Cutera, Inc. (NASDAQ:CUTR) Q1 2024 Earnings Call Transcript

Cutera, Inc. (NASDAQ:CUTR) Q1 2024 Earnings Call Transcript May 9, 2024

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Operator: Thank you for standing by. This is the conference operator. Welcome to the Cutera, Inc. First Quarter 2024 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Greg Barker, Vice President of Finance and Investor Relations. Please go ahead.

Greg Barker: Thank you, operator, and thank you, everyone, for joining us. With me today is Taylor Harris, Cutera’s Chief Executive Officer; and Stuart Drummond, Interim CFO. Following our prepared remarks, we’ll 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. 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 as of that time with respect to future events.

Forward-looking statements include, among others, statements regarding financial guidance, regulatory approvals, productivity improvements and plans to introduce new products and expand into additional geographies. For words that may identify forward-looking statements, we encourage you to refer to the safe harbor statement in our press release earlier today. All forward-looking statements are subject to risks and uncertainties, including those risk factors described in the section entitled Risk Factors in our Form 10-K as filed with the Securities and Exchange Commission and updated in our Form 10-Q subsequently filed. Cutera also cautions you not to place undue reliance on forward-looking statements, which speak only as of the date that 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. 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. Please refer to the reconciliation from GAAP to non-GAAP measures in our earnings release. These non-GAAP financial measures should be considered along with, but not as alternatives to the operating performance measures prescribed by GAAP.

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

Taylor Harris: Thank you, Greg. Good afternoon, everyone, and welcome to Cutera’s first quarter 2024 earnings call. So far this year, we’re stabilizing, tracking with our expectations and making progress on our key strategic priorities despite a challenging macroeconomic environment. I just returned from attending our Cutera University Clinical Forum in Australia, where we launched AviClear into the dermatology community. It was an inspiring event and the enthusiasm for this new technology is encouraging. A handful of dermatologists in Australia have had AviClear for several months as part of our limited commercial release and they’ve each treated a good number of patients. These physicians serve as some of our speakers and panelists for the event, and they were able to share their firsthand experience with the other attendees.

It’s clear that as we launch in international markets, the learnings from the last 18 to 24 months in North America are proving quite valuable. The physicians with early access are already incorporating the clinical best practices identified in our white paper related to expectation setting, pain management, use of concomitant therapy and managing acne flares. And overall, while it’s still early, I would characterize the reception of AviClear in Australia is very encouraging, and we’re hearing similar feedback out of Europe. Physicians involved in our international limited commercial release phase are excited to be offering a truly new non-pharmacologic therapeutic option to their patients for the treatment of acne and they’re also already considering potential new applications of AviClear to treat other conditions of the sebaceous gland.

More broadly, we’ve had a busy first four months of the year. We kicked it off with the first global sales meeting in the history of Cutera, where field teams from around the world were able to come together to learn and prepare for the year. This GSM provided the perfect opportunity for us to launch our new vision, mission and values company-wide and to start building new energy around leadership as a mission-driven values-based organization. Following GSM, we introduced a new business model for AviClear in North America. And in international markets, we began our limited commercial release phase for Avi at the IMCAS meeting in Paris in February. We also introduced our enhanced cooperative marketing program, supported the publication of a white paper on clinical best practices with AviClear and finalize preparations for our first Cutera Academy, which was held last week in Atlanta.

Meanwhile, we introduced our R&D organization’s latest new product, xeo+ to the North American market in early April at the ASLMS meeting. xeo+ builds on the legacy of the original xeo platform, one of Cutera’s most successful products which was introduced over 20 years ago and pioneered both in the YAG laser technology and contact cooling as well as Cutera’s signature laser genesis procedure for skin revitalization. xeo+ offers tremendous flexibility and customization with over 25 applications from skin revitalization to hair removal to pigment reduction and more. With a larger spot size, enhanced contact cooling and redesigned handpieces, xeo+ provides faster and more comfortable treatments. We’re excited to launch xeo+ both to new customers and as an upgrade option to the installed base of over 2,500 original xeo accounts.

I’ll now provide some summary comments regarding our first quarter financial results and then highlight a few of our areas of focus for the year. Similar to the fourth quarter of last year, first quarter financial results reflected an ongoing stabilization in the business. While revenue declined sequentially, reflecting typical seasonality in our industry, our AviClear revenue increased and hit a quarterly high watermark due to the change of business model in North America and the limited commercial release in international markets. Now it’s clear that we’re operating in a challenging macro environment with pressure on the body contouring market in particular. And given that backdrop, we’re fortunate to have the opportunity to launch a new first-in-class device like AviClear.

