AirSculpt Technologies - Q3 2024

Transcript

Operator (participant)

Greetings and welcome to AirSculpt Technologies Inc Q3 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Alison Malkin from ICR. Thank you, Ms. Malkin. You may begin.

Alison Malkin (Partner)

Good morning, everyone, and thank you for joining us to discuss AirSculpt Technologies' results for Q3 of fiscal 2024. Joining me on the call today is Interim Chief Executive Officer and Chief Financial Officer Dennis Dean. 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. Risks 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.airsculpt.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. For today's call, Dennis will begin with an overview of the quarter and share an update on our strategic initiatives, followed by a review of our financials and guidance. Following our prepared remarks, we will open the call to take the questions you have for us today. With that, I'll turn the call over to Dennis.

Dennis Dean (Interim CEO and CFO)

Good morning, everyone, and thank you for joining today's call. Our Q3 results were in line with our expectations and included solid progress on our back-to-basics priorities. These priorities focus on three initiatives: improving the conversion of current and prior lead volumes into performed cases, ensuring our recent de novo center openings are successful, and bettering cost management. We believe this approach has us on the right track to improve performance as we navigate a continuing dynamic macro environment. Briefly highlighting our financials: revenue totaled $42.5 million in Q3, down 9.1% year-over-year, with case volume down 4.3% from the prior year Q3. Same-store cases declined 8.1% over the prior year but improved significantly from the decline of 14% reported in Q2 of this year. Adjusted EBITDA was $4.7 million, or 11% of revenue, versus $9.1 million, or 19.4% of revenue, in Q2.

The decline in revenue accounted for $3 million of the decrease, with the remainder mostly due to the costs related to new de novo openings. As a reminder, it takes approximately three to four months for new centers to reach profitability. And let me now turn to the progress made in our Back-to-Basics priorities. As it relates to converting demand for AirSculpt to cases in our lowest seasonal quarter of the year, and while our core customers are still facing macro challenges, we are starting to see measured improvement in converting leads to consultations. We believe this is attributable to our return to a more targeted advertising approach of paid search advertising at the center level and our continued engagement with historical leads. As you're aware, AirSculpt is a considered purchase with an average spend between $12,000 and $13,000.

In this environment, it is common to see a longer timeframe to convert leads into cases. Historically, our experience shows that it takes approximately 45 days to convert a lead to a case. For Q3, it was closer to 60 days. In response, we have implemented a number of initiatives to drive leads and conversions to cases, and let me share some examples. We are now utilizing Salesforce software to help us reconnect with customer leads in our database and better nurture and communicate with them to offer a more tailored experience, which should help increase conversion to cases over time. Importantly, as these established leads convert to cases, they do so at no additional cost, which will in turn help lower our customer acquisition cost. We have also added new payment options that give consumers more flexibility to finance procedures.

We believe this is an effective way to drive incremental revenue by allowing eligible consumers to schedule higher-priced procedures, which should also help us improve our margins. Our second priority is to drive productivity from our recent de novo locations. We continue to be pleased with the performance of our 2023 de novo center class. Each of the U.S. centers that have been open for 12 months are performing ahead of our stated year-one revenue objective of $4.5 million. Similarly, these centers are also achieving a payback of less than one year. We believe the excellent performance of these centers is the result of our more seasoned recruiting, sales, and operation teams, which should also benefit our recent new center openings as well. As it relates to new locations, it was a busy quarter. We opened centers in Kansas City, Kansas, Columbus, Ohio, Deerfield, Illinois, and Birmingham, Michigan.

While early, so far we are pleased with our new cohort performance. Our fifth and final opening for 2024 is expected to open in White Plains, New York, in the next few weeks. As of September 30, 2024, we operated 31 facilities versus 27 at the end of Q3 of 2023. Looking ahead, we have a strong pipeline of new centers. Overall, we continue to believe we have significant opportunity to operate over 100 centers in the medium term and have three locations currently identified for 2025 and expect to increase that number in the next few months. Turning to our third priority, the quarter also saw continued progress on our cost savings goal as we have identified and achieved $500,000 of our planned $1 million savings goal for the back half of the year.

