Cutera, Inc.

Thank you for standing by. This is the conference operator. Welcome to the QTERRA, Inc. 4th Quarter 2023 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 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star, then 0. I will now turn the call over to Greg Barker, Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Operator, and thank you, everyone, for joining us. With me today is Taylor Harris, QTERA's Chief Executive Officer, and Stuart Drummond, Interim CFO. Following our prepared remarks, we'll take your questions. Before we get started, I'll note that 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 information available to us at the time those statements are made, which by its nature is dynamic and subject to change. Order management's good faith beliefs as of that time with respect to future events. 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. QTERRA also cautions you not to place undue reliance on forward-looking statements. which speak only as of the date they are made. ETAR undertakes no obligation to update publicly any forward-looking statements to reflect new information, events, or circumstances, or to reflect 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 Terra'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 an alternative to, the operating performance measures prescribed by GAAP. With that, it is my pleasure to turn the call over to our CEO, Taylor Harris.

Thank you, Greg. Good afternoon and welcome to QTERA's fourth quarter 2023 earnings call. I'll provide some summary comments regarding our fourth quarter financial results and then highlight our areas of focus and excitement for 2024. But first, I want to thank the whole team at QTERA who have been performing so admirably amidst a challenging set of circumstances. Because of our team's focus and dedication, We finished 2023 with fourth quarter results that were better than we had anticipated, both for revenue and cash burn. We've also been working hard to resolve a number of time-consuming projects, including the transition of our distributed skincare line in Japan, as well as bringing our manufacturing AviClear and XLV Plus back in-house, so that we can now turn our attention more fully to the future. And on that note, over the past few months, we have introduced a new corporate brand, tagline, vision, mission statement, and set of core values. Our mission is to improve lives through medical aesthetic technologies that are driven by science and powered through partnership. This mission both unites us as a team and it energizes us because of the ability we have by supporting our customers to see the life-changing impact that our technologies and service can have on people on a daily basis. What a gift that is. We've also redefined our core values, which you can remember through an acronym that is well-suited for QTERA, PICO, passion, innovation, communication, and ownership. Teams from across QTERA will be involved with each of these values to keep them visible and thriving. So you can start to see how we at QTERRA are bringing a new energy to aesthetics. In the fourth quarter, we saw more of a stabilization in our business than we had anticipated as part of our guidance. Our international business, in fact, grew sequentially from Q3 to Q4, while our North American business experienced a sequential decline, albeit more modest than we had expected. AviClear revenue was stable from Q3 to Q4, with some capital revenue from the limited commercial release of our enhanced product offering offsetting a continued decline in treatment revenue. The primary reason for this procedural softness has been a decrease in the number of contributing systems, which were less than 50% of the installed base during the fourth quarter. As we've mentioned, there are a number of accounts at which AviClear likely won't remain, and we've seen many of these accounts go dormant. However, and of critical importance, we're also identifying the success factors for building a healthy AviClear franchise. On average, utilization rates at dermatology practices are approximately 50% higher than other specialties, and a disproportionate percentage of our most successful accounts are dermatologists. Beyond practice type, though, Key determinants for success are having a physician on-site at the practice, having the entire office staff trained on AviClear, and on how to select patients, communicate with them, and set expectations, as well as having acne patient flow and a willingness to invest in building awareness. All of these best practices, coupled with our new business model, are at the center of our efforts in 2024, which I'll speak to later. Another key item from our Key 4 results that I would like to address is gross margin. Throughout 2023, our gross margin was depressed due to reduced volume, the array of company-specific operational issues that we've highlighted previously, and a high level of inventory reserves. In the fourth quarter alone, we took approximately $8 million of excess and obsolete inventory reserves. Note that we are not scrapping this inventory. and we'll attempt to utilize it over time. But the appropriate accounting treatment is to put reserves in place given the excess position we have, particularly of AviClear. Adjusting for these reserves, as well as our other non-GAAP items, our normalized gross margin was around 37% in Q4. A comparable normalized measure in Q3 would have been approximately 30%. These are well below historical levels, and we are squarely focused on efficiency initiatives that should improve our cost position and gross margin profile over time, beginning in 2024. Turning to 2024, our team is excited about this new year. We remain focused on the same three critical priorities that we've discussed on our previous quarterly calls, returning to operational excellence, building a global AviClear franchise, and driving toward long-term profitability. We are making strides in each of these areas. First, operational excellence. Our chief operating officer, Jeff Jones, and his team, in just a few months, have made progress in the five key areas that we identified last year. Product reliability, field service, inventory control, supply-demand planning, and cost of operations. We are on track to remediate the most critical elements of these issues by the middle of 2024 with ongoing improvement opportunities beyond that point, particularly in the area of cost control. Product reliability performance improved in Q4, and we have a dedicated team in place that is methodically identifying further opportunities so that we expect a continuation of the favorable trend that we saw late last year. In the area of field service, we saw dramatic improvement in our North American service levels in the back half of last year, wiping away most of the backlog of open cases and reducing response times for new service calls. For 2024, the field service team is focused on elevating response time performance to levels above industry standard, as well