Cutera, Inc. (CUTR) on Q1 2021 Results - Earnings Call Transcript
Operator: Thank you for joining Cutera’s First Quarter 2021 Earnings Conference Call. 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 current information that is, by its nature, dynamic and subject to change. 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.
Dave Mowry: Thank you, operator. Today, I am joined on the call by Rohan Seth, our Chief Financial Officer. I will begin today’s call by providing a brief overview of our first quarter 2021 business results, a high-level summary of our energy-based aesthetic market trends and a few operational highlights from our first quarter 2021 performance. Rohan will then provide additional details around our financial results and share our outlook for performance over the remainder of 2021. After Rohan finishes, he will turn the call back to me for some final comments before opening the call to questions. Turning first to our first quarter business results. I am pleased with the results delivered during the first quarter, which were driven by the continued execution of our commercial plans, both in North America and internationally. Total revenue for the first quarter of 2021 was $49.7 million, an increase of 54% over prior year results. Our first quarter 2021 revenue performance reflected broad-based positive results across nearly every geography and in every product category of our business. Capital equipment sales were strong in the period with 35% growth over prior year, WITH notable strength in North America, Europe and Australia and New Zealand. In our energy-based aesthetics, capital sales normally follow a seasonality that declined 20% to 30% from fourth quarter to first quarter. However, during 2021, our capital equipment revenue declined just 6% sequentially from fourth quarter 2020, supporting our belief in the growing recovery in the capital equipment category.
Rohan Seth: Thank you, Dave. Before I begin, please note our prepared remarks will focus primarily on non-GAAP results, unless otherwise noted. A reconciliation of GAAP to non-GAAP is included in our earnings release, and we encourage listeners and readers to review our non-GAAP metrics in conjunction with the GAAP results as contained in our earnings release. As the overall volume of our Japanese business continues to grow, the size of contribution associated with Japan warrants a separate reporting line on a go-forward basis. Please reference our attached materials for further detail. I will now go over our results for the first quarter of 2021. Total revenue for the first quarter of 2021 was $49.7 million versus $32.2 million for the same period in 2020. As a reminder, our revenues in 2020 were impacted by the onset of the COVID pandemic. I continue to be impressed by the willingness and determination of our commercial leaders in responding to the challenging market conditions related to the pandemic. Nowhere is it more apparent than in our international segment, which grew 62% in the first quarter with particularly strong performance in our Australia, New Zealand, Japan and Europe regions. Not to be outdone, our North America business also grew 45%. These numbers are the results of our continued efforts around the retooling and rebuilding of our commercial organizations and reflect an ongoing steady recovery in our end markets. I’m also pleased to report that recurring revenue defined as consumables, global service and skincare revenue was $21.3 million in the quarter compared to $11.3 million for the same period last year, representing an 89% growth over prior year. Within recurring revenue, our skincare revenue continues to outpace the market. First quarter revenue of $12.3 million grew 324% on a year-over-year basis.
Dave Mowry: Thanks, Rohan. In the first quarter, we achieved broad strength across our business with noteworthy performances from our commercial and operations teams. The operations team, inclusive of our manufacturing team, field service engineers and technical support staff continue to step forward and deliver meaningful margin expansion results. When combined with our reduced operating expense levels, the increased revenue and expanded margins delivered $12.9 million of increased adjusted EBITDA in the first quarter over prior year period. This type of result provides strong motivation to our team and creates positive momentum for our business going forward. The leadership team and I intend to build upon this momentum remaining highly focused on executing our vital few initiatives through the remainder of 2021, doing the right things right. The commercial team will continue investing in both people and process as we do work that places the customer at the center of all that we do. The operations teams will continue to focus on expanding gross margins through very directed efforts around labor, material and fixed overhead reductions while our R&D, clinical and regulatory teams work together to deliver innovative products to the market through an increased new product development investment. We remain committed to the execution of our vital few initiatives over the balance of 2021. Our strong start in ‘21 came from the efforts in the second half of ‘20 carried forward and executed in the first quarter. These results serve to build confidence that Cutera will have strong performances throughout the rest of 2021, regardless of the remaining pandemic uncertainties that will likely be headwinds for many in this market. Finally, in closing, I’d like to spend a few moments thanking Jason Richey for his commitment and service to Cutera. Jason came to Cutera in 2018 as the company’s Chief Operating Officer. And when asked by our Board of Directors, Jason stepped up to serve as the interim CEO, dutifully filling the role until my arrival in July of 2019. Ever since I joined Cutera, Jason has been a strong and willing partner in our efforts to turn this business around and create the future of medical aesthetics. As you might have seen in the press release issued after-hours today, Jason will be moving on to a new role. I personally, along with the rest of the Cutera team, wish him the very best and expect that great things will follow him wherever he lands. The company has initiated a retained search for Chief Commercial Officer to fill this vacancy. With that, I’d like to open the call to questions. Operator?
