AirSculpt Technologies - Q1 2024

Transcript

Operator (participant)

Hello and welcome to the AirSculpt Technologies, Inc., first quarter 2024 earnings call. If anyone should require operator assistance, please press star zero on your telephone keypad. A question-and-answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Dennis Dean, Chief Financial Officer. Please go ahead.

Dennis Dean (CFO)

Good morning, everyone, and thanks for joining us to discuss AirSculpt Technologies' results for the first quarter. Joining me on the call today is the company's founder and executive chairman, Dr. Aaron Rollins, and Chief Executive Officer, Todd Magazine. Before we begin, I would like to remind you that this conference call may include forward-looking statements. These statements may include our future expectations regarding financial results and guidance, market opportunities, and our growth. Risk and uncertainties that may impact these statements and could cause actual future results to differ materially from currently projected results are described in this morning's press release and the reports we will file with the SEC, all of which can be found on our website at investors.elitebodysculpture.com. We undertake no obligation to revise or update any forward-looking statements or information except as required by law.

During our call today, we will also reference certain non-GAAP financial measures. We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. A reconciliation of these measures can be found in our earnings release as filed this morning and in our most recent 10-Q, which will also be available on our website. With that, I'll turn the call over to Todd.

Todd Magazine (CEO)

Thanks, Dennis. Good morning to everyone, and thank you for joining the call. We delivered approximately 4% revenue growth in the quarter versus the prior year, which was driven primarily by contributions from the De Novo centers opened in 2023. These centers continue to outperform our internal metrics. However, we did experience some softness in our same-store centers, which was related to temporary macroeconomic headwinds which affected a portion of our customer base that tends to be more price-sensitive. The challenges we are experiencing are consistent with those highlighted by others in the aesthetic and high-end consumer retail spaces. As we noted on our last call, we saw some isolated softness exiting 2023, which carried into the first quarter.

Our revenues have picked up as a result of our typical seasonal pattern, but the degree of the seasonal increase has not been up to the level we have seen in prior years. This drove overall same-store revenue down approximately 10% during the quarter. Our Q1 adjusted EBITDA was $7.3 million, which is a decline from the prior year period. As we mentioned on our last call, we anticipated the EBITDA decline both due to recent revenue trends as well as higher SG&A spending. The higher SG&A spending was a result of increases in paid search costs, mostly due to increased competitive spend, as well as our higher investment in customer awareness building. As we are now in the early part of Q2, which is the height of our season, we are still tracking behind our internal revenue projections.

As a result, we expect our year-over-year revenues for the quarter to be somewhat flat or slightly below prior year. Despite our recent trends, we are not making changes to our guidance at this time. That's because we are cautiously optimistic that the trends will improve in the latter part of our season and into the second half of the year. This optimism is related to, one, our significant investment in customer acquisition marketing, two, changes we've made to our media mix, three, optimizations we've made to performance marketing, four, continued outperformance of our 2023 De Novo class, and five, our confidence in the 2024 De Novos. Let me double-click on our marketing and De Novo efforts. We have seen some very promising improvements toward lead generation as a result of some changes we made to our media mix. This is driving a higher percentage of organic search traffic.

These leads have higher intent and are lower in cost compared to paid search. But given the length of time that it takes to convert leads to an actual procedure, these improvements are only now starting to impact our actual procedure volume. We have also evolved our celebrity partnership approach to provide a more consistent stream of relevant earned media impressions. Most recently, we worked with Kristen Doute, a podcast host, entrepreneur, and star of two Bravo hit shows, The Valley and Vanderpump Rules. Kristen did Stomach AirSculpt, which drove over $3.4 billion earned media impressions and contributed to year-on-year growth in direct and organic traffic to our website. In addition to garnering new leads, celebrity testimonials have also proven to be a strong lever to re-engage and convert existing leads.

