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spk06: Thank you for joining QTERRA's fourth quarter 2020 earnings conference call. After the prepared remarks, there will be a question and answer session. 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. 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. QTERRA also cautions you not to place undue reliance on forward-looking statements which speak only as of the date they are made. QTERRA undertakes no obligation to update publicly any forward-looking statements to reflect new information, events, or circumstances, or to reflect the occurrence of unanticipated events. Future results may differ materially from management's current expectations. In addition, we will discuss non-GAAP financial measures, including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency into QTERA'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 alternatives to, the operating performance measures prescribed by GAAP. With that, I'd like to turn the call over to our CEO, Dave Mowry. Please go ahead, sir.
spk05: Thank you, Operator. Today I am joined on the call by Jason Ritchie, President and Chief Operating Officer, as well as Rohan Seth, our Chief Financial Officer. I will begin today's call by providing a brief overview of our fourth quarter and full year 2020 business results. Jason will then provide operational highlights and commercial updates on the business and then turn the call over to Rohan, who will provide more detail around our fourth quarter and full-year financial results, as well as the near-term outlook. Before opening the call to questions, I will then highlight progress on our long-term initiatives. Now, I'd like to turn to the fourth quarter highlights. I am pleased with our overall performance during the fourth quarter of 2020. While the COVID pandemic continued to impact our end markets, particularly on the capital equipment side of the business, We continue to execute our plans and made significant sequential improvement in both our top line and bottom line performances. As I have discussed in the past, I'm very proud of the way the entire QTERRA team has responded to the challenges presented by COVID-19 to us and to the market in whole. I believe our strong results are the direct reflection of the hard work, commitment, and creativity shown by our team in supporting our customers through this challenging time. During the quarter, we continued to see an overall improvement in our demand environment as the COVID-19 recovery progressed. The pace and the extent of this recovery continues to vary by region, and the magnitude of the impact of the virus remains localized as state and local governments impose restrictions of varying degrees. As you know, since the early days of COVID-19, we have worked with our core customers to track patient traffic and specific treatment volumes, as a leading indicator of the recovery. While the fourth quarter trends reflected sequential improvement in both body sculpting and skin and facial rejuvenation procedures, patients have sought facial rejuvenation treatments in particular. This increased patient trend appears to be driven by the increased volume of video conferencing being conducted during the pandemic. In total, core customers are sharing data that suggests total procedure volumes exiting the fourth quarter of 2020 is approaching or exceeding those in the same period of 2019. More specifically, the most impacted regions within North America were Canada, Southern and Northern California, Illinois, and the New York metropolitan area. Each of these areas were, at various times, highly impacted by limited access. Regarding the international markets, treatment volumes appear to be most highly impacted in the UK, Western Europe, and the Middle Eastern markets. Looking ahead, we expect that the pace of recovery will continue to vary on a regional basis due to the localized impact of COVID-19. While we believe the introduction of vaccines has provided a source of optimism for patients in scheduling procedures, some practitioners in the U.S. have expressed concern that with a known timeline to vaccination, patients who were previously unwilling to delay procedures now may be willing to delay their treatments until the vaccine has created a more safe environment. We will continue to track volumes, treatment types, and customer as well as patient trends so that we may continue to adjust our course and our processes accordingly. Revenue for the fourth quarter of 2020 was $49.9 million, a 4% decline compared to the prior year, but up 28% sequentially. Revenue for the full year was $147.7 million, a 19% decline from 2019. Fourth quarter capital equipment revenue was down 26% compared to prior year, but posted a 25% sequential improvement over the third quarter of 2020. North American capital revenue was down versus prior year, but showed strong sequential improvement, posting 35% growth over the third quarter of 2020. I am pleased that our capital sales continue to trend in the right direction and process improvements and future staffing increases will drive continued improvement in this category as the effects of COVID-19 begin to subside. Meanwhile, as Jason will discuss in more detail, our North American sales leadership team has continued to focus on making improvements to our sales process, our client support capabilities, and our ability to generate and leverage high-quality capital sale leads. These durable efficiency improvements will help us establish a strong foundation from which we can expand our team through the addition of high-quality reps. I am encouraged by our North American results and optimistic with the progress this team has made on their initiatives during the fourth quarter, as this will continue to be an area of management focus heading into 2021. On the international sales front, Japan and Australia and New Zealand continue to be bright spots for Kuterra, as both teams posted year-over-year systems revenue growth for the fourth quarter. Our fourth quarter recurring revenue was exceptionally strong, providing 80% growth over prior year period and a 32% sequential growth over the third quarter of 2020, accounting for approximately 40% of our fourth quarter 2020 revenues. As a reminder, we define recurring as the combination of revenues received from service, contracts, and field service repairs, the sales of our skincare products, and the sale of our consumable products used in the delivery of a Kutera energy-based aesthetic treatment. During the period, skincare remained strong, posting year-over-year growth of 363%, driven by near equal parts of new account expansion and increased penetration or same-store sales. Also contributing to recurring revenue growth