Avi Systems revenue increased from conversion to the new business model as well as new sales more than offsetting the continued contraction in procedures performed on the legacy installed base of leased systems, which is due largely to the reduction we’ve seen in the number of active accounts. As we’ve mentioned before, there are a number of AviClear devices under our former lease model that have gone dormant and which we expect to be returned. However, and of critical importance, we’re also identifying the success factors for building a healthy AviClear franchise. On average, utilization rates of dermatology practices are close to 50% higher than those of other specialties and a disproportionate percentage of our most successful accounts are dermatologists.

Beyond practice type though, key determinants for success include having a physician on site at a practice, training the entire office staff, communicating and setting appropriate expectations with patients and a willingness to invest in building awareness. All of these best practices, coupled with our new business model are at the center of our efforts in 2024. We also began to see progress with our cost structure in the first quarter. Throughout 2023, our gross margin was depressed due to reduced volume, the array of company-specific operational issues that we have highlighted previously and a high level of inventory reserves. Non-GAAP gross margin remained below the historical trend line in Q1. However, on a normalized basis, excluding inventory reserves, it did improve to 40%.

And that’s compared to 37% in the fourth quarter and 30% in the third quarter despite having a lower revenue base in Q1 relative to either of those previous quarters. Additionally, our operating expenses were down both sequentially and year-over-year, reflecting the restructuring and other cost containment initiatives that we’ve enacted. We continue to focus on efficiency initiatives that should support ongoing improvements in our cost position and our gross margin profile over time. I’ll now provide an update on a couple of our critical priorities that we’ve discussed on previous quarterly calls, returning to operational excellence and building a global AviClear franchise. First, operational excellence. We continue to make progress in the five key areas that we identified last year, product reliability, field service, inventory control, supply/demand planning and cost of operations.

In the first quarter, our cross-functional product reliability team consisting of representatives from R&D, field service, quality and operations delivered another improvement in product reliability rates, both in terms of initial performance following new shipments as well as ongoing reliability thereafter. In fact, our Q1 performance met or exceeded our annual objectives across all of our product categories. In the area of field service, we saw a dramatic improvement in our North American service levels in the back half of last year, addressing most of the backlog of open cases as well as reducing response times for new service calls. In the first quarter, we maintained that performance in backlog in North America, and we are beginning to see an improvement in our average response time as well.

We’re also rolling out best practices across our international regions so that we can achieve the same level of service quality across the globe. Now we still have work to do on this front. For years, our international regions were managed separately with the service teams having little support from the corporate office. We’re starting to change that, though, with regular interactions such as trainings and reviews of service part demand and with in-person support as well. For example, as I was leaving Australia, one of our top field engineers from North America was arriving to spend a month with the team, helping to reduce backlog while other leaders were on their way to help with training and the implementation of new processes. I won’t spend as much time on our other focus areas of inventory management, demand planning and cost control, except to make a few points.

We performed another physical inventory count at the end of Q1, and we had a net variance below 1%, and that exceeded our target for the year. It was better than our target for the year. We have now filled our new 50,000 square foot warehouse as we have just over $130 million of gross value of inventory on hand. Our supply/demand planning process continues to mature, and we believe that by midyear, we will be done with the inventory build that has resulted both from previous purchase commitments as well as the need to remediate shortages of certain key components, and we continue to believe that we are positioned to begin working down inventory in the second half of the year, creating a cash tailwind for the company. And now turning to AviClear.

In international markets, we commenced a limited commercial release phase at the IMCAS meeting in February. And in North America during the first quarter, we broadened the availability of our enhanced AviClear offering, which provides greater flexibility and simplicity. The new business model offers the option to purchase the device upfront with a corresponding reduction in ongoing treatment costs to the practitioner. Along with greater business model flexibility, we are offering a hardware and software upgrade that simplifies the user experience, improves product reliability and moves billing from a per patient model to payment for individual treatment cycles. Our primary focus with AviClear in all geographies is on partnering with our customers to build franchises with healthy utilization.

In North America, we’re first working to identify a more focused list of customers who will move forward with AviClear. As a reminder, during 2022 and ’23, the company placed over 1,200 AviClear systems into the field under the original business model. But as we’ve described, most of those accounts were no longer doing AviClear procedures as of the second half of 2023. At the end of the first quarter, our installed base of leased systems in North America had declined to approximately 1,050 with a list of an additional 275 set to be returned in the coming months. We’ve also begun reaching out to customers with upcoming lease renewals, we continue to expect that more than half of the original 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.

