Cutera, Inc. (NASDAQ:CUTR) Q3 2024 Earnings Call Transcript

Cutera, Inc. (NASDAQ:CUTR) Q3 2024 Earnings Call Transcript November 9, 2024

Operator: Thank you for standing by. This is the conference operator. Welcome to the Cutera, Inc. Third Quarter 2024 Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the call over to Shelby Eckerman, Vice President of Finance. Please go ahead.

Shelby Eckerman: Thank you, operator, and thank you, everyone, for joining us. With me today is Taylor Harris, Cutera’s Chief Executive Officer; and Stuart Drummond, Interim CFO. Following our prepared remarks, we will take your questions. Before we get started, I’ll note that today’s discussion 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-Qs 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 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 in 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 alternative 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, Shelby. Although we continue to face challenging business conditions, we remain on track with the 2024 plans that we outlined last quarter, both operationally and financially. AviClear revenue continued to grow on a year-over-year basis, driven by our international launch. Core capital sales, while down year-over-year, increased modestly on a sequential basis. And we saw underlying improvements in gross margin and controlled operating expenses, excluding some noncash accounting charges. At the same time, we’re building the foundation through our team, culture and customer-focused service mindset to support long-term growth for our company. Nowhere was that more evident to me than last weekend at the Cutera University Clinical Forum, or CUCF, which is our annual educational event designed to disseminate best practices for utilization of our technology.

At CUCF, I spoke with numerous customers who love their Cutera devices and who are starting to provide me with more and more positive feedback on the team that is supporting them across the board from sales to service to marketing and post-sales practice development. I remain proud of the resilience that our team at Cutera has been demonstrating and of the foundational changes we continue to pursue to position the company well for future growth. Turning to Q3. The international launch of AviClear continues to proceed exceedingly well. We’ve now sold over 100 AviClear systems outside of North America, and we’ve expanded into approximately 25 countries as we brought online a number of distributor markets during the third quarter. Utilization remains strong with our direct markets averaging over nine treatments per device per month, an increase versus prior quarters.

We’re still early in the launch, so it wouldn’t be appropriate to extrapolate that performance. But that said, the utilization trends are clearly encouraging and customers are reporting to us that they are achieving impressive clinical results, which is the most important indicator of future growth. In North America, we saw typical seasonality across most components of our business, although our core capital revenue was relatively stable in the third quarter compared to the second quarter with broader revenue contribution across our field team than we had last quarter. We are focused intensely on hiring well, cultivating a winning culture and providing industry-leading training and development opportunities for the team. For example, we brought the entire field organization together for training during the first week of October, including a new sales rep certification process for AviClear.

We believe that increased productivity over time begins here with the right team, processes and training. The North America team continues to execute well on the launch of xeo+. As a reminder, xeo+ offers tremendous flexibility and customization with over 25 applications from Cutera’s signature Laser Genesis skin revitalization procedure, to hair removal, to pigment reduction and more. With a larger spot size, enhanced contact cooling and redesigned handpieces, xeo+ provides faster treatments and improved comfort. Additionally, the team drove a nice sequential uptick in our sales of the Secret portfolio of RF microneedling devices, and we also saw a modest uptick in truFlex. The truBody platform, in fact, was one of the highlights at CUCF this year as panelists spoke about the potential for indication expansion, which would involve studying the integration of Sculpt and Flex into regimens with GLP-1s.

Panelist also spoke about the potential for studies of truFlex, our multidirectional RF energy device for muscle stimulation in indications outside of aesthetics, for example, functional strength and physical rehabilitation. We are inspired to do more work clinically to understand how truFlex could potentially be deployed to assist patients in these areas. I’ll now provide an update on our top near-term business priorities, which are: one, the pursuit of operational excellence across a range of functions; two, fully developing the opportunity for AviClear; and three, improving our financial health through an efficient cost structure and reductions in working capital. I will elaborate on all of these. First, operational excellence. We continue to make progress in all of the key areas that we identified last year: product reliability; field service; supply-demand planning; and inventory control.