As for our 2024 De Novos, we remain on track to open six locations with four openings projected in Q3, the first of which is Kansas City, Kansas. We remain highly optimistic about these locations given the improved analytics work we have done on De Novos in the last year. Finally, we continue to focus heavily on our cost management efforts. We exited the year with a $5 million run rate in cost savings and have identified further opportunities to achieve even greater efficiencies. We have and will continue to use these savings to further support our customer awareness strategies for the remainder of the year. In summary, we remain focused on the longer-term success of the overall business and are prudently investing in this outlook. We are closely monitoring our performance and will continue to build the AirSculpt brand, open new centers, and enhance our profitability.

Now, I'd like to turn the call back to Dennis to provide further details on the quarter. Dennis?

Dennis Dean (CFO)

Thanks, Todd. Our revenue for the quarter was $47.6 million, a 3.9% increase over the prior year quarter. Our growth was primarily due to the contribution of new De Novo centers versus the prior year base. As of March 31st, 2024, we operated 27 centers versus 23 at the end of the first quarter of 2023. Our same-store revenue was down 9.8% in the quarter. As Todd mentioned, we attributed the softness to weaker-than-expected performance across the broader aesthetics and consumer retail landscape, particularly related to customers that are more price-sensitive. While we are seeing similar trends in the second quarter, we expect to see some improvement as we move through our later seasonal months and into the second half of 2024. Our average revenue per case for the quarter was $12,712, a 1% increase over the prior year's quarter.

Our percentage of patients using financing to pay for procedures was approximately 50%, which is consistent with recent quarters. As a reminder, we received full payment of all procedures upfront, and we did not have any recourse related to patients who financed their procedures with third-party vendors. Our cost of service as a percentage of revenue was 37.9% versus 39.3% in the same period last year. This improvement was the result of our cost management initiatives, which continue to be a focus for us. As a reminder, we were able to achieve $2.5 million of actual savings in 2023, and our current 2024 outlook includes an incremental $2.5 million of savings for a total of $5 million. We see additional opportunities to further increase our savings in the second half of 2024.

Our customer acquisition cost for the quarter was $2,990 per case as compared to $2,360 in the prior year. This increase, as Todd mentioned in his remarks, is due to further investments in our brand awareness activities. We expect our CAC to stay at an elevated level in the second quarter as we expand these initiatives. For the first quarter, our adjusted EBITDA was approximately $7.3 million compared to $9.5 million from the prior year period, a decrease of 22.4%. Our adjusted EBITDA margin during the quarter was 15.4% compared to 20.6% in the prior year quarter. This decrease was primarily associated with our investment in new customer acquisition and brand awareness initiatives. Our adjusted diluted net income per share for the quarter was $0.03. Our cash position, as of March 31st, 2024, remained healthy at $11 million, and our $5 million revolver remains undrawn.

Our gross debt outstanding is now $71.2 million, and our leverage ratio at the end of the quarter, as calculated under our credit agreement, was 1.47x. Cash flow from operations for the quarter was $3.4 million compared to $6.2 million in the prior year quarter. The decrease is primarily due to the decline in Adjusted EBITDA. Also, during the quarter, we invested $1.6 million, which was mostly related to new center openings. For the quarter, our cash flow from operations to Adjusted EBITDA conversion ratio was 46%, which was in line with our expectation for the quarter. As Todd mentioned in his comments, our first quarter was softer than we expected, and the second quarter is seeing similar trends. However, we are seeing positive signs in lead volumes from our recent marketing initiatives.

Furthermore, we continue to see overperformance in recent De Novo centers and expect strong openings in the new fleet of centers that will come online in the second half of the year. As a result, we are maintaining our full-year outlook of revenues of approximately $220 million and Adjusted EBITDA of approximately $50 million. With that, I'd like to turn the call over to the operator for some questions. Operator?

Operator (participant)

Thank you. We'll now be conducting a question-and-answer session. If you'd like to be placed into question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one. Our first question today is coming from Josh Raskin from Nephron Research. Your line is now live.

