This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk08: 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.
spk07: 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.
spk04: 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.
spk07: Thank you, Rohan. Over the past eight quarters at Kutera, we have worked hard to establish a reputation of steadily executing our plans and achieving our goals, despite the conditions the market has thrown at us. In doing so, execution has become central to this team and to our organization. We intend to leverage this trait as we turn the corner and move from phase one to phase two of our long-term transformation. Entering the back half of 2021, we plan to leverage the fundamental improvements that we have delivered thus far in the journey and begin to execute our game plan to further optimize our performance within the energy-based aesthetic market. As a leadership team, we have put in place several building blocks to prepare for our next phase of development, business optimization. These building blocks include people. Specifically, we have added the depth of talent on board while also seeing benefit from an increased employee engagement of our skilled and tenured team. Process, driving reliable, repeatable profitability through focused execution. Our products, which leverage innovative designs, market-leading quality, technical distinction, and lifecycle durability our customers have come to expect from Cutera. And a strong balance sheet capable of funding our organic programs while providing optionality for future Tuckian opportunities. With these building blocks in place and fortified by a culture of customer centricity, we intend to move purposely driving optimized business performance. One of our optimization objectives is to further enhance our relationship with core customers through improved field support. As such, we are making investments to construct and expand our key account manager team as previously mentioned. We are executing this plan concurrent with our efforts to expand and enhance the North American Capital Equipment Sales Force. The goal of the Key Account Manager expansion effort is to reposition our commercial team to be more supportive of our customers' efforts to drive patient treatment volumes through their practices. Deploying our resources in this fashion, we hope to train clinicians and staff to enhance treatment outcomes for their patients, to drive greater treatment volumes and increase consumable purchases, and coach practices and staff for improved economic outcomes, increasing opportunities for additional capital equipment purchase. Thus far, the KTER journey has been a true team effort, and never has KTER had the extent of talent, the alignment of functions, and the singleness of mind across our entire organization that has come from the company-wide focus on our vital few initiatives. While we are excited to have come this far over the past few quarters, the leadership and I remain far from satisfied knowing full well that there is so much more that QTERRA can and will accomplish. I am energized and excited for what the future holds for QTERRA. With that, I'd like to open the call to questions. Doug?
spk08: 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 Louise Chen with Cantor Fitzgerald. Please proceed with your question.
spk01: Hi, congratulations on the quarter and thanks for taking my questions. So the first question I had for you was if you had any updates on the acne market opportunity, and you had mentioned some tuck-in opportunities that you might look at. What are you interested in there? And then the second question I had was just some modeling questions. How should we think about that sort of slowdown in third quarter 21 versus fourth quarter 21, just so we get the nuance right when we model it? And then also just on OPEX, is second quarter a good run rate for third and fourth quarter? Thank you.
spk07: Great. Thanks, Louise. Yeah, let me kind of take those in order as you presented them. You know, in regards to the ACNI program, we continue to work exceptionally diligently internal to the business to move our efforts forward and be ready and waiting, if you will, when we get the okay to launch. So we continue to work diligently. We have not provided nor are we providing any update on timing or launch sequence or scheduling. at this time. However, it continues to occupy a significant portion of the management's time as we focus on what will be a very transformative event for the company. In regards to the longer-term tuck-in opportunities, we've always said that if things could be tucked in that leverage existing infrastructure, would not be disruptive to our business, or potential augmenting our presence, we would look at those type of things. Obviously, we distribute a skin care line in Japan that we have a distribution agreement with. We would look at license agreements similarly. But at this point, there's nothing that's actively being looked at, nor do we anticipate looking at something actively from an M&A perspective, even though we have a balance sheet that allows us to be opportunistic. And kind of moving to your second question, you know, which was more around the third quarter, you know, we look at this as a little bit of a speed bump and an opportunity for a lot of these practitioners to take a breath. They've been straight out since COVID and, you know, we're actually very pleased, if you will, by the fact that they're going to take a little bit of vacation time because it tells us that they're very thoughtful and have very high confidence in the resilience of the patient traffic. and they don't think they're missing out on anything, as people will just adapt to kind of missing a week in their schedule. So we see it as a favorable thing, and while it might be a little bit of a loss of selling days for consumable or something like that, and it may delay a few deals, we see this as something that actually refreshes the market, refreshes the industry, and gets us back to more regular and routine, I would say, historical seasonality. Those are all positive things from my perspective. I don't know, Rohan, if you want to add on to that at all.