And I’d like to highlight field service in particular, where during the third quarter, we reduced service backlog in all geographies across the globe. In North America, we’ve continued to improve our service response times. Earlier this year, we crossed the industry gold standard for 72-hour response time of 80% and we’ve actually achieved 90% to 100% in more recent weeks and months, which we believe puts us into an industry-leading position. It’s truly remarkable to see how far we’ve come in just over a year. We now believe that our service capability can provide a competitive advantage, and it demonstrates clearly to our customer base, the type of partner that Cutera will be and the type of support we will provide. Second, AviClear. We continue to be encouraged by international launch dynamics, including the uptake by thought-leading KOLs in major direct markets, the initial uptake we’re seeing in newly launched distributor territories as well as the strong and growing utilization across our installed base.

In North America, we’re still working through the transition from the initial leased business model. As of the end of the third quarter, there were approximately 785 systems operating under the lease model, down from 925 last quarter, a reduction of approximately 140 during the quarter, with approximately 200 on a list to be returned in the coming quarters. We continue to expect that more than half of the original installed base of systems will be returned, and we’re now working on moving efficiently through this return process. In addition, we are focusing our efforts squarely on a group of around 150 of the most committed AviClear accounts, where we believe our PDMs can help drive increases in utilization. We’ll also continue to use Cutera Academy programs to help accounts relaunch AviClear successfully in their practices.

And third, cost structure and working capital. We saw underlying improvement in our gross margin and operating expense profiles in the third quarter. On a normalized basis, that is if we exclude our standard non-GAAP adjustments as well as noncash charges for excess and obsolete inventory, our gross margin was 42% in Q3 compared to 35% in Q2 and 40% in Q1. Our non-GAAP operating expenses were $35 million, but that included a bad debt charge of $5.4 million. So that marks two quarters in a row of operating expenses below $30 million, excluding our standard non-GAAP adjustments as well as bad debt expense. On a go-forward basis, we’re likely to have some ongoing E&O and bad debt, but we believe that it will be significantly reduced from the levels we’ve recorded in recent quarters.

On an underlying basis, the progress we’re making in our cost structure reflects operational efficiencies in service, freight, packaging as well as the impact of the reductions in force and other cost containment programs that we have implemented. On the working capital front, as we mentioned last quarter, our ability to realize an inventory workdown benefit has been delayed due to the reduced revenue environment. As a reminder, due to a variety of factors, we have built a gross inventory balance of approximately $135 million. Excluding our field-based inventory like demo units or service loaners, this balance is approximately $120 million. Over the coming years, we plan to reduce this inventory significantly, beginning in the fourth quarter and then to a greater degree in 2025.

In fact, we continue to anticipate a year-over-year improvement in cash burn of over $50 million as we move from 2024 to 2025 related to working capital alone, even in the absence of revenue growth. Additionally, we should recognize a full year of benefit from the cost savings initiatives that we implemented during the third quarter. As such, we anticipate reducing our cash burn by over 50% in 2025 before factoring the opportunities for revenue growth or gross margin improvement. Before I turn the call over to Stuart, I would like to mention that we have now begun selling under our distribution partnership with L’Oreal’s SkinCeuticals business in Japan, following a well-attended launch event with leading dermatologists. We don’t expect a material revenue contribution in the fourth quarter, but we remain excited about the potential for this partnership longer term.

With that, I’ll turn the call over to Stuart.

Stuart Drummond: Thank you, Taylor. This afternoon, I will discuss our Q3 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 third quarter was $32.5 million compared to $46.5 million for the same period in 2023. Excluding skin care revenue of $7.1 million recorded in Q3 of 2023, our Q3 revenue decrease of $6.8 million on a year-over-year basis, mainly reflected decreases in North American capital equipment revenue and consumables revenue. We terminated our skin care distribution agreement in March 2024 and a decrease in North American capital equipment revenue resulted primarily from continued macroeconomic pressures as well as sales rep turnover.

