the back half? And then, you know, I guess that four Q number? Is that how we should think about 2025, at least in the first quarter?

Speaker Change: Got it. Yeah, that's helpful. And then I wanted to turn to the cash burn guidance for the full year. Is there any sort of

Speaker Change: Cadence, we should expect.

Speaker Change: and the back calf. And then, you know, I guess is that 4Q number, is that how we should think about the 25 at least in the first quarter.

Taylor Harris: Bowie, by these early proof points, alongside the momentum we're generating internationally, we continue to see a bright future for Avi Clear, and we remain focused organizationally on driving toward that vision. And last, working capital. Due to the reduced revenue outlook and product mix shift, our ability to realize an inventory work-down benefit has been delayed from the second half of this year into 2025. And we're focused intently on positioning the company to benefit from a material reduction of inventory next year.

Taylor Harris: Yeah, so the back half of the year, it'll be a lower burn than what we had in the first half of the year. It's just not as low as we had thought earlier. And that's due primarily to the shift in timing of the working capital benefit. And so for that reason, the fourth quarter, I think is going to be at a higher level of burn than we should have entered 2025. And so really, this is an important dynamic to consider. We have been at elevated inventory levels. We've talked about that before.

Speaker Change: Yeah, so the back half of the year, it'll be

Taylor Harris: It's just not as low as we had thought earlier. And that's due primarily to the shift in timing of the working capital benefit. And so for that reason, no, actually the fourth quarter I think is going to be at a higher level of burn than we should have entering 2025. And so really, this is an important dynamic to consider. We have been at elevated inventory levels. We've talked about that. And we are positioning ourselves to start working that inventory level down. We have thought we were going to get a benefit of that starting in the second half of the year, but because of the revenue outlook that has been pushed.

Speaker Change: lower burn than what we had in the first half of the year. It's just not as low as we had thought earlier. And that's due primarily to the shift in timing of the working capital benefit. And so for that reason,

Speaker Change: No, actually, the fourth quarter I think is going to be at a higher level of burn than we should have entering 2025.

Taylor Harris: We currently anticipate a year-over-year improvement in cash burn of over $50 million. As we move from 2024 to 2025, that's related to working capital alone, even in the absence of revenue growth or gross margin improvement, or the expense reductions that have already been identified. So digging into this a bit more. In 2024, we anticipate an outflow of cash of over $25 million related to working capital, primarily from a build in inventory in the first half of the year.

Speaker Change: And so really, this is an important dynamic to consider. We have been at elevated inventory levels. We've talked about that.

Taylor Harris: And we are positioning ourselves to start working that inventory level down. We had thought we were going to get a benefit from that starting in the second half of the year. But because of the revenue outlook, that has been pushed, but it's really been pushed to the start of 2025. So that's why I mentioned in our prepared remarks that we're anticipating right now, even if revenue were to stay the same, that we would have a reversal of cash burn in the range of $50 million.

Speaker Change: And we are positioning ourselves to start working that inventory level down.

Speaker Change: We had thought we were going to get...

Speaker Change: a benefit of that starting in the second half of the year, but because of the revenue outlook, that has been pushed, but it's really been pushed to the start of 2025. So that's why I mentioned in our in our prepared remarks,

Taylor Harris: But it's really been pushed to the start of 2025. So that's why I mentioned in our prepared remarks, we're anticipating right now, even if revenue were to stay the same, that we would have a reversal of cash burn in the range of $50 million. We had a 20, just due to working capital. We had a $25 million hit, or this year, that's what we're experiencing. We think we're going to have a $25 million benefit from inventory work down next year. And then you factor in the $10 million of expense reductions that we've identified. And some growth on top of that, and you're starting to look at a pretty material change in cash burn.

Taylor Harris: In 2025, though, even if revenue were to stay flat at 2024 levels, we should recognize a cash benefit from inventory reduction of approximately $25 million. In addition to that working capital reversal, we have identified $10 million of expense reductions, and we're positioning both our North American and international businesses for growth next year led by Avi Clear. We're comfortable that our current cash balance and capital structure provides sufficient liquidity and runway for the near term.

