Cutera, Inc.

Thank you for standing by. This is the conference operator. Welcome to the QTERRA Inc. first quarter 2024 results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will 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 would now like to turn the conference over to Greg Barker, Vice President of Finance and Industrial Relations. Please go ahead.

Thank you, Operator, and thank you everyone for joining us. With me today is Taylor Harris, QTERIS 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, or management's good faith belief 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 that they are made. QTERRA 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 We believe these financial measures can facilitate a more complete analysis and greater transparency into Gutierrez'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, it is my pleasure to turn the call over to our CEO, Taylor Harris.

Thank you, Greg. Good afternoon, everyone, and welcome to QTERA's first quarter 2024 earnings call. So far this year, we're stabilizing, tracking with our expectations, and making progress on our key strategic priorities, despite a challenging macroeconomic environment. I just returned from attending our QTERA University Clinical Forum in Australia, where we launched AviClear into the dermatology community. It was an inspiring event, and the enthusiasm for this new technology is encouraging. A handful of dermatologists in Australia have had AviClear for several months as part of our limited commercial release, and they've each treated a good number of patients. These physicians served as some of our speakers and panelists for the event, and they were able to share their firsthand experience with the other attendees. It's clear that as we launch in international markets, The learnings from the last 18 to 24 months in North America are proving quite valuable. The physicians with early access are already incorporating the clinical best practices identified in our white paper related to expectation setting, pain management, use of concomitant therapy, and managing acne flares. And overall, while it's still early, I would characterize the reception of AviClear in Australia as very encouraging. and we're hearing similar feedback out of Europe. Physicians involved in our international limited commercial release phase are excited to be offering a truly new non-pharmacologic therapeutic option to their patients for the treatment of acne. And they're also already considering potential new applications of AviClear to treat other conditions of the sebaceous gland. More broadly, we've had a busy first four months of the year. We kicked it off with the first global sales meeting in the history of Kutera, where field teams from around the world were able to come together to learn and prepare for the year. This GSM provided the perfect opportunity for us to launch our new vision, mission, and values company-wide and to start building new energy around leadership as a mission-driven, values-based organization. Following GSM, We introduced a new business model for AviClear in North America, and in international markets, we began our limited commercial release phase for Avi at the NCAST meeting in Paris in February. We also introduced our enhanced cooperative marketing program, supported the publication of a white paper on clinical best practices with AviClear, and finalized preparations for our first QTERRA Academy, which was held last week in Atlanta. Meanwhile, we introduced our R&D organization's latest new product, Xeo Plus, to the North American market in early April at the ASLMS meeting. Xeo Plus builds on the legacy of the original Xeo platform, one of Kuterra's most successful products, which was introduced over 20 years ago and pioneered both ND-YAG laser technology and contact cooling technologies. as well as Cutera's signature laser genesis procedure for skin revitalization. Zeo Plus offers tremendous flexibility and customization with over 25 applications from skin revitalization to hair removal to pigment reduction and more. With a larger spot size, enhanced contact cooling, and redesigned hand pieces, Zeo Plus provides faster and more comfortable treatments. We're excited to launch ZioPlus both to new customers and as an upgrade option to the installed base of over 2,500 original Zio accounts. I'll now provide some summary comments regarding our first quarter financial results and then highlight a few of our areas of focus for the year. Similar to the fourth quarter of last year, first quarter financial results reflected an ongoing stabilization in the business. While revenue declined sequentially, reflecting typical seasonality in our industry, our AviClear revenue increased and hit a quarterly high watermark due to the change of business model in North America and the limited commercial release in international markets. Now, it's clear that we're operating in a challenging macro environment with pressure on the body contouring market in particular. And given that backdrop, we're fortunate to have the opportunity to launch a new first-in-class device like AviClear. Avi's systems revenue increased from conversions to the new business model as well as new sales, more than offsetting the continued contraction in procedures performed on the legacy installed base of leased systems, which is due largely to the reduction we've seen in the number of active accounts. As we've mentioned before, there are a number of AviClear devices under our former lease model that have gone dormant and which we expect to be returned. 