Cutera, Inc.

Greetings and welcome to the QTERA's fourth quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. 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 those 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 10Qs, subsequently filed. QTERRA also cautions you not to place undue reliance on four linking statements, which speak only as of the date they are made. QTERRA undertakes no obligation to update publicly any four linking statements to reflect new information, events, or circumstances, or to reflect the occurrence of unanticipated events. Future results may differ materially from management's current expectations. In addition, we will discuss non-GAAP financial measures, including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency into QTERA's ongoing results of operations, particularly when comparing underlying results from period to period. Please refer to the reconciliation from GAAP to non-GAAP measures in our earnings release. These non-GAAP financial measures should be considered along with, but not as alternatives to, the operating performance measures prescribed by GAAP. With that, I would like to turn the call over to our CEO, Dave Mowry.

Thank you, Shmuley, and welcome to everyone listening to the call. We're glad that you could dial in for this update. Joining me on today's call is Rohan Seth, our Chief Financial Officer. Over the course of the call, I will be providing an overview of our record fourth quarter performance along with some operational highlights and commercial insights we have gathered over the course of running the business. Rohan will then provide a detailed review of our results and the outlook for our 2022 financial performance. Following that, I will provide some additional comments including a brief update on our efforts to bring to market a very exciting and innovative energy-based solution for acne. We will then open the call to your questions. Now, moving on to the financial update. During the fourth quarter of 2021, our business continued to improve over prior periods, showing strength with record revenue levels in both capital equipment and consumable product categories. These strong results were headlined by an especially robust North American performance, where the improvements we've made to our commercial organization and the progress on implementing our commercial strategy enabled us to leverage the strong underlying market fundamentals that have come from steadily increasing treatment volumes fueled by a resilient patient traffic in core aesthetic practices. In terms of our commercial organization, the growing momentum from our key account manager strategy was evident in our fourth quarter 2021 consumable sales performance. we believe that our key account managers have provided additional momentum to our North American capital sales. As a reminder, our key account managers, or CAMs, are field-based resources who partner with our customers, enabling practices to increase revenues from their Keterra treatments that they offer. In turn, the ensuing greater device utilization increases Keterra's consumable revenues while the support from our key account managers provides a higher level of service to our customers and to their patients. We have already begun hearing from customers that they recognize and value the presence of Kuterra's key account managers and appreciate our alignment to the financial performance of their practice, thereby making the decision easier to adopt other Kuterra energy-based equipment. Overall revenue for the fourth quarter was $65.6 million, a 31% increase compared to prior year, setting a new record revenue level for the company and capping off a year of robust growth across our business. This record revenue performance is attributed not only to ongoing treatment volume trends as compared to prior years, but even more so to the steady execution of our customer-centric sales strategy by our direct sales teams. Capital equipment sales were the most significant driver of revenue growth during the fourth quarter of 2021. In particular, our North American capital sales force delivered a standout performance during the quarter by leveraging our entire portfolio products, highlighting product performance, total cost of ownership, and Keteria's increased post-sales support commitment from our key account manager strategy. I am particularly proud of our North American capital sales team who built momentum over the course of 2021 and delivered Q4 revenues eclipsing pre-COVID levels. Our overall international capital equipment sales provided a nice lift over prior year, led by the performances of our direct sales team in the EU and our international distributor markets. The Japanese and Australia teams began fourth quarter working through hangover impacts from COVID-related challenges in the third quarter, and made progress throughout the quarter, building momentum going into 2022. With regard to recurring revenue, record-level consumer products sales offset slight weakness in our service revenues. This weakness in service was not the result of any fundamental softness in the market, but instead it was driven by a purposeful decision by management. Given our record capital