Q4 2024 The Beauty Health Co Earnings Call
Thank you for joining the beauty health companies conference call to discuss our fourth quarter.
In 2020 for full year financial results.
We will release.
Our results earlier this afternoon, which can be found on our corporate website at beauty health Dot com.
Speaker Change: Joining me on the call today is beauty health Chief Executive Officer Marla Beck.
Along with their Chief Financial Officer, Mike Monahan.
Speaker Change: Before we begin however, I would like to remind everyone of the company's safe Harbor language.
Speaker Change: Instrument may make forward looking statements, including guidance and underlying assumptions.
Speaker Change: We're looking statements are based on expectations that involve risks.
Speaker Change: And uncertainties that could cause actual results to differ materially.
Speaker Change: Listeners are cautioned not to place undue reliance on any forward looking statements.
Speaker Change: For a further discussion of risks related to our business. Please see the company's filings with the SEC.
Speaker Change: This call will present non-GAAP financial measures.
Speaker Change: Conciliation of these non-GAAP measures to the most comparable GAAP measure.
Speaker Change: R&D earnings press release furnished to the SEC and available on our website.
Following managements prepared remarks, we will open the call for a question and answer session.
Marc: With that I would now like to turn the call over to our CEO Marla Beck. Please go ahead Marc.
Thank you Norberto and good afternoon, and thank you for joining us to review, our fourth quarter and full year 'twenty 'twenty four results.
A year ago I Express my enthusiasm for the opportunity I saw and leading beauty health and innovative category creator at the intersection of beauty aesthetics, well, that's in health that needed a transformational strategy and disciplined execution.
Marc: Over the past 12 months, we've made significant strides in stabilizing the operations optimizing costs reigniting, our product pipeline, attracting top talent and building a stronger foundation for long term profitable growth.
Our fourth quarter financials demonstrate that our transformation efforts are beginning to take hold with continued growth in consumable sales across all regions and substantial improvements in gross margin and bottom line profitability for.
For the full year, we delivered net revenue of 334 million and adjusted EBITDA of $12 3 million, both of which exceeded our guidance. In addition, we reduced operating expenses by over $30 million, demonstrating our commitment to financial discipline and operational excellence.
More importantly, we are transforming our business to set us up for long term leadership in scalability.
Hydro facial isn't a hyper growth mode for many years, but lack certain infrastructure commercial execution and financial discipline needed for a sustainable high margin business that has now changed let me walk you through our key accomplishments in 2024 and what's ahead.
Marc: At the start of the year, we identified three transformation priorities.
Marc: Execution operational excellence and financial discipline.
Marc: Starting with sales execution during the fourth quarter of 2024, we continue to build a more robust and scalable go to market model as we refined our sales structure expanded pricing options and introduced new tools to improve sales execution.
Marc: We diversified our device sales strategy by expanding our good better best pricing model for Allegro elite and sundial and.
In Q4, we saw a continued increase in Nansen day or Youre not sales demonstrating that this strategy is working and additionally, enhanced our lead generation process implementing advanced analytics and segmentation tools to improve targeting and conversion.
Marc: We also expanded our consumables offering with demonstrated success, specifically within our U S. Corporate accounts, which grew approximately 25% year on year. We've added a new commercial leadership team with deep industry expertise they've been with us for a little over four months and share a clear mandate of driving device and consumable sale.
Marc: <unk>, increasing utilization deepening relationships with our providers and executing our product launch plans.
Marc: As a result, we are now better positioned to capture demand and drive long term device and consumables growth with regard to operational excellence, we are driving efficiency and improving profitability as we streamline operations strengthened supply chain oversight and stabilized key product lines, our new manufacturing and supply chain leadership consolidated.
Marc: Manufacturing in long beach, and exited China production, reducing cost and improving quality control.
Marc: We also completed the Sunday of three point out global replacement program, ensuring all providers have the most advanced version of our device.
Marc: Lastly, we implemented new inventory management processes, ensuring alignment with demand and improving working capital efficiency.
Marc: These initiatives proved critical in helping to restore a provider trust and reliability, while enhancing our gross margin profile and bringing added operational rigor across the organization.
Turning to financial discipline, we're focused on creating a leaner more profitable business driven by cost discipline.
Marc: We reduced full year operating expenses by over $30 million year over year, improving our adjusted EBITDA profile and implemented data driven decision, making across all functions and ensuring a higher return on investments.
Marc: We're optimizing our international footprint with the intent to shift our direct business in China to a third party distributor model, allowing us to capture market potential while maintaining a capital light approach, we expect to complete this transition in the second quarter of 2025.