And on an annualized basis, we expect to deliver savings of $2 million, and we will continue to prudently invest savings into higher-return marketing activities as we work to increase leads and case growth. Let me now share additional insights into our financial performance and guidance. As mentioned, revenue for the quarter was $42.5 million, a 9.1% decline versus the prior year quarter, with same-store revenue down 13%. The decline in revenue this quarter was mainly driven by lower case and lead volume due to the challenging consumer spending environment. In addition, while our average revenue per case this quarter was $12,984 and on the high side of our $12,000-$13,000 range, it compares to $13,658 in last year's Q3, which was unusually high driven by patients having more areas treated than any other quarter.

Notably, while leads are lower, our ability to convert leads to consultations showed some improvement, which we attribute to our return to a more efficient marketing spend. The percentage of patients using financing to pay for procedures was 53%, which is consistent with recent quarters. As a reminder, we received full payment of all procedures upfront, and we have no recourse related to patients who finance their procedures with third-party vendors. Cost of service as a percentage of revenue was 41.8% versus 38.8% over the prior year period. Our recent de novo openings reflected a 130 basis points impact, while the remaining percentage increase was due to our inability to flex certain fixed costs such as rent and nursing. Selling and general administrative expenses increased $466,000 in the quarter compared to the same period in fiscal year 2023.

As mentioned, we worked to contain our corporate G&A costs this quarter and was able to achieve a reduction of $500,000 in the quarter. However, this was offset by a year-over-year increase in our marketing spend. Our customer acquisition cost for the quarter was $2,900 per case as compared to $2,750 in the prior year. On a sequential basis, we decreased our advertising spend by $4.1 million as a result of discontinuing certain brand awareness spending initiatives. Notably, our efforts to reduce CAC are working, as reflected in the sequential decrease in our CAC of $425 versus Q2 of 2024. As our marketing and sales efforts begin to convert to cases, we expect to see further reduction in our customer acquisition costs going forward and continue to move toward our CAC goal of approximately $2,000. Adjusted EBITDA was $4.7 million compared to $9.1 million for Q2 2023.

Adjusted EBITDA margin was 11% compared to 19.4% in the prior year quarter, and adjusted loss for the quarter was $1.4 million, or a loss of $0.02 per diluted share. Turning to our balance sheet, as of September 30, 2024, cash was $6 million, and we had $5 million available on our revolving credit facility. Our gross debt outstanding is $71.3 million, and our leverage ratio is 2.2 times. Cash flow from operations for the quarter was $1.8 million compared to $0.6 million in the prior year quarter, and we invested $4.9 million this quarter in de novo facilities. Let me now turn to our outlook for the remainder of the year.

As noted in our preliminary sales release issued on October 24, we have increased the midpoint of our revenue guidance for 2024 to a range of $183 million-$189 million as compared to the guidance issued with Q2 results in August for revenue in the range of $180 million-$190 million. We are also maintaining our full-year guidance for adjusted EBITDA in the range of $23 million-$28 million. Before I wrap up my remarks, I would like to share an update within our organization. I am pleased to announce the promotion of Philip Bodie to Chief Accounting Officer. For the past three and a half years, Philip has served as Senior Vice President and Corporate Controller at AirSculpt, where he has been a highly valuable and trusted partner of mine. Prior to joining AirSculpt, Philip held senior finance roles with significant experiences in the healthcare industry.

I am looking forward to continuing to benefit from his business acumen as we work to improve our financial foundation. Additionally, the search for a permanent CEO is well underway. We have conducted several interviews and are narrowing our list of candidates in hopes of announcing a new leader of AirSculpt in the coming weeks. And finally, despite the challenged consumer spending backdrop, we believe our back-to-basics approach to the business is working and will enable us to continue to improve our revenue and profitability trend. In summary, we remain excited about our business prospects as we see significant opportunity to capitalize on the $11 billion total addressable market in which we operate, with proven results and a proven track record of opening and operating centers and a cash-generative model that will allow us to navigate this dynamic period and continue to invest to support our future growth.

With that, I'd like to turn the call over to the operator for some questions. Operator.

