Cutera, Inc. (NASDAQ:CUTR) Q2 2023 Earnings Call Transcript

Cutera, Inc. (NASDAQ:CUTR) Q2 2023 Earnings Call Transcript August 8, 2023

Cutera, Inc. misses on earnings expectations. Reported EPS is $-0.69 EPS, expectations were $0.55.

Operator: Thank you for standing by. This is the conference operator. Welcome to the Cutera Inc. Second Quarter 2023 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]. The discussion today includes forward-looking statements. These forward-looking statements reflect management’s current forecast or expectation of current 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 good faith believe 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 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 of 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, I would like to turn the conference over to Sheila Hopkins, Former Interim CEO of Cutera. Please go ahead.

Sheila Hopkins : Thank you, operator. Good afternoon and welcome to Cutera’s second quarter 2023 earnings call. With me on the call are Stuart Drummond, Interim CFO; Greg Barker, Vice President of Financial Planning and Investor Relations, and Taylor Harris, our recently appointed Chief Executive Officer. Before reviewing results, I’d like to comment on Taylor’s appointment. Since I stepped in as interim CEO, our board has worked with a clear mandate, find the best person to serve as the permanent CEO of Cutera. We committed to bringing in a world-class operating executive with a track record of success, uncompromising standards, and the skillset and industry experience needed to execute the company strategy. Taylor Harris more than delivers against these specs.

His appointment follows a comprehensive search process led by Russell Reynolds that included input from some of our largest investors. I speak on behalf of the entire board when I say that we could not be more excited to have Taylor at the helm and we’re confident that the company and our shareholders are in good hands going forward. For those of you who don’t know, Taylor, let me share a bit more about why the board and I believe he’s the right person for the job. Taylor is a proven executive with over 20 years of experience and a track record of driving growth in the medical and aesthetic device landscape. Most recently, he served as senior vice president and CFO of Myocardium, a biopharmaceutical company. Prior to that, he was SVP and CFO of Zeltiq Aesthetics.

Taylor played a key role in building CoolSculpting into a formidable competitor. He also served as Vice President and Chief Financial Officer at Thoratech Corporation. And prior to that, he worked at JP Morgan Chase for over a decade with a focus on the medical device industry. Taylor joined our board in June and also served as a consultant for us, and we’ve been able to see that he has a deep-seated sense of integrity, a people-centric approach, and a commitment to excellence that can take Cutera’s business performance and its culture to the next level. Taylor also shares the board’s conviction that there is a tremendous opportunity to unlock and create value at Cutera. And if there’s a common thread woven throughout Taylor’s experience, it is in fact his ability to drive value creation.

So, when you add it up, there is no doubt that he is the right person for this job. And I’m delighted that he is here his second day in the seat for this call, and you’ll hear from him in a few minutes But first, let me walk you through the highlights of our second quarter performance. Then I will pass things over to Stuart to provide greater details on the financials. We’ll conclude with Taylor sharing his initial thoughts on the way forward for the company. He will wrap up the call and open it up for questions. And with that, I’d like to shift and provide an overview of the second quarter. First, a couple of reminders regarding the company’s progress on governance issues. From a Board perspective, in June, we welcomed to four new directors: Kevin Cameron, Nick Lewin, Keith Sullivan, and Taylor.

And they each bring relevant skills and experiences to the table and are adding significant value already. From an organizational perspective, the retention bonuses we implemented in April have worked. We have only lost one person among the targeted group of people, so our employee base has remained engaged. Turning to the business. Our results for the second quarter are frankly disappointing and reflect that the business faces more challenges than were apparent when I first stepped into this seat in April. Total revenue for the second quarter was $61.2 million, down 5% versus a year ago, on a reported basis and down 2% in constant currency. We did see sequential growth versus the prior quarter, but not as much as expected. And the decline versus a year ago traces primarily to capital equipment and cuts across most geographies.

Adjusted EBITDA was a loss of $11.6 million versus a $1.6 million loss in the year-ago period. Now this reflects decreased gross profits and increased OpEx spend behind AviClear. Stuart will provide more detail. But let me provide a bit more perspective on revenue performance. Our core capital business was down minus 13% as reported, and 11% in constant currency. Now some of the declines reflect challenging year-over-year comparisons, as our Q2 ’22 revenues were a high watermark. However, a clear-eyed assessment of this business shows that it also faces operational and macroeconomic headwinds. On the operational front, core capital has been hampered by parts driven service delays and increased reliability issues. These service and reliability hiccups don’t fit well with our customers and are making it much more difficult to close deals.