Speaker Change: We're anticipating right now, even if revenue were to stay the same, that we would have a reversal of cash burn in the range of $50 million. We had a 20, just due to working capital, we had a $25 million hit.

Taylor Harris: Just due to working capital, we had a $25 million hit this year. That's what we're experiencing. We think we're going to have a $25 million benefit from inventory work down next year. And then you factor in the $10 million of expense reductions that we've identified and some growth on top of that, and you're starting to look at a pretty material change in cash burn. And on that growth point, we are already planning to grow on a year-over-year basis internationally in the second half of the year.

Speaker Change: or this year, that's what we're experiencing. We think we're gonna have a $25 million benefit from inventory work down.

Speaker Change: Next year, and

Speaker Change: Then you factor in the $10 million of expense reductions that we've identified, and some growth on top of that, and you're starting to look at a pretty material change in cash burn. And on that growth point...

Taylor Harris: That said, at the same time that we're strengthening our business operationally, we constantly evaluate our liquidity and capital structure needs and options, and we expect to address both of those when conditions are right. We see opportunity to reduce the debt the company is currently carrying, and bringing in additional capital will allow us to fund our growth initiatives as we return the business to profitability.

Taylor Harris: And on that growth point, we are already planning on growing on a year-over-year basis internationally in the second half of the year. So that trajectory should take us into 2025 on a really solid footing. And then all the changes we've described in our North America team should also position us for much better performance next year. So there will be a change as we enter 2025. Understood. Thanks for the color.

Speaker Change: We are already planning on growing on a year-over-year basis internationally in the second half of the year. So that trajectory should take us into 2025 on a really solid footing.

Taylor Harris: So that trajectory should take us into 2025 on a really solid footing, and then all the changes we've described in our North America team should also position us for a much better performance next year. So there will be changes as we enter 2025.

Taylor Harris: Before I turn the call over to Stewart, I would like to highlight our new partnership with Laurie Al's skin suitable business in Japan. We're very excited about this partnership. We've been successful with skin care in Japan in the past, and with skin suitable, we will now be representing the global leader in position to spend skin care in the Japanese market. Our team will focus on introducing the skin suitable portfolio into physician offices, primarily aesthetic dermatology, while Laurie Al will provide comprehensive marketing support. We planned a launch in the fourth quarter of 2024, and as such we expect an immaterial financial impact this year.

Speaker Change: And then all the changes we've described in our North America team should also position us for much better performance next year. So there will be a change as we enter 2025.

Taylor Harris: Understood. Thanks for the color.

Speaker Change: Understood. Thanks for the color.

James Beers: The next question is from James Beers with William Blair. Please go ahead. Hey guys, thanks for taking the question.

Operator: The next question is from James Beard with William Blair. Please go ahead.

Speaker Change: For next question, it's from James Beard with William Blair, please call head

Unknown Attendee: Hey guys, thanks for taking the question. It's Jimmy on from Margaret.

James Beers: It's Jimmy on from Margaret. First, I wanted to maybe dive deeper a little bit on the macro weakness. It could sort of maybe decipher it a little bit more. You know, are you seeing that weakness in the med spa? Is that, you know, is that volume weakness? You've seen primarily med spas and then, you know, is that spreading across other end markets such as, you know, Durham's and plastic surgeons? Hey, Jimmy, yeah, this is more concentrated in the Med Durham community. And really it's an issue, sorry, in the med spa community. It's really an issue of access to capital.

Unknown Attendee: First, I wanted to maybe dive deeper a little bit on the MACA weakness, if you could sort of maybe decipher it a little bit more. You know, are you seeing that weakness in the med spas? Is that, you know, that volume weakness you've seen primarily in med spas? And then, you know, is that spreading across other end markets such as, you know, derms and plastic surgeons?

Speaker Change: Hey guys, thanks for taking the question. It's Jimmy on from Margaret

James Beard: First, I wanted to maybe dive deeper a little bit on the macawaken.

James Beard: We can see the difference, if you could sort of maybe decipher it a little bit more. You know, are you seeing that weakness in the med spas? Is that, you know, is that volume weakness you've seen primarily med spas? And then, you know, is that spreading across other end markets such as, you know, derms and plastic surgeons?