Josh Raskin (Research Analyst)

Hi. Thanks. Good morning. So I understand 1Q is seasonally lower, and you talked about some of the pressures. But I guess if you look at the full-year guidance, it implies 1Q EBITDA is only 15% of the full year. Historically, first quarter has been closer to 22%. And then I hear sort of assuming cautious optimism and guidance. I guess why are you assuming cautious optimism if we've seen softness in procedures for the last two quarters? And I guess what does guidance look like if that cautious optimism doesn't come through, right, if you sort of just run rate where we are in 2Q?

Dennis Dean (CFO)

Hey, Josh. It's Dennis. So yeah, one of the optimistic aspects of what we're looking at really, really hinges on marketing endeavors that we've been implementing during the quarter. Again, it takes a while for leads to convert to cases, and we're seeing a fairly sizable uptick in our lead volumes as a result. So that gives us one portion of optimism. Our 2023 De Novos are significantly outperforming where we had expected them to perform. So we're very excited about that. And we're basically using a very similar plan for the 2024 De Novos that are coming online. If you remember or probably remember, a year or so ago, we kind of started implementing sort of what we called a quick ramp from our De Novos, and I believe that's what's accelerating these things to open up and perform better than we had originally expected.

Those three things, the 2024 class all coming on the second half of the year, I mean, that's obviously going to drive gross differences from what we've seen in previous years.

Josh Raskin (Research Analyst)

I guess, Dennis, embedded in that, what are your assumptions for same-store case growth, maybe starting just in 2Q but even for the full year?

Dennis Dean (CFO)

Sure. Sure. So what we're looking at from that standpoint is kind of seeing a consistent case aspect for the second quarter, high single-digit decline, somewhat similar to where we finished the first quarter. We start to see that improving in the third quarter, getting close to flat, and then getting toward the mid-single digits in the fourth quarter. One of the things, if you recall, in the fourth quarter of last year, we had a couple of centers that hit a pretty large hiccup in the process. And so we've done some things there, done some recruiting, and those things are improving. So we think we'll be able to not have that issue. So I think comp for Q4 of last year is relatively from a low standpoint, so it's a lower comp.

Josh Raskin (Research Analyst)

Okay. Then maybe just last one. Are you at the point where you're thinking about more aggressive promotion or discounting specifically just on the because price is holding up better? So I'm just curious, are you guys thinking about the sort of supply and demand curve and taking down the price and seeing if that increases case volume?

Todd Magazine (CEO)

Hey, Josh. It's Todd. I would say we're doing it very selectively and targeted. We don't want to obviously devalue the brand and go out with kind of broad price reductions. But we're very selectively and very specifically using those in kind of retargeting and through email and text offers, etc., etc. So we are doing that. I mean, as you know, we've relied heavily on the kind of buy more, save more, and that's been very beneficial for us. But we don't want to kind of we don't want to go down too much. I just think ultimately, we don't want to devalue the brand. And we start bumping into other types of competitors, which I don't think really makes a lot of sense for us. So I think we want to continue to be very selective in those price discounting.

Josh Raskin (Research Analyst)

Okay. Makes sense. Thanks.

Operator (participant)

Thank you. Next question today is coming from Korinne Wolfmeyer from Piper Sandler. Your line is now live.

Korinne Wolfmeyer (VP and Senior Equity Research Analyst)

Hey. Good morning, team. Thanks for the question. I'd like to touch a little bit on the CAC and the lead generations you're seeing from your increased marketing spend. So the CAC was really high this quarter. At what point will that start coming down a little bit more? And then can you provide us some color on these early customer leads you're getting from all this heightened marketing spend, just to give us a little bit of confidence that maybe once we get to the back half of the year, that case volume will improve? And how are you shifting the marketing strategy over the course of the year? Thank you.