These issues reflect growing pains are supply chain and production facilities have faced, as they ramped up AviClear production, while at the same time working to meet the needs of our core capital business. Having said that, we own this problem, and we are working diligently to mitigate and then solve it, so that we meet our standards and the expectations of our customers. On the macroeconomic front, our capital business is also challenged by the tightening credit environment, which has made it more difficult some customers to find financing. This has impacted deal closures and placed pressure on our ASPs. MedSpa have been the most affected, and we are investigating new approaches to help these customers find financing. Now there are shoots of green on the core capital business.

First, the shift to a more measured booking pace for AviClear address the problem that we had faced from October through March, with the capital selling organization being somewhat distracted by steep AviClear booking targets. Second, we will bring new product news to the capital portfolio this year with new technology to round out the secret franchise. And we’ll follow that with more new product news on Core Capital in 2024. So, Annette, getting our capital business back on track is a top priority for the company, and Taylor is already engaged with the team to do just that. Turning to AviClear, we have more work to do here also, but the biggest challenge being increasing utilization and the percent of installed offices that are contributing.

Key to success will be practice business development and more effectively holding utilization rates in existing offices as new offices are onboarded. We are working expeditiously on the playbook to achieve stronger results here, and Taylor brings invaluable industry experience to the task at hand. Now I’m encouraged by the progress that we made in the quarter on AviClear. We moved forward with a more measured pace of device bookings. Our KAM team drove treatment volume in the quarter that was in line with our expectations and we’re also progressing development of new handpieces for AviClear that will expand treatment areas. And finally, AviClear became the first acne therapy to obtain FDA clearance as a long-term treatment for mild to severe acne.

Connecting all of the dots while second quarter performance did not meet our expectations and the challenges that we face are greater than I initially realized. I am confident that with Taylor’s leadership, these challenges will be addressed and the business will return to sustainable growth. And with that, I’d like to turn the call over to Stuart for a financial update. Stuart?

Stuart Drummond: Thank you, Sheila. Today I’ll be discussing our reported Q2 results, as well as some non-GAAP results. Our reconciliation of GAAP to non-GAAP gross margin and operating loss is included in our earnings release. We encourage listeners and readers to review our non-GAAP results in conjunction with the GAAP results contained in this earnings release. Turning to our Q2 results, total revenue for the first quarter was $61.2 million compared to $64.2 million for the same period in 2022 and compared to $55 million in Q1 of 2023, the $3 million or 5% decrease from the comparative period represents a 2% decrease on a constant currency basis. This decrease reflects the decline in capital equipment revenue, partially offset by AviClear revenue recorded in Q2 of this year.

As a reminder, we began a limited commercial launch of AviClear in April, 2022, and a full commercial release in November, 2022. Second quarter consolidated capital equipment revenue of $37.9 million, decreased by $5.8 million, 13% from the prior year period. North American capital equipment revenue of $22.2 million, decreased by $3 million or 12% from the prior year period. This decrease included a $1 million increase in our sales return reserve. I would like to highlight that Q2, 2023 North American system revenue represented a $4.2 million improvement over Q1, 2023 reflecting our sales force’s refocus on core capital. International equipment revenue of $15.7 million represented a $2.8 million or 15% decrease from Q2, 2022. Recurring revenue defined as our consumables, global service, skincare, and AviClear revenue was $23.3 million in the quarter, up $2.8 million or 13% over the comparative period.

The increase over the prior year was mainly driven by AviClear revenue of $4 million, partially offset by $0.9 million. decrease in consumable revenue resulting from a promotion we offered in Q2 2022. Non-GAAP gross profit for the first quarter of 2023 was $30.8 million with a gross margin of 50.3%, representing a decrease of 530 basis points compared to the same period last year at an increase of 120 basis points compared to Q1 of 2023. Regarding the comparative quarterly decrease geographic and product revenue mix and increased pressure on ASPs affected gross margin by 270 basis points and continued foreign exchange headwinds adversely impacted gross margin by a further 120 basis points. The remaining factors impacting the comparative decline out of gross margin were cost increases for certain parts, which had 170 basis point impact and an increase in our inventory obsolescence reserve, which had a hundred basis point impact are be clear.

