Cutera, Inc.

Thank you for joining QTERA's first quarter 2021 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 factors described in the section entitled Risk Factors and are Form 10-K, as filed with the Securities and Exchange Commission, and updated in our Form 10-Q subsequently filed. QTERRA also cautions you not to place undue reliance on forward-looking statements, which speak as of only 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 QTERRA'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 would like to turn the call over to our CEO, 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 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. Digging a bit deeper into our capital equipment revenue performance, we were pleased to see some resurgence in certain verticals that have been less of a focus of our customers through the work from home and Zoom meeting environments. In particular, body sculpting was sequentially stronger in first quarter 2021 versus fourth quarter 2020, driven by increased customer and patient interest in body sculpting treatments, likely in anticipation of a return to more normalized social and workplace routines. With respect to recurring revenue, we delivered $21.3 million in the first quarter of 2021, representing a growth of 89% over prior year. All three of our recurring revenue categories, including skincare, consumable products, and service, contribute to our strong year-over-year growth performance. With respect to skincare line we distribute in Japan, our revenue grew 17% sequentially over fourth quarter 2020 to $12.3 million and grew 324% over first quarter 2020 prior year period. As we move into the second quarter of 2021, we are crossing over the first anniversary of the heightened marketing and promotional efforts behind the skincare product growth. While we continue to be bullish on the long-term prospects of the skincare business with its low customer concentration, strong reorder rates, and new account acquisition opportunities ahead, we also remain very cautious on the potential for disruption in a post-COVID environment. In the first quarter of 2021, our consumer product revenues were $2.9 million, representing growth of 16% over prior year. Our global consumer revenue performance in the first quarter of 2021 was driven by the increased treatment volumes we saw in North America during this period. The third component of our recurring revenue is service. Global service revenue associated with both time and material maintenance or repair fees, as well as the revenue from sale of extended service agreements, with $6.1 million for the first quarter of 2021, representing 5% growth over prior year period. As the size of our active installed base continues to grow, the volume of service calls and service agreements we sell into the market will grow proportionally. Turning now to aesthetic market trends, we have seen that energy-based aesthetic end markets continue to improve. The pace and extent of customer recovery still varies by geography, with regional restrictions having localized impact. As anticipated and consistent with other elective procedures, U.S. energy-based aesthetic treatment volumes were a little lower in January and early February, likely due to the resurgence of the virus in the late fourth quarter of 2020, continuing into the first few weeks of 21. Additionally, we observed some consumer hesitation in the early weeks of first quarter 2021 that our clinician customers attributed to the rollout of COVID-19 vaccines, as some patients elected to defer procedures until they had received the vaccine. U.S. volumes rebounded quickly, absorbing any pent-up demand, improving throughout February and stabilizing in March. With respect to Canada, the other component of our North American business was COVID-19 restrictions remain in place in several areas and are expected to continue through a significant portion of second quarter 2021. In composite, between the U.S. and Canada, treatment volumes closed out first quarter 2021, matching pre-COVID run rates, and we are cautiously optimistic that these pre-COVID energy-based treatment volumes will continue throughout Q2. Despite the impact of COVID-19 resurgence in some of our international geographies, we were generally encouraged by our team's steady execution of their regional plans. These results reflected the slow but continued recovery of several key geographies in the Asia-Pacific region in both direct and indirect markets. In Europe, there are several regions that continue to enforce restrictions to certain social events, groups, activities, and travel. Nevertheless, we are bullish that these regions will continue to recover and headwinds will diminish as we move through the rest of 2021 as vaccination coverage expands. Turning now to operations from the first quarter, there were several positive takeaways worth highlighting from a commercial team's execution. Our direct sales teams turned in a strong performance during the quarter, combining to deliver 54% year-over-year system revenue growth. This type of geographical balanced growth was an area of focus, and I am pleased with these efforts and our collective results. Our first quarter 2021 North American capital equipment sales performance was very encouraging, overcoming the typical first quarter seasonality and posting year-over-year growth of 62% despite some lingering effects of the COVID environment. During the period, we continue to have success in expanding our North American commercial team through the addition of sales reps. To date, I am pleased with both the level of talent that we have been able to attract and the rate of onboarding our sales management team has been able to effectively execute. With respect to our international business, our previous organizational investments in Europe are beginning to bear fruit, with EU capital equipment revenue up 38% over prior year. We have previously shared that improvements were made to upgrade key sales positions and streamline our European commercial structure to place greater emphasis on sales rep development and customer interactions. We are pleased to see the revenue growth associated with these changes are already being reflected in our first quarter 2021 European results. The EU region will continue to be an area of focus for our commercial development activities throughout 2021. In addition to the European success we enjoyed in the first quarter of 2021, we had steady growth and strong contributions from previous investments made in our direct sales teams for both Australia, New Zealand, and Japan. Over the course of first quarter 2021, while delivering positive revenue results across the board, we were able to maintain our focus on people and process and continue our investments into the commercial teams, both domestically and internationally. I am excited to see what our commercial organizations will deliver in the back half of 2021 from these longer-term investments. With that, I'd like to turn the call over to Rohan.

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. Service revenue grew 5% over last year to $6.1 million as a result of having an increasing number of systems under extended service contracts. Finally, global consumable revenue grew 16% to $2.9 million. Non-GAAP gross profit for the quarter was $28 million with gross margin of 56.4%, representing a 1,060 basis point improvement compared to the same period last year. This large increase was a result of having a larger revenue base to cover lower fixed costs, which was achieved in part due to a concerted effort on the part of our manufacturing leadership and organization to reduce and streamline our overhead costs. Moving to expenses. Sales and marketing expenses for the quarter were $15.1 million compared to $14.8 million for the same period last year on $17.4 million of increased revenue. This additional spending is driven by variable compensation nearly offset by lower fixed comp, pure marketing activities, and reduced T&E expense. Total R&D expenses were up $0.2 million over prior year on clinical spending. Finally, on to G&A expenses. For the first quarter of 2021, G&A expenses were $7.4 million compared to $7.8 million in the same period last year. For the first quarter of 2021, our non-GAAP operating income, also called adjusted EBITDA, was a profit of $4.6 million compared to the loss of $8.3 million for the same period last year. We experienced no material or significant changes to our tax positions. Moving on to the balance sheet, cash and cash equivalents ended the quarter at $164.9 million. This was in large part driven by the issuance of convertible debt in early March, which raised net proceeds of $118 million after $4.2 million of transaction costs and $16.1 million expended towards the purchase of capped call. Our stated intention is to use the remainder for general corporate purposes, which may include working capital, capital expenditures, and potential acquisitions and strategic transactions. Through the issuance of this convertible debt, we have given ourselves an increased optionality to pursue the best outcomes for our shareholders. We will continue to do so with unrelenting discipline and a firm commitment to putting this capital to use in the best way possible. Before turning the call back to Dave, I would like to provide you with our outlook for the remainder of 2021. Despite regional travel and activity restrictions in several large population centers, We believe that the overall energy-based aesthetic end markets will continue to improve slowly over the course of 2021, fueled by global vaccination processes and incremental treatment volumes over the course of the year. However, with the lingering uncertainties related to COVID-19 from resurgence of the virus in key markets around the world, we intend to remain measured in our approach, and as such, we are choosing not to issue full year 2021 guidance at this time. Regardless of these potential disruptions, we remain steadfast in our commitment to invest in our key value drivers to include our ACME program, other R&D initiatives, and infrastructure in advance of our commercialization of ACME. With that, I will turn the call back over to Dave for some closing remarks.