Cutera, Inc. (NASDAQ:CUTR) Q4 2023 Earnings Call Transcript

Cutera, Inc. (NASDAQ:CUTR) Q4 2023 Earnings Call Transcript March 21, 2024

Cutera, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. This is the conference operator. Welcome to the Cutera, Inc. Fourth 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] I will now turn the call 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 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 released 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 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 from GAAP to non-GAAP measures in our earnings release. These non-GAAP financial measures should be considered along with, but not as an 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, Greg. Good afternoon, and welcome to Cutera’s Fourth Quarter 2023 Earnings Call. I’ll provide some summary comments regarding our fourth quarter financial results and then highlight our areas of focus and excitement for 2024. But first, I want to thank the whole team at Cutera who have been performing so admirably amid a challenging set of circumstances. Because of our team’s focus and dedication, we finished 2023 with fourth quarter results that were better than anticipated, both for revenue and cash burn. We’ve also been working hard to resolve a number of time-consuming projects, including the transition of our distributed skincare line in Japan as well as bringing our manufacturing AviClear and excel V+ back in-house so that we can now turn our attention more fully to the future.

And on that note, over the last few months, we have introduced a new corporate brand tagline, vision, mission statement and set of core values. Our mission is to improve lives through medical aesthetic technologies that are driven by science and powered through partnership. This mission book unites us as a team and energizes us because of the ability we have by supporting our customers to see the life-changing impact that our technologies and service can have on people on a daily basis. What a gift that is. We’ve also redefined our core values, which you can remember through an acronym that is well suited for Cutera, PICO: Passion, Innovation, Communication and Ownership. Teams from across Cutera will be involved with each of these values to keep them visible and driving.

So you can start to see how we at Cutera are bringing a new energy to aesthetics. In the fourth quarter, we saw more of a stabilization in our business than we had anticipated as part of our guidance. Our international business, in fact, improved sequentially from Q3 to Q4, while our North American business experienced a sequential decline, albeit more modest than we had expected. AviClear revenue was stable from Q3 to Q4. And with some capital revenue from the limited commercial release of our enhanced product offering, offsetting a continued decline in treatment revenue. The primary reason for this procedural softness has been a decrease in the number of contributing systems, which were less than 50% of the installed base during the fourth quarter.

As we’ve mentioned, there are a number of accounts at which AviClear likely won’t remain, and we’ve seen many of these accounts go dormant. However, and a critical importance we’re also identifying the success factors for building a healthy AviClear franchise. On average, utilization rates at dermatology practices are approximately 50% higher than other specialties and a disproportionate percentage of our most successful accounts are dermatologists. Beyond practice type though, key determinants are success having a physician on side of the practice having the entire office staff trained on AviClear and on how to select patients, communicate with them and set expectations, as well as having active patient flow 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, which I’ll speak to later. Another key item from our Q4 results that I would like to address is gross margin. Throughout 2023, our gross margin was depressed due to reduced volume, the array of company-specific operational issues that we’ve highlighted previously and a high level of inventory reserves. In the fourth quarter alone, we took approximately $8 million of excess and obsolete inventory reserves. Note that we are not scrapping this inventory and will attempt to utilize it over time. But the appropriate accounting just to put reserves in place given the excess position we have, particularly of AviClear. Adjusting for these reserves as well as our other non-GAAP items, our normalized gross margin was around 37% in Q4.

A comparable normalized measure in Q3 would have been approximately 30%. These are well below historical levels and we are squarely focused on efficiency initiatives that should improve our cost position and gross margin profile over time, beginning in 2024. Turning to 2024. Our team is excited about this new year. We remain focused on the same three critical priorities that we’ve discussed on our previous quarterly calls. Returning to operational excellence, building a global AviClear franchise and driving towards long-term profitability. We are making strides in each of these areas. First, operational excellence. Our Chief Operating Officer, Jeff Jones and his team in just a few months have made progress in the five key areas that we identified last year.