was consumables, delivering year-over-year growth of 19%, which is reflective of increases in treatment volumes with our customers. We were pleased to see the consumable product sales growth outpace sequential treatment volume improvement. The Cutera consumable performance was driven on greater secret RF tip cells in particular. As mentioned earlier, we saw a marked increase in skin and facial rejuvenation procedures within the market. Looking forward, we are bullish on body contouring procedures and expect to see increases throughout 2021 as patients look to regain body image as they move into the new year prepare for long-awaited summer vacations, and resume a greater volume of on-site work and direct social interactions post-vaccination. Before turning the call over to Jason, I would like to point out the team's results in pushing towards sustained profitability. As part of the company's vital few initiatives, we are actively working to expand the gross margin profile of our business. Despite the drag that increased skincare volumes have on our overall gross margin performance, our efforts to remove fixed overhead costs improved manufacturing efficiencies, and reduced material costs are showing the desired result. During the period, we delivered non-GAAP growth margin of 56.6 percent, which was on par with 2019 at 56.7. Regarding operating expenses, like most other companies, Kuterra benefited from the reduced spending associated with restricted travel and trade show cancellations throughout 2020. Unlike other companies, though, We invested internal resources into improving our sales and marketing processes to deliver greater sales efficiencies and, in turn, productivity, making more of our savings durable as reflected in our fourth quarter 2020 results. Research and development expenses during the quarter reflected the lumpiness of spend associated with the timing of engineering, clinical, and regulatory events. R&D remains a priority for the company, and we will not constrain nor delay any of our critical development projects such as acne, in any way. Now, let me turn the call over to Jason to cover some of our fourth quarter and full year 2020 operational highlights.
spk10: Thanks, Dave. 2020 introduced many challenges and forced our team to evolve our ways of doing business on multiple levels. As we move into 2021, I think we've set a solid benchmark for our team to improve upon as markets continue to recover through the year. In North America, our fourth quarter sequential improvement was driven by the continued improvement in rep productivity. This is encouraging given the challenges of the present selling environment and the necessity to continuously evolve our methods in this ever-changing landscape. Through the calendar year, we've developed new processes and created a foundation that I feel will facilitate the scaling of our business going forward. As we head into 2021, We intend to continue driving sales expansion by adding additional high quality sales reps while sharpening our efforts to generate high quality customer leads to fuel the growth. We are also continuing to invest resources into our capital sales training program to accelerate the uptake of new reps and hone the skills of recent additions. We expect these improvements will help drive results in the back half of 2021 as customer appetite for capital continues to recover. Internationally, our capital business underperformed versus prior year due to significant COVID headwinds in the EU and several distributor markets. In regards to the EU, we commenced a restructuring within our sales force, namely in Southern Europe, as we improve our talent pool and consolidate sales leadership roles to improve efficiencies across the region. Additionally, we have improved our connectivity and tracking to duplicate many of the changes we made in the UK earlier, which have already begun to bear fruit. We are optimistic we will achieve a similar result in other key geographies within the EU over the course of 2021. Despite continued lockdowns due to the global pandemic, our Australian New Zealand team and our Japanese team both posted significant capital revenue growth year over year. These numbers reflect the depth and focus of leadership as well as the quality of sales representatives we have in place. Early investments in these regions continue to pay off, and we are following a similar roadmap for our EU geographies. Our product marketing plans for first half of 2021 will, in many ways, continue the efforts we launched during the fourth quarter of 2020. Our TrueSculpt portfolio remains our flagship product in the body sculpting market as we feel it gives aesthetic practitioners the competitive edge they need to drive best-in-class body sculpting results. We will continue to leverage the marketing and efforts around the TrueBody program, demonstrating the benefit of sequential utilization of RF fat reduction and direct muscle stimulation in the patient's pursuit of achieving their desired outcome. Marketing efforts within the face and skin rejuvenation space will center around the continued support of our XLV Plus vascular laser and our Secret family of products. This includes our Secret RF microneedling device, as well as the Secret Pro device, formerly known as Fraxis Pro. As mentioned before, this product combines the capabilities of the Secret RF device with the addition of a fractional ablative CO2 laser to induce thermal remodeling, addressing skin tone and texture, resurfacing, deep wrinkles, and scars, just to name a few. The Secret Pro device was launched in the third quarter of 2020 and is still in the early innings of its availability. Initial customer feedback for Secret Pro has been positive, and we expect to see increasing demand for this product during the 2021 calendar year. Lastly, we have focused on increasing the effectivity of our marketing spend through the back half of 2020 and intend to expand upon these learnings throughout 2021. One particular area we are committed to investing in is the acquisition, qualification, and deployment of high-quality leads for our sales organization. This focus and investment is actively underway as we are committed to having the structure and process in place in advance of the recovering capital equipment appetite of our customer base. Before I turn the call over to Rohan, I would like to share my appreciation for the hard work and dedication we have witnessed from our operational and commercial teams around the world. Their hard work and dedication, irrespective of market conditions, is inspiring and forms a strong foundation from which to build our long-term scalable organization. And with that, I'll turn the call over to Rohan to discuss our financials.
