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CI

CUTERA INC (CUTR)·Q4 2023 Earnings Summary

Executive Summary

  • Q4 2023 revenue was $49.5M, down 26% YoY vs Q4 2022 but up sequentially from Q3 2023; GAAP gross margin fell to 12.6% due to ~$8.4M non-cash excess/obsolete inventory expense; non-GAAP operating loss was $26.1M .
  • AviClear revenue was $3.9M in Q4; management executed a limited commercial release of an enhanced AviClear offering and completed a global restructuring (~25% headcount reduction, >$20M annual personnel savings) .
  • 2024 outlook: revenue $160–$170M (includes ~$4M skincare through Feb transition) and year-end cash/marketable securities $55–$60M; cash burn expected to be ~70% weighted to 1H, heavier in Q1 .
  • International improved sequentially in Q4; North America declined modestly; management emphasized operational excellence, inventory control, service reliability, and AviClear franchise building as core priorities going into 2024 .

What Went Well and What Went Wrong

What Went Well

  • “Finished a challenging year with fourth quarter financial performance ahead of our guidance range,” with FY23 revenue $212.4M vs prior guidance of ~$205M; year-end cash/marketable securities $143.6M vs prior guidance of ~$135M .
  • Service levels and product reliability improved; North American backlog of open service cases was “dramatically” reduced with response times improving, and international business improved sequentially in Q4 .
  • AviClear business model enhancements (option to purchase device; lower per-treatment cost) plus hardware/software upgrades to simplify use; launch of Cutera Academy training and expanded cooperative marketing support to drive utilization .

What Went Wrong

  • GAAP gross margin compressed to 12.6% in Q4 vs 57.5% in Q4 2022, driven by ~$8.4M excess/obsolete inventory reserve and lower volumes; non-GAAP gross margin fell to 20% vs 59.4% YoY .
  • Capital equipment sales remained weak amid macro/financing headwinds (particularly in North America), with total systems revenue down 32.5% YoY in Q4; Q4 operating loss widened to -$44.3M .
  • AviClear utilization softness: ~55% of installed accounts did no procedures in Q4; ~125 devices returned with another ~175 planned (out of ~1,200 installed); recurring treatment revenue declined .

Financial Results

MetricQ4 2022Q3 2023Q4 2023
Revenue ($USD Millions)$67.353 $46.478 $49.540
Gross Profit ($USD Millions)$38.749 $6.457 $6.241
Gross Margin % (GAAP)57.5% 13.9% 12.6%
Gross Margin % (Non-GAAP)59.4% 19.5% 20.0%
Total Operating Expenses ($USD Millions)$44.285 $47.404 $50.557
Operating Income ($USD Millions)-$5.536 -$40.947 -$44.316
Net Income ($USD Millions)-$7.788 -$44.274 -$45.230
Diluted EPS ($USD)-$0.40 -$2.22 -$2.27

Segment/Product & Geography

Revenue by Product Category ($USD Millions)Q4 2022Q3 2023Q4 2023
Total Systems$43.122 $26.277 $29.124
Consumables$6.702 $3.682 $5.116
Skincare$11.777 $7.141 $9.288
Service$5.752 $5.489 $6.012
AviClear (reported separately)N/A$3.889 $3.900
Total Net Revenue$67.353 $46.478 $49.540
Revenue by Geography ($USD Millions)Q4 2022Q3 2023Q4 2023
North America$34.076 $24.855 $22.292
Japan$16.980 $11.529 $14.887
Rest of World$16.297 $10.094 $12.361
International % of Total49.4% 46.5% 55.0%

KPIs

KPIQ3 2023Q4 2023
AviClear Revenue ($USD Millions)$3.889 $3.900
Cash & Marketable Securities ($USD Millions)$179.5 $143.6
GAAP Gross Margin %13.9% 12.6%
Non-GAAP Gross Margin %19.5% 20.0%
Net Cash Used in Operating Activities ($USD Millions)-$36.877 -$33.773

Notes:

  • Management indicated “normalized” gross margin ~37% in Q4 (ex-inventory reserves and other non-GAAP items) vs ~30% in Q3; this normalization is below historical levels and targeted for improvement in 2024 .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueFY 2024“Below $200M” (directional commentary) $160–$170M Lowered/quantified
Cash & Marketable Securities (year-end)FY 2024Not previously provided~$55–$60M New
Skincare Revenue IncludedFY 2024Not previously provided~$4M through Feb transition New
FY 2023 RevenueFY 2023~ $205M Actual $212.4M Beat prior guidance
FY 2023 Year-end Cash & Marketable SecuritiesFY 2023~ $135M Actual $143.6M Beat prior guidance