Revenue in the second quarter of 2023 positively impacted our gross margin compared to the second quarter of 2022 by 130 basis points. Non-GAAP operating expenses for the second quarter of 2023 were $42.4 million compared to $37.3 million for the same period last year. This $5 million increase was mainly driven by the continued expansion of AviClear Salesforce and promotional activities, which represented around $3.1 million of this increase, as well as the charge we took in the second quarter as we increased our allowance for doubt for accounts by $2 million. For the second quarter of 2023. Our non-GAAP operating income, which we referred to as adjusted EBITDA, was a loss of $11.6 million compared to a loss of $1.6 million in the prior year period and compared to a loss of $14.5 million in the first quarter of 2023.

The increase in loss compared to Q2 2022 was due to the decrease in gross profit and increase in operating expenses. Turning to a balance sheet, we ended the court with $222.6 million of cash and market securities compared to $267.7 million at March 31st, 2023 driving this $45 million. Sequential decrease are $25 million used in the Ivy Clear business, and $18 million from core losses of which $8 million relates to board of director legal and advisory fees incurred in support of the recent board governance matters, the are clear use of cash results from $17 million spent on devices and parts and $7 million in cash losses. Our cash consumed in the first quarter of this year was $49.7 million. Our expectation is that our cash consumption will continue to trend downwards throughout 2023, driven by a decline in board of director legal advisory fees as we’re expecting the Q3 amount to be about half of Q2, a reduction in core inventory, an improvement in cash collection, and a slower pace of IV clear placements.

I will now pass the call back to Sheila.

Sheila Hopkins: Thanks, Stuart. Before I turn the call over to Taylor to talk about the future, I want to say that it has been a privilege to serve as Cutera’s interim CEO. In the time I’ve been in this role, I’ve gained even deeper insight into the company’s business people and strategy. Getting to know Cutera people up close has been a joy. I am grateful for their unwavering dedication and commitment, and while there’s a lot of work to be done, I am confident that the company is well-positioned for growth under Taylor’s leadership. I look forward to applying my learnings as interim CEO upon returning to my position as an independent director on the board. Now, let me turn this over to Taylor.

Taylor Harris: Thank you so much, Sheila. It’s an honor to join you today as Cutera’s new CEO. This year, Cutera celebrates its 25th anniversary, 25 years of pioneering innovation and leadership within the medical aesthetics industry. This company founded by accomplished engineers has focused on the science and on the technology that underpins the treatment advances in our field over the past few decades. From the very beginning, we have developed amazing products and we have partnered with our customers with dedicated sales, service, clinical, and marketing support to help them best utilize our technology and our products to serve the needs of patients around the globe. The next 25 years can be even better. And that’s the reason that I’m here at Cutera.

We have an opportunity to make Cutera stronger, to extend our technology and product leadership position, and to provide our customers with unparalleled quality, reliability, and customer support. We are not there now, but we can and we will be. The team at Cutera is hungry to become the pre-imminent player in the aesthetics industry second to none. We will speak to this longer-term vision in the quarters to come. For now, let me talk about three near-term priorities that are intended to address the speed bumps which we have hit in recent quarters. First and foremost, we must improve our product reliability and service levels, where we have seen a disappointing degradation in performance across the installed base of our capital systems. As Sheila mentioned, this dynamic occured concomitant with and may have been in part caused by the significant demand for and the production levels of AviClear.

We will address these reliability issues expeditiously, and once again assume a position of recognized industry leadership, not just in the innovation we bring, but also in the quality and in our commitment to customer service. Second, AviClear. What an impressive new technology for the treatment of acne. AviClear truly has the ability to change people’s lives. It’s a privilege to work at a company with this opportunity and the mission to bring this important new product to market. The science underlying AviClear is proven, the data profile is compelling, the patient interest is an alternative to systemic drug therapy is clear, and the results in patient satisfaction are increasingly impressive. AviClear was one of the most exciting features that attracted me to Cutera, and this therapy will play a vital role in our future, but we need to slow down, before we speed back up.