spk03: Thank you, Jason. As I review my prepared remarks, I want to clarify that I will be sharing both GAAP and non-GAAP metrics as relevant. A complete reconciliation of GAAP to non-GAAP is included in the earnings release. We encourage listeners and readers to review our non-GAAP metrics in conjunction with the GAAP results as contained in our earnings release. Total revenue for the fourth quarter was $49.9 million compared to $51.8 million for the same period in 2019, representing a decline of approximately 4%. The decline is solely attributed to reduce treatment volumes and lower levels of capital equipment purchases due to COVID disruptions. For the full year, revenue was $147.7 million compared to $181.7 million in 2019. Fourth quarter North American capital equipment revenue was $18.4 million compared to $28.5 million for the same period last year. While international capital equipment revenue for the quarter was 11.7M, a 4% decline. The clients in our European and distributed driven businesses were offset by gains in Australia, New Zealand and Japan. For the full year 2020, North American capital equipment revenue. Was 50.7M compared to 96.7M in 2019. Full-year international capital equipment was $40 million compared to $43.8 million in 2019. I am especially pleased to report that recurring revenue defined as consumable, global service, and skincare revenue was $19.8 million in the fourth quarter compared to $11 million for the same period last year, representing an 80% growth over prior years. For the full year, recurring revenue was 56.9M compared to 41.2M in 2019. Gap growth profit for 4th quarter of fiscal 2020 was 28.1M. Representing a 60 basis point gross margin improvement. Compared to the same period last year, the negative impact of our mid shift. Was offset by increased savings in our manufacturing and service operating. Gap growth profit for 2020 was $75.8 million, a 22.8% decline compared to 2019. Total gap operating expenses for the fourth quarter of 2020 were $26.6 million compared to $30.7 million for the same period last year, a 13% decrease that allowed us to deliver improved leverage. Our results reflect the strong efforts made by our teams to drive operational discipline and rigor in our day-to-day operations. Operating expenses for the full year 2020 were 98.6 million compared to 110.2 million in 2019. Sales and marketing expense for the fourth quarter of 2020 was 14.7 million compared to 20.3 million for the same period last year. Lower expenses were primarily the result of lower commissions due to lower sales and process adjustments to our sales and marketing activities, such as shifting from live to online events. While we do expect that some of these expenses may come back as COVID-related restrictions ease, we are confident that many of the changes implemented during 2020 will be more permanent in nature and allow us to have more efficient sales and marketing spending as we return to a more normalized environment. Sales and marketing expense for the full year 2020 was $52.8 million compared to $71.1 million in 2019. R&D expense for the fourth quarter of 2020 was $4 million compared to $4.5 million for the same period last year. R&D expense for the full year 2020 was $14.3 million compared to $15.1 million in 2019. Finally, G&A expense for the fourth quarter of 2020 was $7.9 million compared to $5.9 million in the same period last year, driven by legal fees and settlements for the effort of resolving cases, as well as increased bad debts. G&A expense for the full year 2020 was $31.5 million compared to $24 million in 2019. 2020 proved to be a very challenging environment, which showed up in costs such as bad debts, legal expenses, and in the fees associated with an interim CFO, all of which drove the growth of our G&A expense. Looking into 2021, we expect these items to moderate. And though there may be some lumpiness, we do not view this increase as recurring in nature. For the fourth quarter of 2020, our non-GAAP operating income, also known as adjusted EBITDA, was a profit of $4.7 million compared to a profit of $2.1 million for the same period last year due to lower operating expenses. Adjusted EBITDA for the full year of 2020 was a loss of $4.8 million compared to a gain of $4.3 million in 2019. There were no material or significant changes to our tax positions. However, as part of our ongoing year-end processes, we did have a one-time true-up of certain tax provisions. Turning now to our balance sheet, we ended the quarter with approximately $47 million of cash, cash equivalents, and marketable investments, compared to $33.9 million at the same time last year and $42.4 million at the end of third quarter 2020. We ended the quarter with $28.5 million of inventory, down $0.8 million from the third quarter, as we continued our effort to monetize our inventory through the end of 2020. I'm very pleased to report that the goals we outlined in at the onset of COVID-19 pandemic continue to bear fruit. We continue to be diligent in our cash management and retain strength in our balance sheet to continue to fund our upcoming growth investments. Lastly, turning to guidance. Given the continued uncertainty surrounding magnitude and duration of the COVID-19 pandemic and the wide range of outcomes for its impact on both capital sales and procedure volumes over the course of the year, we will not be providing formal guidance at this time. However, we are providing the following direction commentary to help our investors think about the drivers of our performance in 2021. We expect that capital equipment sales will continue to be driven by our TrueSculpt body sculpting platforms, TrueSculpt Flex and TrueSculpt ID, as well as the Secret Pro micro-needling products. While we expect our first half sales to be driven by recurring revenues, we anticipate a continued recovery in our capital equipment sales, both in the U.S. and internationally, particularly as we move into the second half of the year. We are remaining measured in our outlook for the year for a number of reasons, including the unknown impact of newer, more contagious variants of the coronavirus, as well as the yet to be seen rollout of vaccines and their impact on consumer behavior as we move through the year. We expect recurring revenues to continue growing at a healthy clip throughout the year, driven by our skincare line and the continued expansion of our products that come attached to the consumable. At the gross margin line, we expect continued improvements in full year 2021, driven by the natural expansion of margins as our capital equipment returns to more normal levels, driving cost absorption of a smaller manufacturing cost base. We expect continued discipline at the operating expense line in 2021, with continued leverage on general and administrative costs. However, please note that we will be making meaningful investments this year ahead of the launch of our Acne product, which will cause increased spending in research and development and, to a lesser extent, sales and marketing as we move throughout the year. For cash flows, we expect to be neutral or better on an adjusted EBITDA basis. With that, I will now pass it back to Dave for closing remarks.
