Cutera, Inc.

Thank you for joining Kutera's first quarter 2022 earnings conference call. After the prepared remarks, there will be a question and answer session. The discussion today includes forward-looking statements. Those forward-looking statements reflect management's current forecast and 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, competitive landscape, patient and customer demand, and productivity improvements. For words that may identify forward-looking statements, we encourage you to refer to the safe harbour 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. Tutera also cautions you not to place undue reliance on forward-looking statements which speak only as of the date they are made. Matera undertakes no obligation to update publicly any forward-looking statements to reflect new information, events, or circumstances, or to reflect the occurrence of unanticipated events. Future results may differ materially from management's current expectations. In addition, we will discuss non-GAAP financial measures, including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency into Katerra's ongoing results of operations, particularly when comparing underlying results from period to period. Please refer to the reconciliation from GAAP or 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 Mallory.

Thank you, Grant. We would like to welcome everyone to Katerra's first quarter 2022 earnings call, and we are 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 first quarter revenue performance, along with some operational highlights and commercial insights. Rohan will then provide a detailed review of our first quarter 2022 results, as well as an update to our fiscal 2022 financial guidance. After which, I will provide some detail on AviClear, our recently FDA-cleared laser-based platform for the treatment of acne. I will then hand the call back over to Grant so that we can take your questions. Before getting into the results, let me begin our prepared remarks with some general observations of the aesthetic market and a particular focus on our core customers and the patient patterns within their practices. Global macroeconomic developments continue to make headlines and cast shadows over certain segments of consumer-driven healthcare. We're also aware that recently some companies associated with elective medical procedures have reported softness in their current and near-term demand in light of these economic trends. To be clear, we have not observed these trends or conditions in our key markets at Kutera. In fact, the fundamental strength that we observed in patient treatment volumes translated into strong first quarter 2022 results for the company. Additionally, these underlying market fundamentals have continued providing robust traffic treatment and serve as a positive leading indicator of future demand for capital equipment. We believe that the shifting demographic of the aesthetic patient over the past two and a half years has served to insulate many of our providers and their practices from economic pressures as they draw an increasing volume of new and fundamentally different patients into their practices. This growing patient segment is best defined as actively employed younger professionals with access to disposable income. As a group, the new segment is more resilient to external factors than the typical pre-Zoom era aesthetic patients. Additionally, this young professional segment views energy-based aesthetic treatments as an investment in themselves and in their careers, as the use of video conferencing continues to grow in their professional pursuits as well in their personal engagements. In addition to the patient demographic shift, we have gained deeper insights into practice patterns. Our ongoing investments into key account management have enabled Katerra to build deeper relationships with practitioners and their staffs. These relationships have in turn provided Kuterra with greater visibility into practice schedules, treatment volumes, and patient profiles. Additionally, management has been able to engage with aesthetic practitioners over the course of three recent industry conferences, gathering direct feedback on practice patterns and treatment volumes. These data have reaffirmed to us a very robust pipeline of patient treatments that generally extend out for two to three months for our customers. We believe these trends will carry forward and enable us to continue to build momentum over the remainder of 2022 based on the underlying patient traffic and the known demand for capital equipment. Turning now to QTERRA's first quarter 2022 results, we demonstrated continued momentum in both the capital equipment and consumable product segments carrying forward from previous periods. Our results were once again defined by solid execution by our commercial teams around the world, leveraging great technology, robust underlying market fundamentals, and the increasing momentum from our key account manager strategy. Overall revenue for the first quarter was $58.0 million, representing approximately 17% growth over prior year as reported, and 21% on a constant currency basis. Capital equipment sales was the most significant contributor to our year-over-year growth as we continued to see progress prospecting a greater volume of deals and effectively processing them through our sales pipeline. This was particularly evident in North America. The overall strength of our North American capital equipment sales continued to build over the period as we made additional investments in the expansion and ongoing training and development of this team. During the period, the North