spk04: I was just going to take the OPEX question. I'll start off by saying, well, first of all, we've purposefully chosen to not guide on adjusted EBITDA, which is ultimately what the question is, I guess, at the end of the day. I'd say, first of all, The entire team at Katerra has worked extremely hard to start delivering consistent and repeatable adjusted EBITDA performance. And as we mentioned earlier in the call, we have certain infrastructure and acting related investments that we're making in our business. And I believe as we do all of that, our adjusted EBITDA performance will continue to underscore the inherent opportunity and leverage and potential that's available in our business. So we're not yet guiding on EBITDA profitability, and we remain extremely confident in our ability to continue to unlock the potential of this business and this P&L.
spk01: Thank you.
spk08: Our next question comes from the line of Matthew O'Brien with Piper Sandler. Please proceed with your question.
spk02: Hi, good afternoon. This is Simran on for Matt. Thanks for taking the questions. So I have a few, starting with your strong results on the adjusted EBITDA and gross margin lines 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, Any concerns on your ability to generate strong year-over-year growth in adjusted EBITDA as you maybe get a little bit of pressure at that gross margin line? And then secondly, we know people slowed down their spend in 2020. So how much of the strength in the quarter is catch-up and how do you expect that to play out sequentially here in Q3 and Q4?
spk04: Okay, well, so let me try and unpack that question. So first of all, I'll talk about gross margin and what we see over there. You know, in Q4, we had talked about getting margin to the very low 60s as we exit the year. And obviously, since then, we've seen a lot of growth in our skincare business versus our outlook, and it has materially shifted our mix given the fact that skincare margins are below our overall corporate margins. We also have some headwinds in terms of material costs, which I'd say our operations leadership and team continue to do an amazing job of handling, but this will create a little bit of near-term pressure at the gross margin level. So with all of that taken into account, I'd say we expect that our margin guidance is a little bit delayed by a few quarters, but we expect to stay in the current gross margin zone of approximately 60% in the near term. Also, I'd add that we remain very committed to our long-term goal of low to mid 60s. What was the other follow-up, Simran? Can you remind me? Sorry.
spk02: Yeah, so we know people slowed down their spend in 2020. So how much of the strength in the quarter is catch-up and how do you expect that to play out sequentially in Q3 and Q4?
spk07: Yeah, let me take that. And thanks for the question. I think as we think of technology in the energy-based aesthetic space, you know, while people may have pent-up demand, For systems, that plays out relatively quickly. What they're really looking for are things that they can put in their practice that allow them to drive protection from reimbursement structures as well as give them opportunities to monetize current patient flows and patient traffic. So very little of it is actually about pent-up demand. The pent-up demand may be from an older unit that they think they now have to replace. And frankly, with the lower patient volumes for 2020, that probably nets out an amount of life cycle stress that they put on the product. So we think this is an ongoing regular run rate type of capital business with small disruptions based upon you know, the things we've mentioned historically here around COVID and cash constraints within the practice, which for the most part are in the rearview mirror.
spk04: And to your question on our concern around being able to grow adjusted EBITDA versus prior year, I would just stress again that we're choosing not to guide adjusted EBITDA for the rest of the year. I'm confident that that will continue to deliver good results, though, given the trajectory of our business and P&L.