spk05: Thank you, Rohan. Before opening up for Q&A, I would like to provide a brief progress report reviewing the strides we've made against our key initiatives. Six quarters ago, upon joining QTERA, We turned our attention to building a plan to unlock value and create sustainability. I shared our approach shortly after my arrival and stated that QTERRA was an execution story in the making. Our plan required that we set the foundation from which we could build the future QTERRA. A foundation or phase one required that we tackle three key elements. Number one, improve the reliability of performance at QTERRA by increasing the mix of contribution coming from recurring revenue categories and deliver strong, consistent results. Number two, shift the balance of our resource investments to fund game-changing, differentiated products and programs aligned to our core customers. And third, align our business to clear financial performance standards to include achieving sustained profitability, executing on our vital few initiatives that serve our focus, and accelerating the transformation of our business. Regarding our goal of improving the reliability of our revenue performance, we focused on closing the gap to a more balanced split of recurring to capital revenue, aiming for a 50-50 mix. Over the last 18 months, we've taken and held the position that all new products must have a consumable stream. We've committed commercial resources specifically to accelerating each of our recurring revenue streams and providing better service and support to our customers, inclusive of local promotional marketing procedures, helping practices better position QTERRA treatments, and improving regional support for skin care, including promotional products directly to patients. Over the past six quarters, we've been able to increase the percentage of recurring revenue over total revenue from the low 20s in the second quarter of 2019 to the upper 30s entering 2021. On our second element of the plan, shifting our investment strategy, we've made some critical internal investment decisions in the back half of 2019 to allocate more resources to higher impact programs, specifically targeting unmet clinical needs of our core customers. We began and have continued to allocate greater than one-third of our R&D spend to these first mover type product development programs. Despite financial pressures of a market uniquely challenged by the COVID-19 pandemic, We held fast to our belief in these critical investments, and in doing so, unleashed a remarkable group of scientists, engineers, and designers that embraced the challenge of changing the way energy-based aesthetics is delivered. First and most meaningful of the products coming through this high-impact product pipeline will be our solution to acne. Our prioritization strategy accelerated the development process and aligned our organization around a product which we believe will provide practitioners with a durable solution to acne without the side effects associated with current pharma solutions. Finally, is the third element of our foundation, and that is developing a culture of financial rigor and a pathway to sustained profitability. We have made significant progress overall on improving the financial performance of the business during the last six quarters. By narrowing our focus and ensuring alignment of the various functional areas to a single set of vital few initiatives, We have reduced redundancy, eliminated distractions, and streamlined our business. One recognized benefit of focus is our ability to move key programs and projects faster and more efficiently. This includes our gross margin expansion programs, which has already removed considerable cost from the fixed overhead pool and is actively carving costs out of material, labor, and warranty expenses. Our rightsizing activities executed during the COVID pandemic were done in a strategic manner, We identified and removed operating expenses from non-essential functions by consolidating roles and releasing redundant positions. Concurrently, we identified key processes to improve within sales and marketing as well as G&A to provide additional near-term savings while creating the scalability we need for our future. The impact of our improvements provide durable improvement to the P&L while enabling the company to generate cash in the third quarter aside from one-time adjustments. and generated approximately $4.5 million in cash in the fourth quarter, irrespective of any adjustment. I believe that 2021 will be a bit of a transition year as we close out the Phase I programs I just spoke of and start to identify and initiate some of the Phase II projects that will lead us to the future. While Phase I was a return to basic blocking and tackling, Phase II will be a much more exciting time marked by notable product launches and commercial expansions that deliver growth. As we embark on the next segment of our journey, I am extremely thankful for the hard work and dedication shown by the entire QTERRA team to get us where we are today, ahead of plan. From the challenges we have faced and overcome, we emerged a stronger and more focused organization with momentum from our fourth quarter's performance. I could not be more fired up moving into 2021 knowing that we are better positioned as a company, fully aligned to the critical tasks ahead, and highly motivated as a team to continue our journey towards realizing our vision of creating the future of medical aesthetics. With that, I'd like to open the call to questions. Operator?