American team posted strong results, growing 35% over prior year, driven by our body contouring products, TruSculpt ID and TruSculpt Flex. We also saw strong demand in North America for skin and face rejuvenation solutions, reflected in increased sales for both our Xeo and XLV platforms. International capital equipment sales were led by impressive recoveries in both Australia and New Zealand, as well as Japan, during the first quarter. with those geographies growing 41% and 49% respectively, as reported versus prior year. We believe our Australian market benefited from some pent-up demand in the second half of 2021 lockdowns, while our Japanese results reflect an incremental increase of patients returning to their pre-COVID routines, offset slightly by FX rates. In Europe, capital equipment sales of 3.6 million declined 700,000 from prior year levels as the business worked through the short-term disruptions caused by events in the Ukraine. Looking ahead, we have line of sight to a near-term return to growth based upon the cadence of second quarter 2022 orders in hand, as we anticipate double-digit growth year-over-year for that region. Recurring revenue, defined as the combination of skin care, consumable products, and service, was $21.5 million in the period, an increase of 1% over prior year as reported, but representing a 7% growth on a constant currency basis. Strength in our consumable products offset sales declines within our skin care business, directly impacted by the weakness of the end. Regarding consumables, our first quarter results provided a strong start to 2022, and we anticipate that these results will set the tone for consumable revenues for the rest of the year. Our consumable volumes are being driven higher by the success we are seeing in North America in particular from the revenue-generating activities that we plan, schedule, and run at our customer accounts through our key account managers. We were pleased with the service contract attach rates during the quarter as well. The service team began working also to resolve prior period open orders previously discussed. While we made meaningful strides in building up subassembly inventory for service components, we have not yet significantly reduced this backlog and expect to clear all service part backlogs by the end of 3Q 2022. Finally, on skin care, our revenue for the quarter was $11.6 million, a decline of 5% from the prior year on an as-reported basis, but also representing growth of 4% versus prior year on a constant currency basis. We have seen our skincare levels normalized following the disruptions from the price increase we implemented in the second half of 2021. We believe that the quarterly run rate for our skincare business in Japan is approximately 12 million and anticipate finishing fiscal 2022 with a constant currency growth rate for skincare in the mid to upper single digits. Looking now at the bottom line, I want to first reaffirm this organization's commitment to the long-term sustained profitability as well as remaining disciplined to expense management. This has been evident since the onset of COVID as we cut spending, resized the business, and built a much leaner operation. However, Kuterra is currently poised for transformation as we enter into a new market segment for Kuterra, acting. We have created an opportunity for ourselves to take a unique first-mover device into a market very much in need of innovation. We are choosing to be bold and temporarily break from our string of profitable quarters going back to mid-2020 during the height of COVID. We intend to make timely investments into our commercial and R&D functions over the next two to three quarters to grow faster and shorten the timeframe to accretive growth from our ACME programs. I will speak more around the AviClear product following Rohan's comments. With that, let me turn the call over to Rohan to provide some additional color on our financial performances as well as our outlook for full year 2022. Rohan?

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 our earnings release. We encourage listeners and readers to review our non-GAAP metrics in conjunction with the GAAP results as contained in this earnings release. Starting with revenue, our sales for the first quarter were $58.0 million compared to $49.7 million for the same period in 2021, representing an increase of approximately 17% on an as reported basis, excluding the FX headwinds we faced during the quarter. our constant currency revenue growth was approximately 21% over prior year. First quarter North American capital equipment revenue of $22.7 million increased 35% over the prior year. International capital equipment revenue for the first quarter was $13.8 million, up 20% as reported, and 27% in constant currency from the first quarter of 2021. Recurring revenue, defined to include our consumables, global service and skincare product lines was 21.5 million in the first quarter, up 1% as reported, and up 7% in constant currency. The increase over the prior year was driven by growth in our consumables products, up 33% as reported, and 36% in constant currency. Our skincare segment was particularly impacted by negative foreign currency fluctuation in the yen, down 5% as reported, but up 4% in constant currency. Services revenues continue to be impacted by inconsistent component supplies, down 3% as reported, and flat in constant currency. Non-GAAP gross profit for the first quarter of fiscal 2022 was $32.3 million, with a gross margin of 55.7%, representing a decline of approximately 70 basis points compared to the same period last year. Excluding ACNI costs of $0.9 million, non-GAAP