spk02: Okay, got it. And in terms of your commercial efforts, can you talk about the momentum you're seeing from changes to the European team that you expect to carry into 2022? And then following that same line of thought on the North American side as well, do you expect that group to be positioned to sell more effectively in 2022?
spk07: Yeah, that's another thoughtful question. I think in EU, I think we have been underserved and under-penetrated as a company in terms of the quality of our product and our ability to sell effectively. We made a leadership change for Europe as well as we've made some country leadership changes under the new structure. Additionally, we've been able to recruit back or recruit to the team some exceptionally talented salespeople that I think will continue to grow, building their pipeline throughout the rest of this year. So I think these are sustainable. We also will be investing in expanding our sales organization, and I specifically called out Germany as a huge opportunity for us as one of the larger markets in Europe for aesthetics. our ability to further penetrate and bring a great team to the field in those spaces. I think there's legs on the improvement we are seeing in Europe into the back half of this year and into the early part of 22 before that anniversary is itself. In terms of North America, I indicated two investment patterns that we're making. First, expanding the capital sales force. While, you know, unfortunately we furloughed people in 2020, we've been able to bring back an exceptionally high quality, highly motivated, and very talented capital sales force that has continued to make great strides sequentially for us as they've built their pipeline, rebuilt their processes, and refined their go-to-market approach. We've been adding to that staff fairly aggressively in the first half of this year, and we believe that that staff that we've added will deliver benefits in the back half of 2021 as they build their pipelines. I think we'll see that continue into next year if you were to think about it from a standpoint of anniversarying these new ads and have them now contributing at a full level, you know, after about a year of being on the ground. So we're very excited about that. Additionally, as I indicated in the prepared remarks, we've added some key account managers, and we believe that this will not only drive utilization, but it will drive greater return of investment for our customers, which then opens up opportunities for us to sell additional capital. We think these are really key things, and things that are very differentiated, unfortunately, in this energy-based aesthetics industry. But we think that level of differentiation will be well received by our customers and will put us in a very good position over a longer term to sell capital.
spk02: Got it. And if I can squeeze one last one in here, on phase two and acne, I know you guys have been pretty close to the vest with timing, but any details you can share about the program and maybe what stage it's in? Are you still doing some clinical work? Are you pushing forward on regulatory approval? Any detail on when we can expect that to roll out?
spk07: Yeah, you're exactly right. We've been very close to the vest, and we will continue to be that for some time. We know that competitors are eager to get an update from us, and we've just thought it best to keep this information to ourselves until we get to a point of being able to kind of have a little bit more freedom to operate. That said, I will tell you that we continue to be exceptionally excited about the results and the status that we have. We are moving aggressively and working diligently internally across multiple departments to be prepared when we get the opportunity to go into the market.
spk02: Perfect. Thank you very much.
spk08: Our next question comes from the line of John Block with Stifel. Please proceed with your question.
spk03: Hey, guys. Good afternoon. Hope all is well. Dave, maybe just on the first one, to take a step back, can you give us some more color on the capital traction? The top-line beats seem more diverse than in the past. Capital played a bigger role. I'm just curious if it was primarily body-oriented or what other areas of the portfolio saw increasing momentum into the second quarter?
spk07: It's a great point, John, and I would highlight it this way. We had projected that we would see a back half of 2021 recovery on capital, and I think we started to see it a little earlier than we had anticipated. But I wouldn't want to say it's a wholesale free-for-all out there. I think it is still opportunistic, and you have to be diligent in prospecting opportunities. That said, we saw a very consistent, multi-platformed approach here. I think face and skin has become a key element, and I think specifically with many of our non-core practitioners, they're trying to find a way to monetize and keep patients or get patients revenue into their practices. So we see a lot of the secret microneedling opportunities in some of the non-core practitioners in particular. We've seen a resurgence around the body, though, in particular during the quarter versus previous quarters where it had been much more, I'd say, pressured. So we were very pleased to see growth across the body sculpting platform for both Flex and for ID. And I think we were also very pleased to see, you know, Another measure of success is our ability to hold price, which we did. We've been very, very effective in revitalizing that effort, holding our price, and finding the right accounts to bring that to. I would say it was very measured geographically and very measured across platforms, whereas maybe a few months back it was heavily faced. It was kind of some of the international teams that were really driving the improvement.