spk06: Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of John Block with Stiefel. Please proceed with your question.
spk02: Thanks, guys. Good afternoon. Maybe what I'll do is I'll zoom in first, and then I'll sort of zoom out to wrap up the questions. But first one, Dave, you know, last quarter you said, hey, the new baseline for skin care, and that was around 7 million, and obviously a really big quarter here in 4Q. So how do we think about this going forward? Is $10 million the new new base? You know, it's a big number, but you did mention the success, call it the contribution of new accounts as well as utilization of current accounts. I just want a little bit more color in how we think about that going forward.
spk05: You know, John, thanks for the question. I think we've continued to be quite excited about the skin care line and how that's continued to grow. I do believe that there was some artificial inflation from fourth quarter just due to some timing associated with an anticipation of price increases or what have you that I think our customers anticipated but, you know, obviously was not rolled out. So I do think there was a little bit of a pull into fourth quarter just naturally from customer behavior. I do believe that the base that I spoke of earlier of $7.5 million is still the base that we expect and anticipate for this business going into 2021. And I think there will be some lumpiness from time to time as people anticipate, you know, pricing increases or there's some stocking of new customers or expansion of customers. But I think, you know, what I spoke of I think is really I think where I'd like to kind of believe the baseline is going forward.
spk02: Got it. Perfect. And then just to shift over to gross margins, and, Ron, maybe this one's for you, but they were really good in the quarter again, you know, non-gap. sort of around that 56% to 57% in the back half of 2020. I think in your commentary you talked about gross margins up, I believe, year over year. But if we just even isolate more of that normalized 2H environment, can the gross margins sustain at that level into 21, even if skin care acts a bit as a mixed headwind? And then I've got one more.
spk03: Yeah. So, no, great question, and thanks for that. So, you know, look, we've taken some really significant actions, in the middle of the pandemic and significantly right-sized our fixed cost base. We do expect these gains to be very durable in nature. As you rightly pointed out, our margin this quarter actually grew in spite of lower sales and mixed headwinds. I would expect our margin to ramp up and continue to ramp up as volumes come back online. Our expectation would be to get to the lower 60s as we exit the year, and this further growth in our margin will be driven by continued right-sizing in our services business. Our long-term target for margin continues to be in the mid-60s.
spk02: Wow, great. Great numbers. You know, I said I'll zoom out. So, Dave, just getting some questions, and, you know, I guess I've got questions as well. Just that $30 million in the fourth quarter around capital, how normalized is the environment? I get it. It's sort of unfair to ask normalized in a COVID environment. But, you know, I look to your 4Q to 1Q in past non-COVID years and capital sometimes down 50%. 25% plus sequentially. Was that 30 million, you know, real? Did you think it's real? And is that sort of the right jump-off point into 1Q, as much granularity as you're willing to give? Thank you.
spk05: Yeah, you know, that's a multifaceted question, John, because, you know, we had a number of different variables that we were working through. I think it's a great question, though. So let me kind of take you through a few components. Obviously, as we had indicated, we expected some sequential growth as we started to make – You know, investments in our sales force in North America in particular, you know, I think we continued to upgrade some talent during the quarter, and we saw a great lift from their capabilities and their productivity. That said, you know, we do believe we still have a number of positions to fill for North America, and it takes a time once you fill those positions for those people to make contributions as they build their deal pipelines. So I think that from a headcount perspective, you know, you're probably kind of thinking about it from a normalized perspective, 4Q to 1Q similar. I think that the ups and downs of shutdowns, restrictions, et cetera, were very mixed from a regional perspective. And we all know that elective procedures fell off, you know, for certain markets. We didn't see a whole lot of elective or fall-off in treatment volumes in But certainly we were fighting very, very difficult, very kind of toe-to-toe, if you will, for deals and trying to find our way to as many deals as we possibly could find in the quarter. So I think from that perspective, it's probably going to be similar quarter-to-quarter change, 4Q to 1Q. I think the one thing that may be working in our favor is the vaccines and the optimism, if you will, that's out there that, you know, the cure, if you will, is just around the corner and that's rolling out. And I do think that has opened the doors and created a little bit of excitement or momentum for the buying customers around capital, which might be slightly improved from Q4 to Q1. However, I still think that we've got a lot of uphill work to do there. So I don't know if those three elements help you kind of bracket what we think around the first quarter. But, you know, I'd say it's mostly simple, seasonal, you know, 4Q to 1Q with maybe a little bit of additional optimism for vaccine.
spk06: That's great, caller. Thanks, guys.
spk05: All right.
spk06: Our next question comes from the line of Matthew O'Brien with Piper Sandler. Please proceed with your question.
spk07: Thank you. Afternoon, and thanks for taking the questions. Just a couple for me. First, I wanted a couple of But just to follow up on John's question on the skincare business, Dave, are you seeing any other pull-through in those accounts outside of just the traditional skincare products? Are you getting them to buy other technologies? I know it's largely Japan. And then secondly, as you look at the U.S. on the consumable side, and you kind of talked about some of the strength that you're seeing there, Dave, Overall, just talk about what you're seeing there and how durable is ZoomFace in this phenomenon and the rest of the consumable component to the business as we look into 21.