Non-GAAP gross profit for the third quarter of 2024 was $3.7 million with a gross margin rate of 11.5% compared to a gross margin rate of 19.3% for the third quarter of 2023. The 7.7 percentage point decrease in gross margin rate was driven primarily by an increase in our reserve for excessive inventory. The charge for excess and obsolete inventory recorded in Q3 of 2024 of $10.1 million represented 31 percentage points of gross margin. Non-GAAP operating expenses for the third quarter of 2024 were $34.7 million compared to $39.8 million for the same period last year. This $5.1 million decrease mainly reflects personnel savings resulting from the restructuring announced in November 2023 and June 2024 and lower sales commissions, partially offset by higher bad debt expense.

In the quarter, we recorded bad debt expense of $5.4 million, reflecting the aging of receivables likely related to the challenging macroeconomic conditions our customers are facing. Turning to our balance sheet. We ended the quarter with $59.0 million of cash, cash equivalents and restricted cash compared to $84.3 million at June 2024. Turning to our guidance, we are reaffirming our full year revenue guidance range of $140 million to $145 million with an expected cash, cash equivalents and restricted cash balance at December 31, 2024, of approximately $40 million. With that, I’ll turn the call over to Taylor for closing remarks.

Taylor Harris: Thanks, Stuart. We’re pleased to be maintaining our guidance range for the balance of 2024 because that reflects our team’s resilience amidst a challenging environment. We have not yet seen an easing of credit availability for our customers or an improvement in inpatient demand, both of which are contributing to the dampened appetite for capital equipment purchases. We’re not expecting these conditions to change in the near term, and they continue to present uncertainty in our outlook, but we are working hard to manage through them. Moreover, our team is still conducting a turnaround in multiple areas. We’re improving service and reliability, cleaning up inventory, rebuilding and retraining our North America field organization and winnowing the AviClear installed base, while at the same time, we’re driving our business forward with the launch of both Avi and SkinCeuticals internationally, the refocusing of our AviClear business in North America, launching xeo+ and continuing to identify efficiencies across the board.

None of this would be possible without a committed and passionate team, which we’re fortunate to have. It’s in times of trial that we grow stronger, and I believe we’re experiencing that at Cutera right now. So I’m thankful to our whole team, and I’m excited about where we can go from here. Operator, we’re now ready to begin the question-and-answer session.

Q&A Session

Operator: [Operator Instructions] Our first question is from Jon Block with Stifel. Please go ahead.

Jonathan Block: Thanks, and good afternoon Maybe just to kick things off, last quarter, I believe you had some changes to the North American sales force leadership. Just would love any feedback you’re able to share. Maybe just to tack on to that first question, if you can provide maybe just a broader update on the North American sales force. You had some new adds, I believe, also call it, maybe some intentional churn, some opportunity to pick up some good solid reps from other companies. So maybe where you sit with that initiative to strengthen the overall North American sales force.

Taylor Harris: Jon, yes, thanks for the question. And I feel really good about the progress that we’ve made in North America over the last quarter. So you’re right, we made some changes at the beginning of the quarter. Steve Kreider took over the full commercial leadership in North America. We have two directors on the capital side, some new regional managers in place. And that team, I have to say, has come together in a really productive way over the last few months. A big focus on training, big focus on hiring and big focus on productivity. And we’re actually starting to see the benefits of that. If you look at core capital sales, in the third quarter, this was our best quarter this year of core capital, all right? And the — we actually had fewer sales reps in North America.

And it’s not like the macro conditions have gotten better. So we’re starting to see contribution more broadly across the team, pleased with the ramp of some of the new team members that have come on board, really just pleased with the culture that’s developing and productivity is going to be the focus as we go forward. So I think we’ve got the right tools in place, feel good about the team that we have and that we’re building and looking forward to where we go from here.

