Cutera, Inc.

Thank you for joining Kuterra's third 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 for 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-Q subsequently filed. Katerra also cautions you not to place undue reliance on forward-looking statements, which only speak as of the date they are made. Katerra 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 in Katerra'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 Mowery. Please proceed.

Thank you, Operator. Today, I am joined on the call by Rohan Seth, our Chief Financial Officer. On today's call, I will provide a brief overview of our third quarter 2021 business results, operational highlights, and some commercial insights from the period. Rohan will then provide details of our financial results as well as share our updated outlook for performance over the remainder of 2021, before turning the call back to me for some final comments. I will then open the call to your questions. During the third quarter of 2021, our business continued to perform well, delivering solid results across each category. Over the period, we did not see the negative impact from the Delta variant that many other businesses within the healthcare sector experienced. as aesthetic procedure volumes and customer interest in capital equipment purchases remain strong and well above prior year levels. As we anticipated, many physician customers took well-earned vacations in North America and Europe over the course of the quarter. While physician vacations and family holidays had only a minimal impact on treatment volumes within the period, we note that demand for treatments in the fourth quarter of 2021 remains strong. likely absorbing any pent-up demand from the third quarter. The physician vacations and associated treatment flow disruptions demonstrated a return to more normal routines and predictable patterns, confirming the overall strength that continues across aesthetic practices. This is further confirmed by informal surveys of aesthetic practices, which are reporting fully booked schedules through the end of the year. Turning now to our performance for third quarter 2021, Total revenue for third quarter 21 was $57.4 million, an increase of 47% over prior year results and 24% above our pre-COVID third quarter 2019 performance. Notably, capital equipment sales continued to trend favorably during the quarter, with capital equipment revenues of $32.2 million, representing an increase of 33% over prior year levels. Katerra's capital equipment sales were driven by particularly strong performances from our direct sales teams in North America and Europe, as well as from strength in our distributor markets. In North America, our capital equipment performance sequentially improved over second quarter 2021 during the period. We were able to expand our capital equipment sales force, taking increased sales coverage into fourth quarter 2021 and beyond. our new North American sales reps are coming along very nicely and doing the work necessary to build robust deal pipelines in advance of 2022. While we have yet to completely close the gap on pre-COVID 2019 capital revenue levels in North America, we are pleased with the sales team's pace of improvement and excited to see how the newer sales reps will add to the collective. We consider third quarter 2021 performance to be a positive leading indicator for future capital systems revenue growth as we fuel North American capital equipment sales with increased Salesforce coverage. Despite an increasingly competitive energy-based aesthetic equipment market, our sales teams across the U.S. and Canada have steadily delivered sequential growth, selling through competitive challenges by highlighting the features and benefits and economic value that the QTERRA portfolio offers our customers. The revitalization and expansion of our North American sales force remains a positive driver of our business. And coupled with investments in our key account managers, we are building strong and sustained momentum, providing differentiated service and support to our customers. In Europe, during the third quarter of 2021, we saw continued improvement of our capital sales, allowing us to overcome headwinds typically associated with the seasonality of Europe's third quarter volumes. Our investments in recruiting and upgrading our sales talent, along with increasing a robust and experienced European leadership team, have delivered the desired results of accelerating our capital equipment growth. and all indicators point towards continued expansion of energy-based equipment sales as we continue to cultivate deals and expand further into key European regions such as Germany. As for our capital equipment sales in the direct markets of Australia, New Zealand, and Japan, there were some impacts from the COVID travel restrictions and reduced patient treatment volumes due to lower vaccination rates, respectively. Despite the regional headwinds from government-imposed restrictions limiting people from venturing beyond five kilometers of their home in larger metropolitan centers of Australia, our team pushed through and delivered several deals in a very slow third quarter 2021 market. Looking forward, restrictions are lifting across Australia, and we anticipate that our team will be active and aggressive closing out the year. Additionally, we are seeing increasing vaccination rates across Japan supporting our outlook for capital equipment revenue recoveries in both regions starting in the fourth quarter of 2021 and carrying well into 2022. As I have previously noted, we remain confident that the global capital systems spending environment is strong and still improving. Customer interest for capital equipment purchases continues to climb and we anticipate a solid fourth quarter to close out the year, carrying this strength into 2022. Now, moving to the recurring revenue. This business maintained the positive momentum coming off the prior quarter, delivering 25.2 million in third quarter of 2021, representing a growth of 68% over prior year. During the quarter, all three recurring revenue categories, skincare, consumable products, and services, contributed to our improved recurring revenue mix and the robust year-over-year growth. During the third quarter of 2021, our skincare business delivered revenue of $14.8 million, up 117% over prior year period. This performance was ahead of expectations. driven by greater volumes from physician-customer restocking in advance of an announced price increase. Needless to say, we are pleased by the continued success our skincare team in Japan has delivered, expanding active account bases and increasing penetration within the existing accounts. Going forward, we anticipate that our normalized run rate for skincare will settle in below the third quarter levels as pre-price increased inventories work down and patients resume their routine skin care and aesthetic treatment patterns. Once run rates settle in, we expect to maintain revenues at market growth rates for this category. With regard to consumables, third quarter of 2021 revenue was $3.7 million, representing a growth of 60% over the same period and prior year. Revenue growth in this category was driven by continued strength of patient traffic despite the seasonal disruption from summer holidays and physician vacations. Notwithstanding the seasonality, North American performance was solid and steady driven by revenue-generating activities carried out at practices by Kuterra's new and expanding key account manager presence. Over the third quarter, we continued to expand our key account manager team and have aggressively onboarded these new reps. Customer sentiment for these resources have been strong, and we expect to see increasing consumer revenues for the business in the later part of fourth quarter 21 and carrying into 2022 as the impact of our CAM activities flow through our customers' practices. The third and final category within recurring revenue is our global services. This category includes income associated with time and material repair fees, as well as the sale of service agreements to owners of our energy-based aesthetic systems. Global service revenue was $6.7 million in the period, representing a growth of 14% over the prior year period. driven by increased volumes of service agreements covering a growing installed base of systems. We expect that global service revenues will continue to grow at a steady rate above capital as service agreement attach rates improve in addition to the growing volume of our active installed base of systems. Before turning the call over to Rohan, I would like to recognize the continued progress our team has made on one of our vital few initiatives. gross margin expansion. During the period, like so many other businesses, we experienced some specific headwinds from increasing costs of critical components and high demand materials. Additionally, inbound and outbound freight expenses have increased more recently. Nevertheless, our supply chain and engineering teams have continued to identify improvements to offset much of the impact of these costs being passed along. Meanwhile, our sales teams have been exceptionally strong in holding price in the face of competition, enabling us to not only maintain our margins, but to expand from our other cost improvement efforts. With that, I'd like to turn the call over to Rohan. Rohan?