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 close to 50% higher than those of other specialties, and a disproportionate percentage of our most successful accounts are dermatologists. Beyond practice type, though, key determinants for success include having a physician on site at a practice, training the entire office staff, communicating and setting appropriate expectations with patients, 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. We also began to see progress with our cost structure in the first quarter. Throughout 2023, our gross margin was depressed due to reduced volume, the array of company-specific operational issues that we have highlighted previously, and a high level of inventory reserves. Non-GAAP gross margin remained below the historical trend line in Q1. However, on a normalized basis, excluding inventory reserves, it did improve to 40%. And that's compared to 37% in the fourth quarter and 30% in the third quarter, despite having a lower revenue base in Q1 relative to either of those previous quarters. Additionally, our operating expenses were down both sequentially and year over year, reflecting the restructuring and other cost containment initiatives that we've enacted. We continue to focus on efficiency initiatives that should support ongoing improvements in our cost position and our gross margin profile over time. I'll now provide an update on a couple of our critical priorities that we've discussed on previous quarterly calls, returning to operational excellence and building a global AviClear franchise. First, operational excellence. We continue to make progress in the five key areas that we identified last year. product reliability, field service, inventory control, supply-demand planning, and cost of operations. In the first quarter, our cross-functional product reliability team, consisting of representatives from R&D, field service, quality, and operations, delivered another improvement in product reliability rates, both in terms of initial performance following new shipments as well as ongoing reliability thereafter. In fact, Our Q1 performance met or exceeded our annual objectives across all of our product categories. In the area of field service, we saw dramatic improvement in our North American service levels in the back half of last year, addressing most of the backlog of open cases as well as reducing response times for new service calls. In the first quarter, we maintained that performance and backlog in North America, and we are beginning to see an improvement in our average response time as well. We're also rolling out best practices across our international regions so that we can achieve this same level of service quality across the globe. Now, we still have work to do on this front. For years, our international regions were managed separately, with the service teams having little support from the corporate office. We're starting to change that, though, with regular interactions such as trainings and reviews of service part demand, and with in-person support as well. For example, as I was leaving Australia, one of our top field engineers from North America was arriving to spend a month with the team, helping to reduce backlog, while other leaders were on their way to help with training and the implementation of new processes. I won't spend as much time on our other focus areas of inventory management, demand planning, and cost control, except to make a few points. We performed another physical inventory count at the end of Q1, and we had a net variance below 1%, and that exceeded our target for the year. It was better than our target for the year. We have now filled our new 50,000-square-foot warehouse, as we have just over $130 million of gross value of inventory on hand. Our supply-demand planning process continues to mature, and we believe that by mid-year, we will be done with the inventory build that has resulted both from previous purchase commitments as well as the need to remediate shortages of certain key components. And we continue to believe that we are positioned to begin working down inventory in the second half of the year, creating a cash tailwind for the company. And now turning to AviClear. In international markets, we commenced a limited commercial release phase at the MCAS meeting in February. 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 payment for individual treatment cycles. Our primary focus with AviClear in all geographies is on partnering with our customers to build franchises with healthy utilization. In North America, we're first working to identify a more focused list of customers who will move forward with AviClear. As a reminder, during 2022 and 23, the company placed over 1,200 AviClear systems into the field under the original business model. But as we've described, most of those accounts were no longer doing AviClear procedures as of the second half of 2023. At the end of the first quarter, our installed base of leased systems in North America had declined to approximately 1,050, with a list of an additional 275 set to be returned in the coming months. We've also begun reaching out to customers with upcoming lease renewals, and we continue to expect that more than half of the original systems will be returned. This process requires a significant amount of attention, both from our field team and our internal customer support and operations teams. This is critical work to allow us to start the rebuilding process. At the same time, though, we've dedicated a group of individuals in the company to our key practice development initiatives. And perhaps most important among these is QTERRA Academy, a two-day university-style training program that launched at the end of April. Our first Academy session was received with rave reviews, both from our internal team as well as the customers who attended. When asked if Academy had a significant impact on their confidence with AviClear, 100% of attendees said yes. When asked what we should do differently with future academies, 100% said nothing. So we're excited about what Academy can do for our AviClear franchise and also for the broader business. As one attendee commented, this made me have a different perspective on QTERRA as a whole in a very positive way. It shows that QTERRA truly cares about their practice partners and wants us to succeed. Our CAM team has now been fully trained on the QTERRA Academy curriculum, and we are developing a video content library so that they can apply the Academy experience at a local, individualized level. In summary, we're tracking along with our plans for the year, and we're making progress on our key initiatives, setting the foundation for the future. So with that, I'll turn it over to Stuart for a review of our Q1 financial results.