Jonathan Block: Great. That was helpful. Thank you. And maybe just a quick second question. The overall gross margin numbers just have had some charges and some noise, but I think you called out the underlying gross margin had some improvement. I believe it was in the low 40s. Tell us, what’s missing from really getting that higher when you look back at older Cutera and above 50 or well above 50%? Is it just a volume argument to be made there? Is there also mix — more favorable mix that is needed? Do we need to be more patient and wait for the consumables, the high-margin consumables from AviClear to become more prominent? Clearly, that’s a key lever when we think about the cash flow. So I just would love some more color on the gross margins.

Taylor Harris: You got it. Yes. So really, Jon, everything that you mentioned is going to be part of the pathway towards driving gross margin higher. I do think it’s fair to look at us right now on a normalized basis in that 40%, low 40% range, excluding these large noncash inventory charges. And so how do we get it back higher? Well, I do think volume is at the top of the list. And so that’s what we’re going to be focused on over the coming year and beyond. The other factors that we can work on, mix for sure is one. And so there, we’ve — because of what’s happened in the body contouring market and our business, that’s one of our higher-margin products, which were at a depressed level of sales this year, although we did do better in our body franchise in the third quarter than we had in the first half of the year.

But a rebound in that portion of the business would certainly help on the margin front. Developing the AviClear consumables business, that’s absolutely going to help on the mix front. And then the other thing, we’re focused squarely, as you heard me talk about, on efficiencies. I think the team and operations in service is doing a good job of identifying those. I think there’s still more room to run on that front, and that will be part of the improvement over time as well.

Jonathan Block: Perfect. Thanks for the color.

Operator: The next question is from Anthony Vendetti with Maxim Group. Please go ahead.

Anthony Vendetti: Thank you. Taylor, so on the inventory adjustment, I know it was noncash. It sounds like it was $10 million. Was there a write-down last quarter? And does this write-down this quarter clean up the inventory as far as you can tell at this point? And then I have a follow-up.

Stuart Drummond: Anthony, it’s Stuart here. Yes, about 3/4 of that $10 million inventory charge this quarter related to a slight change in our methodology. The refurbished AviClear units, which are from the returns from the lease space. There are around 460 life to date, and we anticipate another couple of hundred coming in. So we actually took a reserve on those units for the first time. So as mentioned, that was about 3/4 of that $10.1 million charge. As we look forward, we still do expect some inventory reserve charges, but nothing to this…

Anthony Vendetti: Okay. So this was the bulk of it. And then just as we look at the R&D pipeline innovation, maybe is there anything that is on the near-term horizon or anything in the pipeline other than upgrades or tweaks to current products?

Taylor Harris: Anthony, yes, we do have programs in the R&D pipeline. We won’t give specificity with most of what we’re working on. But I will say — and that’s just for competitive reasons. I will say that we’re definitely excited about the indication expansion work that we’re doing with AviClear. We’ve gotten a lot of feedback from customers that — about areas that they think AviClear could be useful, and we’re starting to gear up for some of those studies. We’ve mentioned sebaceous hyperplasia, hidradenitis suppurativa, but there are other indications that we’ll be looking at as well. So that’s not a new product, but the beauty is we have an existing product that we think we can have the opportunity to expand applicability for.

Anthony Vendetti: Okay. Great. And so you mentioned about the burn rate. I didn’t catch that on the prepared remarks. In ’25, do you think that’s going to come down by how much or…

Taylor Harris: Yes. Yes. So what we said was that we expect at least a 50% reduction in our burn next year. So that’s pretty significant. And the biggest source of that is working capital, where we’ve had an increase in working capital, so use of cash this year. But we’re now at that turning point in our inventory balance where inventory is going to become an asset that we are converting into cash over the next few years. And we actually think that’s going to start in the fourth quarter, and it’s going to grow in magnitude in 2024. So we mentioned that even without revenue growth, we think that, that flip in working capital is going to lead to a $50 million improvement in our cash burn profile. That’s the biggest source of our improvement in cash burn next year.

Anthony Vendetti: Okay. And then if we look at the geographies where you’re selling right now, where do you see the most opportunity? And are there any geographies that you still have to either get a new distributor in or still needs to do turn around?