In the coming weeks, I will be meeting with the team to look at ways to optimize AviClear. We will look at everything from our clinical training and practice development support to our billing systems and our business model. With over 1000 AviClear devices in physician offices, we need to focus our team on educating our customers on how to drive utilization within their practices. This will include training the physician’s staff on how best to speak to their patients about the benefits of Avi and ultimately to get them in for treatment. We know that we need to deploy AviClear capital strategically. But more importantly, we need to assist our physician partners on how to get the best results for their patients suffering with acne. Fundamentally, we need to put ourselves to our customer issues and do everything we can to support them as they deliver this game-changing therapy for patients.

The team at Cutera is hard at work thinking through these plans. And in the meantime, we are focused on improving service levels, building our practice development capabilities, and continuing to drive awareness through our consumer and professional marketing activities. Third, we will focus on growth in our core business which has lagged our expectations in recent quarters. With an exciting new product like AviClear, it was easy for organizational attention to become diverted away from the core product line upon which Cutera has been built. We are thrilled with the industry’s excitement regarding Avi and the level of demand that we experienced, and we will build a world-class franchise supporting patients with acne over time. However, this initial demand stretched the organization too far in some areas to the detriment of our core business.

So earlier this year, we began to slow the pace of new AviClear bookings, and we’re now focusing our capital, our capital organization’s priority, squarely on the core business as we develop the tools to drive greater treatment session utilization with AviClear. The broader company has a significant role to play in supporting our field team. Most importantly, through product support and new product innovation. But with this focus effort from our capital organization and the support from our service and innovation functions, I believe we can continue the legacy of product leadership and growth at Cutera. Underpinning all of this work is the foundation of our people, our purpose, and our mindset, and I think our logo highlights the most important building block and our coming journey with its highlight on the letter U, the Cutera, our focus is on you, not on our individual selves, but on those that we serve, our teammates, our customers, and patients.

This core value is part of the DNA here at Cutera. I’ve seen it firsthand in these early days, and I truly believe that it’s only through this cultural mindset that we will have the fortitude and resilience to weather the journey to greatness. So, we, as an organization, are recommitting to supporting each other and to pursuing excellence for our customers. On the people front, we have some key holes to fill in the near term, and we need to make sure that we’re allocating our time and resources toward the right set of priorities, but I am confident that we have the team and the will to win. Now let me turn to our outlook for the balance of 2023. With today being my second day on the job, there’s a degree of uncertainty that must be recognized.

So, I’ll walk you through the way, we formulated our revenue guidance. In the first half of the year, our core capital and consumables product lines declined year-over-year. We will be redirecting more attention to this portfolio. However, there are macro pressures facing our customers that are not getting easier, and we need some time to resolve our service challenges. Our guidance assumes that these factors will weigh more heavily in the second half than they did in the first. We will also be committed to winning business based on our technology and our service while maintaining higher margins. For AviClear, we expect the installed base to continue to grow with scheduled installations, bringing a higher level of revenue contribution in the second half of the year compared to the first.

However, this increase is likely to be modest given the fact that the summer is a slow period for laser treatments in general, and that we need to work with all of our practices on developing sustainable engines for generating patient flow and utilization. As I mentioned earlier, we are committed to building AviClear into a mainstay treatment for patients with moderate to severe acne. But in the near term, we need to optimize our go-to-market approach and make sure that we have the reliability and processes to support our customers before reaccelerating. Last, as it relates to our skin care line in Japan, we have been informed by our partner, ZO, that they do not intend to extend our distribution agreement beyond the current agreement’s expiry in June of 2024.

We expect our revenue in the second half of 2023 to be down compared to the first half. We are still working through the details of the transition process, and we’ll provide more color at a later date on how revenue will trend leading up through the middle of 2024. I would note that this product line currently has a gross margin profile slightly below corporate average with relatively low associated operating expense. So, all of those considerations informed our thoughts around the revenue guidance range of $220 million to $230 million. While we don’t give specific quarterly guidance, the phasing should reflect seasonal softness in the third quarter. As for the bottom line impact, I would just reiterate Stuart’s comments regarding the moderation of our cash burn as we progress through the next two quarters.

We plan to end the year with a strong cash position in the ballpark of $150 million. We’re highly focused on using that capital judiciously when I’m steering our business towards profitability and cash flow. Our performance year-to-date and our near-term outlook does not reflect the type of profile that we aspire to, but it’s important to acknowledge the facts on the ground while we retool to support sustainable long-term growth, profitability, and leadership. The future at Cutera is bright. With that, I’ll turn it over to the operator for questions.