This is critical work to allow us to start the rebuilding process. At the same time, though, we’ve dedicated to group of individuals in the company to our key practice development initiatives and perhaps most important among these is Cutera Academy, a 2-day university-style training program that launched at the end of April. Our first academy session was received with rave reviews, both from our internal team as well as the customers who attended. When asked, if Academy had a significant impact on their confidence with AviClear, 100% of attendees said yes. When asked what we should do differently with future academies, 100% said nothing. So we’re excited about what Academy can do for our AviClear franchise and also for the broader business, as one attendee commented, this made me have a different perspective on Cutera as a whole in a very positive way.

It shows that Cutera truly cares about their practice partners and wants us to succeed. Our CAM team has now been fully trained on the Cutera Academy curriculum, and we are developing a video content library so that they can apply the Academy experience at a local individualized level. In summary, we’re tracking along with our plans for the year, and we’re making progress on our key initiatives, setting the foundation for the future. So with that, I’ll turn it over to Stuart for a review of our Q1 financial results.

Stuart Drummond: Thank you, Taylor. This afternoon, I will discuss our Q1 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 first quarter was $38.8 million compared to $54.5 million for the same period in 2023 and compared to $49.5 million in Q4 of 2023. Our Q1 revenue decreased by $10.7 million compared to Q4 of 2023, mainly reflecting Q4 of being typically our strongest quarter of our fiscal year as well as the early termination of our skin care distribution agreement in Japan. The $15.7 million or a 29% decrease from the first quarter of 2023 was due mainly to a $10.3 million decline in capital equipment revenue and a $3.9 million decline in skin care revenue.

This decrease in capital equipment revenue resulted from continued macroeconomic pressures and a challenging financing environment, particularly for our North American customers. The decrease in capital equipment revenue was partially offset by an increase in systems revenue related to AviClear as we began capital sales of this device. Non-GAAP gross profit for the first quarter of 2024 was $14.8 million with a gross margin rate of 38.2% compared to a gross margin rate of 43.5% for the first quarter of 2023. The 5.3 percentage point decrease was driven by lower manufacturing and sales volume and a $0.7 million non-cash charge in Q1 of 2024 for excess inventory. Non-GAAP operating expenses for the first quarter of 2024 were $35.2 million compared to $41.3 million for the same period last year.

This $6.1 million decrease mainly reflects personnel savings resulting from the restructuring announced in November 2023 and lower sales commissions. We have recorded a $9.1 million gain on the early termination of our Japanese skincare distribution agreement, and this is recorded as a separate line in our GAAP income statement. This agreement was originally scheduled to end in June 2024 and we agreed to an early termination and received what were effectively payments for the gross margin we relinquished. For the first quarter of 2024, we incurred a non-GAAP loss from operations of $20.4 million compared to a loss from operations of $17.6 million in the prior year period. Turning to our balance sheet. We ended the quarter with $105.4 million of cash and cash equivalents compared to $143.6 million at December 31, 2023.

The $38.2 million quarterly sequential decrease in cash and cash equivalents was driven by a $20 million net cash loss for the quarter, a $17.5 million net payment to Jabil for the nonrenewal of our manufacturing service agreement and a $6.5 million reduction in accounts payable. These items were partially offset by $5.8 million that we received as partial payment related to the early termination of the skincare distribution agreement. Now turning to our guidance. We are reiterating our previous revenue guidance of $160 million to $170 million, which includes the $4 million of skincare revenue earned through the transition in the first quarter. We are also reiterating our expected cash and cash equivalents balance at December 31, 2024, to be in the range of $55 million to $60 million.

Before I turn the call back to the operator, I’d like to mention some changes to our Q4 2023 income statement since our Q4 earnings release on March 21 of this year. We have revised our estimate of the inventory provision related to AviClear materials, resulting in an additional $12 million being charged to cost of revenue. In addition, we reclassified two charges related to the nonrenewal of the manufacturing services agreement with Jabil, an expense of approximately $6 million was reclassified from general and administrative expense to cost of revenue and an expense of approximately $1 million recorded as other expense in Q3 was reclassified to cost of revenue in Q4. Operator, we are now ready to begin the question-and-answer session.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from George Sellers with Stephens. Please go ahead.

George Sellers: Hi, good afternoon, and thanks for taking the question.

Taylor Harris: Thank you, George.

George Sellers: On guidance, you obviously reiterated the cash that you expect to have at the end of the year target. I’m just curious if you could give us some additional color on the cadence for cash burn through the remainder of the year. It was obviously a little bit elevated in the first quarter, and I think probably in line with what we were expecting. How should that trend sequentially in the second quarter? And then what’s sort of the exit rate that you expect to end the year with?