Earnings Call Themes & Trends

TopicQ2 2023 (Q-2)Q3 2023 (Q-1)Q4 2023 (Current)Trend
Operational excellence (service & reliability)Service delays and reliability issues acknowledged; parts availability constraints; plan to remediate Backlog reduced ~80%; aiming for industry-standard response times by early 2024 Dramatic NA service improvement; continued global rollout of best practices Improving
Inventory control & accountingExtended Q1 plant shutdown for audit; FX/mix pressure; margin headwinds Inventory shortfall ~$8–$9M; restatements; daily material controls instituted ~$8.4M excess/obsolete reserve in Q4; opened own warehouse; better supply/demand planning Stabilizing
AviClear business model & utilizationLarge placements; focus shifting to utilization; retention plan Introduced purchase option; reduced per-treatment cost; limited releases; utilization pressures Limited NA release; broader Q1 launch; tech/UX upgrades; training academy; ~55% dormant accounts Reset underway
Macro/financing environmentTightening credit, ASP pressure; med-spa exposure Continued macro pressure; capital revenue down, especially NA Assumes 2024 macro similar to 2H23; capital starts from late-2023 run-rate Cautious
Restructuring/cost actionsRetention plan ~$11–$13M; sales force expansion for AviClear Global restructuring initiated (~25% headcount reduction, >$20M annual savings) Restructuring completed; personnel savings >$20M annualized; incentive comp may partially offset Completed
Cash burn cadence/liquidityHigh burn Q1; expected moderation through 2023 Burn heavier in early 2024 due to commitments; inventory expected to become cash source later ~70% of 2024 burn in 1H; Q1 burn likely above Q4; target year-end cash $55–$60M Front-loaded
New products/R&DSecret franchise update; 2024 new product plans Evaluating product refresh; focus on quality & support Planning refreshed product platform around midyear; pilot studies for expanded AviClear indications Pipeline progressing
Geography mixInternational strength; Japan skincare impacting mix International down YoY; skincare decline; AviClear stable International improved sequentially; skincare to exit in 2024; international % at 55% in Q4 Mixed shift

Management Commentary

  • “We finished 2023 with fourth quarter results that were better than we had anticipated, both for revenue and cash burn…we have completed the key elements of our corporate restructuring…we are now squarely focused on…operational excellence and building a successful AviClear franchise across the globe.” — Taylor Harris, CEO .
  • “Adjusting for [inventory] reserves as well as our other non-GAAP items, our normalized gross margin was around 37% in Q4…we are squarely focused on efficiency initiatives that should improve our cost position…beginning in 2024.” — Taylor Harris .
  • “Our COO…made progress in…product reliability, field service, inventory control, supply/demand planning, and cost of operations…we are on track to remediate…the most critical elements…by the middle of 2024.” — Taylor Harris .
  • “We broadened the availability of our enhanced AviClear offering…option to purchase the device upfront with a corresponding reduction in ongoing treatment costs…hardware and software updates…move billing…to paying for individual treatments.” — Taylor Harris .

Q&A Highlights

  • Guidance composition: Systems and consumables assumed slightly down YoY in 2024 with tough 1H comps; skincare ~$4M through Feb then exits; sequential improvement as AviClear best practices disseminate .
  • Cash burn cadence: ~70% of 2024 burn in 1H; Q1 heavier than Q4 due to AviClear purchase commitments; inventory expected to become cash source in 2H .
  • AviClear utilization and returns: ~55% of accounts did no procedures in Q4; ~125 returns with ~175 planned (total ~300 out of ~1,200); disciplined international launch; focus on dermatology practices (higher utilization) .
  • Business model preference: Majority of accounts prefer purchase model; lease option may remain for existing customers; per-treatment economics improved under purchase .
  • Convert maturities: Three tranches; first ~$70M due March 2026; capital structure options to be addressed as AviClear initiatives progress .

Estimates Context

  • Wall Street consensus (S&P Global) for CUTR was unavailable due to missing mapping; therefore, we cannot provide comparisons vs consensus for Q4 2023. We will update if/when SPGI mapping becomes available.
  • Implication: With no external consensus, internal guidance and sequential/YoY dynamics inform expectations; 2024 revenue guided to $160–$170M and cash to $55–$60M at year-end .

Key Takeaways for Investors

  • Q4 showed sequential revenue improvement (+$3.1M vs Q3) despite continued macro and company-specific headwinds; however, margins remain severely depressed due to inventory reserves and low volumes .
  • 2024 is an operational clean-up and AviClear reset year: expect cash burn front-loaded in 1H with inventory/work-capital turning favorable in 2H; plan for revenue $160–$170M and year-end cash $55–$60M .
  • AviClear strategy pivot (purchase model, UX upgrades, academy training) targets utilization recovery; watch dermatology-focused accounts and international KOL sites for early signs of traction .
  • Restructuring completed with >$20M annual personnel savings; near-term incentive compensation may offset some savings as growth targets are pursued .
  • International mix rising (55% of Q4 revenue), partially due to skincare timing and stronger capital sales ex-NA; NA remains constrained by financing environment; monitor capital productivity as sales org expands .
  • Balance sheet: year-end cash/marketable securities $143.6M; convert maturities start in 2026 (~$70M); liquidity management hinges on cost actions and inventory monetization .
  • Execution on service, reliability, and inventory controls is the gating factor for margin recovery; normalized gross margin (~37% in Q4) highlights improvement potential as transient costs abate .