AirSculpt Technologies, Inc. (NASDAQ:AIRS) Q1 2024 Earnings Call Transcript

AirSculpt Technologies, Inc. (NASDAQ:AIRS) Q1 2024 Earnings Call Transcript May 10, 2024

AirSculpt Technologies, Inc. beats earnings expectations. Reported EPS is $0.1032, expectations were $0.08. AIRS isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the AirSculpt Technologies, Inc. First Quarter 2024 Earnings Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Dennis Dean, Chief Financial Officer. Please go ahead.

Dennis Dean: Good morning, everyone, and thanks for joining us to discuss AirSculpt Technologies results for the first quarter. Joining me on the call today is the company’s Founder and Executive Chairman, Dr. Aaron Rollins; and Chief Executive Officer, Todd Magazine. Before we begin, I would like to remind you that this conference call may include forward-looking statements. These statements may include our future expectations regarding financial results and guidance, market opportunities and our growth. Risks and uncertainties that may impact these statements and could cause actual future results to differ materially from currently projected results are described in this morning’s press release, and the reports we will file with the SEC, all of which can be found on our website at investors.elitebodysculpture.com.

We undertake no obligation to revise or update any forward-looking statements or information except as required by law. During our call today, we will also reference certain non-GAAP financial measures. We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. A reconciliation of these measures can be found in our earnings release as filed this morning and in our most recent 10-Q, which will also be available on our website. With that, I’ll turn the call over to Todd.

Todd Magazine: Thanks, Dennis. Good morning, everyone, and thank you for joining the call. We delivered approximately 4% revenue growth in the quarter versus the prior year. which was driven primarily by contributions from the de novo centers opened in 2023. These centers continue to outperform our internal metrics. However, we did experience some softness in our same-store centers. which was related to temporary macroeconomic headwinds, which affected a portion of our customer base that tends to be more price sensitive. The challenges we are experiencing are consistent with those highlighted by others in the aesthetic and high-end consumer retail spaces. As we noted on our last call, we saw some isolated softness exiting 2023, which carried into the first quarter.

Our revenues have picked up as a result of our typical seasonal pattern, but the degree of the seasonal increase has not been up to the level we have seen in prior years. This drove overall same-store revenue down approximately 10% during the quarter. Our Q1 adjusted EBITDA was $7.3 million, which is a decline from the prior year period. As we mentioned on our last call, we anticipated the EBITDA declined both due to recent revenue trends as well as higher SG&A spending. The higher SG&A spending was a result of increases in paid search costs mostly due to increased competitive spend, as well as our higher investment in customer awareness building. As we are now in the early part of Q2, which is the height of our season, we are still tracking behind our internal revenue projections.

As a result, we expect our year-over-year revenues for the quarter to be somewhat flat or slightly below prior year. Despite our recent trends, we are not making changes to our guidance at this time. That’s because we are cautiously optimistic that the trends will improve in the latter part of our season and into the second-half of the year. This optimism is related to, one, our significant investment in customer acquisition marketing. Two, changes we made to our media mix; three, optimizations we’ve made to performance marketing; four, continued outperformance of our 2023 de novo class and five, our confidence in the 2024 de novos. Let me double-click on our marketing and de novo efforts. We have seen some very promising improvements toward lead generation as a result of some changes we made to our media mix.

This is driving a higher percentage of organic search traffic. These leads have high in intent and are lower in cost compared to paid search. Not given the length of time that it takes to convert leads to an actual procedure, these improvements are only now starting to impact our actual procedure volume. We have also evolved our celebrity partnership approach to provide a more consistent stream of relevant earned media impressions. Most recently, we worked with Kristen Doute, a podcast host entrepreneur and star of two Bravo hit shows, the Valley and Vanderpump Rules. Kristen in stomach AirSculpt, which drove over 3.4 billion earned media impressions and contributed to year-on-year growth in direct and organic traffic to our website. In addition to garnering new leads, celebrity testimonials have also proven to be a strong lever to reengage and convert existing leads.

