Cutera, Inc.

Thank you for standing by. This is the conference operator. Welcome to the QTERRA Inc. second 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'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. I would now like to turn the call over to Shelby Eckerman, Vice President of Finance. Please go ahead.

Thank you, Operator, and thank you for everyone for joining us today. With me today is Taylor Harris, QTERA's Chief Executive Officer, and Stuart Drummond, Interim CFO. Following our prepared remarks, we will 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 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 risk 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. Katerra also cautioned you not to place undue reliance on forward-looking statements, which speak only as of the date they are made. Katerra 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 CARA'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 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, Shelby. I'll start by acknowledging that we're reporting a disappointing second quarter performance and four-year outlook. Historically, our business and our industry have seen increased capital purchase activity as we move sequentially into the second quarter. This year, that trend didn't hold, primarily, we believe, due to continued macroeconomic pressure, which we're assuming will persist through the balance of the year. We are marching forward with new commercial leadership in North America, additional cost reductions, and we're building upon the strong momentum that we're generating with AviClear. I'm proud of the resilience that our team at QTERA is demonstrating and of the foundational changes We continue to pursue to position the company well for future growth. There were some important bright spots in our second quarter performance, and I want to highlight those. First, the international launch of AviClear is proceeding exceedingly well. We've sold over 70 AviClear systems outside of North America. And for the approximately 50 customers that have had systems in place for at least two months, Utilization is averaging over 10 treatments per month. Now, we're very early in the launch, so it wouldn't be appropriate to extrapolate that performance, but it is still quite encouraging. Second, we've had highly positive feedback from the launch of ZO Plus in North America, and we're exceeding our expectations there. ZO Plus offers tremendous flexibility and customization, with over 25 applications, from Cutera's signature laser genesis procedure to hair removal, to pigment reduction, and more. We believe that ZioPlus can be a great upgrade option for our installed base of legacy Zio accounts over time. But in the second quarter, we actually sold more ZioPlus systems into accounts that are new to Qterra, which we view as a positive indicator of the long-term opportunity. Third, we've strengthened our North American sales force over the past quarter. In July, we promoted Steve Kreider to SVP of North America with full responsibility for a unified commercial organization, including capital sales, practice development, marketing, and customer excellence. Steve is a mission-driven leader, and he has tremendous passion for building great teams, training and developing people, and for providing clarity and focus on priorities. All of those attributes, as well as his deep experience in both dermatology and aesthetics, will serve Cutera well. Steve and his leadership team are focused on driving consistent execution and improved productivity. To this end, we've restructured our capital sales organization under the leadership of two new directors and a team of regional managers. Across both capital and practice development, our leaders are focused on team management, collaboration, training, and process improvement. including utilization of the Salesforce platform to improve execution and forecasting. Our current North American team represents a solid mix of QTERA veterans and new talent. In recent months, we have attracted a number of proven capital salespeople and practice development managers with deep industry experience. We've also had a fair amount of turnover, much through performance management. Turnover detracts from revenue in the short term, as it takes new reps, even experienced ones, some time to build their territories. But we believe that the overall transition has strengthened our team for higher levels of performance over the medium and long term. Turning to our overall financial performance in the second quarter, revenue was below our expectation due to a combination of macro pressure and the aforementioned Salesforce transition. Overall capital systems revenue increased sequentially in international markets due to the strength of the AviClear launch, but it declined sequentially in North America. Customers across multiple geographies continue to struggle with access to capital and financing terms, which are limiting their ability to invest in new capital. Our gross margin was also below expectations, primarily due to lower sales volume, but also attributable to a mixed shift and some continued charges related to the remediation of our operational challenges. The mix shift is important to understand. In the first half of the year, we had a meaningful shift toward international revenue, which comes at a reduced gross margin. Relative to our forecast, we also had lower sales of our RF energy platforms, True Body