spk03: Got it. Great color. Thanks for that. And maybe just to shift, the skin care renewal and the filing that you put out on that, I guess it was a month or so ago, you gave some details on call it the duration around the contract, but is there anything that you can provide from a margin perspective or even a regional basis that where maybe the contract gives you guys a little bit of flexibility, I guess, to differently, you know, could you have more favorable terms from a margin perspective, just considering the amount of value you're bringing to the table with the recent run rate?
spk07: Well, I want to be very careful not to divulge something that, you know, we have confidentiality around with the supplier. I'll first and foremost tell you that, you know, we believe that it was a more significant drag on our gross margins, and we've been able to improve that position marginally. You know, it's still a distributed product, and certainly, you know, you are not going to have the same revenues and margin profiles we'd have of an organically developed one. That said, I think that we do see great partnership with our manufacturer of the product, And we're very, I guess, enlightened and engaged by the fact that they're willing to work with us aggressively over the next three years with this distribution agreement.
spk03: Okay, fair enough. And last one for me, just to keep it somewhat tight. Roland, I'll take a different approach. I'll stay away from adjusted EBITDA, but maybe a couple questions. Your 2H revenue implied in your guidance is not too dissimilar than your 1H revenue implied and you're speaking to seasonality. So could 3Q and 4Q look somewhat like what we experienced in 1Q and 2Q? And then the follow-up to that would just be, to stay away on the specific on acne, does the annual guidance that you provided of the 215 to 221, I'm assuming that has no acne embedded in it? And thanks for your time, guys.
spk04: Yeah. So... I'll start with the easy one first. There's no acne embedded in our outlook for the year. Like we had called out in our prepared remarks, there is a little bit of pull forward that happened in Q2. There is a little bit of seasonality. So yes, you are right. We've also kind of factored in some of the stumbling blocks, if you will, that we see on the horizon with the Delta variant, with vacations, et cetera, into our outlook.
spk07: Just to round that question out before we turn it over, my view here is that there's still a lot of unknowns. There's still a lot of things that are going on. We felt very much compelled to share an outlook with the street based upon our view of the market's recovery. However, we just want to remind the market that there's still under-vaccinated geographies and the Delta variant is creating a little bit of concern. We just wanted to be very mindful of some of these other issues as we continue to move forward. Nevertheless, we're exceptionally concerned pleased with the momentum that we're building as an organization and very, very thoughtful around continuing that momentum in a very thoughtful and measured way.
spk03: Perfect. Thanks for the color, guys.
spk08: Our next question comes from the line of Chris Cooley with Stevens. Please proceed with your question.
spk05: Good afternoon, everyone, and congrats on the record performance there in the quarter. Just two quick ones for me, if I may, and we'll keep with decorum. If we think about the investment, can you help us just think maybe either in the aggregate or maybe in terms of timing when we think about these incremental investments that you're planning here for the back half, realizing you're not guiding to adjusted EBITDA for the full year, but just any color as it pertains to the timing of these incremental investments that have yet to take place, or maybe an absolute magnitude would be of benefit, and then I've got one other quick follow-up. Thanks much.
spk04: I'll take that a little bit, and then maybe, Dave, you can chime in. Like you rightly pointed out, we are not guiding towards adjusted EBITDA, but there are several investments, I'd say, in systems, processes, and people that we're making. We believe we need to do this in advance of what we expect to be a transformational launch and event for us in ACNI to give us scalability, to give us process maturity, to set us up for the next phase of our evolution and growth. So there's a lot here that will be somewhat variable. And I'm a bit hesitant to give out an amount that might change materially, Chris. Yeah, so let me speak to it. Yeah, I'd say it'd be spread over the next four quarters, two to four quarters or so.