gross margin in the first quarter was 57.3%, and approximately 90 basis points improvement as compared to the same period last year. Within the quarter, our gross margins were impacted by supply chain and macroeconomic inflationary pressures, as well as FX headwinds. Nevertheless, we offset these factors with ongoing cost improvement initiatives, as well as the increased leverage of our fixed cost base. We note that FX rates represented a headwind of a little over 300 basis points to gross margins in the quarter. Total non-GAAP operating expenses for the first quarter of 2022 were $36.1 million compared to $23.4 million for the same period last year. This increase was largely driven by conscious acceleration in AviClear spend, totaling $7.2 million, as the regulatory approval became more likely to occur within the quarter. The increased ACNI expenses versus 4Q21 were largely due to accelerating spend in areas such as training as well as sales and marketing. Non-GAAP sales and marketing expense for the first quarter of 2022 was $23.5 million compared to $13.5 million for the same period last year, driven by continued expansion in our sales force, higher commissions, increased travel, as well as expenses associated with the launch of AviClear. Non-GAAP R&D expense for the first quarter of 2022 was 5.5 million compared to 3.8 million for the same period last year, driven by increased investments in AviClear and additional clinical studies. Rounding out our operating expense commentary, non-GAAP G&A expense for the first quarter of 2022 was 7.1 million compared to 6.2 million in the same period last year, driven by inflation and an expansion in our headcount. For the first quarter of 2022, our non-GAAP operating income, commonly referred to as adjusted EBITDA, was a loss of $3.8 million compared to a profit of $4.6 million in the prior year period. As anticipated, our investment in AviClear was the most significant driver of this decline on a year-over-year basis. Excluding ACNI investments of $8.1 million for the first quarter of 2022, adjusted EBITDA was $4.3 million. As I mentioned earlier, embedded within our non-GAAP OPEX is a $7.2 million spend on our ACNI program, approximately 75% of which is in sales and marketing investments, with most of the rest in R&D. Additionally, you will see in our reconciliation of GAAP to non-GAAP statement of operations that we spent about $4 million in taking our new ERP system live in the quarter. While implementation spending will continue throughout 2022, we are already seeing expenses taper down as we move past the heavy lift of going live in Q1. Finally, there were no material or significant changes to our tax position. Turning now to our balance sheet, we ended the quarter with $131.8 million of unrestricted cash and marketable securities compared to $164.9 million at the same time last year and $164.2 million at the end of the fourth quarter 2021. This sequential decline of approximately $32 million was driven primarily by the following factors. Firstly, investments of $12.5 million in inventory and $5.6 million in prepaids and deposits to support the launch of AviClear as well as to secure our overall supply chain. Secondly, the cash net loss of $8.6 million, which was mainly driven by ACNI spend and ERP-related investments. The rest of our cash usage was mostly driven by typical first-quarter seasonal factors, including annual incentive compensation payouts. Over the remainder of the year, we expect additional cash burned to be approximately $10 million per quarter. We do not expect cash consumption to be linear as we build and place initial inventories to launch AviClear. With AviClear, we have a strong first mover advantage and broadening customer acceptance based on exceptional clinical data. Given our strong balance sheet, we are well positioned to continue supporting the growth of our core business while ensuring the successful launch of AviClear. Before I turn the call back over to Dave, I would like to provide you with an update on our outlook for the full year of 2022. While we are encouraged by our first quarter results and the demand trends that we've seen thus far through April and into early May, we are also faced with foreign exchange headwinds. Based on how we see 2022 evolving, we are reiterating our original revenue guidance of $255 to $260 million, but at the updated FX rates, implying underlying constant currency growth of approximately 13% to 15%, an increase from our prior constant currency growth rates of 10 to 12%. As a reminder, this guidance does not include any revenue from our recently approved AviClear product. Moving on to adjusted EBITDA guidance. With an earlier than expected approval and bolstered by the physician response to our data, we now expect an acceleration in our ACNI spend, taking our range to 25 to 30 million versus the previous range of 15 to $20 million of ACME spent. Excluding investments associated with our ACME program, we continue to expect our adjusted EBITDA on a constant currency basis to be in the range of 33 to 35 million. Therefore, for 2022, we now expect our full year adjusted EBITDA to be in the range of five to $10 million as compared to our prior guidance of at or near 20 million. In line with this update, We anticipate that there will be a period of incremental investment as we ramp placements of our system, with lower margins as this occurs. However, we anticipate that our AviClear product line and its associated infrastructure to be accretive to consolidated results going into full year 2023. With that, I will now pass the call back over to Dave to provide further detail on the launch of AviClear.