Operator: Our first question comes from Matt O’Brien with Piper Sandler.
Korinne Wolfmeyer: This is Korinne on for Matt. Best of luck to Jason. So starting off, historically, your split of recurring in capital sales is like 30-70; last quarter, 40-60; this quarter, a little over 40%. And you’ve mentioned getting closer to 50-50. Are you moving along with that this year? Are we going to hit that breakout this year? Or when do we expect to see that type of breakout going forward?
Dave Mowry: Well, thanks, Korinne. Glad you could join the call. Give our best to Matt. I think the split you see is probably driven in part from our growth in consumables and skincare. But it is also somewhat driven by some of the decline in our capital sales as a result of the COVID environment that we’ve seen. So I want to be careful not to take a lap on kind of the suppression of our capital sales. I would expect that capital sales continue to grow, especially in the back half of this year, and we may revert a little bit on the current balance and to the upper 30s, but it’s not going to drift all the way back. And I feel very good about our recurring revenue streams. We feel very bullish about those. But I think the recovery of our capital business in the back half may create a little bit of overshadow to that.
Korinne Wolfmeyer: Great. That’s really helpful. And then one more for us. With the skincare margins a little bit lower, what sort of things do you have in place to offset that headwind as you work towards your long-term margin goals?
Dave Mowry: Yes, it’s a great question. I’m going to start and then kick it over to Rohan if he has some additional points he’d like to make. I’m going to talk more specifically about skincare, and maybe Rohan can talk more globally about our margin expansion. With skincare, we’re working very aggressively and actively with the manufacturer to evaluate what we can do to take out of some of our logistics costs and some of our handling expenses as well as negotiate in a best possible way to improve our pricing, and then ultimately, the profit margin that we generate. And we’ll be working through those -- through the course of the next several months in hopes of getting and landing in a spot that’s less dilutive to the overall margin. So we’re active in looking at that, and we’ll be able to hopefully see some benefit from those activities. Rohan, do you want to talk about margins, in general?
Rohan Seth: Yes. And thanks a lot, Dave. So I’d say, first of all, some of the results of our efforts over the past several quarters are kind of bearing fruit already, and that was evidenced in the results and the numbers that we put forth in Q1. I’d say with the faster than expected growth in our skincare business, it delays by a little bit our previously communicated outlook on margin. But that being said, the skincare business continues to increase our conviction in bottom line profitability. I feel really good about where adjusted EBITDA ended up this quarter and where it’s trending towards.
Operator: Next question, Chris Cooley with Stephens.
Chris Cooley: Just for us maybe at the outset, and I apologize if you covered this in your prepared remarks, but is there any update just in terms of your thoughts on the timing of when we can either see data or get a more formal update as it pertains to the new product cadence and more specifically the acne offering? And then just as a second kind of follow-up, I’ll just ask some here in succession. Again, really impressive what you all did on the adjusted EBITDA line on a year-over-year basis this quarter. Just curious a little bit as we see that rise in capital going forward in the back half of the year that you just alluded to, any concerns there that you’d have pressure on your ability to generate strong year-over-year growth in adjusted EBITDA as maybe you get a little bit of pressure at the gross margin line, or do you think you’re realizing some operating synergies there that would more than offset that?
Dave Mowry: Thanks, Chris. Great questions. I’ll take the first one and maybe Rohan can speak more specifically to the trends on bottom line and margin again. So in regard to acne, look, I think we’ve set an awful lot about acne. We’ve made sure that investors understand the level of our investment and conviction with acne, and we continue to be exceptionally bullish with the results and the progress our team has made. Nevertheless, we find that the more we disclose, the more we help and inform other people of where we are and what’s happening, and I think, really, in our minds, we’ve given enough at this point. And when it’s time to give more, we will do so. I would say that we are continuing to execute our plan. There’s been no change to our plan. And we just find that giving more data just is not necessarily in our best interest at this time.
