Cutera, Inc.

Thank you for standing by. This is the conference operator. Welcome to the QTERRA Inc. fourth quarter 2022 results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then zero. The discussion today includes forward-looking statements. These forward-looking statements reflect management's current forecast or expectation of current 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 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. QTERRA also cautions you not to place undue reliance on forward-looking statements which speak only as of the date they are made. Futera 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 of GAAP to non-GAAP measures in our earnings release. These non-GAAP financial measures should be considered along with, but not as alternative to the operating performance measures prescribed by GAP. With that, I would like to turn the conference over to Dave Mowry, CEO of Kuterra. Please go ahead.

Thank you, Operator. Good afternoon and welcome to Kuterra's fourth quarter and full year 2022 earnings call. We are glad that you can join us for this update. Rohan Seth, our Chief Financial Officer, is joining me on today's call. During the initial segment of the call, I will provide you with our view on the fourth quarter 2022 performance, as well as the underlying market fundamentals and other leading indicators of the health of our business. I will then pass the call to Rohan, who will provide you with greater detail on our financial results for both fourth quarter 2022 and full year 2022 periods, as well as share our initial full year 2023 financial guidance. Following Rohan's remarks, I will share our thoughts on the year ahead, the financial contributions of the AviClear product, and the associated business transformation we anticipate delivering over the course of 2023. Following our prepared remarks, we will turn the call over to the operator, who will then open the call to your questions. With that being said, let's dive right in. As a starting point for the call, I'd like to put our full year 2022 performance into perspective. During 2022, our team delivered strong top-line results with a mid-teens, full-year constant currency growth across the business with contributions coming from each geography in almost every product category. This performance came in the face of macroeconomic pressures, wavering consumer confidence, and material foreign exchange headwinds. Additionally, we successfully brought to market and scaled an innovative first mover energy based laser for the treatment of acne, which we believe increases our total addressable market by nearly two and a half fold. The AviClear device is and will always be the first FDA approved device for the treatment of mild, moderate, and severe acne across all skin types. Most critically, the clinical outcomes and patient safety profile from this signature procedure are unmatched. We remain convinced that this device will indeed change the way that dermatologists see and treat acne. Finally, we were able to see the green shoots of the financial transformation we intend to deliver through the novel AviClear business model. By approaching the acne market with a unique placement-based approach to AviClear, we have established a true collaboration that tightly aligns our interests with those of the clinicians and practice owners. In addition to the transformation of our customer relationships, we also expect AviClear to energize top-line migration to recurring revenues, expansion of gross margins, increased positive impact on EBITDA, greater linearity in our business, and a significant change in the trajectory of cash generations for QTERRA. I will provide additional commentary on the AviClear program later in this discussion. Turning now to fourth quarter 2022 performance. While revenue was lower than expected, we overachieved our AviClear placement expectations following its full North American launch announced in November of 2022. Top line shortfall in the period was driven by a miss on the North American core capital equipment sales. and to a lesser extent, North American core consumable product sales, both of which were directly impacted by the extent and volume of AviClear activity in the period, as key account managers focused on promoting, placing, and supporting the increased customer demand for AviClear. As previously disclosed, we are utilizing the same sales force to place AviClear and sell our core capital equipment. In fourth quarter 2022, the North American capital team focused its efforts on driving AviClear bookings and perhaps over-indexed some of their efforts. Following the full North American AviClear launch, strong underlying interest in AviClear quickly converted into customer demand that occupied our sales team throughout November and most of December. The higher than anticipated volume of deals diverted much attention away from routine processing of core capital deals and left a significantly shortened timeframe to close deals. when sales reps finally pivoted back to their core capital pipeline. Based upon our experience thus far with the AviClear launch, we believe that these efforts spent prospecting and closing AviClear deals would have translated into advancing approximately 100 to 120 core capital deals, which we estimate to have resulted in roughly $4 to $5 million of core capital revenue, some of which may still be recovered over the course of 2023. We have already taken action to address the root cause of our capital revenue shortfall in fourth quarter 2022. The underlying issues requiring attention are number one, sales rep activity and monitoring, and number two, sales commission and incentive structures. Following end of year closed activities, we went to work with the North American sales leadership team to understand these issues. And this has in turn resulted in the construction and implementation of an uncapped compensation program that rewards sales performance when it achieves goals in both the core and AviClear segments. Additionally, we have implemented activity tracking utilizing Salesforce.com application to help sales managers ensure that adequate time and attention are being applied by each rep across both segments. While these repairs may seem obvious, these are management oversights and they do not reflect upon the skills or capabilities of our North American sales force. As you will hear