Marc: These actions have given us the flexibility to reinvest in innovation brand elevation and commercial execution, while maintaining strong financial discipline.
Marc: Towards the end of 2024, we showcase beauty health and hydro facials innovation and clinical leadership by introducing our med Tech meets beauty positioning at the intersection of aesthetics beauty and wellness.
We released the hydro lock H a booster in Q3, our first clinically backed booster and the most successful hydro facial branded booster launched today selling out in record time we.
We were planning to launch additional boosters in 2025, continuing continuing our momentum in science backed high efficacy because consumables.
Marc: Our wrap the treatment room strategy, which includes skincare and Backbar expansion extends our presence and treatment rooms to drive a higher revenue per provider.
Marc: We are also validating the efficacy of hydro facial when combined with other treatments such as non ablative lasers providers are stacking treatments to enhance outcomes for their clients and hydro facial is offering the ideal complement.
Clinical validation demonstrates hydro facials ability to address multiple skin concerns in a compelling way, which resonates with our medical and med spa providers Esthetician and end consumers.
Marc: Sure we are taking steps to shift hydro facial from a great treatment to a true science batch clinically validated getting care leader.
We enter 2025, we remain laser focused on executing our vision with precision.
This includes deepening our provider partnerships, increasing engagement simplify and sales execution and expanding brand support.
Marc: Accelerating science backed innovation, expanding our booster pipeline skincare offerings and clinical validation initiative, while leveraging our 179 patents and enhancing commercial execution refining our pricing model, increasing lead conversion and strengthening international partnerships.
Marc: Well, we are facing the same near term macroeconomic uncertainty and industry headwinds as many of our peers, we have strengthened our leadership team.
Marc: Fortified our foundation outlined a clear strategy to unlock the full potential of this business.
Marc: Hydro facial is a category defining treatment with over 34000 active global devices and over 60% market share in the U S Microdermabrasion category.
Marc: It is a traffic driver for providers, a compelling consumer experience and a uniquely differentiated offering in the medical aesthetics space. We will continue to leverage this distinct advantage to drive long term success.
Mike Monahan: Before turning the call over to Mike I want to thank our team for their dedication and execution. Your commitment has been instrumental in reaching this pivotal moment and I look forward to building on our momentum as we execute our vision in 2025.
Mike Monahan: With that I'll turn it over to Mike.
Mike Monahan: Thank you Marla I'm encouraged by our performance in 2024, as we strengthened our financial foundation and delivered on our full year net revenue and adjusted EBITDA commitments, both exceeding the high end of our guidance.
Mike Monahan: Fourth quarter revenue came in at $83 5 million, representing a 13, 8% year over year decline, we are seeing the continuation of a challenging environment for many of our providers as they remain cautious on capital equipment purchases, particularly in international markets.
As a result, we saw a decrease in global equipment sales of 40% in the fourth quarter to improve access to our devices. We introduced a good better best strategy in 2024 by opening up our portfolio of select legacy devices at lower price points in the fourth quarter Nansen diode sales represented 29% of.
Mike Monahan: Total systems sold as compared to 21% in the prior year fourth quarter globally.
Mike Monahan: Current year fourth quarter Nansen, Dario device sales represented 39% of systems sold in the Americas.
Mike Monahan: Total units sold worldwide during the fourth quarter was 1087 units with an average selling price of $24650 compared to 1551 units sold globally in Q4 2023.
In the Americas, we sold 649 units compared to 758 units in the fourth quarter of 2023. Additionally.
Mike Monahan: Additionally, we sold 140 units in APAC compared to 450 in Q4, 2023, and 298 units in EMEA compared to 343 units in Q4 2023.
Mike Monahan: For the full year, we sold 4907 systems, bringing the total active machines in the field to 34735 units versus 31446 units at the end of Q4 2023.
Mike Monahan: Consumable sales for the quarter totaled $56 7 million or eight 7% increase versus Q4 2023 with growth across all regions.
Mike Monahan: These results bring our consumable sales for full year 2024 to $208 9 million compared to $191 4 million for full year 2023.
Mike Monahan: For the full year consumables net sales increased 10, 1% in the Americas, five 3% in APAC and eight 2% in EMEA.
Mike Monahan: From a regional perspective Q4 consolidated revenue in the Americas was down three 9%, while revenue across APAC and EMEA declined by 55% and eight 3% respectively.
Mike Monahan: In APAC, China accounted for $23 9 million of the region's revenue a decline of 56, 4% year over year.
Mike Monahan: The decline in China reflects a 72% drop in system sales along with an eight 3% decrease in consumables revenue.