Q&A Session

Operator: [Operator Instructions]. Our first question comes from George Sellers of Stephens Inc. please go ahead.

George Sellers : Good afternoon, and thanks for taking my question. I guess starting with AviClear, I’m just curious if you could give a little bit more detail on the utilization trends, how the physicians who maybe got the device at the end of last year, what utilization looks like for those doctors versus doctors that have gotten it more recently. If you could just give some more detail there, I think that would be really helpful.

Taylor Harris: Sure. Hello, George, happy to talk about what we’ve seen with AviClear. And I won’t give specific comments on some of the topics, but I’ll try to give you some directional color. And maybe more broadly, I’ll just start with where we are from a placement front. We’ve obviously been really successful in placing AviClear out into the field. And that just indicates a lot of demand, a lot of interest, and it gives us a good degree of optimism about the future of Avi. So, we’ve now got over 1,250 devices in the field as of the end of the second quarter. Our training programs have ramped as well. So, the vast majority of those units have been placed. As we think about utilization, I think it’s important to think about both, how many devices out in the field are contributing, active as well as what types of utilization rates we’re seeing there.

So, the good news, is that the number of devices that are contributing has increased. However, the percentage as our installed base has increased, the percentage that are contributing, and we think about contribution really is how many devices are doing a treatment during a month. So, the percentage that is contributing has declined, and that reflects — really the large increase in our installed base. Consequently, utilization rates have declined. And we’ve really seen that across the user base. I think some of that in recent months has been a fact — has been attributed to just seasonality in the business. We’re learning more about the way this business works seasonally. But we’re also looking into all of the other factors. Clearly, the number one focus of the organization needs to be supporting the customers who have this device and helping them build great practices.

So that’s what we’re planning on doing. I think there’s a playbook here. We saw it at Zeltiq. We had a similar challenge, not when I was there, but in earlier days with respect to having a large installed base and needing to really refocus on driving utilization, and that’s what we’re going to do here.

George Sellers : Okay. That’s really helpful. And then maybe switching to the core aesthetic business. I’m just curious if you could sort of level set. Has there been a structural change in that business, as it relates to profitability or in terms of demand? Or is this more something that can be corrected with some of the initiatives and things that you’re working on?

Taylor Harris: So, what I’d say, I do think that, as you’ve noticed, our — and Stuart alluded to, our selling prices have declined in the first half of the year, and we’ve had an overall volume decline as well. And I think what that reflects are a couple of pressures. One is a macroeconomic pressure. And the second is more company specific. So, on the macro front, the financing environment is more challenging, and we’re seeing that reflected in our conversations with customers, and we’re looking for ways to support them. So, I would say that, that’s a structural issue that we need to address. The company-specific factor has in large part to do with some of the service challenges, the reliability challenges that Sheila spoke to.

And so there, we need to do a better job of supporting our customers and delivering the quality and the timeliness of service, getting — when machines go down, getting them back up online quickly. That is not structural. That is something that we control, and we’re focusing a lot of attention there.

George Sellers : Okay. That’s a really helpful color. I will leave it at two and thank you again for the time.

Operator: Our next question comes from Jon Block of Stifel. Please go ahead.

Jon Block : I’ll start with AviClear. So, boxes higher Q-over-Q. AviClear revenue lower Q-over-Q. So obviously, utilization not very good. Taylor, I think you mentioned the percent contributing has declined. That’s weighing on utilization. And I know it’s your second day on the job, but I want to press you a little bit. Is this the right business model in terms of placing the box essentially for free and then Cutera getting outsized economics in the consumables, you’ve got, as you mentioned, over 1,200 boxes out there, where you dispatch sales guys, who’s serious about adopting the technology. So maybe just talk to us on your thoughts on that business model. I know Zeltiq was a little different. I mean, you charge for the box and you still got the recurring — but is this the right one where it essentially goes out for free and then the 50% shared economics? Or is there more of a mill ground that might be a better fit?