Todd Magazine (CEO)

Yeah. Hey, Korinne. It's Todd. So what I would say is, obviously, we believe in the business long term, which is why we're heavily investing in lead gen. Our cost basis has definitely gone up. A lot of that is due to just competitive activity. But there's a few changes that we've made that seem to be really the early signs are very, very promising, which is what is giving us the optimism. Number one, we've kind of historically, we've relied very heavily on paid search. It's been kind of the majority of our kind of lead gen efforts. We're starting to diversify away from that solely. And so we've been experimenting with connected TV, display media, retargeting. In some markets, we've done some radio and outdoor. And what we're seeing, actually, is more organic search, which obviously is very promising for us.

So ultimately, you're seeing more people come to us as opposed to us to ultimately go out and kind of buy those leads, if you will. So that's very encouraging, and we're seeing that part of it. The second is a new initiative or kind of doubling down on an initiative, which is what we call existing or aged leads. We have a lot of people kind of in our databases that obviously are interested but have not converted. A lot of our effort over the last year or so has been put against people that are first coming in, those kind of fresh leads. Well, you have all these leads that we can go after and try to convert. So now, with some of our analytics tools, we're able to get to them a little bit more selectively, and we're seeing some very promising improvement there.

And then lastly, just optimization of our paid search. I mean, it will remain a key lever for us, excuse me. But we're always trying to kind of optimize the spending and make sure that it's more efficient and more targeted. We're doing things with zip codes, get to the right people, and getting the right messages to the right people. So there's a lot of changes that we've made. And again, the early signs, as Dennis pointed out, leads are really just kind of the leading indicator. Obviously, those ultimately have to convert to sales and then eventually to procedures. So the early indication on leads, which are improving, but it's also just the quality of the leads that we're seeing, which a lot of them are coming from organic search, which tend to be kind of higher-intent consumers.

So that's kind of the headline, I would say, on your question related to CAC. In the short term, our CAC is going to remain high. We are keeping our foot down on the pedal to drive that revenue. But over time, all of these changes that we're making should ultimately enable us to be much more efficient in our spending. In general, if you're going to get more organic search as opposed to paid search, that is going to be much more efficient. So a lot of the diversifying that we're doing in media that's driving more of this kind of organic lead gen over time will enable us to start to take our CAC down over time. And obviously, that will ultimately be our goal.

Dennis Dean (CFO)

One thing I would add too, Korinne, is that our cost initiatives, rather than just kind of keeping those at the EBITDA level, we're kind of reinvesting back that into marketing. So that's, again, the initiatives that we've done. We've just said, "Hey, this is a good opportunity to use these excess resources and to put back into the marketing efforts." And we expect, as we continue to identify initiatives through the year from a cost standpoint, we'll likely do a similar process.

Korinne Wolfmeyer (VP and Senior Equity Research Analyst)

Very helpful. Thank you so much for all that color. And then just to touch on the GLP-1 issue, we are seeing more offerings or better accessibility for people to get GLP-1s. Do you still view that as more of an awareness driver versus demand taker for AirSculpt, or is there any change in thinking there? Thank you.

Todd Magazine (CEO)

Look, all of our research would say that GLP-1s are ultimately a tailwind for us. We're seeing a lot of patients come to us who are either interested in weight loss medication, and we've been doing a lot of marketing on this as well. The combination of weight loss medication and AirSculpt seem to be very, very powerful. So are there some people that maybe would have come to us and they went to weight loss medications? Possibly. There's also a lot of people coming to us, and they discovered us because they started to investigate weight loss medications. And so ultimately, what we're seeing is a very symbiotic relationship. And so far, we're looking at it very much as an opportunity and as a tailwind as opposed to something that is a major risk for us.

We continue to look at it as something that's going to ultimately help us over time.

Korinne Wolfmeyer (VP and Senior Equity Research Analyst)

Great. Thanks so much.

Operator (participant)

Thank you. Next question is coming from John Ransom from Raymond James. Your line is now live.