Mike Monahan: As a reminder, the international launch of Sunday or took place in Q2 2023, creating a challenging sales comparison for subsequent quarters, which combined with the ongoing macro headwinds impacted our 2020 for topline performance.
Despite these top line challenges I'm pleased with our ability to improve our gross margins and profitability.
Mike Monahan: Gross profit for the fourth quarter was $52 3 million favorably comparing to $45 7 million in the prior year period.
Mike Monahan: Adjusted gross margin for the quarter was 67, 1% compared to 54, 6% in the prior year period, primarily driven by lower inventory related charges and a favorable mix shift towards consumable net sales, partially offset by lower average selling price of equipment net sales.
Mike Monahan: GAAP gross margin for the quarter was 62, 7% improving versus the prior year period as well as sequentially from 51, 6% in Q3 of this year.
Mike Monahan: On a full year basis gross profit improved by 17, 5% to $182 3 million compared to full year 2023 adjusted gross.
Mike Monahan: Gross margin was relatively flat at 62% in 2024, compared with 62, 8% in 2023, while GAAP gross margin was 54, 5% in 2024 compared to 39% in 2023.
Mike Monahan: The improvement in gross margin was primarily due to the absence of charges and inventory related write downs.
Mike Monahan: Associated with the <unk> program of $65 2 million in 2023, and favorable mix shift towards consumable net sales, partially offset by higher inventory related charges and $8 million of manufacturing optimization related cost incurred in 2024.
Mike Monahan: Total operating expenses for the fourth quarter decreased by seven 1% to $59 5 million as we continue to strategically manage our expenses.
Selling and marketing expense was down approximately 17, 2% to $26 5 million, reflecting lower personnel related expenses, including sales Commission expense.
R&D expense was also down $1 8 million, while G&A expense was $31 8 million or an increase of nine 6% driven by higher share based compensation expense and legal and other professional fees, partially offset by lower bad debt and severance expense.
Mike Monahan: This led to an operating loss of $7 2 million in Q4 of 2024, an improvement versus a loss of $18 4 million in Q4 of 2023.
Mike Monahan: Adjusted EBITDA of $9 million was well above our implied guidance, reflecting lower operational spend and higher gross margins, partially offset by lower net sales.
Moving to the balance sheet, we ended the quarter with approximately $370 million in cash in 2024, we deployed $156 million of cash to repurchase $192 million of our convertible debt leveraging our healthy and robust liquidity position.
This is further strengthened by the cost reductions we are gaining as we take additional actions to improve the efficiency of the business.
Mike Monahan: Looking at inventory, we ended the quarter with approximately $69 million, a decrease compared to $91 million in December of 2023.
While we have made significant improvements in our supply chain. The decrease was primarily driven by excess and obsolescence charges.
Mike Monahan: We are now projecting full year 2025 sales of between $270 million to $300 million and adjusted EBITDA of $10 million to $25 million.
Mike Monahan: Compared to full year 2024, our full year 2025 guidance assumes continued pressure on delivery systems due to financing pressure and uncertainty in the global market projected decline in all three regions specifically China.
Capital expenditures are expected to be approximately 10 million to.
Mike Monahan: $15 million for the full year 2025 for.
Mike Monahan: For Q1 2025, we are projecting sales of 61 to 66 million and an adjusted EBITDA loss of negative $6 million to negative $4 million.
As a reminder, the first quarter is historically, our lowest sales quarter, coupled with higher trade shows and sales meetings as we build our pipeline and prepare for our annual sales strategy.
Mike Monahan: In summary, we are encouraged by our progress as our strategic initiatives continued to take hold.
Mike Monahan: Building on our 2024 results, we remain committed to driving long term shareholder value through strong sales execution operational efficiency and financial discipline.
Mike Monahan: While work remains we are confident that our actions over the past year have provided a solid foundation for sustained profitable growth I'll now turn the call back to the operator for our Q&A.
Mike Monahan: Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Speaker Change: If youre using a speakerphone please pick up your handset before pressing the keys.
Speaker Change: Anytime Youre question has been addressed and we would like to withdraw your question. Please press Star then two.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: And the first question will come from Susan Anderson with Canaccord Genuity. Please go ahead.
Susan Anderson: Hi, good evening, Thanks for taking my question.
Susan Anderson: I wanted to maybe ask on that delivery. Since then I'm, just kind of what youre seeing out there from a macro perspective.
Susan Anderson: It looks like you're expecting them to be down pretty significantly again in first quarter or do you think this is really kind of all macro driven or.
Higher interest rates, maybe if you could just give some more color there.