spk05: Well, first of all, Matt, I have to give you credit. I haven't heard the coined phrase ZoomFace, but I will probably start stealing that shamelessly. In terms of your first question, skin care and the durability and the pull-through from it, You know, like we said, there is some account expansion and there's also penetration, which makes it, you know, in our minds, a durable business and one that's probably less susceptible to kind of shrink back or creep, right? But by the same token, we don't necessarily see it as a significant contributor to pull through. It does get us into new accounts. It does allow us to expand our base of sales or distribution of that product However, in many cases, those are not necessarily transferring to capital purchases in any way, shape, or form right now. We do believe that over a longer-term period, that may be the case, but certainly not the current case. As we think a little bit more about the Zoom-based phenomenon and what we think will continue there. We do think that there's probably a higher degree of facial rejuvenation programs that are going to play out over the first part of 2021. But as I said, we remain exceptionally bullish on the true body and the body contouring lines coming back as people get more freedom, more independence, and lower restrictions. We know that folks have been waiting long for summer vacations. We think as people have greater social interactions and in many cases start returning to work on some basis a few days a week or what have you, I think they're going to feel the need to kind of lose the couch potato attitude and kind of adopt a little bit more of a healthy look and feel. And I think that's going to drive a little bit more volume into the body contouring procedures. So at least that's our insight, talking with our customers and understanding what they're seeing and hearing. So I believe that that's fairly well calibrated.
spk07: Got it. Okay. And then flipping over to phase two, Dave, you know, I know it sounds like, you know, with these investments here in R&D on the acne side this year, it makes sense, you know, that this is still probably more of a development type year for acne. But I think Rohan mentioned some does a marketing investment this year, so I don't want to get too far ahead of ourselves with any of this, but it feels like acne is something that could roll out in 22. Is that the right way to think about it? And then just talk maybe a little bit more about the confidence that you've seen over the last couple months in that program.
spk05: Yeah, Matt, I appreciate the question. We have not We've decided to kind of sit on our hands a little bit in terms of what we release. We know that there's some competitive product out there, and we don't intend to do anything to give them any advantage that we've been able to gain through our own learning. So we've been kind of sitting back a little bit and not providing as much data, and I appreciate the investors' patience with us as we move through that. That being said, our bullishness for the product, its ability to to treat and solve the medical condition known as acne, and it has been remarkable, and we have not come off that position. I think from a timing perspective, we'll get into a position maybe later in the first half or early second half of the year where we can announce a little bit more around the timing and provide a little bit more insight to the results we're seeing and why we're so bullish on this technology. Those things said, we do believe that this is a transformative product for the company, and we also believe that there are some things that we can do behind this that will also maybe not be quite the same market size, but would be of interest and significance in helping us continue to transform this company from a fast follower to a first mover. And I couldn't be more proud of our R&D team. the scientists, the engineers, the designers over there, and the clinicians that are helping us drive these programs.
spk07: Very fair.
spk06: Thank you so much. Our next question comes from the line of Chris Cooley with Stevens. Please proceed with your question.
spk04: Good evening, everyone, and congrats on a great fourth quarter. Just quickly for me, if I could, if we think a little bit about how the cadence is to go through the year and the initiatives that you already have in place. You started upgrading the sales force in the third quarter and then expanded it further in the fourth quarter. How do we think about those sales force expansion initiatives, the marketing nuances there for the capital side as you start to face some competition from other indications which are out there in the first half? We all know we have cellulite treatments coming out which are pretty well heralded as well as some wrinkle therapies. Just kind of curious kind of how you are looking at addressing kind of the finite demand for incremental capital here in the first half of the year. And I've got a follow up.
spk05: Yeah, Chris, that's a great question. First of all, thanks for the compliments. You know, we certainly appreciate that regarding the fourth quarter results. In terms of your question, you know, there's no doubt that the competition for wallet share is continuing to kind of grow and expand, if you will. And we're well aware of the technologies that are out there. I think our view in these markets is that, you know, we believe that we've been somewhat constrained by our own staff as the markets have been somewhat limited. But as the markets continue to open up, we will continue to add reps and expand our footprint. And we believe that there's plenty of room for that to happen and grow. That said, we do believe that 2021 is probably more of a back half story on capital and capital equipment growth. We think that we'll be kind of modulated a little bit on the first half of the year as these new reps come up to speed, build their deal pipeline, and then kind of learn the processes and gain some efficiency and productivity. We do believe, though, in the first half of the year it will be a little bit more of a recurring revenue growth story and something that I think could be a positive contributor to kind of get us to the second half. So, you know, I think we're well aware of the competition. We understand what's out there. We understand fighting for wallet share, but we also know that we have a very differentiated and very complete product portfolio that allows us to be engaged in almost any deal going on anywhere. And we believe that that portfolio is really what allows our reps to have access to almost any deal that's available. We also know that we've been able to command our ASP and get into deals because of the quality of our product, the flexibility, and the broad breadth of capabilities our products have. And we'll continue to leverage that as new markets, new people come to the market, We know that we're a known entity. We have good product, reliable, robust capabilities, and we'll continue to ride that on our legacy lines.