Rohan Seth: Yes. And I’ll address the question on adjusted EBITDA, Chris. So I’d say, look, we feel really good about the sustainability of the results that we’re delivering and we’ll deliver for the rest of this year. I feel like we’re achieving a little bit of scale and all of the efforts that we’ve made over the past 4 to 5 quarters are bearing fruit. That being said, as the year progresses, we will use some of these resources to accelerate efforts on things such as acne, possibly ERP and continue to reinvest in the best ideas that are available to us, which are all internal, as best as we can see right now.
Operator: Next question, Jon Block with Stifel.
Jon Block: Great. Nice quarter, Dave and Rohan. I guess first question, Dave, to start it with you know what, what normally is the case in aesthetics, it’s capital down 20% to 30% from that 4Q to 1Q and you well outperformed. But I guess, what’s also usual in aesthetics is for that step-up, 1Q to 2Q. And I’m just curious because of the big outperformance that you had from 4Q to 1Q, as we think about our models and I know you don’t want to give specifics, but do we still think the norm occurs? In other words, are you’re still growing capital, call it, from 1Q to 2Q despite what looks like a very impressive 1Q number?
Dave Mowry: Yes. By the way, Jon, I appreciate the question, and I appreciate bringing the clarity. Look, I don’t think we’re going to see quite the same seasonality. And this is just my opinion in digging into this and talking with some of our sales leaders. I don’t think we’re going to see quite the same step up in capital in Q2. I think the performance we saw in Q1 might have pulled forward very -- in terms of how aggressive our teams were in the marketplace during Q1. We’re certainly going at this thing with a vengeance to drive another sequential improvement. But I think frankly, it’s probably not going to be the same magnitude. We have seen seasonality flow from Q1 to Q2 because of that preference. I am, at this point, very thoughtful that we should see sequential improvement, but I don’t think it’s going to be of a nature that I’m willing to guide to at this point.
Jon Block: Okay. Fair enough. And then Rohan, maybe a quick 2-parter for you, and then I’ll end with just a higher-level question. But when we think about gross margin, it seemed to be in your talks and also I believe in the press release, do we think about them moving higher throughout the year? Like you said the success in skincare might put a little bit of a cap on it, but do we still think about, call it, sequential improvement off that 1Q ‘21 gross margin number? And the follow-up, the 2-parter is, what about skincare? I mean, every time I ask about it and you say, don’t take that as the current run rate and yet it moves higher. Is this finally the time that we think somewhere between maybe that 4Q and 1Q might be the right run rate for skincare? And then I’ve got one more.
Rohan Seth: Yes. So I’ll address the question on margin. I’d say -- yes, I’d say as the business continues to scale, we’ll continue to see some expansion in gross margin. I’d say skincare will be a headwind, whether we like it or not, it’s there. That being said, it is a profitable business for us. It does help us on the adjusted EBITDA side. So while it maybe be dilutive for us on a gross margin perspective, it’s a good business for us. We appreciate having it. So I’ll turn it over to Dave to talk us through where he sees skincare leveling out.
Dave Mowry: Yes. Jon, it’s a little bit problematic for us because, as you know and probably everyone on the call recognizes, Japan’s kind of still in the travel lockdown. And for the most part has been, well, operating -- not operating at full capacity. And a lot of folks in Japan have probably augmented their skincare regimen by using topicals. We’re about to kind of see how that plays out as restrictions start to lift in Japan on travel. Although Tokyo is still on shutdown. So we’ll see. Our fear is that there’s some degree of growth that we’ve seen as a result of just the COVID environment itself. While we think we’ve got broad-based customers and we’ve got good reorder rates, we think we have some hedge there. But I’m not so sure that the current run rate is the real run rate in a post-COVID environment. And that’s what we continue to kind of be hesitant to get in front of. That said, we like the way we’ve set this business up, and we like the fact that it’s being effectively promoted across a broad customer base. And I think we don’t see it reverting back to a pre-COVID number for us, but probably settling in somewhere kind of in the mid-range of what we’ve seen since the pickup.