spk07: I would say the infrastructure is probably more of a four quarter. I think the sales investments that we're making and building out these teams are relatively low risk exposures for the company as most of the revenue, most of the expense comes in variable comp. And we've seen a pretty rapid recovery from our sales team of creating kind of a self-funding mechanism here. So I feel very confident in the headcount we're adding into the sales organization that it will kind of be relatively neutral on an adjusted EBIT basis to the business. I think the infrastructure expectations are a little bit more like what Ron shared, where they're probably more evenly spread over the next four quarters or so.
spk05: Okay. Maybe just to clarify before I do my follow-up, just when I think about the sales investments, really that's, primarily here in the back half of this calendar year may be tapering a little bit into the early part of 2022, whereas the infrastructure investments that you're talking about are over the course of the next year.
spk07: That's exactly correct, Chris. You've got it right.
spk05: Got it. Thanks. And then let me follow up on John's question as well when we think about the capital growth, which was very impressive here in the course of the quarter. You mentioned that body contouring and fat reduction both, or I should say muscle contouring, I'm sorry, and fat reduction both came back in the quarter. Can you help us think just broadly about relative growth rates when we think about the platform? I know in the past you've spoken to the body more broadly. I'm just trying to get a feel for the continued uptake of the the combo device relative to maybe a resurgence in growth and body contouring.
spk07: Yeah, so just to be explicit, we do not have a combo device, however, We do use our device in combination. I'm sorry.
spk05: I meant on the microneedling and the place. I apologize. It wasn't clear.
spk07: Thanks. Okay. No, no. Forgive me, Chris. I jumped to the conclusion there. So, you know, in terms of body sculpting, we did see a nice recovery, and I think that the strength in that recovery is underscored by our ability to preserve average selling price. which tells me we're not going to the discount store to kind of make these things happen. That gives me a lot of confidence that there's an underlying equipment or capital demand that we're servicing. And even up until right now, we continue to see people that are reaching out, looking for information, and want to get access to the TrueBody portfolio, if you will, both Flex and ID. So I think that there's strength there that will continue in the back half of this year, and certainly it's an area that we like to focus on because we think we have differentiated technology in both of those products. In terms of the combination device, the Secret Pro, which you reflect, has both an ablative CO2 laser on board with its microneedling. We think that this product fits in exceptionally well in our portfolio. It's the only ablative laser that we have, a fractional ablative laser that we have, in the portfolio, and we think that it's really a great product for the core business, in particular the germs, when they treat scars and deep wrinkles. This is an opportunity to not only recruit collagen with the microneedling, but also do a little bit of ablation on the surface to lessen the extent of the wrinkling. So we've seen great results of that product. We have not really been overly aggressive in positioning the product at this point. We've used it solely as kind of an augment to the secret practitioner that may want a little bit more power, maybe a little bit more energy to deal with more aggressive wrinkling. As we think about the product going forward, we think that those should continue to grow at or above market rates. We believe that our staff and our team is putting us in a position to win with those products as well as our body products. I think those are probably the four most solid products from a contribution perspective, followed very, very closely with our XLV line and even our Xeo multiplatform product. I think these are all very good products that have very good reception in the marketplace and almost a renewed sense of demand from the core customer. we're very pleased with the way our portfolio is positioned across all of these platforms for the different practitioners that we're serving.
spk05: That's helpful. If I could maybe squeeze one other quick one in. I mean, just looking at the contributions to growth here as well and the margin profile, the additional color that you provided there as it pertains to gross margin. Thoughts on maybe an update on the LRP? I realize this is what's called a transitional year here coming out of the COVID suppressed 2020 and you have a transformational launch with ACNI at some point here in the future. But any thoughts on updating this either at year end or early next year, just in terms of your thoughts on the LRP here for QTERA, because clearly you've generated tremendous results, lots of material improvement, both in top line growth and margin. Just kind of wanting to think about maybe level setting that longer term. Thank you again.