Operator (participant)

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, 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 would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. One moment, please, while we poll for questions. The first question comes from the line of Joshua Raskin with Nephron Research LLC. Please go ahead.

Joshua Raskin (Partner - Managed Care and Providers)

Hi. Thanks. Good morning. I guess the first one, just starting on the new centers, I know you had four in the quarter. It looks like the case count on those four was about 130 cases in the quarter. I know Deerfield and Birmingham were right at the end of the quarter, but I think you said that was sort of in line. How should we think about that ramp and what sort of contributions in the fourth quarter are you expecting?

Dennis Dean (Interim CEO and CFO)

Hey, Joshua. Hey, thanks for the question this morning. So as we said, it was very much in line. As you pointed out, Deerfield and Birmingham really did not contribute hardly anything in the quarter for us. Kansas City opened up first full month, I believe, was August, and Columbus was first full month was September. So as you pointed out, it didn't get a full complement of those activities. Those centers are improving well. I mean, I think what you would look at is probably looking at, obviously, you could expect a little over doubling that amount. As we pointed out, the centers that we opened up last year continue to perform well. When we think about how a center performs on a full-year basis, our sort of expectation is a range of around $4.5 million of revenue for the full year.

And while we don't give out each center individual information, those centers last year performed above that. Our current centers that are open are performing very much in line, and so we expect it's not a full quarter of that, obviously, from the standpoint of the $4.5 million, but we do expect some pretty significant improvement over what we saw in the third quarter.

Joshua Raskin (Partner - Managed Care and Providers)

All right. That's helpful. Maybe switching topics, just, I'm curious of your views on the impact of GLP-1s and the bulge. If you've got any more data on how many patients are using them prior to a procedure or seeing you, and I don't know if you're seeing any specific changes in demand for skin tightening procedures, things like that.

Dennis Dean (Interim CEO and CFO)

Yes. Still no significant change from what we've talked about in previous quarters around it. We have seen some publications recently that are strongly suggesting that the GLP-1 are leading to people considering body contouring procedures, specifically as it relates to skin tightening. I think that's an area that we need to be leaning into a little bit further, and I expect us to do that in the coming year. Skin tightening, as you know, I mean, if you've been around anyone that's been on the GLP-1, that's an area that you can tell that is a needed aspect of it.

Just again, the GLP-1s have been sort of a catalyst of drawing people to, "What can I do with my appearance?" And so obviously, the weight loss aspect has been working for a lot of people, and we think skin tightening is definitely an area that we focus on. Currently, we do skin tightening. Obviously, we talked about AirSculpt itself, performing really good skin tightening just with the modality itself. We do add on to various AirSculpt procedures with a product from a Renuvion product to assist enhancing skin tightening as well. But I think there's further work we can do around that, and we've been kicking around several ideas internally. And it's a process we want to be diligent about and make sure that when we do roll out new products, new items, new services, that we do those clinically well.

Obviously, we want to make sure that they give the results that people have grown to expect from AirSculpt.

Joshua Raskin (Partner - Managed Care and Providers)

Makes sense. Makes sense. Maybe just one last one. I think that, as you mentioned, new payment options to finance for consumers. What does that mean? Does that mean more financing? I assume it means more financing available. I assume you guys aren't taking on the financing risk, but I'm just curious what that meant.

Dennis Dean (Interim CEO and CFO)

Yeah. So that's correct. We still aren't taking on financing risk from that standpoint. It's just not an area that we want to do right now. What it is, Josh, is we're looking at opportunities for customers that qualify to—and obviously, we want to do it based on procedures that are probably a little larger in nature from a revenue standpoint. We're looking at extending payment options beyond some of our traditional payment options. Many of our patients qualify for a—it's like a 12-month same-as-cash program. And we're working with vendors or financing vendors to kind of open up opportunities again for the right qualified candidates to extend that to, say, 24 months, 18 to 24 months, again, based on their quality from the standpoint of credit.

And so that gives that patient the opportunity to be able to pay for that over a two-year period versus a 12-month period, which we think will enhance our revenue per case and also possibly bring in some additional volume, particularly as it relates to the challenges that consumers are facing currently.