Mike Monahan: Mike do you want to take that sure.
Mike Monahan: Hi, Susan Yes, that's what that's what the main drivers are for overall delivery systems. We're seeing we're seeing providers that are taking a little bit longer to make a decision as to buy the device and we believe that's driven by the uncertainty in the overall macro environment and then the <unk>.
Interest rates are.
Mike Monahan: <unk> to put pressure overall.
Mike Monahan: Overall on on that sales process, we are continuing to pull levers that we've talked about we've seen we've had success with introducing devices at lower price points and that's the good better best strategy you saw that.
Mike Monahan: It's been improving as a percentage of overall sales.
And we continue to work with the sales force continues to focus on emphasizing the return on investment from the hydro facial machine, which you can pay itself.
Mike Monahan: Back in less than nine months.
Speaker Change: Okay, great. Thanks for the color and then maybe if I can add one more just on the consumable side. So obviously, you're continuing to see growth. There. How are you feeling just in terms of the consumer and their continued demand on the consumable side.
Speaker Change: The 2025, and then I was curious did you see growth across all of the region with consumables.
Speaker Change: Thanks, Susan I'll start and then I'll have Mike add N and first we noted are consistent signature consumables revenue per system in the U S for 2024 compared to 2023, so consumers are continuing to prioritize hydro facial treatments as part of their skin health.
Speaker Change: <unk> regimen.
Speaker Change: And we're excited to see that continued growth in terms of macro.
Speaker Change: Yes, the trends are in our favor macro trends the G. L. P usage is certainly driving consumers and we're seeing a lot of treatment stacking on the part of providers, where they require that hydro faithful hydro facial as the first treatment for lasers or other treatments.
Speaker Change: Some of the other trends around returning to sort of this natural look as is benefiting us in terms of the actual global I'll have Mike talk a little bit more in detail.
Speaker Change: For our regional growth, we expect consumables I would expect to see growth we factored in at the midpoint of our guidance growth for the Americas and EMEA as we move China to a third party distributor, there's we expect lower growth in Q4, Eric.
Sorry for the year and APAC as we make that transition.
Speaker Change: Hey, great. Thanks, so much good luck this year.
Susan Anderson: Thanks, Susan.
And our next question will come from Oliver Chen with TD Cowen. Please go ahead.
Oliver Chen: Hi, Marlene Mike regarding what you're seeing you made lots of improvements them. What are you seeing with reliability no marla in terms of the machines and the feedback you're getting and then what inning you are there and as we do think about good better best to Marla what would happen to the consumer in terms of incremental would be.
Susan Anderson: Versus cannibalization themselves.
Susan Anderson: Like are really customer centric approach to have offerings, but I was curious about.
Susan Anderson: The dynamics are.
Susan Anderson: Customers, perhaps trading up later.
Susan Anderson: Or are you, losing the better and best when you sell the goods.
Susan Anderson: And then Mike on the modeling as we think about regional modeling.
Mike Monahan: Love some color in terms of the equipment sales by region.
Susan Anderson: Pretty different by region.
Susan Anderson: It could be also useful to dive into why.
Speaker Change: Marty makes the most sense in terms of that strategy youre choosing to take thank you.
Speaker Change: Thanks, Oliver a lots of great questions. So in terms of providers sentiment around some tail in 2024, we enhanced our manufacturing quality process and invested in both customer service and technical support we are seeing meaningful improvement in our overall manufacturing quality.
We're seeing minor technical issues that remain but work that we're able to quickly address them with our teams and so we're in a completely different position today than my worry year ago.
And then in terms of your next question.
Speaker Change: Good better best strategy I think what's happening is we're still seeing a number of trade up season now.
Speaker Change: We're not doing sort of the trade up accounting.
Speaker Change: Our strategy that we did in the past what happens is you know there are a fair number of Esthetician and med spas that want to get into hydro facial.
Into our hydro facial device, but don't have the.
Speaker Change: The credit to do so, especially brand new businesses that don't have the credit history, I think credit markets are a little tighter than they were in the past.
Speaker Change: The provider may start within a lead or an Allegro and then trade up later the tradeoffs are still very robust.
Speaker Change: I don't know, Mike if you want to add to that and then take his third question about global demand.
Mike Monahan: Sure Let me, let me focus on the on the global demand I think I think in each of the regions.
Speaker Change: We expect overall equipment sales to be pressured that's what the midpoint of the guidance assumes I expect to see it the most in in APAC.
Speaker Change: And that's largely from the transition from China from a direct model to a distributor model and I'll talk about that in a minute.