Taylor Harris: Well, we’re in the middle of rolling AviClear out throughout our existing network of distributors. So there are a number of markets to come. And a lot of the markets we went to just here very recently in the third quarter. And so there should be opportunity for further development, further penetration of AviClear in those markets. Probably the biggest opportunities where we’re not in with AviClear right now, Korea, Japan, those can be meaningful markets for us. We have existing presence direct in Japan with an established distributor in Korea. Then as I think longer term, probably the single biggest market that we are underpenetrated in is China. The pathway for registration there for AviClear will be measured in years. So that’s not a near-term opportunity, but it will be meaningful when we get there.

Anthony Vendetti: Okay. That’s helpful. And so in terms of — you’ve said that over probably 50% or a little over 50% of the AviClear devices are coming back. Did you give an update on how many of them have come back and how many are still out there that you think will come back?

Taylor Harris: Yes. So just to reframe that, we got to a peak under the leased business model of about 1,250 AviClear machines, and we now stand at 785 leased machines. So we’ve had returns over the past few quarters. We had about 140 return in the third quarter. We’ve got a list that we know we’re going to come back of another 200 roughly. And there will be more than that. So that’s what gets us down to that more than half coming back, meaning we end up with less than half. What we’re — but really with most of those, they were doing very little in the way of utilization. So where we’re turning our attention right now, is to that committed core. We know of about 150 accounts in North America where we think there’s a great opportunity to grow.

It’s just the right account dynamics. And so we’re allocating our PDM time and attention now more and more to helping those accounts grow. And we think it really starts with utilization. If we can build utilization in these accounts to the types of levels that we’re seeing in international markets, then I think that’s going to create a real buzz around AviClear in North America and help with this restart of our AviClear business under the new business model that we have.

Anthony Vendetti: Okay, great. That’s excellent color. I appreciate it. I’ll hop back in the queue. Thank you.

Taylor Harris: Thanks Anthony.

Operator: [Operator Instructions] The next question is from Margaret Kaczor with William Blair. Please go ahead.

Macauley Kilbane: This is Max on for Margaret. Just one quick one for me. I know you guys are obviously operating in a tough capital environment. I was just curious if you could touch on what you’ve seen this quarter and how that shapes your outlook heading into 2025. And then just a follow-up to that. Curious to hear your thoughts on the achievability of returning to growth or maybe just some overall higher-level growth drivers that you’re really focusing on for 2025.

Taylor Harris: Sure. Thanks, Max. So on the macro front, we haven’t seen any change in the third quarter relative to the first half of the year. So I would just characterize this as — it’s a tough — it’s a challenging environment. And it really comes down to financing availability for customers as well as a lot of our customers are just reporting slower consumer spend in their practices. So that’s affecting, that’s dampening appetite for purchasing capital equipment. And as I mentioned on the call, we’re not expecting that to improve in the fourth quarter. But what I’m proud of is that I feel like our team is learning how to adapt, learning how to manage through tough conditions. And that’s just going to position us even better for when the sledding becomes easier.

And as I think about growth, absent, even without a change in the macro, what I’m feeling optimistic about is you look at our international business, and we grew in the third quarter of 2024. We’re planning on growing internationally in the fourth quarter. So I think we’re already on a trajectory for growth in 2025 when you look at our international business. And then in North America, as I mentioned in the — giving the color on our field team dynamics, the underlying productivity of the team is firming up. It’s starting to improve. And between that and growing that North America field organization. We’ve had some turnover in the first few quarters of the year. We’re looking to stabilize that, build upon it. That, plus increased productivity, plus getting AviClear onto a growth trajectory again in North America.

That’s the formula for growth in North America next year, and that’s what we’ll be driving to do.

Macauley Kilbane: That’s great color. Thank you for taking the question.

Taylor Harris: Sure. Thanks.

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

Taylor Harris: Okay. Thanks. Well, thanks to everyone for joining us today. Thanks, as always, to the team here at Cutera, and I wish everyone a good evening.

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