as rolling out best practices across our international regions. so that we achieve this same level of service quality across the globe. This team has started to attract great engineers from across the industry when roles open, showing the power of a culture of ongoing improvement and the momentum that can build quickly. This bodes well for our plan for Kutera to be recognized as industry leading, both in technology and through our service and support. In terms of inventory management, where we experienced significant challenges last year, we ended on a high note with our year-end physical inventory count proceeding much faster than at year-end 2022 and with no count-related issues identified in the audit. We've assembled a materials control team, which has implemented daily reviews to ensure that inventory movements are being transacted appropriately. We've also opened our own warehouse, which allows us to consolidate more expensive third-party warehouses with better control while also providing room for the significant amount of AviClear and XLV Plus inventory that we will be bringing in from Jabil. On the planning front, we've introduced a new process in Q4 to better match supply and demand. As a reminder, we've had too much inventory in certain areas, most notably AviClear, and too little in other areas. We are still building inventory in the first half of the year due to purchase commitments and the need to remediate shortages of certain key components. But after that, we should begin working down inventory, creating a cash tailwind for the company. On the cost front, we've implemented key processes for repairing and reusing components, as well as checking the quality of purchased materials and rejecting those that aren't usable. We've also reviewed vendors for certain key components in an effort to reduce scrap rates. And we're now producing all AviClear and XLV Plus in-house, thereby better leveraging our fixed overhead expense while at the same time improving quality. The operations team has also implemented new controls and processes around shipping, which has already begun to reduce freight expense. Our second key priority is growing the AviClear franchise. In international markets, we commenced a limited commercial release phase at the MCAS meeting in February, and we have had highly favorable feedback from the first wave of new AviClear customers. And in North America, during the first quarter, we broadened the availability of our enhanced AviClear offering, which provides greater flexibility and simplicity. The new business model offers the option to purchase the device up front, with a corresponding reduction in ongoing treatment costs to the practitioner. Along with greater business model flexibility, we are offering a hardware and software upgrade that simplifies the user experience, improves product reliability, and moves billing from a per-patient model to paying for individual treatment cycles. Our primary focus with AviClear in all geographies is on partnering with our customers to build franchises with healthy utilization. We believe a few challenges limited utilization in 2023, each of which we plan to address this year. On the service front, we've already made significant progress, and we have hardware and software updates that address the majority of issues that customers have seen since launch. On the clinical front, we have strengthened our clinical protocols through a consensus white paper from leading dermatologists. This was recently published in the Dermatology Digest, and serves as a basis for ongoing practice training. We've also brought on board a new medical liaison to help respond to customer questions and make connections to AviClear KOL Centers of Excellence if needed. And last, perhaps most important, we are currently finalizing our plans for Kutera Academy, a two-day university-style training program that will launch at the end of April. In addition to providing clinical education, Kutera Academy is an important component of our overall effort to help customers build and grow their AviClear practices. To this same end, we've also introduced an enhanced cooperative marketing program, which provides rising levels of rewards benefits, including matching funds for co-branded marketing programs to customers who purchase Kutera consumables. Customers can use these funds through a simple white glove service provider on digital marketing tactics that are proven the most effective at driving patient conversion. From a financial return perspective, our new business model allows customers to achieve an even higher return on their investment as utilization grows. And with our new programmatic support options coupled with our key account manager team, we're providing the tools to help achieve this growth. Lastly, on AviClear, As the pioneer of this technology, we are committed to ongoing clinical research, not only within the field of acne, but also in potential expanded indications. During 2024, in partnership with leading researchers, we plan to conduct pilot studies on the use of AviClear in both sebaceous hyperplasia and hydradenitis suppurativa, both of which are conditions associated with the sebaceous gland. These are areas of unmet clinical need affecting meaningful numbers of individuals, and there's clear interest within the dermatology community in a novel treatment approach like AviClear. During the second quarter, we will host an investor webinar to reintroduce AviClear from its scientific foundation to its clinical data profile in the treatment of acne and to its potential extensibility into these new indications of use. We'll tend to save the date in the weeks to come. Our third and final priority is the drive toward profitability. Everything we've covered regarding operational excellence and growth of the AviClear franchise should contribute meaningfully to our path to profitability. In addition, though, we need to manage our cost structure in a disciplined fashion while also making prudent investments to drive growth. On the cost structure front, we have now almost completed the global restructuring program that we initiated in Q4 2023, which has reduced headcount by close to 25%. This reduction should lead to personnel-related savings of over $20 million on an annualized basis. Partially offsetting these savings, though, will be an increased level of incentive compensation in 2024, assuming that we hit our corporate targets, as well as some select new investments. We do, for example, plan to increase the footprint of our North American field organization with both capital reps and key account managers. We also continue to invest in new product development, and we plan to launch a refreshed product platform later this year. All of this contributes to our excitement regarding 2024 and beyond. Every team in the company has a critical role to play in achieving these objectives, and together, we're going to make it happen. I'll now turn it over to Stuart to provide more detail on Q4 and our guidance for 2024.