Speaker Change: Second we're seeing more pressure on in EMEA than we are in the U S and so while we still expect that the midpoint of our guidance to see overall equipment sales to be down.
We're expecting it to be a little bit less in the U S and specifically overall in the Americas.
Speaker Change: <unk> for China, moving to a third party distributor model, it's really around.
Speaker Change: Overall global focus.
Speaker Change: And the size and.
Speaker Change: Potential for us to execute within China, So China last year was a little over $20 million in revenue and.
Speaker Change: And in terms of scale, we have quite a large infrastructure in order to support that revenue stream.
Speaker Change: Our belief was by moving to a distributor model.
Speaker Change: That particular distributor that we're working with Ken can apply more focus to that particular region and do it more efficiently that enables us.
Speaker Change: To drive profitability, even though there'll be a lower revenue stream associated with that so so overall, we believe that.
This is the right move for the company over the long term and we will be able to return to growth in.
And drive more profitability.
Speaker Change: Okay, and I know you've been making changes to your sales force where are you in that journey Marlin in terms of where the sales force is now and how it's structured versus prior.
Mike on your regional comment is there any color on EMEA, because I imagine there are certain divergence between countries within EMEA or maybe not thank you.
Speaker Change: Oh, great question. So we.
Speaker Change: We have a new chief revenue officer, who's extremely focused on adding process and technology to how our sales force.
Speaker Change: It addresses our provider needs and in terms of our structure. We still have the same structure, which is we have capital sales managers that focus on selling the device we have.
Speaker Change: <unk> development managers, which focus on driving consumable sales and really partnering deeply with the providers to enhance the number.
Speaker Change: Hydro facial treatments. They are doing and then we have regional trainers, which really focus on onboarding new providers, we have streamlined that for optimization.
Speaker Change: But it's really enabling our chief revenue officer has been a lot of time in the field with our teams.
Speaker Change: So we have reduced some of the numbers, but it's.
Really about focusing on the providers and their utilization.
Yeah.
Oliver Chen: For your question Oliver on EMEA, Yes, the markets are very different on the direct side in EMEA.
Speaker Change: Our two largest markets are Germany, and the UK in the smaller markets or France direct markets of France and Spain.
We've seen the most success within EMEA in the in the in the German market.
Speaker Change: Where they've been able to execute and are really focused in on the higher end of the market the medical side of the business.
Speaker Change: And we've also made a number of leadership focus changes brought in some new leadership in in France.
Speaker Change: And then the new Chief revenue Officer made some structural changes that we think will allow the team to focus on the right areas to to return the regions to growth.
Speaker Change: Thank you best regards.
Speaker Change: Thank you.
Yes.
Our next question will come from Olivia Tong with Raymond James. Please go ahead.
Olivia Tong: Great. Thanks, good afternoon.
Olivia Tong: We're heavily at this point you have reasonably strong visibility on our March quarter results. So can you talk about why the rate of decline worsened.
Olivia Tong: Empire is a pretty.
Speaker Change: Pretty remarkable worsening in sales in Q1 versus the exit rate in Q4, I know you mentioned macros, but given the base changed already would expect that my question is already sort of embedded in there.
Olivia Tong: And then on expenses I know that first half is heavier.
Speaker Change: Good shows and other events.
Speaker Change: So can you talk about your fixed cost base, you know cost of your banks and such that you know it looks like you need to have at least $30 million in Cogs.
Speaker Change: Your your sort of fixed cost base as we think about the.
Speaker Change: So the guide on Q1.
Mike Monahan: Mike do you want to take that sure.
Mike Monahan: So those three factors driving the guidance in Q1 and the full year.
The first is the China slowdown in the shift to the distributor model. So on a year over year basis, the midpoint of the guidance assumes $5 million to $6 million of the Q1 pressure year over year is driven by China.
Mike Monahan: And in China also is impacting on the full year about $10 million to $15 million I think it's important to kind of model and that impact because it is having.
Mike Monahan: And impact on the overall revenue.
Mike Monahan: Second piece is lower device sales globally due to the macro uncertainty and the high borrowing costs, we talked about.
Then the third is we're seeing lower consumable sales per device.
Mike Monahan: Despite consistent treatments due to a decline in platinum and deluxe treatment election. So so effectively what's happening is we're seeing very similar number of treatments for the end consumer coming in but for the more expensive options. They are electing for the more base hydro facial treatments.
Mike Monahan: I think your follow up question was was really around.
Mike Monahan:
Specifically.
Mike Monahan: Yes, the fixed costs.
Most of the variable costs in our business or on the selling and marketing line and then you know there really around commissions and the marketing spend that.
