Q3 2024 Cutera Inc Earnings Call
Speaker Change: Thank you for standing by. This is the conference operator. Welcome to the QTERRA Inc. 3rd Quarter 2024 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded.
Speaker Change: 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 0.
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. With me today is Taylor Harris, Qutera's Chief Executive Officer and Stuart Drummond, Interim CFO. Following our prepared remarks, we will take your questions.
Shelby Eckerman: Before we get started, I'll note that today's discussion includes forward-looking statements.
Shelby Eckerman: 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 Eckerman: Forward look-in statements are based on information available to us at the time those statements are made, which by its nature is dynamic and subject to change, or management's good faith belief as of that time with respect to future events.
Shelby Eckerman: Forward-looking statements include, among others, statements regarding financial guidance, regulatory approvals, productivity improvements, and plans to introduce new products and expand into international additional geographies. 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: All forward-looking statements are subject to risk and uncertainties, including those risk factors described in the section entitled Risk Factors and are Form 10-K, as filed with the Securities and Exchange Commission and updated in our Form 10-Qs subsequently filed.
Shelby Eckerman: Katera also cautions you not to place undue reliance on forward-looking statements.
which speak only as of the date they are made.
Future results may differ materially from management's current expectations.
Shelby Eckerman: and greater transparency in Quintero's ongoing results of operations, particularly when comparing underlying results from period to period.
Shelby Eckerman: Please refer to the Reconciliation Gap to Non-Gap Measures in our earnings release. These non-gap financial measures should be considered along with, but not alternative to, the operating performance measures prescribed by GAAP.
Shelby Eckerman: AviClear revenue continued to grow on a year-over-year basis driven by our international launch.
Shelby Eckerman: Core capital sales, while down year over year, increased modestly on a sequential basis.
Shelby Eckerman: And we saw underlying improvements in gross margin and controlled operating expenses, excluding some non-cash accounting charges.
Shelby Eckerman: At the same time, we're building the foundation through our team, culture, and customer-focused service mindset to support long-term growth for our company. Nowhere was that more evident to me than last weekend at the Kutera University Clinical Forum, or CUCF.
Shelby Eckerman: which is our annual educational event designed to disseminate best practices for utilization of our technology.
Shelby Eckerman: At CUCF, I spoke with numerous customers who love their Qutera devices and who are starting to provide me with more and more positive feedback on the team that is supporting them across the board, from sales to service to marketing and post-sales practice development.
Shelby Eckerman: I remain proud of the resilience that our team at QTERA has been demonstrating and of the foundational changes we continue to pursue to position the company well for future growth.
Shelby Eckerman: Turning to Q3, the international launch of AviClear continues to proceed exceedingly well.
Shelby Eckerman: We've now sold over 100 AviClear systems outside of North America, and we've expanded into approximately 25 countries, as we brought online a number of distributor markets during the third quarter.
Shelby Eckerman: Utilization remains strong, with our direct markets averaging over nine treatments per device per month, an increase versus prior quarters.
Shelby Eckerman: We're still early in the launch, so it wouldn't be appropriate to extrapolate that performance. But that said, the utilization trends are clearly encouraging, and customers are reporting to us that they are achieving impressive clinical results, which is the most important indicator of future growth.
Shelby Eckerman: In North America, we saw typical seasonality across most components of our business, although our core capital revenue was relatively stable in the third quarter compared to the second quarter, with broader revenue contribution across our field team than we had last quarter.
Shelby Eckerman: We are focused intensely on hiring well, cultivating a winning culture, and providing industry-leading training and development opportunities for the team.
Shelby Eckerman: For example, we brought the entire field organization together for training during the first week of October, including a new sales rep certification process for AviClear.
Shelby Eckerman: We believe that increased productivity over time begins here, with the right team, processes, and training.
Thank you.
Shelby Eckerman: The North America team continues to execute well on the launch of ZeoPlus.
Shelby Eckerman: As a reminder, Xeo Plus offers tremendous flexibility and customization with over 25 applications.
Shelby Eckerman: From Qutera's signature laser genesis skin revitalization procedure, to hair removal, to pigment reduction, and more. With a larger spot size, enhanced contact cooling, and redesigned hand pieces, XeoPlus provides faster treatments and improved comfort.
Shelby Eckerman: Additionally, the team drove a nice sequential uptick in our sales of the secret portfolio of RF microneedling devices, and we also saw a modest uptick in TruFlex.