Product reliability, field service, inventory control, supply/demand planning and cost of operations. We are on track to remediate the most critical elements of these issues by the middle of 2024 with ongoing improvement opportunities beyond that point, particularly in the area of cost control. Product reliability performance improved in Q4. And we have a dedicated team in place that is methodically identifying further opportunities so that we expect a continuation of the favorable trend we saw late last year. In the area of field service, we saw a dramatic improvement in our North American service levels in the back half of last year, wiping away most of the backlog of open cases and reducing response times for new service calls. For 2024, the field service team is focused on elevating response performance to levels above industry standard, as well as rolling out best practices across our international regions, so that we achieve the same level of service quality across the globe.

This team has started to attract great engineers from across the industry when roles open showing the power of a culture of ongoing improvement and the momentum that can build quickly. This bodes well for our plans for Cutera to be recognized as industry-leading, both in technology and through our service and support. In terms of inventory management, where we experienced significant challenges last year, we ended on a high note with our year-end physical inventory count proceeding much faster than at year-end 2022 and with no count-related issues identified in the audit. We’ve assembled a materials control team, which has implemented daily reviews to ensure that inventory movements are being transacted appropriately. We’ve also opened our own warehouse, which allows us to consolidate more expensive third-party warehouses with better control while also providing room for the significant amount of AviClear and excel V+ inventory that we will be bringing in from Jabil.

On the planning front, we’ve introduced a new process in Q4 to better match supply and demand. As a reminder, we’ve had too much inventory in certain areas, most notably AviClear and too little in other areas. We are still building inventory in the first-half of the year due to purchase commitments and the need to remediate shortages of certain key components. But after that, we should begin working down inventory, creating a cash tailwind for the company. On the cost front, we’ve implemented key processes for repairing and reusing components as well as checking the quality of purchase materials and rejecting those that aren’t usable. We’ve also reviewed vendors for certain key components in an effort to reduce scrap rates, and we’re now producing all AviClear and excel V+ in-house.

Thereby better leveraging our fixed ahead expense, while at the same time, improving quality. The operations team has also implemented new controls and processes around shipping, which has already begun to reduce freight expense. Our second key priority is growing the AviClear franchise. In international markets, we commenced a limited commercial release phase at the IMCAS meeting in February, and we have had highly favorable feedback from the first wave of new AviClear customers. 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 liability and move billing from a per patient model to paying for individual treatments. Our primary focus with AviClear in all geographies is on partnering with our customers to build franchises with healthy utilization. We believe a few challenges, limited utilization in 2023, each of which we plan to address this year. On the service front, we’ve already made significant progress, and we have hardware and software updates that address the majority of the issues that customers have since launch. On the clinical front, we have strengthened our clinical protocols through a consensus white paper from leading dermatologists.

This was recently published in the dermatology digest and serves as a basis for ongoing practice training. We’ve also brought on board a new medical liaison to help respond to customer questions and make connections to AviClear to KOL centers of excellence, if needed. And last, perhaps most important, we are currently finalizing our plans for Cutera Academy, a two-day university-style training program that will launch at the end of April. In addition to providing clinical education, Cutera Academy is an important component of our overall effort to help customers build and grow their AviClear practices. To this same end, we’ve also introduced an enhanced cooperative marketing program, which provides rising levels of rewards benefits, including matching funds for co-branded marketing programs to customers who purchase Cutera consumables.

Customers can use these funds through a simple white glove serve provider on digital marketing tactics that are proven the most effective at driving patient conversion. From a financial return perspective, our new business model allows customers to achieve an even higher return on their investment as utilization grows. And with our new programmatic support options, coupled with our key account manager team and providing the tools to help achieve this growth. Lastly, on AviClear, as the pioneer of this technology, we are committed to ongoing clinical research, not only within the field of acne, but also in potential expanded indications during 2024 in partnership with leading researchers we plan to conduct pilot studies on the use of AviClear in both sebaceous hyperplasia and hidradenitis suppurativa, both of which are conditions associated with the sebaceous gland.

These are areas of unmet clinical need, affecting meaningful numbers of individuals and there’s clear interest within the dermatology community in a novel treatment approach like AviClear. During the second quarter, we will host an investor webinar to reintroduce AviClear from its scientific foundation to its clinical data profile in the treatment of acne into its potential extensibility into these new indications of use. We’ll send to save the date in the weeks to come. Our third and final priority is to drive toward profitability. Everything we’ve covered regarding operational excellence and growth of the AviClear franchise should contribute meaningfully to our path to profitability. In addition though, we need to manage our cost structure in a disciplined fashion, while also making prudent investments to drive growth.

On the cost structure front, we have now almost completed the global restructuring program that we initiated in Q4 2023, which has reduced headcount by close to 25%. This reduction should lead the personnel-related savings of over $20 million annualized basis. Partially offsetting these savings though, will be an increased level of incentive compensation in 2024 and assuming that we hit our corporate targets, as well as some select new investments. We do, for example, plan to increase the footprint of our North American field organization with both capital reps and key account managers. We also continue to invest in new product development, and we plan to launch a refreshed product platform later this year. All of this contributes to our excitement regarding 2024 and beyond.

Every team in the company has a critical role to play in achieving these objectives. And together, we’re going to make it happen. I’ll now turn it over to Stuart to provide more detail on Q4 and our guidance for 2024.

Stuart Drummond: Thank you, Taylor. This afternoon, I will discuss our Q4 GAAP results as well as some non-GAAP results. A reconciliation of GAAP to non-GAAP gross margin and operating loss is included in our earnings release. Total revenue for the fourth quarter was $49.5 million, compared to $67.4 million for the same period in 2022 and compared to $46.5 million in Q3 of 2023. Our Q4 revenue compared favorably to Q3 2023, increasing by $3.1 million, mainly due to strong capital equipment sales in our international markets as well as strength in skincare. The $17.8 million or 26% decrease from the fourth quarter of 2022 was due mainly to a $14 million decline in capital equipment revenue. This decrease in capital equipment revenue resulted from continued macroeconomic pressures and a challenging financing environment, particularly for our North American customers.

AviClear revenue for the fourth quarter of 2023 was $3.9 million. In our 10-Q for the September quarter, we announced that we were no longer considering AviClear as a separate reporting segment following our AviClear business model change and corporate restructuring. Accordingly, we have included AviClear lease fees and direct sales as part of systems revenue and AviClear treatment revenue is reported in consumables revenue, comparative periods have been adjusted accordingly. Non-GAAP gross profit for the fourth quarter of 2023 was $9.9 million with a gross margin rate of 20%, compared to a gross margin rate of 59.4% and for the fourth quarter of 2022. The primary driver of this 39 percentage point decrease is a 19 percentage point impact from the increase in our reserve for excessive inventory reflecting the decline in our capital equipment sales forecasts and a provision for AviClear materials and finished goods.

Other contributors to this gross margin decrease included an approximate 10 percentage point impact from lower manufacturing and sales volume, as well as inventory variances identified through our annual physical count and write-offs of demo equipment and skin care product. Non-GAAP operating expenses for the third quarter of 2023 were $36 million, compared to $39.7 million for the same period last year. This $3.7 million decrease mainly reflects personnel savings resulting from the restructuring we announced in November 2023, as well as lower sales commissions. For the fourth quarter of 2023, we incurred a non-GAAP operating loss of $26.1 million, compared to an operating income of $0.2 million in the prior year period and a loss of $28.7 million in the third quarter of 2023.

Turning to our balance sheet. We ended the quarter with $143.6 million of cash and cash equivalents compared to $179.5 million at September 30, 2023. This $36 million quarterly sequential decrease was primarily driven by a net loss after adding back non-cash items of $28 million and other working capital changes. In our 10-Q for the September quarter filed on March 6 of this year, we disclosed that a change in our AviClear strategy from a lease model to a direct sales model would result in the reclassification from property, plant and equipment to inventories of all AviClear devices that had not been leased, as well as AviClear parts. Accordingly, the AviClear inventory materials, net of reserves has been recorded as long-term inventories at December 31, and 2023.

Before we open the call for questions, I would like to provide you with our outlook for 2024. We are issuing revenue guidance of $160 million to $170 million, including $4 million of skincare revenue earned through the transition in the first quarter. We expect to continue to consume cash, more heavily weighted towards the first-half of 2024 as we close out certain supply obligations, primarily related to AviClear. Our expected cash and cash equivalents balance at December 31, 2024, is in the range of $55 million to $60 million. Operator, we are now ready to begin the question-and-answer session.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from George Sellers of Stephens. Please go ahead.

