Cutera, Inc.

Thank you for joining QTERA's second 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 a current 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 a 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 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, QTERRA will discuss non-GAAP financial measures, including results on adjusted basis. QTERRA believes Kuterra believes these financial measures can facilitate a more complete analysis and greater transparency into Kuterra'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. The 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.

2021 update. 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 second quarter 2021 business results. Then I will share our view of the underlying energy-based aesthetic market trends as well as a few operational highlights from the period. Rohan will then provide details around our financial results, as well as share our outlook for performance over the remainder of 2021, after which he will turn the call back to me for some final comments before we open the call to questions. Turning now to our second quarter business results. During the second quarter 2021, our business continued to improve, largely as anticipated and slightly ahead of our expectations as the steady cadence of our commercial execution drove notable revenue growth across our business. Total revenue for the second quarter 2021 was $58.6 million, an increase of 122% over prior year results and 23% above our pre-COVID second quarter 2019 performance. This was the single best revenue quarter in Katerra's history, driven by the expanding and developing sales teams in both our international and domestic markets, the improving global energy-based aesthetic treatment volumes, and the corresponding increase in appetite for capital equipment purchases despite regional variability in end markets. Notably, capital equipment sales strengthened during the quarter, to $35.6 million, an increase of 26% sequentially and nearing normalized pre-COVID 2019 net levels. We are pleased to see our efforts around our capital equipment uptake continue building strength over the quarter as revenue accelerated sequentially across our different platforms. Commercial teams efficiently executed their region-specific plans focused on accommodating customers at varying stages of COVID recovery around the world. In addition to the positive trends we have seen in the face and skin rejuvenation markets, we were especially pleased to see improving procedure volumes from the body sculpting business, bolstering our confidence that the capital spending environment for body sculpting products will continue to strengthen as we move through the second half of 2021. and the global markets returned to a more normalized routine. On a regional basis, Kuterra's capital equipment sales were driven in particular by performances from our direct sales teams in North America, Australia, New Zealand, and Europe. In North America, our team's highly focused efforts delivered another quarter of sequential capital equipment growth of 19% over first quarter 2021. While we have yet to completely close the gap to our pre-COVID 2019 levels in North America, I am generally pleased with this team's pace of improvements as they have been fueled by the investments in Salesforce expansion, increasing our headcount, as well as the density of coverage in several key metropolitan areas. We expect that the increased rep count will help drive late second half 2021 capital performance as newer reps work to build their pipeline of equipment deals. We also anticipate that there will be some impact to North America energy-based aesthetic volumes over the course of the mid to late summer as patients and practitioners take long awaited family vacations. While these planned breaks will modestly impact near-term revenue, we do see this particular activity as a positive indicator of the long-term health of the energy-based aesthetic market. Patients are returning to more normalized and predictable routines, and the overbooked and somewhat fatigued aesthetic practitioners are growing more and more confident in the sustained patient traffic, allowing them to plan time away. For those of you who have followed our company and this industry for a period of years, you will recognize this seasonal pattern and will regard its reemergence as a healthy rather than concerning development. Our capital equipment sales in Australia and New Zealand region delivered 90% sequential growth and 135% growth over pre-COVID second quarter 2019 levels. This standout performance followed a highly productive customer educational event in Australia this past May. The Kutera University Clinical Forum or CUCF event was run by our local Kutera team with great support from our global marketing staff. The event was exceptionally well attended by Australian aesthetic practitioners, and we believe that second quarter 2021 revenue results for Australia reflected a portion of deals that were likely pulled forward from deals previously expected in the second half of 2021. As a result, we expect to see a small but corresponding dip in capital equipment revenue contribution from Australia during the third quarter of 2021. In the second quarter, 2021, Kuterra's capital equipment sales in Europe grew 229% over prior year period and 79% over pre-COVID second quarter 2019 levels. These results are reflective of the ongoing investment in sales talent and our European sales team's renewed focus on capital equipment selling processes. We expect to see a continuation of these positive trends and believe that the recent investments in Germany will provide some additional lift in the fourth quarter of 2021 leading into 2022. Within Europe and similar to North America, we are seeing a return to normal holiday schedules and we anticipate that while treatment volumes may step back slightly for a period, patient traffic and treatment queues are both strengthening entering the second half of 2021. We expect the treatment volume growth will lead to capital demand improvement over third and fourth quarters of 2021. Regarding recurring revenue, the business maintained positive momentum, delivering $23.0 million in the second quarter of 2021, representing growth of 113% over prior year. During the quarter, all three recurring revenue categories, skincare, consumable products, and service, contributed to our robust year-over-year growth. Our skincare business continued to perform across the second quarter of 2021 with revenue of $11.8 million, up 147% over prior year period. While our performance was slightly below the first quarter 2021 revenue number, we are very confident in our position within skincare market in Japan. Furthermore, we were delighted with the renewal of our distribution agreement with Zio Skin Health, which took place in June. Consumable product revenue was $4.4 million during the quarter, which represents a growth of 52% sequentially and 211% over prior year. Revenue growth in consumables resulted from the strength in treatment volumes in both the U.S. and international markets. Our North American performance stepped up over prior year and prior quarter because of the energy and effort we have put into building out our key account manager program. Similar to our capital equipment sales team, we are expanding our key account manager team so that in turn we can extend our reach and provide Kuterra customers with differentiated post-sale support. Key account manager candidates are being sourced and selected for their previous experience executing