Shelby Eckerman: The TrueBody platform, in fact, was one of the highlights at CUCF this year as panelists spoke about the potential for indication expansion, which would involve studying the integration of Sculpt and Flex into regimens with GLP-1s.
Panelists also spoke about the potential for studies of TruFlex.
our multi-directional RF energy device for muscle stimulation
Shelby Eckerman: indications outside of aesthetics. For example, functional strength and physical rehabilitation. We are inspired to do more work clinically to understand how TruFlex could potentially be deployed to assist patients in these areas.
The End
Speaker Change: I'll now provide an update on our top near-term business priorities, which are, one, the pursuit of operational excellence across a range of functions.
Speaker Change: Two, fully developing the opportunity for AviClear. And three, improving our financial health through an efficient cost structure and reductions in working capital.
Speaker Change: I will elaborate on all of these. First, operational excellence. We continue to make progress in all of the key areas that we identified last year. Product reliability, field service, supply-demand planning, and inventory control.
Speaker Change: And I'd like to highlight field service in particular, where during the third quarter we reduced service backlog in all geographies across the globe.
Speaker Change: In North America, we've continued to improve our service response times.
Speaker Change: And we've actually achieved 90 to 100% in more recent weeks and months.
which we believe puts us into an industry-leading position.
Speaker Change: It's truly remarkable to see how far we've come in just over a year. We now believe that our service capability can provide a competitive advantage, and it demonstrates clearly to our customer base the type of partner that Qutera will be and the type of support we will provide.
Second, Avi Clear.
Speaker Change: We continue to be encouraged by international launch dynamics, including the uptake by thought-leading KOLs in major direct markets.
Speaker Change: The initial uptake we're seeing in newly launched distributor territories as well as the strong and growing utilization across our installed base
Speaker Change: In North America, we're still working through the transition from the initial leased business model. As of the end of the third quarter, there were approximately 785 systems operating under the leased model.
Speaker Change: down from 925 last quarter, a reduction of approximately 140 during the quarter, with approximately 200 on a list to be returned in the coming quarters.
Speaker Change: We continue to expect that more than half of the original installed base of systems will be returned, and we're now working on moving efficiently through this return process.
Speaker Change: In addition, we are focusing our efforts squarely on a group of around 150 of the most committed AviClear accounts, where we believe our PDMs can help drive increases in utilization.
Speaker Change: And we'll also continue to use Kutera Academy programs to help accounts relaunch AviClear successfully in their practices.
Speaker Change: And third, cost structure and working capital. We saw underlying improvement in our gross margin and operating expense profiles in the third quarter.
Speaker Change: on a normalized basis, that is, if we exclude our standard non-GAAP adjustments, as well as non-cash charges for excess and obsolete inventory.
Speaker Change: Our gross margin was 42% in Q3 compared to 35% in Q2 and 40% in Q1.
Speaker Change: Our non-GAAP operating expenses were $35 million, but that included a bad debt charge of $5.4 million.
Speaker Change: So that marks two quarters in a row of operating expenses below $30 million excluding our standard non-GAAP adjustments as well as bad debt expense.
Speaker Change: On a go-forward basis, we're likely to have some ongoing E&O and bad debt, but we believe that it will be significantly reduced from the levels we've recorded in recent quarters.
Speaker Change: On an underlying basis, the progress we're making in our cost structure reflects operational efficiencies in service, freight, packaging, as well as the impact of the reductions in force and other cost containment programs that we have implemented.
Speaker Change: On the working capital front, as we mentioned last quarter, our ability to realize an inventory work down benefit has been delayed due to the reduced revenue environment. As a reminder, due to a variety of factors, we have built a gross inventory balance of approximately $135 million.
Speaker Change: Excluding our field-based inventory, like demo units or service loaners, this balance is approximately 120 million dollars.
Speaker Change: Over the coming years, we plan to reduce this inventory significantly.
Beginning in the fourth quarter.
Speaker Change: and into a greater degree in 2025. In fact, we continue to anticipate a year-over-year improvement in cash burn of over $50 million.
Speaker Change: as we move from 2024 to 2025 related to working capital alone, even in the absence of revenue growth.
Speaker Change: Additionally, we should recognize a full year of benefit from the cost savings initiatives that we implemented during the third quarter.
Speaker Change: As such, we anticipate reducing our cash burn by over 50% in 2025 before factoring the opportunities for revenue growth or gross margin improvement.
Speaker Change: Before I turn the call over to Stuart, I would like to mention that we have now begun selling under our distribution partnership with L'Oreal Skin Suiticals business in Japan, following a well-attended launch event with leading dermatologists.