As for our 2024 de novos, we remain on track to open six locations with four openings projected in Q3, the first of which is Kansas City, Kansas. We remain highly optimistic about these locations given the improved analytics work we have done on de novos in the last year. Finally, we continue to focus heavily on our cost management efforts. We exited the year with a $5 million run rate in cost savings and have identified further opportunities to achieve even greater efficiencies. We have and will continue to use these savings to further support our customer lanes strategies for the remainder of the year. In summary, we remain focused on the longer-term success of the overall business and are prudently investing in this outlook. We are closely monitoring our performance and we’ll continue to build the AirSculpt brand, open new centers and enhance our profitability.

Now I’d like to turn the call back to Dennis to provide further details on the quarter. Dennis?

Dennis Dean: Thanks, Todd. Our revenue for the quarter was $47.6 million, a 3.9% increase over the prior year quarter. Our growth was primarily due to the contribution of new de novo centers versus the prior year base. As of March 31, 2024, we operated 27 centers versus 23 at the end of the first quarter of 2023. Our same-store revenue was down 9.8% in the quarter. As Todd mentioned, we attributed the softness to weaker-than-expected performance across the broader aesthetics and consumer retail landscape, particularly related to customers that are more price sensitive. While we are seeing similar trends in the second quarter, we expect to see some improvement as we move through our later seasonal months and into the second-half of 2024.

Our average revenue per case for the quarter was 12,712 and a 1% increase over the prior year’s quarter. And our percentage of patients using financing to pay for procedures was approximately 50%, which is consistent with recent quarters. As a reminder, we received full payment of all procedures upfront and we do not have any recourse related to patients, who finance their procedures with third-party vendors. Our cost of service as a percentage of revenue was 37.9% versus 39.3% in the same period last year. This improvement was the result of our cost management initiatives, which continue to be a focus for us. As a reminder, we will on $2.5 million of savings for a total of $5 million and we see additional opportunities to further increase our savings in the second-half of 2024.

Our customer acquisition cost for the quarter was $2,990 per case, as compared to 2,360 in the prior year. This increase, as Todd mentioned in his remarks, is due to further investments in our brand awareness activities. We expect our CAC to stay at an elevated level in the second quarter as we expand these initiatives. For the first quarter, our adjusted EBITDA was approximately $7.3 million, compared to $9.5 million from the prior year period, a decrease of 22.4%. Our adjusted EBITDA margin during the quarter was 15.4%, compared to 20.6% in the prior year quarter. This decrease was primarily associated with our investment in new customer acquisition and brand awareness initiatives. Our adjusted diluted net income per share for the quarter was $0.03.

Our cash position as of March 31 2024, remained healthy at $11 million, and our $5 million revolver remains undrawn. Our gross debt outstanding is now $71.2 million, and our leverage ratio at the end of the quarter as calculated under our credit agreement was 1.47 times. Cash flow from operations for the quarter was $3.4 million, compared to $6.2 million in the prior year quarter. The decrease is primarily due to the decline in adjusted EBITDA. Also that during the quarter, we invested $1.6 million, which was mostly related to new center openings. For the quarter, our cash flow from operations to adjusted EBITDA conversion ratio was 46%, which was in line with our expectation for the quarter. As Todd mentioned in his comments, our first quarter was softer than we expected, and the second quarter is seeing similar trends.

However, we are seeing positive signs and lead volumes from our recent marketing initiatives. Furthermore, we continue to see overperformance in recent de novo centers and expect strong openings in the new fleet of centers that will come online in the second-half of the year. As a result, we are maintaining our full-year outlook of revenues of approximately $220 million and adjusted EBITDA of approximately $50 million. With that, I’d like to turn the call over to the operator for some questions. Operator?

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Q&A Session

Operator: Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Josh Raskin from Devin Research. Your line is now live.

Josh Raskin: Hi, thanks. Good morning. So I understand 1Q is seasonally lower. You talked about some of the pressures. But I guess, if you look at the full-year guidance, EBITDA it implies 1Q EBITDA is only 15% of the full-year historically, first quarter has been closer to 22%. And then I hear sort of assuming cautious optimism and guidance. I guess why are you assuming cautious optimism, if we’ve seen softness in procedures over the last two quarters? And I guess what does guidance look like if that cautious optimism doesn’t come through, right, if you sort of just run rate where we are in 2Q?