revenue-generating activities within aesthetic practices. We believe that this strategic partnership approach between Kuterra and our customers better aligns the company's resources with our customers and will result in greater treatment volumes, which benefit both our customers and Cutera. Global service revenue, which includes the income associated with time and material maintenance and repair, as well as the sale of extended service agreements, resulted in $6.8 million in the period, representing a growth of 11% sequentially and 47% over prior year period. The growth of service revenue continues to be driven by higher volume of service agreement sales as well as increased volume of service repair and equipment maintenance requests coming from our active install base of systems. As we have stated previously, service revenues are expected to grow at or slightly above capital placement rates as the business normalizes over the next few quarters. Over the past few quarters, the energy-based aesthetic market has continued to build positive momentum fueled by the steady pace of patients seeking treatment. New, higher treatment volumes, along with stable patient traffic and growing appointment queues at the practitioners' offices, now averaging one and a half months, have inspired practitioners' confidence and fueled appetite for capital equipment purchase. While there continues to be regional variability in the pace of customer recovery from the pandemic-related restrictions, the collective energy-based aesthetic treatment volumes have continued to grow nicely, and our teams around the globe have been able to take full advantage of the opportunity delivering strong revenue performance. In many regions, practice reopenings have begun shifting towards practice expansions for many of our core customers. Along these lines, we have seen many entrepreneurial practice owners actively seeking to recruit new patients to their practices, building out capabilities and procedure demand. While some uncertainty remains in select regions, we believe that the increasing focus on our customer never goes out of style. With regard to the Delta variant to the COVID virus, We believe that while some small disruptions in certain regions may be experienced, the vast majority of patients now vaccinated will continue to seek treatments and practices will continue to utilize processes that protect and instill confidence among their patients, allowing higher treatment volumes to continue. In this new environment, Kuterra has benefited most from our commercial team's process discipline with an increased focus on serving our customers during the difficulties of the pandemic. Since the early days of COVID-19, we have sought to better align ourselves with our customers, and we intend to continue to take additional steps along these lines. We will make investments in our field-based team to create the structures and processes that blend the best of the old with the new as we continue to provide best-in-class technology to our talented, dedicated, and highly motivated capital equipment sales force. This team will be strengthened by the addition of multiple resources within each region dedicated to post-sale customer support and success. We believe that this increased field presence aligned with our customers' objectives will benefit them by helping bring greater patient treatment volumes to their practices. In addition, We believe that our investment will also provide our company with increased recurring revenue over time, and more importantly, increase our opportunities to place new equipment into the market as customers find pathways to faster return on their investment. 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. Total revenue for the second quarter of 2021 was 58.6 million versus 47.8 million for the same period in 2019 at pre-COVID levels. As a reminder, our revenues in 2020 were impacted meaningfully due to the COVID pandemic. As market conditions continue to evolve and improve, so do our results. Our international business led the way again this quarter with 42% growth in systems versus 2019 at pre-COVID levels. Our North America business continues its steady march towards pre-COVID levels and ended at $19.9 million in systems revenue. Our recurring revenue defined as consumables, global service, and skincare revenue was $23 million in the quarter. compared to 10.8 million for the same period last year, representing 113% growth over the prior year quarter and 8% sequentially. There has been a meaningful growth in this segment of our business versus pre-COVID levels, which stood at 10.2 million in Q19. Within recurring revenue, our skincare revenue continued its strong growth, second quarter revenue of 11.8 million grew 147% on a year-over-year basis. Service revenue grew 47% over last year to $6.8 million as a result of having an increased number of systems under extended service contracts. Finally, global consumer revenue grew 211% to $4.4 million versus second quarter 2020. Non-GAAP gross profit for the quarter was $34 million. with a gross margin of 58.1%, representing an improvement of more than 10 points compared to the same period last year, and an improvement of nearly three points versus our pre-COVID levels in 2Q19. Moving to expenses. Sales and marketing expenses for the quarter were 18.4 million compared to 11 million for the same period last year, on 32.2 million of increased revenue. This additional spending is driven by variable compensation due to strong revenue growth and from increased headcount. Total R&D expenses were up 1.9 million over prior year on increased headcount and technical spending. Finally, on to G&A expenses. For the second quarter of 2021, G&A expenses were flat versus second quarter 2020. For the second quarter of 2021, our non-GAAP operating income, also called adjusted EBITDA, with a profit of $6.8 million compared to a loss of $3.5 million for the same period last year. We experienced no material or significant changes to our tax positions. One final point on operating expense spending. Kuterra remains steadfast in our commitment to invest in key value drivers of this business, as we have done faithfully throughout COVID and into 2021. Amongst these initiatives, we highlight our ACNI program, along with other R&D programs and longer-term infrastructure projects in advance of our commercialization of Acne. Moving on to the balance sheet. Cash and cash equivalents ended the quarter at $169.2 million versus a balance of $164.9 million at the start of the quarter. This was largely driven by the cash generated in the business as working capital remained materially unchanged versus Q1 2021. Before turning the call back to Dave, I would like to provide you with our outlook for the full year of 2021. As we have progressed through the first half of the year, we see improvements continuing in the energy-based aesthetic and markets. We're encouraged by the recurring revenue growth we have seen in our business, our expanding pipeline of capital equipment sales, opportunities for the second half of the year, and the improving sales efficiencies demonstrated by our commercial organization. Despite potential near-term impact from patient and practitioner vacations, possible restrictions from the Delta variant, and ongoing regional patient traffic disruptions associated with under-vaccinated geographies, our market fundamentals remain strong. As a result, we're issuing revenue guidance for the full year of 2021 at $215 million to $221 million. With that, I will return the call back to Dave for some closing remarks.