Speaker Change: We don't expect a material revenue contribution in the fourth quarter, but we remain excited about the potential for this partnership longer term. With that, I'll turn the call over to Stuart.
Stuart Drummond: Thank you, Taylor. This afternoon, I will discuss our Q3 gap results as well as some non-gap results. A reconciliation of gap to non-gap release margin and loss from operations is included in our earnings release.
Stuart Drummond: Total revenue for the third quarter was $32.5 million compared to $46.5 million for the same period in 2023.
Stuart Drummond: Excluding skin care revenue of $7.1 million recorded in Q3 of 2023, our Q3 revenue decrease of $6.8 million on a year-over-year basis mainly reflected decreases in North American capital equipment revenue and consumables revenue.
Stuart Drummond: We terminated our skincare distribution agreement in March 2024 and a decrease in North American capital equipment revenue resulted primarily from continued macroeconomic pressures as well as sales rep turnover.
Stuart Drummond: Non-GAAP gross profit for the third quarter of 2024 was $3.7 million, with a gross margin rate of 11.5%, compared to a gross margin rate of 19.3% for the third quarter of 2023.
Stuart Drummond: The 7.7 percentage point decrease in gross margin rate was driven primarily by an increase in our reserve for excessive inventory.
Stuart Drummond: Non-Gap Operating Expenses for the third quarter of 2024 were $34.7 million compared to $39.8 million for the same period last year.
Stuart Drummond: This $5.1 million decrease mainly reflects personnel savings resulting from the restructuring announced in November 2023 and June 2024 and lower sales commissions, partially offset by higher bad debt expense.
Stuart Drummond: In the quarter, we recorded bad debt expense of $5.4 million, reflecting the aging of receivables, likely related to the challenging macroeconomic conditions our customers are facing.
Stuart Drummond: Turning to our balance sheet, we ended the quarter with $59.0 million of cash cash equivalency restricted cash, compared to $84.3 million at June 2024.
Stuart Drummond: Turning to our guidance, we are reaffirming a full year revenue guidance range of $140 to $145 million with an expected cash, cash equivalents and restricted cash balance at December 31, 2024 of approximately $40 million.
Speaker Change: With that, I'll turn the call over to Taylor for closing remarks.
Taylor Harris: Thanks Stuart. We're pleased to be maintaining our guidance range for the balance of 2024 because that reflects our team's resilience amidst a challenging environment.
Taylor Harris: We have not yet seen an easing of credit availability for our customers or an improvement in inpatient demand, both of which are contributing to the dampened appetite for capital equipment purchases.
Taylor Harris: We're not expecting these conditions to change in the near term, and they continue to present uncertainty in our outlook, but we are working hard to manage through them.
Taylor Harris: Moreover, our team is still conducting a turnaround in multiple areas. We're improving service and reliability, cleaning up inventory, rebuilding and retraining our North America field organization, and winnowing the Alveclear installed base.
Taylor Harris: While at the same time, we're driving our business forward with the launch of both Avi and SkinCeuticals internationally.
Taylor Harris: the refocusing of our AviClear business in North America, launching Xeo Plus, and continuing to identify efficiencies across the board. None of this would be possible without a committed and passionate team, which we're fortunate to have.
Taylor Harris: It's in times of trial that we grow stronger, and I believe we're experiencing that at QTERRA right now. So I'm thankful to our whole team, and I'm excited about where we can go from here. Operator, we're now ready to begin the question and answer session.
Speaker Change: Thank you. To join the question queue you may 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 key. To withdraw your question press star then 2.
Speaker Change: Our first question is from John Block with Stiefel. Please go ahead.
Speaker Change: Great, thanks and good afternoon. Maybe just to kick things off, you know, last quarter I believe you had some changes to the North American Salesforce leadership. Just would love any feedback you're able to share. Maybe just to tack on to that first question.
Speaker Change: You know if you can provide maybe just a broader update on the North American sales force you had some new ads I believe also call it maybe some intentional churn some opportunity to pick up
Speaker Change: Some good solid reps from other companies. So maybe where you sit with that initiative to strengthen the overall North American sales force
Speaker Change: Hey, John. Yeah, thanks for the question, and I feel really good about the progress that we've made.
in North America over the last quarter or so.
Speaker Change: You're right, we made some changes at the beginning of the quarter. Steve Kreider took over the full commercial leadership in North America. We have two directors on the capital side, some new regional managers in place.