Dennis Dean: Hey Josh, it’s Dennis. So yes, one of the optimistic aspects of what we’re looking at really, really hinges on marketing endeavors that we’ve been implementing during the quarter. It’s – again, it takes a while for leads to convert the cases. And we’re seeing a fairly sizable uptick in our lead volumes as a result. So that gives us one portion of optimism. Our 2023 de novos are significantly outperforming where we had expected them to perform. So we’re very excited about that. And we’re basically using a very similar plan for the 2024 deals that are coming online. If you remember, or probably remember a year or so ago, we kind of started implementing sort of what we call a quick ramp from our de novos. And I believe that’s what’s accelerating these things to open up and perform better than we had originally expected.

So those three things, the 2024 class all coming on in the second-half of the year, I mean, that’s obviously going to drive growth differences from what we’ve seen in previous years.

Josh Raskin: And I guess, Dennis, embedded in that, what are your assumptions for same-store case growth maybe starting just in 2Q, but even for the full-year?

Dennis Dean: Sure, sure. So what we’re looking at from that standpoint is kind of seeing a consistent case aspect for the second quarter high-single-digit decline, somewhat similar to where we finished the first quarter. We start to see that improving in the third quarter, getting close to flat and then getting towards the mid-single-digits in the fourth quarter. One of the things, if you recall, last — in the fourth quarter of last year, we had a couple of centers that hit a pretty large hiccup in the process. And so we’ve done some things there, done some recruiting and those things are improving. So we think we’ll be able to not have that issue. So think comp for Q4 of last year is relatively from a low standpoint. So it’s a lower comp.

Josh Raskin: Okay. And then maybe just last one. Are you at the point where you’re thinking about more aggressive promotion or discounting specifically just on the — because price is holding up better, so I’m just curious, are you guys thinking about the sort of supply and demand curve and taking down the price and seeing if that increases case volume?

Todd Magazine: Hey Josh, this is Todd. I would say we’re doing it very selectively and targeted. We don’t want to obviously devalue the brand and go out with kind of broad price reductions. But we’re very selectively and very specifically using those, and kind of retargeting in through e-mail and text offers, et cetera, et cetera. So we are doing that. I mean, we’ve — as you know, we’ve relied heavily on the kind of buying more, save more, and that’s been very beneficial for us. But we don’t kind of — we don’t want to go down too much. I just think ultimately, we don’t want to devalue the brand and we start bumping into other types of competitors, which I don’t think really makes a lot of sense for us. So I think we want to continue to be very selective in those price discounting.

Josh Raskin: Okay, makes sense. Thanks.

Operator: Thank you. Next question today is coming from Korinne Wolfmeyer from Piper Sandler. Your live is not live.

Korinne Wolfmeyer: Hey, good morning, team. Thanks for the question. I’d like to touch a little bit on the CAC and the lead generation you’re seeing from this — your increased marketing sense. The CAC was really high this quarter. At what point will that start coming down a little bit more? And then can you provide us some color on these early customer leads you’re getting from all this heightened marketing spend. Just to give us a little bit of confidence that maybe once we get to the back half of the year, that case volume will improve. And how are you shifting the marketing strategy over the course of the year? Thank you.

Todd Magazine: Yes. Hey Korinne, it’s Todd. So what I would say is, obviously, we believe in the business long-term, which is why we’re heavily investing in lead gen. Our cost basis has definitely gone up. A lot of that is due to just competitive activity. But — there’s a few changes that we’ve made that seem to be really — the early signs are very, very promising, which is what is giving us the optimism. Number one, we’ve kind of way — historically, we’ve relied very heavily on paid search. It’s been kind of the majority of our kind of lead gen efforts. We’re starting to diversify away from that solely. And so we’ve been experimenting with connected TV, display media retargeting. In some markets, we’ve done some radio and outdoor.