John Ransom (Managing Director)

Hey. Good morning. Just talking about the second quarter. This is your big quarter, historically. Do you usually see this late of a start? Is the quarter back unloaded, or are you kind of like-for-like off to a slower start versus, say, the last couple of years?

Dennis Dean (CFO)

Yeah. So John, I mean, the timing of when the quarter or when season starts is always difficult to manage. Last year, it started in March. This year, it is more of a delayed start. And so that's a little bit of a difference from a timing perspective. And so as we talked about, as the lead gen and the impact that we're seeing there, it's a little bit later in the typical season flow that we've seen in the past. So will that kind of allude to maybe a season that kind of moves further into the summer? Right now, we just don't know. But if the season is season for the number of months, then one would suggest that would be the case.

John Ransom (Managing Director)

Okay. Then secondly, on marketing, I mean, I appreciate all the comments you're making about that. But we've been hearing for a couple of years now about how you're pivoting from the Instagram channel to something more around brand awareness and celebrity endorsements. Just looking in the rearview mirror, how would you critique your own performance in terms of that transition and what maybe should have been done that hasn't been done so far? Thanks.

Todd Magazine (CEO)

Yeah. Look, it's a good question. I would say, generally, these are changes that have to be made over time. We historically have been heavily, heavily reliant on paid search as our driver. As you know, last year, we started to do some celebrity marketing, which definitely helped. We saw some definite improvements in awareness building. But what we saw, particularly as we were using some of these bigger celebrities, is that we would get the spike, and then it would kind of come back down. And as I mentioned in my prepared remarks, some of the changes that we're making now is kind of doing this rather than kind of a couple of big celebrity relationships or partnerships over a year. How do we do this as kind of more of a string of pearls? So maybe smaller celebrities but more frequent.

And we're also finding with some of these smaller celebrities, they have a huge social following, and that's actually been very beneficial to us. So I think it's been an evolution. I think we've been moving it in the right direction. I don't think anybody would have anticipated the kind of market changes that have happened. So that, I think, has been the biggest factor. But I think, generally, we were moving in the right direction. I think we're kind of now in the optimization, and we're continuing to diversify our media. And I think that's proving to be very beneficial as well. So these are not changes that could happen absolutely overnight. But I think we're moving in the right direction, and we'll continue to evaluate as we make these changes. And hopefully, it'll continue to drive the growth that we need.

John Ransom (Managing Director)

Great. Just lastly, I mean, we're calculating some pretty grim same-store numbers. Are there any locations now that are unprofitable? Do you foresee any closures, or are all your locations still profitable even if the volume's down?

Dennis Dean (CFO)

Yeah. All of our locations, John, are still generating a profit. So nothing from that standpoint. I would say the London Center is slower from a ramp standpoint as we continue to learn through that market. So it's not ramping up from a profitability standpoint like a typical center that we have take the rest of the 2023 cohorts. It's not ramping up to the same degree as those are. But all the centers continue to be profitable. And so no reasons at all to consider closing any.

Todd Magazine (CEO)

Yeah. The only comment I'd make on London, I mean, it's definitely look, international markets, particularly in Europe, I mean, there's definitely a learning curve. I think there's a lot of things that we've definitely learned. But we continue to be incredibly optimistic about the market. It just might take us a little bit longer to kind of get it all figured out. But once we do, we think that is going to be a very strong center for us.

John Ransom (Managing Director)

I mean, my editorial comment, the next healthcare company on the services side that has a good outcome in London might be the first. It's been a trail of tears for a lot of your peers that have gone into that market. So you're not alone, so. Editorial comment.

Thank you.

Dennis Dean (CFO)

Thanks, John.

Operator (participant)

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Todd Magazine (CEO)

Thanks, everybody. We will talk to you in a few months and have a great weekend.

Operator (participant)

Thank you. That does conclude today's telecoverage. You may just connect your line at this time and have a wonderful day. We thank you for your participation today.