Stewart Drummond: With that, I'll turn the call over to Stewart. Thank you, Taylor. This afternoon, I will discuss our Q2 gap results as well as some long gap results.

Taylor Harris: Hey Jimmy, yeah, this is more concentrated in the MedDerm community. And really, it's an issue, sorry, in the MedSPA community. It's really an issue of access to capital. So there is a segment of our customer base that financing has been shut off for. So it's not just a matter of rates or terms, which are definitely more onerous now than they have been in the past. It's actually for a segment of customers an inability to access capital at all.

Stewart Drummond: A reconciliation of gap to non-gap growth margin and loss from operations is included in our earnings release. Total revenue for the second quarter was 34.4 million compared to 61.8 million for the same period in 2023 and compared to 38.8 million in Q1 of 2024. Our Q2 revenue decrease of 4.4 million compared to Q1 of 2024 mainly reflected Q1 skincare distribution revenue of 4.2 million. We terminated our skincare distribution agreement on March 2024.

James Beard: Hey, Jimmy. Yeah, this is more concentrated in the MedDerm community and really it's an issue, sorry, in the MedSPA community.

Taylor Harris: So there is a segment of our customer base that financing has been shut off for. So it's not just a matter of rates or terms, which are definitely more onerous now than they have been in the past. It's actually for a segment of customers and inability to access capital at all. And that's generally for people who are earlier in their business venture or who don't have an indie beside the name on the office. It's just tougher to get financing. So we're not seeing it be that type of an issue in the medical community, in the dermatology community, although the rates in terms are challenging there.

Jimmy: It's really an issue of access to capital. So there is a segment of our customer base.

James Beard: that financing has been shut off for. So it's not just a matter of rates or terms, which are definitely more onerous now than they have been in the past.

Stewart Drummond: The 27.4 million or 44% decrease in revenue compared to the second quarter of 2023 was due mainly to a 13.8 million decline in North American capital equipment revenue, a 9.4 million decline in skincare revenue, and a 3 million decline in consumables revenue. This decrease in North American capital equipment revenue resulted primarily from continued macroeconomic pressures as well as the sales force dynamic that Taylor referenced. Non-gap growth profit for the second quarter of 2024 was 9.6 million with a growth margin rate of 28.0 percent compared to a growth margin rate of 46.6 percent for the second quarter of 2023.

James Beard: It's actually for a segment of customers, an inability to access capital at all. And that's generally for people who are earlier in their business venture or who don't have an M.D. beside the name on the office. It's just tougher to get financing.

Taylor Harris: And that's generally for people who are earlier in their business ventures or who don't have an MD beside the name on the office building. It's just tougher to get financing. So we're not seeing it be that type of an issue in the medical community and the dermatology community. Although the rates and terms are challenging there, so that's the real issue. I will say, I am, I'm hopeful that we're going to start to see some rate relief here.

Jimmy: So we're not seeing it be that type of an issue in the medical community and the dermatology community, although the rates in terms are challenging there.

Taylor Harris: Now, that won't necessarily immediately transfer into financing opening up, but it's the start of a healing process. So that's the reason we haven't assumed that it's going to get easier in the second half of the year, but I think there's still room for some optimism.

Taylor Harris: So that's the real issue. I will say I am hopeful that we're going to start to see some rate relief here. Now, that won't necessarily immediately transfer into financing opening up, but it's the start of a healing process. So that's the reason we haven't assumed that it's going to get easier in the second half of the year, but I think there's still room for some optimism.

Jimmy: So that's that's the real issue. I will say

James Beard: I am, I'm hopeful, right, that we're going to start to see some, some rate relief here.

Stewart Drummond: The 18.6 percentage point decrease in growth margin rate was grown primarily by decreased sales volume and a change in sales mix with a shift in sales in North America, two sales in Europe, and an increase in a reserve for excess inventory. On a normalized basis, excluding imagery reserves, our non-gap growth margin would be approximately 35%. Non-gap operating expenses for the second quarter of 2024 were 30.9 million compared to 42.1 million for the same period last year.

Jimmy: Now, that won't necessarily immediately transfer into financing opening up, but it's the start of a healing process.

Jimmy: So that's the reason we haven't assumed that it's going to get easier in the second half of the year, but I think there's still room for some optimism.