Taylor Harris: Sure. Thanks, George. Yes, you’re right. We’re trending along with what we expected as part of our overall cash guidance for the year. And as we look forward, the second quarter will be down relative to the first, but it will still be elevated relative to the back half of the year. In fact – whereas on our earlier call, we had indicated that we thought about 70% of our burn would happen in the first half of the year. We now think that will be a little closer to 75% in the first half of the year. And the reason for that is there – we’ve got a few more million dollars, call it, $3 million of extra onetime non-recurring expenses that we’re expecting in the first half of the year, but we’re offsetting that with some operating expense reductions that will primarily occur through the second half of the year.

So what that means is that overall, we’re on track – but the exit rate in the second half of the year, is actually a little improved now relative, to what we had expected earlier in the year.

George Sellers: Okay. That’s really helpful. And then on AviClear, I’m just curious, you talked about the increase really being driven from the shift in the commercial strategy and some capital sales, but how did procedure volume trend with the doctors who are actually using the device. So if we exclude the dormant accounts and just focus on the derms, like you talked about that are seeing success. What’s procedure volume look like with those accounts?

Taylor Harris: So yes, so I’d say there are a few different types of accounts in there. The first comment I would make is that as we’re launching at new accounts and I’d frame this primarily internationally where that’s obviously been the focus, we’re seeing some good initial adoption. And so that’s really encouraging. I would say that it’s early, so we don’t want to get ahead of ourselves there. But we’re certainly encouraged by what we’re seeing with new accounts and in particular, international. There’s also a core group of physicians in the U.S. or in North America, I should say, where we’ve had fairly stable utilization over the last several quarters. And that, I think, reflects – all right, they’ve adopted, they’ve incorporated AviClear into their practice.

There is a subset of accounts that are still doing procedures, but where there’s been softness sequentially for a few quarters in a row, and we did see some of that in the first quarter. And what that really speaks to is the need for all of these initiatives that we’ve talked about to really help support practice development and practice growth. That is our focus. And as we’re out talking to these accounts, that’s a big part of the conversation, and it’s, I think, important before they make decisions, on whether they’re going to return the device, whether they’re going to stay on the lease model, or whether they’re going to convert. And so, that’s squarely where we’re aiming when we talk about programs like Cutera Academy. Like our Cooperative Marketing Program, like some of these roundtables, where we’re discussing best practices.

It’s really focused at that group of account, George, where we’ve seen softness in procedure volume, but we also think there’s an opportunity for growth over time.

George Sellers: Okay. That’s really helpful. Maybe to just squeeze 1 more in. Obviously, you’re pulling down your OpEx expense, but we’ve also heard that there’s been some sales rep hiring at the same time. And I’m just curious if you could give some color on maybe where you’re adding sales reps, what parts of the business you think they’ll be effective? And any background on maybe the experience level of these reps and revenue that you would expect them to be able to drive?

Taylor Harris: George, good to hear you’re doing your channel checks. You’ve heard correctly. Just to add some color, though, we are right now in North America at a pretty similar level in terms of overall head count in our field force as where we started the year. We had some turnover during the first quarter, but more recently, we’ve had some real traction with our hiring initiatives. Our plan has been to build and we still plan on this through the year so that we’re exiting the year higher than where we started. Right now, we’re about at par. We are adding both in our capital organization as well as our CAM, that’s our key account manager organization that’s focused on practice development. And I’d say we’ve had a – there’s been a mix of the profile that we’ve been able to attract to the company, which I think is encouraging.

And that mix has, for sure, included some on the fairly experienced side, which I think is a good sign of buy-in to what we’re doing here and the opportunity they see both with the full portfolio, but probably with AviClear, in particular.

George Sellers: Okay, that’s really helpful. I’ll leave it there and thank you all again for the time.

Taylor Harris: You got it, thanks, George.

Operator: The next question is from Jon Block with Stifel. Please go ahead.

Jon Block: Hi guys, good afternoon. Taylor, maybe I’ll just start with xeo. I think you mentioned 2,500 legacy xeos in the field. I would love to hear any early feedback for xeo+ and how do you see that opportunity playing out throughout the year, replacement versus new accounts? And I ask because just like back of the envelope, even a modest 5% to 10% of that current installed base upgrading seems like it could be material revenue. So maybe you could just talk through that opportunity a bit?

Taylor Harris: Sure. So yes, thanks for the question, John. We introduced xeo+ in early April at the ASLMS meeting, and feedback has been positive. I think what we’ve heard – most commonly, there’s a real appreciation for the hand-piece design. Users are telling us it’s they just have better visibility. It also – we’ve got enhanced contact cooling. We’re able to do procedures more quickly. That, for sure, means benefits to the patient. It means benefits to the practice in terms of ROI. But I think from a user’s perspective, it’s this visibility issue that has been highlighted. And generally, better visibility means a better procedure. So we’re optimistic on that front. Yes, the opportunity – we’ve had xeo+ in the field for 20-plus years.