Taylor Harris: Jon, I think it’s a great question, and it’s the right question to ask. And before I get to that, let me just talk to the second quarter and the patient dynamic. Revenue was down, as you noted, we did treat more patients in the second quarter than we did in the first quarter. Now it was modestly more, but it was more. We had — we did have a revenue adjustment on accounting adjustment that we needed to take. Without that, you would have seen a revenue trend more reflective of the underlying patients treated trend. But the broader point remains in that what we saw as we progressed through the first half of the year and even into the start of the third quarter is utilization rates not where we want them to be. So, your question is the right one.

It is one that I asked when I started doing my work, looking at Cutera as an opportunity personally. And I think one thing that — and I’ll tell you this, the organization is looking at it for sure. One thing we’re committed to is meeting customers where they are. And so, the question you’re asking is one that some customers have asked as well. And I think we need to be really thoughtful and responsive on that front. There are — different business models, each can work. And we just want to find the right setup for our particular situation. So, for now, we need to leave it at that, but it is something that we’re looking hard at. And Jon, I’d also say that’s part of the reason that we’re slowing down here on the capital front is we want to reassess are we doing this the right way from a number of different angles.

Jon Block : Great. That was very helpful. And maybe just to shift gears for the second question and I’ll also just keep it to two. But one thing that I want to make sure I ask about are the quality issues at Cutera. And Taylor, you mentioned the 25-year history of the company, and I’ve been monitoring you guys for a while, this company has always led with quality, and that’s really resonating with your customer base. So, I find that’s a surprise. How pervasive are these issues across the portfolio? Maybe you can talk a little bit to that. Really what’s unfolded in the past three months to six months in terms of why this is coming front and center now? And then maybe most importantly, how long does that take to turn around?

Taylor Harris: Sure. Jon, I’ll start and then if Sheila wants to add anything, then she can hop in. I think that what we’re seeing here is part of the fact that we really flooded the engines with AviClear. And the — so we saw a lot of capital go out, a lot of production volume through our facility, and it really stretched the organization. And so, it’s hard to link it — link some of the challenges we’re having directly to that or full proof of that. But the timing would indicate that, that had a meaningful role to play. And so, I fully agree with your assessment of the company over its history. And I also believe that we can and will get back to being known for quality and service. But the fact is we’ve got a lot more devices out in the field with — across the core as well as with Avi.

And so, it stretched the organization. So, I think what we need to do is — and this is, we talked about this. But we’re bringing the new deployments of AviClear effectively to a halt as we pause here. Now we do have scheduled installations. We’ve made commitments to customers. We’re going to fulfill those. But we’re going to give the organization some breathing room to refocus on service levels and on quality across the entire portfolio. That won’t be easy. How long is it going to take? I can’t give you a promise there. What I can tell you is that the organization’s top priority right now, and there’s a clear commitment.

Operator: Our next question comes from Matthew O’Brien of Piper Sandler. Please go ahead.

Unidentified Analyst: This is Phil on for Matt. Thanks for taking my questions. My first one is for Taylor. Congrats on the new role. I was just wondering if you could expand on what you saw at Cutera that ultimately prompted you in taking this role, despite some of these near-term headwinds that you outlined, what might be needed from a resource or a technology perspective that the company might not have at this point? And any guide rails in terms of how long this might take to get your strategic plan in place?

Taylor Harris: Phil, thanks for the question. So, I’ve been familiar with Cutera for a number of years. I remember back to when I was at JPMorgan, and the company went public and they were at our healthcare conference. I thought, wow, this is a really, really cool company. And then just having been in the aesthetics business, was familiar with the reputation of the company for being a product innovator, a leader, and a company that stood behind its products. So, I felt reputationally, it’s the kind of company that it appeals to me and I want to be a part of. I think AviClear was another big draw for me. So, there aren’t too many times, but you have an opportunity to launch an exciting new therapy like this. And I do think the market needs is ready for, hungry for an alternative to drug therapy.

And I think Avi has the potential to be a really meaningful, impactful new product launch. And then the other couple of things I’d say is that I’ve had the opportunity over the last couple of months to be involved with the team as a consultant on the Board. And I’ve just been super impressed with the commitment level of the team. I’ve been at companies before where you go through hard stretches. And I think it’s in those times that teams come together and that you end up looking back. And those are the times you remember, and it makes — coming out of those time periods, all the more sweet. And I think that’s what’s going to happen here at Cutera. And I’m just convinced we’ve got a team that wants that. So, the challenges we have here, we’re not going to sugar coat them.