spk07: Yeah, I think it's a great question and a good comment. I think at this point we're working diligently on thinking through the ACNI launch plan, what that means, what the timing is, and we'll be working aggressively through kind of the fall timeline on what a budget for 2022 looks like, et cetera, for the company. and working with our board to kind of look at what a five-year plan may look like for the business. I think at some point thereafter, we'd probably be in a position to express that and have a little bit better line of sight for how acne plays into that, as well as some other key products and expansion ideas that we have.
spk05: Thank you.
spk08: Our last question comes from the line of Anthony Vendetti from Maxim Group. Please proceed with your question.
spk06: Thanks. Yeah, just two quick questions. On the skincare business, you know, that continues to perform well. I think you had mentioned, Dave, on the last call that you didn't know if it would be sustainable. So I guess as it continues to perform well here, should we start to think about this as the new quarterly run rate or is this still performing above expectations and we shouldn't expect it to stay at this? And the next question is just on the post-sale customer success reps or key account managers or what Zeltik and others call PDMs. Are you looking to hire enough of those reps or managers to to be at an almost one-to-one ratio with your sales reps, or is that too many account managers to help support the after-sale process?
spk07: Yeah, two very thoughtful questions. So, first of all, on skin care, you know, what we've said, and just to remind everybody on the call, what we've said about skin care is we believe it to be somewhat elevated due to the nature of the Japanese market and the fact that it's been under-vaccinated, which means a little bit of suppression of patient traffic into the DERM offices. And as a result, many patients have taken to buying additional skin care lines, eye serum, wrinkle reduction, moisturizers, SPF, stuff that all help them avoid kind of or get some of the benefits that they were seeing through procedures. We think that that will at some point have a terminal end point in terms of the vaccination, and we think that there's probably some new normal that will result as a result of kind of that change. Even if it does, we feel very comfortable in the analysis we've done that this is a sustainable business. It may not be at the exact rate it is right now, but it's a very healthy business, and what we had projected earlier was high single digit millions per quarter, and I think we're probably feeling it may be low double digit millions, but I think we don't yet know fully yet, Anthony, on how much we will see recover or retract when more patients are having procedures. The one thing we hear from our customers in Japan, though, is that as people get more and more associated or comfortable with using the skin care lines, it's much more difficult for them to give that up. And some of the feedback has been these become habitual in terms of routines and regular routines in a very disciplined culture. So we're excited about where it is. We want to be mindful that it may have a small step back at some point. But we also believe that this has long-term legs and has opportunities for continued growth. with additional penetration into new accounts as well as deeper penetration in the existing accounts as we continue to grow and develop those markets. On your second question around the key account managers, I think we've certainly learned a lot from others in this industry. And as you would imagine, we've gleaned everything we can from what drove success for others. and we're trying to steal the best of their ideas and combine it with some of our own as we think about new market dynamics. We're not going to necessarily say it's going to be a one-to-one ratio between capital and key accounts, but I think what we would say is we know the right number of accounts for any given key account manager that they can handle effectively and we'll be watching and using that metric as our throttle to add people or processes and where we'll add them based upon the account locations. So I think we have all the right metrics. I don't know if we're ready to yet roll out our deep and longer range plans around the staffing, but I will tell you that we know that there's the right number of accounts that any given person can manage well and drive the right level of activity. And certainly we have mile markers out there from Zeltik and others that have done it well.
spk06: Okay, great. That's helpful. Thanks very much. Appreciate it.
spk08: This concludes our question and answer session. I'd like to hand it back to Mr. Dave Mowry for closing remarks.
spk07: Thank you, Doug, and thank you for everyone attending. We very much look forward to providing you with another update later this fall. Until then, be well.
spk08: Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.
Disclaimer