Taylor Harris: Okay, that's helpful. Maybe on that point of not assuming things get better in the second half, you know, just did some quick math, but I think to get to maybe the middle to the low end of the range, looking at maybe Q3 down sequentially and maybe back up again in Q4. Is that the right way to think about the cadence for the rest of the year? It is. Yeah, that is traditionally the way that our industry and our business work. So, in setting our guidance, we assume that Q2 is a new normal in terms of conditions.

Taylor Harris: Okay, that's helpful. Maybe on that point of not assuming things get better in the second half, you know, just did some quick math. But, you know, I think we should get to maybe the middle to low end of the range, looking at maybe two, three down sequentially. And, you know, maybe back up again in Q4. Is that the right way to think about the cadence for the rest of the year?

Speaker Change: Okay, that's helpful. Maybe on that point of not assuming things get better in the second half. You know, it just did some quick math, but you know, I think to get to maybe the middle to low end of the range to looking at maybe two, three down sequentially.

Stewart Drummond: This 11.2 million decrease mainly reflects personnel savings resulting from the restructuring announced in November 2023 and lower sales commissions. In Q2 of 2024, we received close to 5.8 million of litigation proceeds. This amount was included as income within general administrative expense and was excluded from our non-gap results. For the second quarter of 2024, we incurred a non-gap loss from operations of 21.3 million compared to a loss from operations of 13.2 million in the prior year period.

Speaker Change: Q4. Is that the right way to think about the cadence for the rest of the year?

Taylor Harris: It is. Yeah, that is traditionally the way that our industry and our business works. So in setting our guidance, we assumed Q2 would be a new normal in terms of conditions. Those macro conditions don't change.

Speaker Change: It is. Yeah, that is traditionally the way that our industry and our business works. So, in setting our guidance, we assumed that

Taylor Harris: Those macro conditions don't change, and we just looked at the range of historically sequential movement as we go into Q3, Q4. Now, what will obviously be driving toward is hey, we've got a new product cycle with Avi Clear and we are taking Avi Clear into the dermatology community, both internationally and in North America, which should be a more resilient community. And so we're going to be driving toward that. We're going to be driving toward productivity enhancements across our North America team. But if you just look at what has played out from a sequential trend perspective for the industry over time, then that's what leads you into the guidance range.

Speaker Change: Q2 is a new normal in terms of conditions.

Taylor Harris: And we just looked at the range of historically sequential movement as we go into Q3, Q4. Now, what we'll obviously be driving toward is, hey, we've got a new product cycle with AviClear. And we are taking AviClear into the dermatology community, both internationally and in North America, which should be a more resilient community. And so we're going to be driving toward that. We're going to be driving toward productivity enhancements across our North America team.

Jimmy: those macro conditions don't change. And then we just looked at the range of historically sequential movement as we go into Q3, Q4.

Stewart Drummond: Turning to our balance sheet, we ended the quarter with 84.3 million of cash, cash equivalence, and restricted cash compared to 105.4 million in March 31, 2024. Then 21.1 million quarterly sequential decrease was driven mainly by a 16.7 million net cash loss for the quarter as well as inventory purchase commitments.

Speaker Change: Now, what we'll obviously be driving toward is, hey, we've got a new product cycle with Obby Clear.

Jimmy: We are taking AviClear into the dermatology community, both internationally and in North America, which should be a more resilient community. We're going to be driving toward that. We're going to be driving toward productivity enhancements.

Stewart Drummond: Now turning to our guidance, we are revising four-year revenue guidance to a range of 140 to 145 million compared to previous revenue guidance of 160 to 170 million. We are also revising our expected cash, cash equivalence, and restricted cash balance at December 31, 2024 to be approximately 40 million. Our previous guidance was a range of 55 to 60 million dollars.

Taylor Harris: And so, but if you just look at what has played out from a sequential trend perspective for the industry over time, then that's what leads you into the guidance range. And I think you have the cadence; you're thinking about that appropriately.

Speaker Change: across our North America team and so but if you just look at what has played out from a sequential trend perspective for the industry over time then that's what leads you into the guidance range I think you've got the cadence you're thinking about that appropriately

Taylor Harris: I think you've got the cadence. You're thinking about that appropriately. Great.