later in the discussion, the level of AviClear placements in the period confirms the quality and capabilities of this exceptional sales team. Now with data in hand, we are actively reviewing the sales activity at senior levels within the organization with the goal of leveraging this information to improve our sales processes. Meanwhile, our sales managers are delivering a strong accountability message that efforts must be applied across both segments. Additionally, our internal staff is scaling its support to ensure that the capital sales team can remain tightly focused on processing deals with their customers. Before turning the call over to Rohan, I would like to share our view of the markets as we look ahead to 2023. We believe that some macroeconomic headwinds are indeed present and that these will have an impact on our 2023 results. Nevertheless, we believe that these changes will not be long-lasting as underlying market feedback continues to highlight steady patient traffics. Additionally, our routine assessment of activity levels indicates well-booked practice schedules, reinforcing our confidence in the continued resiliency that we have seen over the past six quarters. With AviClear now in full launch, we can leverage what we believe to be a more recession resistant process and procedure to place products into areas that may be more impacted by macroeconomic factors. In the end, we expect to be able to leverage our core products, bolstered by some new product introductions, in combination with AviClear to deliver above market performance for the business. With that, Let me turn the call over to Rohan to provide some additional color on our financial performance and our fiscal year 2023 outlook. 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. Total revenue for the fourth quarter was $67.4 million compared to $65.6 million for the same period in 2021, representing an increase of approximately 3% on an as reported basis. During the quarter, we continued to face meaningful foreign currency headwinds, and our constant currency revenue growth was approximately 10%. Fourth quarter North American capital equipment revenue of $25 million decreased by 13% over the prior year. International capital equipment revenue for the fourth quarter was $17.4 million, up 18% as reported, and 27% in constant currency from the fourth quarter of 2021. Recurring revenue defined as our consumables, global service, skincare, and AviClear product lines was $24.9 million in the fourth quarter, up 13% as reported, and 29% in constant currency. The increase over the prior year was largely driven by skincare revenue of $11.8 million, up 10% as reported, and 37% in constant currency, and the continued ramp of AviClear, generating $3.2 million in revenue for the fourth quarter. This growth was partially offset by decline in consumable revenue, which came in at $4.2 million, down 22% as reported, and 18% on a constant currency basis. driven by AviClear account onboarding activities, diverting the attention of our sales team away from core promotional events. Our service revenue grew slightly at 2% on a constant currency basis. Non-GAAP gross profit for the fourth quarter of fiscal 2022 was $40 million, with a gross margin of 59.4%, representing an increase of 30 basis points compared to the same period last year. Excluding a more than 210 basis point impact from foreign exchange headwinds, the non-GAAP gross margin in the fourth quarter would have been 61.5%, an approximately 240 basis point improvement over the prior year. This was particularly impressive given the shortfall in North American capital revenue and highlights the transformation that AviClear is bringing to our business. Total non-GAAP operating expenses for the fourth quarter of 2022 were $39.7 million compared to $34.5 million for the same period last year. Included within this number are $6.7 million in expenses related to all these years. Non-GAAP sales and marketing expenses for the fourth quarter of 2022 were $26 million compared to $22.3 million for the same period last year. driven by continued expansion in our sales force, higher commissions, and increased travel. Non-GAAP R&D expenses for the fourth quarter of 2022 were $5.5 million compared to $5.6 million for the same period last year. Non-GAAP G&A expenses for the fourth quarter of 2022 were $8.3 million compared to $6.6 million in the same period last year, driven by expansion in our headcount and an increase in our bad debt reserve due to an increase in age receivables. This was driven mainly by the same Salesforce distraction that impacted core capital equipment sales. We expect this to largely be addressed over the next couple of quarters. For the fourth quarter of 2022, our non-GAAP operating income, which we refer to as adjusted EBITDA, was $0.2 million compared to $4.3 million in the prior year period, largely driven by FX advance, of more than $3.4 million and costs associated with the full North American launch of AviClear. Finally, there were no material or significant changes to our tax position. Turning now to our balance sheet. We ended the quarter with $317.3 million of cash and marketable securities compared to $250.8 million at the end of the third quarter. driving the $66.5 million sequential increase or $91.4 million of net proceeds from our December convertible debt raise, partially offset by $24.9 million of cash utilization, primarily driven by increased AviClear deployment. Before I turn the call back over to Dave, I would like to provide you with our outlook for the full year of 2023. We are issuing constant currency revenue guidance of $277 million to $292 million, implying 10% to 16% constant currency growth over the prior year. At current foreign exchange rates, we expect to eclipse these headwinds exiting Q2 23. We also expect adjusted EBITDA to be in the low single-digit millions with consistent sequential improvement as we progress through 2023. And we expect to continue to consume cash, primarily in the first half of 2023, as we continue to expand our AviClear footprint in the North American market, with a projected cash consumption of $55 to $65 million, greater than half of which will happen in Q1. By Q4 2023, we expect to achieve cash flow breakeven. As a reminder, our core business historically has consumed cash in Q1 and Q2 of the year. With that, I will now pass the call back over to Dave.