Thank you, Dave. As I review my prepared remarks, I want to note that I will primarily focus on non-GAAP results unless otherwise stated. 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 third quarter was $57.4 million compared to $39.1 million for the same period in 2020, representing growth of approximately 47%. North American capital equipment revenue was $20.7 million compared to $13.7 million for the same period last year, representing growth of 51% over 3Q 2020. International capital equipment revenue for the third quarter was $11.5 million as compared to $10.4 million in the third quarter of 2020, representing growth of 10%. The year-over-year performance of our international capital sales benefited from our European sales team driving growth of 52%, our Australian New Zealand team delivering 16% growth, and our Middle East and Asia Pacific distributed markets delivering a growth of 11% over the prior year period. Our teams within these markets continue to lay a strong foundation for sustainable growth over the next several years. Recurring revenue from defined as consumables, global service, and skincare revenue, was 25.2 million compared to 15 million for the same period last year, representing 68% growth over prior year. As Dave mentioned earlier, a source of pride for third quarter 2021 was our gross margin performance. In the face of several economic headwinds within the third quarter of 2021, GAAP gross margin was 58.2% versus 55.6% for the same period last year, and non-GAAP gross margin finished at 58.3% versus 57.2% in Q3 2020. These improvements were driven by continued leverage on our fixed overhead cost base and consistent execution against our vital few initiatives. Total non-GAAP operating expenses for the third quarter of 2021 were $28.4 million compared to $20 million for the same period last year. Our results reflect higher variable compensation expenses as well as increased investments to continue to drive our top-line growth. Sales and marketing expenses for the third quarter of 2021 were $17.9 million compared to $10.9 million for the same period last year. The higher expense was primarily driven by higher sales and investments in Salesforce expansion and optimization across multiple geographies. R&D expenses for the third quarter of 2021 were $4.7 million compared to $3.1 million for the same period last year, driven by research and clinical investments in new technology. Finally, G&A expenses for the third quarter of 2021 were $5.7 million compared to $6.1 million in the prior year, driven by reductions in administration expenses. For the third quarter of 2021, our non-GAAP adjusted EBITDA was $5.1 million compared to $2.4 million for the same period last year. This continued improvement in our profitability is the direct result for our global teams working in concert and bringing a laser focus in driving growth with a view to our bottom line. There were no material or significant changes to our tax positions. Turning now to our balance sheet. We ended the quarter with approximately $162.5 million of cash and equivalents compared to $42.4 million at the same time last year and $169.2 million at the end of second quarter 2021. The reduction in cash from second quarter of 2021 is largely driven by AR expansion due to revenue mix and timing, as well as investments in our ERP program. We ended the quarter with $35.5 million of inventory, up 0.9 million from Q2 2021. We expect that our inventories will increase through year-end driven by our efforts to continue to secure our supply chain. As you may have picked up from my prepared remarks, a key word that I have used over and over is investments. And I'd like to take a moment to provide some further details on this front. We continue to prepare our company for the next phase of our growth. One area where we have been increasing our investment is in our information technology infrastructure, more specifically our new ERP system. With strong momentum in our core business and some pivotal growth initiatives on the horizon, we are at a stage in our company's life cycle where it's important to build a truly scalable architecture to support the next phase of our growth. We continue to chip away at this area, which is one of our vital few initiatives, and we plan to have the system in place in advance of some of our new product launches in the next year. Finally, moving back to our top-line performance and outlook. Given our strong performance in the quarter and solid outlook, we are increasing our guidance. We are raising FOLIER 2021 total revenue guidance to a range of $224 million to $228 million, representing year-over-year adjusted revenue growth of 52% to 54%. With that, I will turn the call back over to Dave for some closing remarks. Dave?