Jon Block: Okay. Very helpful. And last one for me, a little bit higher level. Dave, you’ve got the improved balance sheet. The aesthetics market is clearly coming back. The market is even moving the body where you guys have a really good portfolio. Maybe talk to us, if you use this as an opportunity to accelerate the rep hires even more? If you wanted to do that, does that get thrown off a little bit with Jason’s departure? And what are some of the characteristics or wants that you have when you think about onboarding someone in Jason’s place?
Dave Mowry: Well, Jason is a hard position to backfill just because of his drive and his commitment to excellence. And I think that’s certainly something that we’ll miss here. That said, I do think we have to get a little deeper into the commercial organization, and we have to get a lot more hands-on as we build it out, especially in light and in view of a future acne component. So what we don’t want to do is get super aggressive with adding people, then finding that we have to create some degree of restructuring or reorganization as acne launches. So we’re trying to be very thoughtful around what’s the future state and how do we bridge from now till that point. So I think that’s a very big deal. I think the other thing I would share is when I think about backfilling with the Chief Commercial Officer, my view is that this person has to have some varying skills. I want them to have certainly some aesthetic understanding and some experience or maybe even in capital market as well. But I think it’s also important that they come with some clinical understanding. As we think about some of the shifts in this business, we’ve seen greater and greater kind of requirements for clinical data and clinical support, especially as we get into more of the medical conditions that we intend to treat. So I think it’s a tall order. We’re already underway with it, but it’s a tall order. But I think we’ll have success in finding somebody that can help us drive and move the needle.
Operator: Our next question comes from Anthony Vendetti with Maxim Group.
Anthony Vendetti: Most of my questions have been answered. But maybe, Dave, I know you said you didn’t want to speak or provide an update on the acne treatment laser. But has that -- has the time line shifted at all? Or is the time line still the same from last quarter when you discussed the overall time line for getting approval and then potentially launching it commercially?
Dave Mowry: Yes. Well, look, I appreciate the market’s interest in this product. And I want to be very cautious because by answering your question, I’m actually giving kind of -- I’m reaffirming. So I’ve said I’m not going to say more, Anthony. I would tell you that we haven’t changed our opinion. We haven’t changed our view of the product. And we continue to drive with great efficiency towards what we think will be the future commercialization date and time. So all I would do is confirm to you that we haven’t fundamentally seen any change that drives or changes our view on, number one, the size of the market, the capabilities that we have to affect the market or the model that we would probably, I guess, from my perspective, be moving towards. So that’s the best I think I can do.
Anthony Vendetti: Okay. And then just lastly, maybe more higher level. It seems like most practices have obviously reopened at this point, maybe some of the spas might be -- maybe some of the medical spas might be some of the only exceptions but even most of them are, I think, reopened. Would you say there’s a pent-up demand for capital equipment, or has that demand been just coming back slowly over the last couple of quarters?
Dave Mowry: Yes. Look, I think you’re right. A lot of places have opened and several people have added capital equipment. Our view has long been and continues to be that we’re going to see probably the greatest appetite increase in the second half of this year. I think we have to not only get through the vaccination processes but we have to get some stability. I mean, I think everyone’s probably aware that there’s some new challenges in Michigan now on resurgence of the virus. So we want to be very thoughtful that we haven’t quite outrun this yet, and I think a lot of people are getting a little ahead of themselves and getting overly excited. We’re trying to be measured and thoughtful around this and make sure that we don’t get over our ski tips in terms of what we say and how we say it. That said, we’re very pleased with the results we’ve delivered in the markets and in the environments that we’re playing in. And we don’t want anybody to interpret that we aren’t thinking that we’re doing well in those markets. We just aren’t sure and certainly aren’t in control over the full expansion and the full recovery of the economy.
Operator: I would like to turn the floor over to Dave Mowry for closing remarks.
Dave Mowry: Thank you, operator. We appreciate everyone’s interest in the continuing of the -- following the Cutera story. We’re very pleased with our results, very excited about our future, and we’ll continue to make the investments we think necessary to drive what we believe to be a transformative event in this company’s history. With that, I’ll leave you and look forward to talking with you and updating you next quarter. Thank you.
Operator: This concludes today’s teleconference. You may disconnect your lines at this time, and thank you for your participation.