Speaker Change: And that team, I have to say, has come together in a really productive way over the last few months.
Speaker Change: big focus on training, big focus on hiring, and big focus on productivity.
Speaker Change: We're actually starting to see the benefits of that. You know, if you look at core capital sales,
in the third quarter.
This was our best quarter this year of core capital.
all right and
We actually had fewer sales reps.
contribution more broadly across the team.
Speaker Change: pleased with the ramp of some of the new team members that have come on board, really just pleased with the culture that's developing, and productivity is going to be the focus as we go forward.
Speaker Change: So, I think we've got the right tools in place, feel good about the team that we have and that we're building, and, you know, looking forward to where we go from here.
great that was helpful thank you and maybe just
Speaker Change: A quick second question. You know, the overall gross margin numbers just have had some charges and some noise, but I think you called out the underlying gross margin had some improvement. I believe it was in the low 40s.
Speaker Change: Taylor, what's what's missing from really getting that higher, you know, when you look back at older QTERRA and above 50 or well above 50 is it
Speaker Change: Is it just a volume argument to be made there? Is there also mix, more favorable mix that is needed? Do we need to be more patient and wait for the consumables, the high-margin consumables from ObviClear to become more prominent?
Speaker Change: Clearly that's a, you know, a key lever when we think about the cash flow, so I just would love some more color on the gross margins. Thank you.
Speaker Change: driving gross margin higher. I do think it's fair to look at us right now on a normalized basis in that 40%, low 40% range excluding these large non-cash inventory charges.
Speaker Change: So how do we get it back higher? Well, I do think volume is at the top of the list. And so that's what we're gonna be focused on over the coming year and beyond.
Speaker Change: The other factors that we can work on, mix for sure is one, and so there we've, because of what's happened in the body contouring market and our business, that's one of our higher margin products.
Speaker Change: which were at a depressed level of sales this year, although we did do better in our body franchise in the third quarter than we had in the first half of the year.
Speaker Change: But a rebound in that portion of the business would certainly help on the margin front.
developing the AviClear consumables.
Speaker Change: business, that's absolutely going to help on the mix front. And then the other thing, we're focused squarely, as you heard me talk about, on efficiencies. I think the team and operations in service is doing a good job of identifying those. I think there's still more room to run on that front, and that'll be part of the improvement over time as well.
Perfect. Thanks for the color.
Speaker Change: The next question is from Anthony Vendetti with Maxim Group. Please go ahead.
Speaker Change: Thank you. So on the inventory adjustment, I know it was non-cash. Sounds like it was ten million dollars. Was there a write-down last quarter and is this write-down this quarter?
Speaker Change: Clean up the inventory as far as you can tell at this point.
And then I have a ball.
Yeah, I am, and he is, too, again.
Speaker Change: Yes, so about three quarters of that $10 million inventory charge this quarter related to a slight change in our methodology.
Speaker Change: The refurbished Abbeyclare units, which are from the returns from the lease space.
Speaker Change: There are around 460 left to date, and we anticipate another couple of hundred coming in. So we actually took a reserve on those units for the first time. So as mentioned, they've got three quarters of a 10.1 million charge.
Speaker Change: As we look forward, we still do expect some inventory reserve charges, but nothing to this one.
Speaker Change: okay so this was the this was the bulk of it
and then and then just as we look at
The R&D pipeline innovation may be
Speaker Change: Is there anything that is on the near-term horizon or anything in the pipeline other than, you know...
upgrades or tweaks to current products.
Speaker Change: Hey, Anthony. Yeah, we do have programs in the R&D pipeline.
We won't give
Speaker Change: specificity with most of what we're working on, but I will say, and that's just for competitive reasons, I will say that we're definitely excited about the indication expansion work that we're doing with AviClear. We've gotten a lot of
Speaker Change: feedback from customers that about areas that they think I'll be clear
Speaker Change: could be useful, and we're starting to gear up for some of those studies.
Speaker Change: We've mentioned sebaceous hyperplasia, hydradenitis suppurativa, but there are other indications that we'll be looking at as well.
Speaker Change: So, that's not a new product, but the beauty is we have an existing product that we think we can have the opportunity to expand applicability for.
Okay, great.
so
Thank you.
Speaker Change: I didn't catch that on the on the prepared remarks in 25 you think that's going to come down by how much or
Yeah
Yes, so
What we said was that we expect
at least a 50% reduction in our burn next year.