Joshua Raskin (Partner - Managed Care and Providers)

Perfect. Thanks a lot.

Operator (participant)

Thank you. A reminder to all the participants that you may press Star and one to ask a question. Next question comes from the line of Korinne Wolfmeyer, Piper Sandler. Please go ahead.

Korinne Wolfmeyer (VP and, Senior Equity Research Analyst)

Hey, good morning. Thanks for taking the question. I'd like to touch a little bit on the cost of service this quarter. It was, as a % of sales, it did step up a little bit. Could you provide a little bit of color on what the driver here was? Was it just a function of lower volumes or anything else going on? And then how to think about the proper run rate of that as we head into Q4 and then even the early parts of 2025? Thanks.

Dennis Dean (Interim CEO and CFO)

Hey, thanks, Korinne. And yeah, as you pointed out, the cost of service did tick up in the quarter. What is typical for us in the third quarter is, remind you guys, the third quarter is our most challenging quarter of the year from a revenue standpoint, even when there's not a consumer macro challenge out there. So we always tend to see a little bit of an uptick in the third quarter as it relates to just the decline in the revenue from that standpoint. One of the major drivers, Korinne, was opening up four new centers in the quarter. Not only do we have pre-opening-related costs in there, but we also have, as you guys probably recall, it takes us three to four months for a center to ramp up to being cash flow profitable.

And so many of those, while we're pleased with the current state of how volume is starting to pick up there, we're still incurring somewhat of a full brunt of the costs at the center level there. And so that's really causing a pretty big clip of that percentage increase. About 130 basis points was related to just the de novo activity. So expect that part to be able to begin to come down as those centers begin to ramp up further in the fourth quarter. So highly expect improvement as we move into the fourth quarter to something very similar to where we were earlier in the year. Second quarter, obviously, is a very healthy quarter for us from a revenue because it's our highest. But again, I think going back to that, where we have historically been is where we ought to land.

Again, as those de novos ramp up, we'll see some significant improvement there.

Korinne Wolfmeyer (VP and, Senior Equity Research Analyst)

Great. That's helpful. And then moving through the P&L, the SG&A stepped down a good amount, and I know there's some cost savings going on, but it sounds like you're still prioritizing marketing and customer spend. So any color on the building blocks around SG&A and then how we should be thinking about that heading into Q4? Thanks.

Dennis Dean (Interim CEO and CFO)

Yeah. Sequentially, we took out about a little over $4 million in marketing spend, again, compared to the second quarter. That is our number one area of focus, trying to reach the right optimal level of marketing spend. I mean, our main focus currently is heavily in the search aspect of it. Search is much more expensive on a lead basis, on a cost per lead standpoint. Doing marketing search activities is definitely more expensive to us, but it also provides a much quicker turnaround. And because those patients have a lot more intent, they're very intent in buying the products and looking for body sculpting. And so we're just trying to strike the right balance there between making sure that we're getting the right return on what we're spending there.

But we may see a little bit of an uptick in the fourth quarter in our marketing spend, but no, we're close to where we were in the second quarter. But again, striking the right balance is something that we're very focused on. We did do some things around corporate overhead that gave us about a $500,000 benefit in the current quarter. We expect that to continue on. Most of those were staffing-related and sort of identifying what we call sort of middle management type positions that we felt like we could do in the near term without from that standpoint. And so we were able to achieve that cost and expect, again, that to continue on in the fourth quarter and also going into next year.

So continuing to do a lot of work around cost, making sure that we're identifying costs that we need in the business and areas that we can potentially do some additional reductions on as long as we don't sacrifice quality and safety and those sorts of things.

Korinne Wolfmeyer (VP and, Senior Equity Research Analyst)

Great. Thanks so much.

Operator (participant)

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I would now like to turn the floor over to Dennis Dean for closing comments.

Dennis Dean (Interim CEO and CFO)

Thank you again for joining us today, and we look forward to speaking with you when we report fourth quarter results, and we're going to see many of you, I believe, in the upcoming days and weeks related to some investor events. Thank you very much.

Operator (participant)

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.