Mike Monahan: We do the variable costs in the in the G&A line are largely around kind of salary and wages and professional fees, which make up a big portion of our G&A.
Got it and then perhaps just want to follow up on consumables because despite the shift in systems, which we understand you have continued to grow consumables that are fairly.
Mike Monahan: The steady high single digit rate. So can you talk through the sustainability of that.
Mike Monahan: And what's your expectations are going forward.
Mike Monahan: I mean, I'll talk a little bit about strategy and then Mike can talk about how he's thinking about the numbers, but we're incredibly.
Credibly, a focus on partnering with our providers to drive utilization and.
Mike Monahan: Therefore, our consumable sales. So we think our wrap the true treatment room strategy and the launching of more clinically batch consumables really drives excitement and attention.
Mike Monahan: Two the treatment room, so with the success of Hydro lock, which we launched you know late in 2024.
Mike Monahan: It shows how impactful consumables launches can be on the business Hydro lock was roughly 15% to 20% of the revenue in that category for us in Q4.
Mike Monahan: So it shows how consumables drive traffic drive excitement drive purchase and so it's really igniting this innovation pipeline around consumables, especially in the back half of the year.
Mike Monahan: It can be impactful to both our providers and their end consumers.
Mike Monahan: Four four overall consumable sales you know there's two factors there is the total number of systems deployed globally and then the average sales per device.
Mike Monahan: So last year, we talked about we ended the year with.
Mike Monahan: Over 34000 systems globally. The average consumable revenue per system was about $6300 and so as we look to the future and growing consumable sales, even though we're projecting a slowdown in terms of new capital and new devices deployed we still expect to grow that base, which is important.
Mike Monahan: We're still bring.
Bringing in new providers into the hydro facial brand.
Mike Monahan: The second metric we are very focused in on is.
Mike Monahan: To.
Mike Monahan: Drive that consumable sales per device, which as I mentioned, we saw some declines in that primarily around.
Mike Monahan: The.
Mike Monahan: Not seeing folks elect in this economy.
Mike Monahan: Higher priced boosters or up sells.
Susan Anderson: We are specifically focused on his marla mentioned intra.
Susan Anderson: Introducing new boosters, new products, putting the marketing behind those products in order to drive excitement that we think we can start to grow that metric, which will further support the overall consumable sales in the business.
Speaker Change: Understood. Thank you.
Speaker Change: And our next question will come from Ashley Hogan with Jefferies. Please go ahead.
Ashley Hogan: Hi, Thanks for taking our questions. So maybe first now that this is dale issues have stabilized are there any plans on auto leasing a new updated system and if so just curious how you would approach the trade trade in trade up dynamic and then any color you can give us on kind of the average income of of the hydro faithful customer.
Speaker Change: That'd be great. Thanks.
Thank you so much Ashley.
Speaker Change: So in terms of investing.
Speaker Change: Investing in a new device we think.
Speaker Change: We believe that investing in innovation around our devices critical and the team is working on that for the future.
Speaker Change: Including leveraging some of our 179 patents and to that so we're excited about that and excited about our commercial team in place that that's helping us.
Speaker Change: Worked through this.
Speaker Change: In terms of trade and trade up Mike do you want to talk about I mean that for the future.
Speaker Change: We can talk about trading up into some day I'll now and then go forward, we'll make that decision long term, Mike do you want to talk about that.
Speaker Change: Once we have a new device. That's a that's an important part of the business to be able to introduce something new and then be able to sell that to our existing <unk>.
Speaker Change: Provider base. So while we don't have anything planned are factored into the 2025.
Speaker Change: That is a key piece of the business that we would.
Speaker Change: Factor in and rollout at the appropriate time.
Speaker Change: Great. Thanks, so much.
Speaker Change: And our next question will come from Jon Block with Stifel. Please go ahead.
Jon Block: Thanks, guys good afternoon.
Speaker Change: Moreover, in like I guess I'm not good better best can.
Speaker Change: Can you get that good low the financing bogey I mean, the overall capital ISP is.
Speaker Change: Roughly 25000 can good good.
Get down to I don't know 12000 15000.
Speaker Change: And then sort of tack on some consumable commitment.
Speaker Change: The practice to sort of remove as interest rate overhang that you guys keep on referring to that's pretty pervasive and then I'll ask my follow up.
Mike Monahan: Mike do you want to tackle that sure Hi, John I think the.
The device that we have the ability to do that are on the used devices, you'll remember we have.
Mike Monahan: The elite systems that we took back as part of the trade up one when the company introduced.
Mike Monahan: Sundar we've.