spk04: Great. I appreciate all that, Collar. And then maybe just a quick clarifying question for me. When you look down to the P&L, you know, really strong results. The only place that I guess was a little bit surprising to the downside was on the service component. And especially with capital being more in line with our expectations in the quarter, just curious if you could provide any color there about what you saw in the fourth quarter as it pertains to the service line item there, specifically within the consumer.
spk05: There's a couple of elements to that on the service side. The first element I would share with you is, first of all, I think we saw a very strong service line comparative last year with some distributor sales as distributors typically stock up on parts, service parts, at the end of the year. And many of our distributors, as you can tell from the markets, have not been as active in selling products this year, or many of those markets have suffered through restrictions. I think, secondly, we had some restrictions that were kind of come and go, catch as catch can, if you will, within some of the different territories. And I think that was also somewhat, you know, restrictive as well. So we were not disappointed at all, frankly, in our service performance. We were actually pretty pleased that we were able to kind of pull it together with the restrictions that they faced on both travel and access to accounts.
spk04: That's great. If I could just squeeze one last one in, and I'll get back into maybe a quick one for Rohan. You know, great second-half cash flow improvement sequentially there, driven by the leverage in the P&L, so I'm just kind of curious. I realize it's going to be lumpy as we go through the first half of the year, it sounds like, from an R&D spin perspective and some other items, but should we anticipate continued sequential improvement in adjusted EBITDA or cash flow as we think about the business going forward, or is it – more skewed to the second half of the year as you really start to get some leverage with stronger capital sales.
spk03: Thanks so much. Yeah, no, I appreciate the question. And look, as you may have noted, we've chosen not to guide. The one thing I will reiterate is that we do expect to be cash EBITDA neutral or better for the year. We will continue to manage our P&L as responsibly as we can. while keeping our eye on growth investments to drive our future.
spk04: Thank you.
spk06: Our next question comes from the line of Anthony Vendetti from Maxim Group. Please proceed with your question. Thanks.
spk08: Yes, most of my questions have been answered. But just in terms of the capital equipment products that are driving growth now, I know TrueBody, TrueSculpt, is one of your main products, and as you mentioned, you know, facial rejuvenation right now. Is Zio still one of the main products in terms of capital equipment sales? And then if you could also comment on Excel V, just in terms of where those products stand in terms of contribution to revenues and go forward.
spk05: Yeah, we don't break those out specifically, but let me give you a little bit of color, Anthony. You know, from our perspective, ZO and XLV are core products. They're part of our legacy products, but they're also high-performing and on the higher volume side of the legacy laser products that we offer. We've seen a pickup just because of the facial rejuvenation and the facial programs that are going on at our customers' accounts. And we've also seen that the XLV, because it's a workhorse product for a lot of our Durham core customers, if you will, we've seen kind of a refreshing of that. And that comes from a couple things. We've done some upgrades to that product portfolio over the last couple years. And our XLV is really, I think, a top line, probably the highest performer, best performing product within the vascular laser offerings that are out there in the field. And we believe people are seeing the value that it creates. On the Xeo side, there's a great deal of flexibility that that offers, so new practices or expansion of practices are great applications for bringing Xeo into a practice, into a clinic, if you will. Both of those have been, I think, a higher percentage sales in 2020 just because of the nature of procedures and focus on facial rejuvenation or facial procedures.
spk08: Okay, that's very helpful, Dave. And then maybe just on the obviously skin care, and you went through the rationale behind that outperformance this quarter. But in the revenue line, it's the handpiece refills and skin care. In terms of handpiece refills, that used to be for the Titan product. Is there anything else in there? And is the number for the fourth quarter higher? 90% plus skin care, or how should we look at that?
spk05: Yeah, the vast majority of that number, I'm even hedging when I say that, I would say that this is really a skin care number, as reported by skin care. It comes out of Japan, and really the growth is all from that product. The Titan replacements on a per year-over-year basis are are probably declining slightly, if you will, as new technology is out there and available into the marketplace. So, you know, as new regulatory approvals are gained, that will continue to decline, and we'll see pickup elsewhere within the products and systems, if you will. But that's a skin care number, and that's the predominant growth contributor.
spk08: Okay, and then just the last question on the skin care line. The gross margin on that, is that stable? Is there room for improvement there? Or is the gross margin improvement that Rohan mentioned and the goal, is that going to be driven by new products which have to meet a certain threshold in order to be released?