and Secret. These platforms have higher margin profiles than our standalone lasers, and we also have inventory of these systems that we're attempting to work down. So a shift away from these platforms hits gross margin and changes the timing of our working capital benefit. Our operating expenses were well controlled in the second quarter, which offset some of the reduction in revenue and gross margin. I'll now provide an update on how we're responding to some of these challenges and on our focus areas moving forward. First, operational excellence, all in support of our customers. We continue to make great progress in all of the key areas that we identified last year, product reliability, field service, inventory control, supply-demand planning, and cost of operations. The overarching goal of these improvements is to support our customers. That is the mindset with which we're approaching the business, and that's the same goal as we have with our North American commercial leadership change and restructuring. Second, our cost structure. During the fourth quarter of last year, we initiated a restructuring that reduced headcount by 25% and our expense base by approximately $20 million. In response to the reduced revenue outlook for 2024, we've identified additional cost savings that should annualize at approximately $10 million in 2025. Third, AviClear. We continue to be encouraged by international launch dynamics. including the uptake by thought-leading KOLs in major markets, as well as the strong utilization of the installed base that we are seeing. This gives us the confidence that AviClear can become a mainstay platform in aesthetic dermatology across the globe, with utilization opportunity expanding over time as we add indications like sebaceous hyperplasia to the already significant opportunity in acne. In North America, we're still working through the transition from the initial leased business model. As of the end of the second quarter, there were approximately 925 systems operating under the leased model, down from 1,050 last quarter, with approximately 270 more on a list to be returned in the coming quarters. We continue to expect that more than half of the original leased installed base of systems will be returned. Now, this process requires a significant amount of attention, both from our field team and our internal customer support and operations teams, but it's critical work to allow us to continue the rebuilding process. In parallel with this winnowing activity, we are seeing our growth-oriented investments start to bear fruit. Utilization of our cooperative marketing program increased to over 40% in the second quarter, and our QTERA Academy initiative continues to receive rave reviews. We've now hosted four Academy events, with 98% of participants saying that it had a significant impact on their confidence with AviClear. Buoyed by these early proof points, alongside the momentum we're generating internationally, we continue to see a bright future for AviClear, and we remain focused organizationally on driving toward that vision. And last, working capital. Due to the reduced revenue outlook and product mix shift, Our ability to realize an inventory work down benefit has been delayed from the second half of this year into 2025, and we're focused intently on positioning the company to benefit from a material reduction of inventory next year. We currently anticipate a year over year improvement in cash burn of over $50 million as we move from 2024 to 2025, and that's related to working capital alone. even in the absence of revenue growth or gross margin improvement or the expense reductions that have already been identified. So digging into this a bit more, in 2024, we anticipate an outflow of cash of over $25 million related to working capital, primarily from a build in inventory in the first half of the year. In 2025, though, even if revenue were to stay flat at 2024 levels, we should recognize a cash benefit from inventory reduction of approximately $25 million. In addition to that working capital reversal, we have identified $10 million of expense reductions, and we're positioning both our North American and international businesses for growth next year, led by AviClear. We're comfortable that our current cash balance and capital structure provides sufficient liquidity and runway for the near term. That said, at the same time that we're strengthening our business operationally, we constantly evaluate our liquidity and capital structure needs and options, and we expect to address both of those when conditions are right. We see opportunity to reduce the debt the company is currently carrying, and bringing in additional capital will allow us to fund our growth initiatives as we return the business to profitability. Before I turn the call over to Stuart, I would like to highlight our new partnership with L'Oreal's SkinCeuticals business in Japan. We're very excited about this partnership. We've been successful with skincare in Japan in the past, and with SkinCeuticals, we will now be representing the global leader in physician-dispensed skincare in the Japanese market. Our team will focus on introducing the SkinCeuticals portfolio into physician offices, primarily aesthetic dermatology. while L'Oreal will provide comprehensive marketing support. We plan to launch in the fourth quarter of 2024, and as such, we expect an immaterial financial impact this year. With that, I'll turn the call over to Stuart.