Mike Monahan: We've had a lot of success in selling those at lower.
Mike Monahan: Price points for providers, who are looking for.
Mike Monahan: Aren't willing to pay the 20 high twenties.
Mike Monahan: Unable to at this time, so we sold over 500 of those devices globally last year and we factored in.
Approximately 500 into our guidance this year and so in the near term. We think that's the lever that we would pull and we've had great success, we have a lot of confidence in the quality of the device.
And we're able to sell it at a lower price point.
Mike Monahan: That particular device.
Pressures our overall gross margins. It has it has lower gross profit.
Mike Monahan: Given the price point the cost basis that we have for it but it's still a way to get people into the brand and drive future consumable sales. So we're utilizing that lever.
Speaker Change: Got it. Thank you and then maybe for the follow up morally the prior management team there was.
Mike Monahan: A ton of excitement for China.
Speaker Change: <unk> shown a long term opportunity there so.
Speaker Change: I'm just curious if you can talk to the decision to move to the distributor approach in China, maybe if you can just flush out how you weighed the near term versus the long term and the change in the economics with the distributor and then Mike all of the models I'm guessing from the sell side.
Speaker Change: China direct so is there a quick and dirty way to like pro forma for US I thought you might have said, it's a 10 to 15 million dilutive impact for revenue, but is there also some sort of accretive benefit from an EBITDA perspective, because you guys might've been operating at a net loss in China. If you were direct this year. Thank you.
Great question, John So in terms of China, We still think it's a significant and important opportunity its a large market.
With a large provider based in a large and consumer base a realization. When we made this decision was the investment required to capture market share with significant and we were better.
Off as a company.
Speaker Change: Focusing our investments in our core markets and our product pipeline and working with a distributor that has the wherewithal to be end market be able to scale. There the sales team and the marketing focus and be more of an expert at China than we are.
Speaker Change: <unk>.
Speaker Change: Our our perspective hasn't changed from prior management, we still think it's a it's an amazing high growth high potential market.
Speaker Change: Perspective that changes.
What do we think it takes to capture share and are we willing to make that investment now.
Speaker Change: Or in the future and our determination is right now we want to focus on the core <unk> and.
Speaker Change: And partner with a great distributor.
Speaker Change: To access and grow the Chinese market.
Speaker Change: And then Mike do you want to talk about the modeling sure on the financials, yes, it's I would I would assume $10 million to $15 million of of topline pressure as a result of the change were in the middle of working through that so there will be sales disruption in the short term as we make that transition.
Speaker Change: The purpose as Marla said.
Speaker Change: Of moving to a distributor as we believe.
Over the long term it will be accretive you take the expenses moving to a distributor we can take out the large expenses that we have invested in the region and drive profitability. We believe over the longer term during 2025 I would assume.
Speaker Change: Right now we haven't quantified the cost to make the change we're expecting to announce those costs later in Q2 once we have them finalized.
Speaker Change: But excluding those costs I would anticipate that you can move from a slightly or a net loss, which we incurred in 2024 two.
Speaker Change: EBIT neutral I would say in 2025 positioning the company for adjusted EBITDA growth in 2026.
Speaker Change: Thank you.
Speaker Change: And our next question comes from Nathan <unk> with BNP Paribas. Please go ahead.
Speaker Change: Okay.
Speaker Change: Hello, <unk> your line may be muted.
Speaker Change: Thank you.
Speaker Change: Thanks for that can you discuss the 2020 enterprise go to market trends.
Speaker Change: Pricing the partnership strategy in the U S and internationally.
Speaker Change: And I also saw some policy, making functions being added to the chief revenue officer, and the chief supply chain, Judy So how does that translate to 2025 strategy.
Speaker Change: Okay.
Speaker Change: In terms of.
Speaker Change: Pricing do you want to take that Mike sure.
Speaker Change: <unk> strategy.
Speaker Change: We expect to be consistent in 25 with 24 I would model in some ASP.
Speaker Change: Year over year pressure is what are the midpoint of our guidance factored in largely due to product mix.
Speaker Change: And so as we continue to deploy the good better best strategy.
Speaker Change: That impacts kind of overall pricing. Additionally, the mix of distributor versus direct is modeled in to be slightly higher.
Speaker Change: Distributor revenue in 2025.
Speaker Change: Partnership on partnerships I think.
Speaker Change: I'm, assuming you're referring to the consumables business in terms of booster partnerships versus direct is that correct.
Speaker Change: Yes, that's right. Thank you.
Speaker Change: Yeah, so in terms of booster partnerships.