performance layered over a sluggish global supply chain, we made the choice to prioritize the manufacture and placement of new products over replenishing distributor inventory of service parts. While this was not ideal, we believe that we struck an appropriate balance within the quarter between customer demands and distributor needs. Our team is partnering with our key suppliers to provide longer-term visibility into our increasing demand and expect to clear up any pent-up demand for service parts over the next two quarters as we have line of sight into replenishment deliveries. Consumable product revenue experienced robust growth during the quarter, providing an early indication of the success we can anticipate from our key account manager strategy. With the ongoing expansion of our active install base of systems from capital sales, combined with an increased number of key account managers now on board, We anticipate that the trend of consumable revenue growth witnessed in the fourth quarter of 2021 will continue into 2022. While there is a potential for a portion of the fourth quarter consumable volume was tied to purchases by customers ahead of expected robust demand in the new year, we do expect that the underlying treatment volume will remain strong going into 2022, supported by our key account manager activities. Skincare revenue of $10.7 million represents only a slight growth over prior year period, but it was a sequential decrease as compared to third quarter 2021. This was fully anticipated as we had mentioned on the third quarter 2021 earnings call, pre-buying in advance of the announced price increase was significant. We estimate the impact in the period to be approximately $2 million. implying a quarterly run rate for skincare business to be in the range of 12 to 12.5 million per quarter. Skincare ordering patterns will settle back into a normal cadence over the first half of the year, and we can expect to see this product category return to growth at or above market rates. Before I turn the call over to Rohan, I will comment first on our gross margin expansion, which is one of our vital few initiatives. During the fourth quarter of 2021, the team delivered another strong performance by implementing cost savings programs to help offset the inflationary pressures such as increased freight expense, higher component costs, and the required processing and special expediting fees associated with pulling in supply deliveries. While we have done a good job building inventories in front of some of the inflationary headwinds, our team's efforts on cost reductions will become increasingly important over 2022. With regard to operating margin, we will remain committed to running the business effectively and efficiently and will continue to make judicious investment decisions that fuel growth. With that, let me turn the call over to Rohan to provide some additional color on our financial performances as well as share our outlook for full year 2022.

Thank you, Dave. As I review my prepared remarks, I want to note that I will be discussing some non-GAAP results. A complete reconciliation of GAAP to non-GAAP is included in the earnings release. We encourage listeners and readers to review our non-GAAP metrics in conjunction with the GAAP results as contained in our earnings release. Total revenue for the fourth quarter was $65.6 million compared to $49.9 million for the same period in 2020, representing an increase of approximately 31%. For the full year, revenue was $231.3 million compared to $147.7 million in 2020, an increase of 57% from the prior year period. Fourth quarter North American capital equipment revenue was $28.7 million compared to $18.4 million for the same period last year. International capital equipment revenue for the fourth quarter was 14.8 million, a 26% increase compared to the same period last year. For the full year 2021, North American capital equipment revenue was 86.1 million compared to 50.7 million in 2020, representing a growth rate of 70%. Full year international capital equipment was 53.5 million compared to 40 million in 2020, implying a growth rate of 34%. Following the investments made in late 2020 and early 2021, we are exiting 2021 having exceeded the high watermarks established in 2019. Recurring revenue defined to include our consumables, global service, and skincare product lines was $22.1 million in the fourth quarter compared to $19.8 million for the same period last year, representing a 12% growth over the prior year. For the full year, Recurring revenue was 91.6 million compared to 56.9 million in 2020, representing a 61% growth over the prior year. The increase in 2021 was largely driven by the continued strength in our skincare and consumable franchises, which bodes well for our continued growth. I would like to note here that over the course of the past three years, since 2018, our recurring revenues have grown from 19% to 40% of sales. Our long-term target remains to exceed 50% of total revenues, and we are very pleased with the progress we made last year. Non-GAAP gross profit for the fourth quarter of fiscal 2021 was $38.8 million, representing a nearly 250 basis point margin improvement compared to the