Operator: Great, that's helpful. Thank you. Once again, if you have a question, please press star then one. The next question is from Matthew O'Brien on Piper Sandler.

James Beers: That's awful. Thank you.

Speaker Change: Great, that's helpful. Thank you.

Anthony: Offer it out, we are now ready to begin the question-and-answer session. Anthony, we'll now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speaker phone, please pick up your handset before pressing any keys. If you will, draw your question, press star then two.

Samantha: Once again, if you have a question, please press star, then one. The next question is from Matthew O'Brien from Piper Sandler. Please go ahead.

Operator: Once again, if you have a question, please press star then one. The next question is from Matthew O'Brien on Piper Sandler. Please go ahead.

Speaker Change: Johnson.

Speaker Change: Once again, if you have a question, please press star then one.

Speaker Change: The next question is from Matthew O'Brien from Piper Sandler, please go ahead.

Samantha: Hi, this is Samantha from Matt. Thank you for taking our question. Are you interviewed or lead growth in North America next year? I wonder if you could provide any more color on that, maybe in terms of timing or what could really drive some of that growth. Sure. So hi, Samantha. Thanks for the question. Yeah, Avi Clear is it's a clear growth driver for us internationally right now. And we're in the process of transitioning our business model in North America from what we started with, which was a least model. And we went really broad to what we're moving to, which is an ownership model focused on the highest potential, most productive users, which is largely aesthetic dermatology.

Speaker Change: Hi, this is Samantha on for Matt. Thank you for taking our question.

Samantha: I guess first regarding Ava Clear in North America, you mentioned some expectations that Ava Clear can contribute or leave growth in North America next year. I wonder if you could provide any more color on that, maybe in terms of timing or what could really drive some of that growth.

Jordan Bernstein: The first question is from John Block, with Steve, please go ahead. Great. Thanks for taking the question.

Taylor Harris: It's actually Jordan Bernstein on for John. I just wanted to pick up on the international obvious clear line. Now our checks have seemed to pick up on some very strong momentum there throughout the first half of the year. Sounds like the rollout's been progressing in any additional color on additional markets that are coming in quarters would be appreciated. Any specifications on the cadence there would be helpful. Thanks, and then I have a follow up as well.

Unknown Attendee: Sure. So, hi Samantha, thanks for the question.

Speaker Change: Sure.

Speaker Change: So, hi Samantha, thanks for the question.

Speaker Change: Yeah, I'll be clear is...

Taylor Harris: Yeah, AviClear is, it's a clear growth driver for us internationally right now. And we're in the process of transitioning our business model in North America from what we started with, which was a leased model, and we went really broad, to what we're moving to, which is a ownership model, focused on the highest potential, most productive users, which is largely aesthetic dermatology. There are, I think, reasons to believe that that's going to turn into a strong growth driver. There are a few.

Speaker Change: It's a clear growth driver for us internationally right now, and we're in the process of transitioning our business model in North America from what we started with which was a least model and we went really broad.

Speaker Change: To what we're moving to, which is an ownership model focused on the highest potential, most productive users, which is largely aesthetic dermatology.

Taylor Harris: Sure, Jordan, yeah. I think your checks are accurate. That's exactly what we're seeing. We've really had an almost flawless launch of obvious clear internationally. It's proceeding at or above the levels that we had anticipated. In the second quarter, we were up in terms of revenue versus the first quarter of the launch, even though we didn't really go to too many new markets. So we're just seeing good traction in existing markets. We were at a couple of more markets in the second quarter compared to the first.

Taylor Harris: We are, I think, reasons to believe that that's going to turn into a strong growth driver. There are few first is that's what we're seeing internationally, and we're really in the process of repeating that playbook as we move into this new phase in North America. Second, we've already transitioned a number of accounts to an ownership model in North America. And if you look at the utilization of those owned devices compared to the least devices, even the least devices that are active, it's over two times the utilization rates that we're seeing for those owned devices. So they're, they're more productive.