Speaker Change: We continue to invest in both of our hydro facial granted boosters and in driving partnership booster sales or hydro facial branded boosters have obviously, a higher gross margin and so our.
Our investment priority is in marketing there as boosters.
Speaker Change: And in launching new boosters, but you will see a handful of partnerships.
Speaker Change: Over the next couple of years in terms of innovation.
Speaker Change: But we saw with the success of hydro facial hydro lock H, a boost or how important the clinical.
Speaker Change: Backing is in terms of sell through of our boosters and so we're able to do that and perform that clinical backing a pretty quickly on our own and so that that's really our priority is hydro facial branded boosters.
Thank you and one follow up on the distributor model in China. If you could tell us more about the distributor you are working with including Theyre experiencing steady.
Speaker Change: Yeah.
Speaker Change: We were not able to announce that on this call, but we will have more to talk about.
Speaker Change: During Q2, when we expect to make the transition.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: Our next question will come from Karen <unk> with Piper Sandler. Please go ahead.
Speaker Change: Hi, This is Sarah on for Korean unrelated to our progress on the manufacturing consolidation hover results than with that and then are you finding any capacity issues and then just how much better quality control do you believe you have now.
Speaker Change: All great questions. So we reassured manufacturing in the fall that's complete.
Speaker Change: We put in our quality improvement program in the spring of last year and so in our long Beach facility and we're.
Speaker Change: Cited about the results we've seen from that and so we feel like re shoring really had an impact in terms of our ability to drive quality throughout our manufacturing and do all of the testing that we think is critical.
Speaker Change: And then in terms of capacity we have we.
Speaker Change: We have plenty of capacity to manufacture all three of the devices that we're offering.
Speaker Change: Great. Thank you.
Speaker Change: Yeah.
Speaker Change: Our next question will come from Margaret Kaczor with William Blair. Please go ahead.
Speaker Change: Hey, guys. This is Max on for Margaret.
Speaker Change: Thanks for taking the question.
Speaker Change: Two quick ones from me I'll ask both upfront first just on Opex 30 million Opex decrease year over year. This year. I know you guys are focused on disciplined spending, but just as we think about opex spending 25, Mike you had mentioned that majority of the variable costs as column compensation related expenses, but is there more room for leverage here.
Are you expecting any extra costs associated with it.
The shift in China.
Speaker Change: Mike Go ahead, and then the second one sorry, just a second I'll go ahead, and just expert guidance for cash for the year on 2025 and are you guys.
Speaker Change: We purchased some convertible notes in 'twenty, four but any color on plans for cash throughout the year. Thanks.
Speaker Change: Go ahead Mike.
Mike Monahan: Sure So our guidance implies.
Mike Monahan: Adjusted EBITDA improvement on a percentage basis, if you take the midpoint of the revenue and the midpoint of the adjusted EBITDA range for the full year that we gave.
Mike Monahan: That's driven by two things one we continue to expect adjusted gross margin to improve.
Mike Monahan: Our operations team is doing a great job driving efficiency through throughout the organization on a piece of that relates to the last question that came up around consolidating operations and really getting leverage out of that the second piece of it is the overall mix of the revenue streams. So we're forecasting a larger percentage of consumables.
Mike Monahan: As a percentage of revenue versus prior year, which drive higher margins and so that's the piece there on Opex I would expect we model then given the revenue.
The forecasted revenue decline on a total dollar basis to see.
The dollars come down and selling and marketing and G&A on a percentage basis, we modeled them to be relatively consistent at the midpoint.
Mike Monahan: From where we were last year. So most of the leverage is being driven by the gross margin improvements. Your second question on cash at the midpoint of our guidance.
I would assume that cash is largely.
Mike Monahan: Cash neutral as you think throughout the year free cash flow neutral.
As you think throughout the year. The first half of the year is typically where we have a use of cash.
Mike Monahan: And so theres a bit of pressure in the first half of the year and then as we enter into the back half of the year just based on how our revenue stream flows and what our expenses look like we expect that to convert to a source of cash ultimately putting us near neutral to the for the full year.
That's great color thanks, guys.
Yeah.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to MS. Marla Beck CEO for any closing remarks.
Marla Beck: Thank you operator in closing we are well positioned to build on our momentum driving innovation operational excellence and deeper partnerships with our providers hydro facial remains a strong global brand and we believe our strategic focus will ensure sustained profitable growth I want to thank our team for their dedication and commitment. We're excited for the opportunities ahead and cause.
Speaker Change: <unk> and our ability to deliver long term value.
Speaker Change: Yeah.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
Speaker Change: [music].
Yes.
Speaker Change: