The Beauty Health Company (NASDAQ:SKIN) Q1 2024 Earnings Call Transcript

The Beauty Health Company (NASDAQ:SKIN) Q1 2024 Earnings Call Transcript May 9, 2024

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Operator: Hello, and welcome to The Beauty Health First Quarter 2024 Earnings Conference Call. At this time, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. I’ll now turn the call over to your host, Norberto Aja, Investor Relations. Please go ahead.

Norberto Aja: Thank you, operator, and good afternoon, everyone. Welcome to Beauty Health Company’s 2024 first quarter conference call. We’ll start in just a minute with management’s comments and your questions. But before doing so, let me take a minute to read the Safe Harbor language. Management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. Listeners are cautioned not to place undue reliance on any forward-looking statements. For a further discussion of risks related to our business, see the company’s filings with the SEC. This call will present non-GAAP financial measures.

Reconciliation of these non-GAAP financial measures to the most comparable GAAP measures are to be found in the earnings press release furnished to the SEC and available on our website. Joining me on the call today is Beauty Health Chief Executive Officer, Marla Beck; along with Chief Financial Officer, Mike Monahan. Following management’s prepared remarks, we will open the call for a question-and-answer session. With that, I would now like to turn the call over to our CEO, Marla Beck. Please go ahead, Marla.

Marla Beck: Thank you, Norberto. Good afternoon everyone and thank you for joining us. We are pleased to be with you today to review Beauty Health’s first quarter results and the progress we are making on our business transformation. As discussed on our last call, we continue to drive towards rebuilding and restoring confidence with a focus on laying the foundation for future growth. While this transformation will take time, I am encouraged by the progress we are making towards our three strategic priorities, sales excellence, operational excellence and financial discipline. Our teams are driven and focused and I am excited by the long-term potential of Beauty Health. Turning to our first quarter results. We had a solid start to 2024.

First quarter revenues came in above our guidance midpoint with healthy, consumable sales. Profitability was also well ahead of expectations driven by continued cost rationalization. While we are encouraged by our progress, there is still more work to be done, particularly on the device side of the business. We’ve addressed the core issues that impacted earlier versions of our Syndeo system with the release of Syndeo 3.0 last July. The quality has improved significantly. However, our field teams and customer service teams are finding some technical issues, most of which are resolvable by phone or an in-field technical visit. In the last 30 days, we have brought in a seasoned operations leader who has decades of experience to rapidly bring our quality processes and our global production and supply chain processes up to superior levels.

We will get this right over the next couple of quarters. Our number one priority is to make sure our providers have the devices they need to serve their customers and maximize their revenue streams. We are committed to this every day. We remain acutely focused on improving our financial results and addressing our near-term operational challenges while building the foundation necessary to capture the significant long-term growth opportunities for our hero brand Hydrafacial. For providers and consumers alike, Hydrafacial is beloved for its instant skin health results, scientifically proven clinical efficacy, and strong brand recognition. Investing in Hydrafacial treatment devices offers providers the potential for a new revenue stream, increased traffic, and ongoing support by our business development and training teams.

It is a treatment asked for by name across doctors offices, med spas, single room estheticians, as well as retail and hospitality locations for healthy, glowing results every time. On our last earnings call, we introduced three key strategic priorities for 2024, including sales excellence, operational excellence and financial discipline. While early in this transformation, I am encouraged by our progress, regarding our first priority, sales excellence. Our field team has been successful in elevating our strong provider relationships through best-in-class customer service and engagement. The treatment room is the center of our business and providers and our sales teams are the face of the brand. We believe consistent personal connection between our experienced and tenured sales team and our providers is a unique differentiator for the Hydrafacial brand.

In putting the provider first, we have also allocated additional resources to support them. We refined our training programs, giving our providers more accessible and convenient education opportunities to hone their craft and effectively grow their businesses. We’ve also expanded our technical and customer service teams, including the addition of 24/7 technical support in the U.S. and Canada to swiftly address the needs of our customers. In a study conducted in February, Hydrafacial has the highest NPS among branded capital equipment in med spas and traditional spas. Additionally, Hydrafacial was recently named aesthetics vendor of the year by our corporate partner, Relive Health at their franchisee conference. This recognition is a testament to both the clinical efficacy of our treatment system and the world class support of our field teams.

Our providers continue to recognize the unmatched result of our treatment and the power of the Hydrafacial brand to not only bring consumers through their doors, but also to serve as a revenue multiplier for their business. As we look further ahead, we are more confident than ever in Hydrafacial potential, both in its current form and through innovation. Moving to our second area of focus, operational excellence. As I mentioned on our last call, my focus from day one has been to streamline our operations, concentrating on our most promising growth avenues and instituting added rigor, accountability and oversight throughout our supply chain. A comprehensive evaluation of our entire manufacturing and operational framework is underway. I look forward to updating everyone upon its completion later this year.

To this end, we recently made additional strategic leadership changes. In April, we appointed Sheri Lewis to the newly created position of Chief Supply Chain and Operations officer. Sheri is a talented and deeply experienced executive who brings decades of relevant expertise across global supply chain and operations, including at Medtronic. She will serve an important role in advancing our strategic objectives in this area. She is currently leading a comprehensive global supply chain review to drive continuous quality improvements. Regarding our third priority, financial discipline, our goal is to be cost conscious in everything we do, balancing our cost structure with revenue and opportunity. Operationally, this means tighter expense management and a reallocation of resources to high impact areas of the business.

Looking ahead, we see a number of compelling opportunities to drive long-term profitable growth by leveraging the tremendous power of the Hydrafacial brand and our clinically proven treatments. We see an attractive opportunity around consumables to drive further penetration and will be working through our long-term innovation pipeline. We will look at how we expand our offering to increase the efficacy and longevity of our results. We see a clear opportunity to grow our device installed base by further segmenting our provider channels and offering unique value. We have exclusive offerings in our medical channel currently, such as our wet diamond tip in our medical grade peel. We’ve see an opportunity to expand our offerings treating each segment in a unique way.

Additionally, we have meaningful clinical studies related to the efficacy of Hydrafacial treatments both historic and underway, that we will leverage in all of our stakeholder channels. We also see the opportunity to increase penetration in our existing markets to drive scale. We are looking at how we increase our investments in our direct markets to drive both provider and consumer adoption and retention. Of course, none of these opportunities would be possible without our entire team’s unwavering focus on delivering the highest levels of support and service to our providers and end consumers. Our past and future success is predicated on this ironclad commitment. What gives me the most confidence in our ability to drive further improvements and growth, while creating added value for our partners and shareholders is the quality of our team, including the recent additions we have made.

While we remain cautious in the short-term as we work through the remaining headwinds, I believe the long-term outlook and opportunity for Beauty Health has never been more promising. I look forward to engaging with you over the coming quarters to discuss our progress. With that, I will turn the call over to Mike.

Mike Monahan: Thank you, Marla. I will begin with a detailed review of our first quarter financial results and then provide an update on our financial guidance for 2024. Revenue came in above the midpoint of our guidance at $81.4 million, representing a 5.7% year-over-year decline. This was primarily driven by slowdown in capital equipment sales across all regions, substantially offset by an increase in consumables. Gross margin was 59.4% versus 62.7% in the prior year period on a GAAP basis and 63.4% versus 70% respectively, adjusting for non-cash expenses and certain add backs. The primary drivers behind the decline on a GAAP basis were higher indirect product costs along with an increase in inventory related charges. This led to an adjusted EBITDA of $400,000, or 0.4% of revenue versus a $500,000 loss, or negative 0.6% of revenue in the first quarter of 2023.

During the quarter, we saw growth in overall consumable sales across all regions, offset by lower capital equipment sales. Global equipment revenue declined 21.1% as we saw pressure across most of our end markets. While we continue to see strong interest in both our brand and products, we are seeing tightening credit and longer lags between lead generation and closing. During the quarter we sold 1,417 systems at an average selling price of $25,253. This brings the total active machines in the field to 32,530 units versus 27,406 units at the end of Q1 2023. Consumable sales grew 11.5% to $45.6 million, continuing to demonstrate the growing interest and appeal of Hydrafacial from end consumers. From a geographical perspective, revenue in the Americas declined 5%, primarily driven by soft capital equipment sales due to credit tightening and customer caution.

For the quarter, APAC revenue declined 12.1% to $12 million, while China accounted for $7.2 million of the region’s revenue, a decline of 3.1% year-over-year. The decline in China reflects an 11.9% drop in new system sales, partially offset by an increase in consumables growth. We believe there is a large opportunity for growth in China. However, we remain cautious in the near-term. We are focused on developing a strong, stable sales force and equipping them with the tools needed to grow the business. EMEA’s Q1 revenue declined 2.9% to $19.1 million, with strength coming from consumables offset by lower new capital equipment sales. We delivered consolidated GAAP gross profit of $48.4 million, resulting in a GAAP gross margin of 59.4%, adjusting for non-cash charges such as depreciation, amortization, and stock based compensation adjusted gross profit of $51.6 million for a 63.4% adjusted gross margin.

We expect adjusted gross margin to be relatively consistent with Q1 levels for the balance of 2024 as we continue to work to evaluate and optimize our supply chain strategy. As it relates to operating expenses, I am pleased to report a decline of $6.1 million, down 8.5% year-over-year as we continue to have success in more strategically managing expenses across the globe. Selling and marketing expense was down approximately 13% to $33.7 million, reflecting a lower marketing spend as well as lower compensation in sales commissions. R&D expense was $2.8 million, up $500,000, while G&A expense was $28.9 million, down $1.5 million with savings primarily driven by lower compensation and outside services expense; this resulted in a net loss of $700,000.

Normalizing for non-cash items and certain discrete charges our adjusted EBITDA was $400,000, favorably comparing to a net income of $20.3 million and an adjusted EBITDA loss of $500,000 in Q1 2023. Moving to the balance sheet, we ended the quarter with approximately $444.6 million in cash. Through May 8th we repurchased $192.3 million of our convertible debt. As of March 31st, we have had approximately – we have approximately $70 million remaining on our existing share repurchase authorization. We feel comfortable with our current liquidity position and together with our board we will continue to evaluate the best allocation of capital. Taking a look at inventory, we ended the quarter with approximately 9$5.7 million, an increase compared to $91.3 million in December 2023.

The increase was primarily driven by additional inventory needed to build and deliver replacement 3.0 units to our provider base. We remain on track regarding our Syndeo replacement program during the second quarter. As of the end of March, we estimate we will replace approximately 1,000 more systems for customers globally who qualify but have yet to receive their replacement Syndeo 3.0 system. Our March quarter-end accrual for the Syndeo replacement program was $8.3 million, down from approximately 21 million at the end of December 2023. Our warranty accrual of approximately $7 million as of March 2024 is in place to cover our total global systems, inclusive of extended Syndeo warranties we issued to support our providers during 2023, I would like to take a moment to reiterate the revenue cadence and seasonality of our business.

Revenue is typically highest in the second and fourth quarters of the year. This is due to two factors. First, capital purchases historically are largest in the fourth quarter, as our provider base often has clear visibility into their annual capital spend allowance by that point in the year. Second, the second and fourth quarters, spring and fall, often have the highest consumer demand for Hydrafacial treatments, which we support with our consumables promotions in May and in November. Given the size of our business, the seasonality has an impact on the cadence of our revenue. Regarding guidance, in the second quarter we expect net sales to be $96 million to $102 million and adjusted EBITDA of $4 million to $7 million. We expect revenue to increase sequentially from Q1, but be down year-over-year in the second quarter, primarily driven by near-term global pressure for capital equipment.

Additionally, in the second quarter we face a challenging year-over-year comparison for system sales given our international Syndeo launch in the 2023 comparable period. For the full year 2024, we are projecting revenue growth to be flat to low-single digits year-over-year. However, we expect to deliver adjusted EBITDA of $40 million or greater. This guidance is consistent with what was communicated on our previous earnings call and implies a return to revenue growth in the second half of the year, reflecting improved provider confidence, a more favorable credit environment and accelerating consumable sales. In closing, our goal is to execute with a similar simpler structure while exceeding the expectations of our providers, consumers, partners and shareholders.

Our action plan is clear. We will increase our footprint through new capital equipment sales. We plan to increase consumable sales, stabilize the business, complete our Syndeo 3.0 replacement program, and drive profitability. I will now turn the call back to the operator for Q&A.

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Q&A Session

Operator: Perfect. Thank you. [Operator Instructions] All right, our first question comes from the line of Oliver Chen from TD Cowen. Please go ahead.

Oliver Chen: Hi Marla and Mike. Regarding the current situation of the machines on the field, why are some problems fixable by phone versus in person? And what’s your expectation on timing of having those issues resolved. And are they – are they surprising you or not really this was in line with how you expected this to go. And on the revenue side, Mike, what were the main drivers of the upside? And then a bigger picture question. you mentioned stabilizing the business. When you say stabilizing the business, Marla and Mike, like what are the key steps in terms of and your thoughts on the overall stabilization plan? Thank you.

Marla Beck: I will start. On Syndeo, we continue to make progress. The core issues we had with earlier versions have been addressed. Recent issues are related to noise and consistent flow in cosmetic issues. And to address this, we have a full customer and technical service team who work quickly to diagnose and potentially solve the issues over the phone. Most are resolved over the phone, and if it’s not resolved over the phone we send a member of our field service team to visit the provider in person to resolve the issue. So, and then regarding the future, we have recently brought in a seasoned operations leader who has decades of experience to really look at our global production and bring our processes up to the level we expect. We’ll report on that in the next couple of quarters. She just joined our team. Mike, I’m going to pass to you for the remaining questions Oliver had.

Mike Monahan: Sure. So the second question you asked, Oliver, was around revenue, the main drivers of it. In the first quarter consumables was really a bright spot for us. We had nearly 12% growth on consumables on a consolidated basis, and we were able to deliver that across the regions. As we look throughout the rest of the year, in terms of the guidance we provided, we further expect to continue to see that trend in terms of driving overall consumable sales. And we also expect to see improvement in new capital equipment sales, specifically in the Americas, as we get further along throughout the year. And those two factors your third question around stabilizing the business that along with really focusing on gross margin, is where we’re spending the majority of our time.

Operator: All right, our next question comes from the line of Ashley Helgans from Jefferies. Please go ahead.

Unidentified Analyst: Hi, this is Sydney on for Ashley. Can you share a bit more about the health perception from providers and where that stands? It sounds you guys have done a lot of work there, but just wondering what feedback you’re hearing, where you feel like you are kind of in that recovery of those relationships? Thank you.

Marla Beck: Yes. I have been touring providers with our teams and talking with our teams every week. The provider is more confident than they’ve been in Syndeo and the progress that we’re making. We even see that with our corporate accounts as they’re continuing to invest in driving hydrafacial as a gateway treatment for their other aesthetic services, so the confidence is significantly up from before?

Operator: All right. Our next question comes from the line of Allen Gong from JPMorgan. Please go ahead.

Allen Gong: Thanks. I’ll just ask kind of both of my questions up front. You mentioned tightening credit as being a challenge to capital, but also said that you expect that to get better over the course of the year. We’re only a month or so into the quarter, but are you starting to see any improvements on that so far in May? And then when I think about your guide, the $96 million and $102 million for second quarter, and then I think about your full year target for flat to up low-single digits that does put quite a bit of your sales into the back half of the year. And given some uncertainties around the trajectory of the macro environment and your ongoing kind of remediation, what gives you confidence that you can hit that number?

Mike Monahan: Sure. This is Mike. I’ll take both those questions. So, on the tightening of the credit, we’re actively looking for different financing alternatives for our providers to make sure they have access to capital. So we’re not seeing significant changes in May. However, we are working with them to make sure that we can support them going forward, and we expect to make some progress on that throughout the year. On the second question, on the guidance and the revenue cadence, on a percentage basis we expect Q4 to be a higher percentage of this year’s revenue than the last couple of years. The launch of Syndeo in the U.S. in 2022 and internationally in 2023, along with some of the device challenges we had last year, impacted the normal cadence of revenue in the business.

If you look at it historically – historically it has been very strong in the fourth quarter that tends to be the largest quarter for this business prior to the last couple of years, and so we’ve modeled our guidance according to that. And as we think that from a revenue cadence, we’ll start to return back to a more normal basis than we have in 2022 and 2023.

Operator: All right. Our next question comes from the line of Susan Anderson from Canaccord Genuity. Please go ahead.

Susan Anderson : Hi, good evening. Thanks for taking my question. On the system sales, I was curious how much of the weakness you thought maybe was caused by the higher interest rates versus just a general pullback in, I mean, from general pullback in spending at med spas versus just concerns around the Syndeo issues and maybe just holding off. And then also I was curious if you had any thoughts on if providers were holding off from purchasing until the issues were fixed, or are they going to another competitor or something like that? Thanks.

Mike Monahan: I think it’s a combination of both. We’re seeing the higher interest rates are definitely having an overall impact on having our providers pause, some of them, and it’s taking a little bit longer between the leads we generate and being able to close. I think the combination of that, we really don’t know the specifics between interest rates and some of the equipment challenges we’ve had in the past. But one thing I will say is we’re starting to see that lesson. We don’t really believe that we’ve seen a significant impact on kind of competitors. We think the opportunity is very strong, and that’s as you look at our guidance for the rest of the year, when we look at our pipeline, we’re really encouraged about what we believe we can deliver kind of over the near term.

Operator: All right. Our next question comes from the line of Olivia Tong from Raymond James. Please go ahead.