same period last year. Non-GAAP gross profit for the full year 2021 was $134.2 million, a 72% increase and a more than 500 basis point margin improvement compared to 2020. The story for our margin improvement remained consistent all year, driven by a better sales mix and continued leverage of our fixed cost base while offsetting several supply chain and macroeconomic inflationary pressures. Total non-GAAP operating expenses for the fourth quarter of 2021 were $34.5 million compared to $23.6 million for the same period last year. Over a third of this increase, about $4.2 million, were investments to drive our ACNI initiative. Non-GAAP operating expenses for the full year 2021 were $113.5 million compared to $82.9 million in 2020. Now I will cover the OPEX details on a non-GAAP basis. Sales and marketing expense for the fourth quarter of 2021 was $22.3 million compared to $13.2 million for the same period last year. Sales and marketing expense for the full year 21 was 70.4 million compared to 46 million in 2020. R&D expense for the fourth quarter of 21 was 5.6 million compared to 3.7 million for the same period last year. R&D expense for the full year 2021 was 18.6 million compared to 12.4 million in 2020. Finally, G&A expense for the fourth quarter of 2021 was 6.6 million compared to 6.7 million in the same period last year. G&A expense for the full year 2021 was 24.5 million compared to 24.5 million in 2020. For the fourth quarter of 2021, our non-GAAP operating income, also known as adjusted EBITDA, was 4.3 million compared to 4.7 million in the prior year period, while adjusted EBITDA for the full year 2021 was 20.7 million compared to a loss of 4.8 million in 2020. I'd like to take a moment to provide some additional details on the company's profitability profile. It's worth noting that our EBITDA excluding the investments we made during the year to support the forthcoming commercialization of our Acne product would have been $8.9 million in Q4 and $30.2 million for full year 2021. We are very proud of our improvement in the underlying profitability. and these numbers are a direct result of the focus, collaboration, and discipline of our global QTERRA team. Our Q4 ACNI spend of $4.6 million was fueled by the encouraging market insights and clinical data we have gathered to date, and it's our belief that we will earn a very strong return on these investments on behalf of our shareholders. We're cautiously optimistic with the progress we have made on our ACNI device and will continue to invest judiciously. Finally, There were no material or significant changes to our tax position. Turning now to our balance sheet. We ended the quarter with $164.2 million of cash and cash equivalents compared to $47 million at the same time last year and $162.5 million at the end of the third quarter of 2021. We ended the quarter with $39.5 million of inventory, up $4 million from the third quarter, primarily driven by investments to prepare for the launch of our Acne device. Our balance sheet continues to be the strongest it has ever been in the history of Kutera and positions us very well to capitalize on the meaningful innovations being churned out by the best engineers in the business. Before I turn the call back over to Dave, I would like to provide you with our outlook for the full year of 2022. As we have navigated through the COVID pandemic and continue to deal with the lingering effects of its variants, We are very encouraged by the strong performance of our team, as well as the overall health and demand environment in our end markets. As a result, we are issuing revenue guidance for the full year of 2022 at $255 million to $260 million, implying underlying growth of 10% to 12% on a constant currency basis. This guidance does not include any revenue from ACME. In 2022, other than our investments in ACME, we intend to make additional investments to fuel the growth of our core business and build out our infrastructure. These OPEX investments of 4 to 6 million include initiatives such as ERP and will enable long-term scalability as well as accelerate the growth trajectory of our business. Additionally, we anticipate our gross margin to experience near-term cost pressures in the range of 2 to 3 million for the year, due to the ongoing global supply chain challenges. Regardless of these investments and supply chain challenges, we anticipate adjusted EBITDA to grow slightly ahead of revenues, underscoring the progress we've made against our profitability goals, along with the inherent leverage present in our business. For 2022, excluding investments associated with our ACNI program, our adjusted EBITDA on a constant currency basis would be in the range of 33 to 35 million. We expect our 2022 ACME program investments to be in the range of 15 to 20 million, notwithstanding timing adjustments based on future feedback from the FDA. We intend to manage the cadence and extent of our investments in 2022 to deliver foliar adjusted EBITDA to be at or near 2021 levels. As we scale QTERRA and absorb foundational investments while continuing to deliver on profitability goals, it emphasizes the progress we've made over the last couple years. With that, I will now pass it back to Dave.