We’re going to talk about them. We’re going to put numbers to them, and we’re going to deal with them methodically. But — I think that for me, looking at them, I felt like they were issues that are fixable with resolve. They’re not — these are not technology issues — these aren’t clinical data issues, these are execution issues. And so, we just need to focus on them. And so, all of that made me feel excited. I’m here not for a couple of quarters, but for a long time, and we’re going to start working on it right now.

Unidentified Analyst: I appreciate the color. Thank you, so much. And I guess to wrap it up, I would love to hear a little bit more about the sales retention plans that were mentioned earlier, just because OpEx numbers were a little high. What did you have to commit there? How long is that duration? And how can we get comfortable that when these commitments expire, there’s not going to be some type of exit there sometime next year or later?

Stuart Drummond : Phil, it’s Stuart speaking. I’ll speak to the first part of your question. So, we announced in our subsequent events footnote that we’re committing up to $13 million. The final number came in at $11 million. The retention plan is over one year and is paid out in four instalments through this year and the bulk actually is weighted towards next year. And it covers around 50 employees, mainly in the sales and marketing area, and a few key individuals in the G&A area as well.

Sheila Hopkins: Yes. And this is Sheila. Just to follow-up that. The good news is that those retention bonuses have worked quite well. On the sales front, we’ve retained 100% of the targeted employees. And for the management team, we’ve retained all, but one. And as importantly, the team on the ground here remains as Taylor mentioned quite committed and engaged.

Unidentified Analyst: Thanks, so much.

Operator: [Operator Instructions] Our next question comes from Anthony Vendetti of Maxim Group. Please go ahead.

Anthony Vendetti: Taylor, I was wondering just to follow-up on the service issues. When were they identified? Was it with the commencement of the placement of the AviClear systems or service issues starting to crop up before that? And then just in terms of the core business, do you feel like some of the core systems that have been around — legacy systems have been around for a while or just naturally starting to decline? Or would you attribute that more to the current credit environment, high interest rates. And if one of those are an issue — is there really anything you could do to turn around that core business, absent new product development?

Sheila Hopkins: This is Sheila. Let me just kind of start on the service and reliability issues and when do they begin to surface. And let me say this as some background perspective. On the timing to service front, the issue is actually parts availability. There are a number of parts that are on the backlog that reflects some supply chain issues. And that has gotten in the way of our SSCs, which are our service engineers being able to service offices in a timely manner. It is not a deficiency of that organization at all. It is the need for Cutera to find ways to close the gap on these parts. And that is what the organization will be doing with a great sense of urgency. The parts availability issues have been around for a while.

They began with COVID and they have persevered since then, but we really do need to, as Taylor said, wrap our minds around this issue and solve it in a way that is systemic and very methodical. On the reliability front, those issues really did begin to surface as we ramped up Avi. And I think it is fair to say that, as Taylor has mentioned, while Avi is an amazing technology that does have a brilliant future, the organization was a bit overwhelmed and stressed then. And as the manufacturing organization ramped up Avi reliability issues began to surface across the portfolio of products. It is not entirely broad scale; the reliability issues are focused on three systems to four systems. But once again, these are issues that we own and that we will be dealing with post haste.

And to that end, let me just talk a little about the steps the organization will be taking to better address the reliability issues. And to a large degree, the primary way to address the reliability issues is through enhanced quality control measures. And that’s going to look like on increased quality controls for third-party systems and third-party materials, enhanced quality control testing on our lines, and also improved quality control measures so that we’re testing systems as they come off the line before they are shipped to make sure that they are meeting our quality standards.

Anthony Vendetti: Yes. That was helpful, Sheila, on the service reliability and quality front. Just on the second part of my question on the legacy of core products. Is there really much you can do to turn that around in this environment absent new product development?

Taylor Harris: Yes, Anthony, I think on that front, there is a challenging macro environment, but there are things that we can do. The first is focus. And so, we’ve already refocused the capital organization squarely on the core product line. That will be one of the benefits of not looking to place new Avi here in the coming months. The second does relate to everything Sheila covered with respect to service and reliability. So, we’ve got some great products. We’ve got a broad product line, and there are parts of that, that we feel like we’ve got a good opportunity to grow, but we need to be able to commit on the reliability front. And that’s what we’re doing. And then for sure, new product flow helps. And there’s — our team there has a number of different programs we’re working on.