Speaker Change: We are, I think, reasons to believe that that's going to turn into a strong growth driver. There are a few. First is, that's what we're seeing internationally, and we're really in the process of repeating that playbook as we move into this new phase in North America. Second,

Taylor Harris: First, that's what we're seeing internationally, and we're really in the process of repeating that playbook as we move into this new phase in North America. Second, we've already transitioned a number of accounts to an ownership model in North America. And if you look at the utilization of those owned devices, compared to the leased devices, even the leased devices that are active, it's over two times the utilization rates that we're seeing for those owned devices.

Speaker Change: We've already transitioned a number of accounts to an ownership model in North America and if you look at the utilization of those owned devices

Speaker Change: compared to the least devices, even the least devices that are active.

Taylor Harris: But really what we're doing is just solidifying the base of installed customers, giving them great support, starting to expand within those territories. And you see that with the utilization numbers that I talked about. So that's really critical. These are, I think, excellent utilization numbers and they're at levels that are going to show other customers that they can really integrate and make obvious clear a mainstay in their practices. Now, as we look at the second half of the year, we expect the launch to continue to trend in that upward direction.

Taylor Harris: So they're more productive. And we're seeing great feedback from our Cutera Academy, just focused on AviClear sessions. So people are coming out energized. We think we've got the training down. We've got the cooperative marketing program, and we now have an aligned practice development organization to focus on our target accounts. So we think with all of that, we're set up well to grow the AviClear franchise in North America, and yeah, we're seeing some green shoots on that front.

Speaker Change: It's over two times.

Speaker Change: The Utilization Rates.

Speaker Change: that we're seeing for those own devices. So they're they're more productive. We're seeing great feedback from our Cutera Academy, just focused on AviClear sessions.

Taylor Harris: We're seeing great feedback from our Cutera Academy just focused on AviClear sessions. So people are coming out energized. We think we've got the training down. We've got the Cooperative Marketing Program. And we now have an aligned practice development organization to focus on our target account. So we think with all of that, we're set up well to grow the Avi Clear franchise in North America. And, and yeah, we're seeing the, we're seeing the green shoots on that front. Great.

Speaker Change: So, people are coming out energized, we think we've got the training down, we've got the cooperative marketing program.

Speaker Change: And we now have an aligned practice development organization.

Speaker Change: to focus on our target account. So we think with all of that, we're we're set up well to grow the AviClear franchise in in North America. And and yeah, we're seeing we're seeing the green shoots on that front.

Taylor Harris: We are in the third and fourth quarter starting to go to a broader range of distributor territories. However, there are some markets like Japan where we may not from a regulatory perspective launch this year. So we'll still have good new market opportunity internationally beyond 2024. Again, though, I think the most important indicator of launch health is utilization. And we're feeling really good on that front. Great. That's helpful, Collar. Thanks.

Taylor Harris: Great, thank you. This concludes the question and answer session. I'd like to turn the conference back over to Taylor Harris for closing remarks.

Samantha: Thank you.

Speaker Change: [inaudible]

Speaker Change: Great, thank you.

Speaker Change: [inaudible]

Taylor Harris: This concludes the question and answer session. I'd like to turn the conference back over to Taylor Harris for closing remarks. Well, great. Well, thanks everyone for joining us today. And just one more time. I want to say thanks to the Cutera team for all of your support. Let's go get them in the second half of the year. Feel free to follow up if you have any more questions. Thanks.

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

Taylor Harris: Well, great. Well, thanks, everyone, for joining us today. And just one more time, I want to say thanks to the Cutera team for all of your support. Let's go get them in the second half of the year. Feel free to follow up if you have any more questions. Thanks.

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

Taylor Harris: We're great. Well, thanks everyone for joining us today and just one more time. I want to say thanks to the Coutira team for all of your support. Let's go get them in the second half of the year. Feel free to follow up if you have any more questions. Thanks.

Taylor Harris: And then my follow-up is on the skincare room at Lauriel, the skin surgical line. Your prior skincare distribution agreement had hovered around at 20% of total company sales. Do you think this product line has the potential to approach that or any color on quantifying the new agreement would be helpful? Sure. Yeah. What I would say is we have all the building blocks in place to make this a very important product line for Qtera.