spk05: Yeah, I would tell you that, you know, we have a contract in place that gives us assurance and support and, you know, it's good for both us and the manufacturer of the product. We've fortified that relationship and will continue to do so, but I believe that skin care will continue to be a slight drag on margins and probably more so as we continue to grow and leverage the overhead absorption that we'll see with higher volumes next year. That said, we're very happy with that line and very happy with the contributions it makes overall. Is there opportunity for improvement? I would say the opportunity for improvement is probably more within our own products and the things that we can control. So I'm not anticipating a significant contribution in margin from the skin care. Frankly, I'm just looking to be able to manage it, maintain it, and not have further declines from it.
spk08: Okay, very helpful.
spk05: If I could, Andy, I'm sorry. I meant to say one more thing. I don't think it will prevent us from achieving our goal either. And that's probably, I think, the point I think is important to make is, you know, we've targeted low to mid-60s gross margin for this business. And as we've modeled this, we don't believe this will block us from achieving that goal.
spk08: Okay, excellent.
spk06: Thanks. Thanks very much. Our next question comes from the line of Jim Sidoti with Sidoti & Company. Please proceed with your question.
spk09: Hi, good afternoon. Can you hear me?
spk05: We can, Jim. How are you?
spk09: I'm well. I'm well. Glad to. It sounds like everybody's doing well there. Glad to hear everybody's healthy. Two questions. One, if you look at system sales, down 35% in North America, but only down 4% in the rest of the world. Can you just give us a little more color why that is?
spk05: Yeah, I think it's a great question. I think, first of all, it's a little bit of the law of numbers. We had very small numbers in a few countries that were able to really outperform. So I think that's part of the story here, Jim. Australia, New Zealand, and Japan, which have undergone significant makeovers in terms of the talent and the capabilities within those two regions. We're still in the process of doing those type of upgrades here in the U.S., And I will tell you, through the course of COVID, we've had the opportunity to make over a significant portion of the sales organization in North America. And I believe they'll continue to improve, grow, stretch, and we'll be able to add and scale this business. So I don't believe that's a long-term issue for us. But I think it's certainly a focus area for us to continue to accelerate that recovery. And I think if you look back on Q3 and look back on Q4, earlier periods, if you will, within the year, I think what you'll see is that some areas were less impacted by COVID and other areas were more impacted, similar to like the intercontinental region and even Europe had more significant impact from COVID than some of the Asian direct markets that we play in. Those things said, I also will tell you that I think the North American market is a competitive market. You know, we've seen an increase in competitive nature of certain deals. I think what is compelling and what gives me great optimism is the fact that we've been able to hold price and win the majority of the deals that we're in. So while I think more deals are competitive, I do think that we've got a good product portfolio and a good positioning, if you will, that allows us kind of the view that we'll win more as we go forward.
spk09: And so for Australia, New Zealand, and Japan, did you say you added distribution or did you change to a new distributor there?
spk05: No, no, no. We made these investments a couple years ago, and what we're seeing play out here is the quality of that leadership that we put in place and the quality of talent that they've developed and continue to kind of invest in.
spk09: Okay. All right. And then the second question, you know, I know you're hesitant to give guidance. I don't blame you. But you did make a comment about R&D spending going up, I think, for the acne development. Can you just give us some sense on, you know, what that means? Is that a clinical trial? Is that still in the development stage, regulatory approval costs? Can you just give us a little more color of what that is and maybe some magnitudes?
spk05: Yeah, I'll give you some color as to the elements, and maybe Rohan can give you some magnitudes. But I don't think it's huge amounts. But from my perspective, to make it to the finish line here, not only in North America but across the globe, we've got to obviously achieve the regulatory approvals that we need within those regions. This is really a medical condition, Jim, and I think as such the FDA has appropriately asked for appropriate data and support in kind of giving a regulatory approval. We believe those same approvals are going to be necessary in other regions in terms of CE-MARC as well as approvals in major markets that we play in, such as Japan and Korea and Asia, which are large and very predominant AFNI markets that we want to make sure we continue to access. So as we look forward, we've got clinical work to do. We're going to have a rollout, if you will, that's going to be responsible for developing the right data, which is inclusive of additional clinical trials, not just for regulatory approval, but to understand applications and how to best train, teach, and deliver the knowledge needed to work this device effectively and get the outcomes that we know can be delivered. There's a lot that's going on from that perspective across R&D from prototype builds to clinical data collection to presenting and being able to have a scientific dissemination plan that's worthy of the size of market that this would address. Rohan, you want to give some color on benchmarking the size?
spk03: Yeah, so like Dave mentioned, there's some build-out on the R&D front, and depending on where we are in commercialization, there could be some spending on the sales and marketing side and a very light amount of spending on the manufacturing side as well. And we expect that to be in the range of $3 million to $4 million for the year all in.
spk09: Got it. Got it. That's very helpful. Thank you very much.
spk05: Operator, I don't think there's any more calls in the queue. I just wanted to thank everyone for their attendance and attention on this earnings call. I think we've done a good job of executing on our game plan, and we're exceptionally excited going into 2021, knowing the momentum that we've built. Well, we look forward to updating you in future calls and giving you insight to the company's performance, and along the way, executing our plan and continuing to realize our vision of creating the future of medical aesthetics. Thank you.
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