So that's pretty significant and the biggest source of that
is working capital.
where we've had, we've had an
Speaker Change: Increase in working capital, so a use of cash this year. But we're now at that turning point in our inventory balance where inventory is going to become an asset that we are converting into cash over the next few years.
Speaker Change: And we actually think that's going to start in the fourth quarter, and it's going to grow in magnitude in 2024.
So, we mentioned that even without revenue growth,
Speaker Change: We think that that flip in working capital is going to lead to a $50 million improvement in our cash burn profile. That's the biggest source of our improvement in cash burn next year.
Okay and then if we look at
the geographies where you're selling right now.
Thank you. Thank you.
Where do you see the most opportunity?
still needs to turn around.
Speaker Change: Well, we're in the middle of rolling AviClear out throughout our existing network of distributors.
Speaker Change: There are a number of markets to come, and a lot of the markets...
Speaker Change: We went to just here very recently in the third quarter and so there should be opportunity for further development, further penetration of AviClear in those markets.
The probably the biggest opportunities.
Speaker Change: Korea, Japan, those can be meaningful markets for us. We have existing presence direct in Japan with an established distributor in Korea.
Speaker Change: Then as I think longer term, probably the single biggest market that we are under penetrated in is China.
Speaker Change: The pathway for registration there for AviClear will be measured in years, so that's not a near-term opportunity, but it will be meaningful when we get there.
Okay, that's helpful.
Thank you.
So in terms of, you've said that over
Speaker Change: 50% or a little over 50% of the AviClear devices are coming back. Did you give an update on how many of them have come back and how many are still out there that you think will come back?
Yes, so...
Speaker Change: Just to just to reframe that, we got to a peak under the leased business model of about 1,250 AviClear machines.
And we now stand at 785 leased machines.
Speaker Change: We've got a list that we know we're going to come back of another 200 roughly and And there will be more than that. So that's what gets us down To that more than more than half coming back meaning we you know end up with less than half
what we're, but really with
Speaker Change: With most of those, they were doing very little in the way of utilization.
So, where we're turning our attention right now.
is to that committed core.
And so we're...
Speaker Change: allocating our PDM time and attention now more and more to helping those accounts grow and we think
Speaker Change: to the types of levels that we're seeing in international markets.
Speaker Change: then I think that's going to create a real buzz around AviClear in North America and help with this restart of our AviClear business under the new business model that we have.
Speaker Change: okay great that's that's excellent color I appreciate it I'll hop back in the queue thank you
Thanks, Anthony.
Speaker Change: Once again, if you have a question, please press star then 1.
Speaker Change: The next question is from Margaret Caxor with William Blair. Please go ahead.
Speaker Change: Hey guys, this is Max on for Margaret. Just one quick one for me. I know you guys are obviously operating in a tough capital environment. I was just curious if you could touch on what you've seen this quarter and how that shapes your outlook heading into 2025.
Speaker Change: And then just a follow-up to that, curious to hear your thoughts on, you know, the achievability of returning to growth or maybe just some overall, you know, higher level growth drivers that you're really focused in on for 2025. Thanks.
Sure, thanks Max. So on the macro front
We haven't seen any change.
Speaker Change: in the third quarter relative to the first half of the year.
I would just characterize this as a, it's a tough...
Speaker Change: It's a challenging environment and it really comes down to financing availability for customers as well as a lot of our customers are just reporting slower consumer spend in their practices. So that's affecting, that's dampening appetite for purchasing capital equipment.
Speaker Change: But what I'm proud of is that I feel like our team is...
Speaker Change: learning how to adapt, learning how to manage through tough conditions.
Speaker Change: And that's just going to position us even better for when...
Speaker Change: the sledding becomes easier. And, you know, as I think about growth, absent, even without a change in the macro, what I'm...
Speaker Change: What I'm feeling optimistic about is, you know, you look at our international business, and we grew in the third quarter of 2024. We're planning on growing internationally in the fourth quarter.
Speaker Change: So I think we're already on a trajectory for growth in 2025 when you look at our international business.
Speaker Change: And then in North America, as I mentioned, in giving the color on our field team dynamics.
Speaker Change: The underlying productivity of the team is firming up. It's starting to improve.
And between that...
We're looking to stabilize that, build upon it.
Speaker Change: That's the formula for growth in North America next year, and that's what we'll be driving to do.
Great. That's great, Kyle. Thank you for taking the question.
Sure, thanks.
Speaker Change: This concludes the question and answer session. I'd like to turn the conference back over to Taylor Harris for any closing remarks.
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