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

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

Taylor Harris: So we have the infrastructure. We have the relationships. We know how to sell and distribute skincare. And we're taking on what we view as the best global physician dispensed skincare line in the world. So as we thought about replacing this business in Japan, it obviously took us a few quarters to reach an agreement with someone. But we could not have landed on a better partner and a better option than skin suitable with Lauriel.

Taylor Harris: So we're really excited about it. And we do think that there's a ton of potential over time. We had, I wouldn't expect that over the next two years or so, that we're going to be approaching the peak levels that we got to with the Zio skin health line just because it takes a while to build to that level. And there were some COVID-related dynamics that I think helped that. But as I said, the building blocks are in place for this to become really meaningful, really important over time.

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Jordan Bernstein: Great. Thanks for all to me.

Harrison Parson: The next question is from Harrison Parson with Stevens. Please go ahead. Hey, this is Harrison on for George, good afternoon, and thanks for taking the questions. Sure. Yeah, so I wanted to start on the reduction and revenue guidance for the full year, sounds like that's due to systems. I wanted to see if you could kind of outline or break down the impact from the Salesforce turnover versus what you're seeing in the macro environment, sort of which one of those had more of an impact on the quarter.

Speaker Change: [inaudible]

Harrison Parson: Sure. Yeah, so I'll give you a little of additional color and and hit on those questions that that you're asking, Harrison. So the of the reduction, the vast majority of that is North America. The only thing that's unchanged really is the international launch of Avi Clear, where we're still tracking really, really well better than we thought at the beginning of the year, in fact. And then so within North America, both of those dynamics affected us, the macro pressures and the Salesforce restructuring and turnover.

Harrison Parson: It's hard to parse those out, but I think they could have been almost equal contributors, just to put a little bit of color around it. You know, normally we have a sequential uptick, this time we had a sequential downturn in North America. And so but we saw some of that hit our core capital internationally, which is why we know there's a or feel confident there's a macro issue here. The turnover, though, is is real.

Harrison Parson: And like I said, this is going to be I think good for the long term, because we've been able to attract some very strong new players and we've retained some our all-stars, our superstars. So I feel really good about the composition of the team and what that's going to mean for productivity going forward. But we had approximately 40% turnover in the North America capital organization during the second quarter. And so that is that's going to have an impact.

Harrison Parson: It takes people time to ramp. Got it. Yeah, that's helpful. And then I wanted to turn to the cash burn guidance for the full year. Is there sort in any sort of cadence we should expect in the back half? And then, you know, I guess is that 4Q number? Is that how we should think about for 2025, at least in the first quarter? Yeah, so the back half of the year, it'll be lower burn than what we had in the first half of the year.

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Harrison Parson: It's just not as low as we had thought earlier. And that's due primarily to the shift in timing of the working capital benefit. And so for that reason, no, actually the fourth quarter I think is going to be at a higher level of burn than we should have entering 2025. And so really this is an important dynamic to consider. We have been at elevated inventory levels. We've talked about that. And we are positioning ourselves to start working that inventory level down.

Harrison Parson: We have thought we were going to get a benefit of that starting in the second half of the year, but because of the revenue outlook that has been pushed. But it's really been pushed to the start of 2025. So that's why I mentioned in our prepared remarks, we're anticipating right now even if revenue were to stay the same that we would have a reversal of cash burn in the range of $50 million.

Harrison Parson: We had a 20, just due to working capital. We had a $25 million hit, or this year, that's what we're experiencing. We think we're going to have a $25 million benefit from inventory work down next year. And then you factor in the $10 million of expense reductions that we've identified. And some growth on top of that, and you're starting to look at a pretty material change in cash burn. And on that growth point, we are already planning on growing on a year-over-year basis internationally in the second half of the year.

Harrison Parson: So that trajectory should take us into 2025 on a really solid footing. And then all the changes we've described in our North America team should also position us for much better performance next year. So there will be a change as we enter 2025. Understood. Thanks for the color. The next question is from James Beers with William Blair. Please go ahead. Hey guys, thanks for taking the question. It's Jimmy on from Margaret.