We aren’t sure right now the order in which we’re going to be bringing some of those to market. But there are plans to bring new product to market in 2024, and that should absolutely be helpful.

Sheila Hopkins: The other thing I’d point out here is, just one other point on the core business is that the macroeconomic pressures that we are seeing really do affect the med-spa environment more than some other parts of our customer base. So as for example, we are still seeing good growth on our business, on the core business amongst aesthetic dermatologist. So that is a point of strength that we can leverage going forward.

Operator: Our next question comes from Margaret Kaczor of William Blair. Please go ahead.

Margaret Kaczor : Hi, good afternoon. Thanks for taking my questions. I wanted to start out on AviClear and maybe a simple question or not simple question, but how much of the answer is pulling back some systems from the field that were maybe not necessarily profitable for the company versus changing some of the pricing dynamics versus increasing investments such as PBMs [ph] or a more dedicated sales force, just because the product does seem like it’s maybe a little bit different than the rest of the quarter. How do you look at those three?

Taylor Harris: Sure. Margaret. Good to talk with you again. So, I think it’s hard to provide a percentage allocation of what we think will be impactful here. But I would take each one and say that we think there’s opportunity. So, for sure, there are some devices that are not being utilized or may not have real potential to grow at least in the near term. And there we’ll have a conversation. There’s an opportunity potentially to bring that back and have that be a win-win. So, I do think that, that will be part of the discussion in the coming weeks and months. On the business model or pricing front, I think that that’s — we’re hearing from customers, there is a desire for different options. And so, we just need to — we need to look at that.

We want something that’s going to be simple to understand, transparent, consistent, but we want to provide some flexibility. And then the last point is, I think the longer term — that’s the answer for sure. We — with AviClear, we’re a treatment company. We’re interested in helping our customers treat their patients. And so that means having our team aligned in that direction, both from a practice development, practice marketing, clinical training perspective, and then really working with our customers as well to help them be successful. So, I think that there’s probably an order of — there’s an order of operations here. But then ultimately, the third point is the one that we’re shooting for to make this a long-term success.

Margaret Kaczor : And then as we think about utilization trends this quarter, anything that you can highlight, where some systems up, some down? Was it pretty similar I think the prior management team had kind of described this maybe is a little bit more of a scatter plot where maybe you’re working through that data generation before taking a more definitive action. And that’s on Avi? Thanks.

Taylor Harris: Well, in the second quarter, while there are absolutely bright spots and there are also some systems that aren’t performing at all. In fact, there’s a good percentage. Generally, second quarter utilization was down compared to the previous couple of quarters. And I think that likely reflects a couple of factors. One is just the seasonality in our business. And the second is simply the number of machines out in the field, some of which aren’t performing at all. But also, the — that’s stretching our organization then in terms of being able to support them. So that’s generally what we saw in the second quarter, also leading into the start of the third. And that’s the reason that we’re doing, what we’re doing here in terms of retooling, and focusing on identifying where are our most productive opportunities to step in on a — quickly and start growing practices and then doing that more consistently across the base.

Sheila Hopkins: One other piece of color there would be that we added a lot of new devices in the second quarter. And so those devices are still in the emerging phase of utilization. And by definition, they pulled down the averages. And so, as we pause even more on the number of devices that we place that really will enable the CAM organization to get into those offices and nurture them, put some really high-quality practice development plans in place, and get those utilization numbers up. And once again, there is a playbook that we can use here. And Taylor is well-versed in the use of that playbook.

Margaret Kaczor : Sounds great. Thank you both. Appreciate it.

Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Taylor Harris for any closing remarks.

Taylor Harris: Thanks, Ariel. Before we say goodbye for the day. I just want to — I want to thank Sheila who has been a continent professional. She stabilized the organization and she’s been so thoughtful and supportive in onboarding me. So, we’re fortunate to have Sheila staying on our Board, and we all thank her for everything she’s done operationally over the past few months. We got a lot of work to do here at Cutera, but we’ve got a big opportunity ahead, and the team and I are excited to get going. So, we hope you will join us on that journey, and we thank you for listening. Have a great evening.

Operator: This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.