George Sellers: Hey, good afternoon and thanks for taking the question. Maybe just to start on guidance. Could you just parse out what that revenue guidance assumes from systems consumable and then also have a clear contribution throughout the year? Thank you.

Taylor Harris: Sure. Hey George, good to hear from you. So as we — just a couple of thoughts on our revenue guidance. As we looked at 2024, and we were assuming that we have a similar macroeconomic backdrop as what we faced in the second half and particularly the fourth quarter of last year. And as you saw in our results in the second-half of last year, we did have more of — more pressure on the capital equipment portion of our business than in other parts. And so we’ve assumed that where we were exiting 2023 is where things pick up in 2024 on capital. The — for a couple of specifics for skincare, we’re assuming $4 million of revenue. That’s what’s embedded in our range. And that’s what we recorded in the months of January and February, and we’ve now transitioned to that business, so there’s no more skin care revenue.

In aggregate, we would have our systems and our consumables slightly down year-over-year on a full-year basis from 2023 to 2024, and that’s because we have tough comps in the first-half of the year. We are assuming as we move through the year that we perform better and that as we disseminate more best practices with AviClear and training that we’re going to start to see a pickup sequentially in our AviClear business.

George Sellers: Okay. That’s really helpful. I appreciate that color. And then maybe on the cash burn piece of it. You mentioned a few puts and takes with inventory building in the first-half of the year, but there’s also some cost saves. How should we think about just the cadence and the progression of cash burn? Is there sort of a step function improvement we should expect in the second-half of this year? Or how should we be thinking about that cash position specifically?

Taylor Harris: Yes. You’re absolutely right, George. So of the burn that we’re anticipating in 2024, about 70% of it should be incurred in the first-half of the year and that will be more heavily weighted towards the first quarter. And the reason for that, as we’ve talked about in the back half of last year is we still have purchase commitments related to inventory, particularly with AviClear. And we’ve gotten a fair amount of that behind us with — by wrapping up our agreement with Jabil. So in the first quarter, a lot of that is occurring. In fact, Q1 burn will probably be a little higher than we had in Q4. These are working capital movements. And we’ll still have some of that in the second quarter. But by the second half of the year, we should be in a much more favorable position with respect to our burn profile.

And in fact, we should have inventory at a level that we’re able to start working it down, having that become a source of cash for us, offsetting some of the other elements of burn.

George Sellers: Okay, great. That’s really helpful. Thank you all for the time.

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

Joe Federico: Hey, guys. This is Joe Federico on for John. Thanks for taking the questions. I guess just to start maybe on AviClear, revenue stable sequentially. And but it included that lower procedural revenue. I was just curious maybe what the thought was for the recurring revenue aspect to kind of turn the corner. Are some of those productive accounts that you mentioned that are already dormant? Is there more to come? And then I also just wanted to ask if there were any learnings maybe from the early international launch with AviClear so far.

Taylor Harris: Sure. Thanks, Joe. So yes, let’s start with AviClear procedures. You’re absolutely right that the primary factor affecting our procedure with AviClear has just been that we went to a large number of accounts early in the launch. It was well over 1,200, and many of those they may have tried AviClear, but have decided that it’s probably not going to be an ongoing part of their practice or they’re still waiting. So in — by the fourth quarter, we had approximately 55% of the account base that did not do a procedure. So that’s what caused the procedure slowdown as we move from the initial launch phase into the second-half of last year, Q3 and Q4. So what we’re doing right now, we’re in a period as we’re going back out to market and having conversations with these — with accounts you have AviClear of really helping diagnose well, what some of the learnings and what some of the challenges are.

And I think the good news is that we’re not hearing anything that’s surprising to us. And in fact, we hear from a lot of accounts that they want to be in the business of treating acne and they want to make AviClear work, but they need our help in that. So that’s exactly what we’re doing. And a lot of what I talked about in my prepared remarks is what are our initiatives that we’re kicking off here. We’ve already kicked much of it off in Q1, some to come in Q2, what are we doing to help support growth of utilization across the AviClear account base. And so I think there are a number of accounts who are taking some time to try to make that work. And that’s the good news. But it will take some time for us to work the account base help identify the ones that are going to commit to AviClear and then start rebuilding that procedure base.