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Harrison Parson: First, I wanted to maybe dive deeper a little bit on the macro weakness. It could sort of maybe decipher it a little bit more. You know, are you seeing that weakness in the med spa? Is that, you know, is that volume weakness? You've seen primarily med spas and then, you know, is that spreading across other end markets such as, you know, Durham's and plastic surgeons? Hey, Jimmy, yeah, this is more concentrated in the med Durham community.

Harrison Parson: And really it's an issue, sorry, in the med spa community. It's really an issue of access to capital. So there is a segment of our customer base that financing has been shut off for. So it's not just a matter of rates or terms, which are definitely more onerous now than they have been in the past. It's actually for a segment of customers and inability to access capital at all. And that's generally for people who are earlier in their business venture or who don't have an indie beside the name on the office.

Harrison Parson: It's just tougher to get financing. So we're not seeing it be that type of an issue in the medical community, in the dermatology community, although the rates in terms are challenging there. So that's the real issue. I will say I am hopeful that we're going to start to see some rate relief here. Now, that won't necessarily immediately transfer into financing opening up, but it's the start of a healing process. So that's the reason we haven't assumed that it's going to get easier in the second half of the year, but I think there's still room for some optimism.

Harrison Parson: Okay, that's helpful. Maybe on that point of not assuming things get better in the second half, you know, just did some quick math, but I think to get to maybe the middle to the low end of the range, looking at maybe Q3 down sequentially and maybe back up again in Q4. Is that the right way to think about the cadence for the rest of the year? It is. Yeah, that is traditionally the way that our industry and our business work.

Harrison Parson: So in setting our guidance, we assume that Q2 is a new normal in terms of conditions. Those macro conditions don't change and we just looked at the range of historically sequential movement as we go into Q3, Q4. Now, what will obviously be driving toward is hey, we've got a new product cycle with Avi Clear and we are taking Avi Clear into the dermatology community, both internationally and in North America, which should be a more resilient community.

Harrison Parson: And so we're going to be driving toward that. We're going to be driving toward productivity enhancements across our North America team. But if you just look at what has played out from a sequential trend perspective for the industry over time, then that's what leads you into the guidance range. I think you've got the cadence. You're thinking about that appropriately. Great. That's awful. Thank you. Once again, if you have a question, please press star then one.

Samantha: The next question is from Matthew O'Brien from Piper Sandler. Please go ahead. Hi, this is Samantha on from Matt. Thank you for taking our question. Are you interviewed or lead growth in North America next year? I wonder if you could provide any more color on that maybe in terms of timing or what could really drive some of that growth. Sure. So hi Samantha. Thanks for the question. Yeah, Avi Clear is it's a clear growth driver for us internationally right now.

Samantha: And we're in the process of transitioning our business model in North America from what we started with, which was a least model. And we went really broad to what we're moving to, which is an ownership model focused on the highest potential most productive users, which is largely aesthetic dermatology. We are I think reasons to believe that that's going to turn into a strong growth driver. There are few first is that's what we're seeing internationally and we're really in the process of repeating that playbook as we move into this new phase in North America.

Samantha: Second, we've already transitioned a number of accounts to an ownership model in North America. And if you look at the utilization of those owned devices compared to the least devices, even the least devices that are active, it's over two times the utilization rates that we're seeing for those owned devices. So they're, they're more productive. We're seeing great feedback from our cutera academy just focused on Avi Clear sessions. So people are coming out energized.

Samantha: We think we've got the training down. We've got the cooperative marketing program. And we now have an aligned practice development organization to focus on our target account. So we think with all of that, we're, we're set up well to grow the Avi Clear franchise in North America. And, and yeah, we're seeing the, we're seeing the green shoots on that front. Great.

Taylor Harris: Thank you. This concludes the question and answer session. I'd like to turn the conference back over to Taylor Harris for closing remarks. Well, great. Well, thanks everyone for joining us today. And just one more time. I want to say thanks to the cutera team for all of your support. Let's go get them in the second half of the year. Feel free to follow up if you have any more questions. Thanks. This brings to a close today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

Unknown Attendee: [inaudible] very much, thank you very much, thank you very much Jonathan Block, Anthony, Stuart Drummond, Greg Barker, James Beers Jonathan Block, Anthony, Stuart Drummond, Greg Barker, James Beers, Jonathan Block, Anthony, Stuart Drummond, Greg Barker,