The Beauty Health Company - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 net sales were $70.7M (-10.3% YoY) with GAAP gross margin 64.6% and Adjusted EBITDA $8.9M; management said results “exceeded the top end of our guidance range,” driven by consumables resilience and cost discipline.
• FY 2025 guidance was raised: net sales to $293–$300M and Adjusted EBITDA to $37–$39M; management also gave Q4 2025 guidance of net sales $74.5–$81.5M and Adjusted EBITDA $6.9–$8.9M.
• Devices remained under pressure (delivery systems net sales $20.8M, units sold 875), while consumables were resilient ($49.8M); active installed base expanded to 35,409, and booster category sales grew 14%.
• Regional trends were mixed: Americas revenue down 7% YoY to $48.3M, EMEA flat at $16.1M, APAC down 41.5% to $6.3M due to the China distributor transition; inventory was reduced to $56.1M and U.S. manufacturing is fully operational.
• Catalyst: raised FY guidance and improved margins despite macro headwinds (financing access, uneven consumer confidence), plus a strategic pivot to core consumables and provider engagement (pause of skincare initiative).

What Went Well and What Went Wrong

What Went Well

• Margins improved materially: GAAP gross margin 64.6% vs. 51.6% in Q3 2024, driven by lower inventory charges and mix shift toward consumables.
• Adjusted EBITDA rose to $8.9M (12.6% margin), supported by “ongoing operational efficiency” and lower opex; CEO: “Revenue of $70.7 million and Adjusted EBITDA of $8.9 million exceeded the top end of our guidance range”.
• Innovation traction: HydroLock HA and Hydrophilic with Pep9 boosters drove 14% growth in booster sales; consumables mix increased to 71% of net sales.

What Went Wrong

• Device softness continued: delivery systems net sales fell 24.6% YoY to $20.8M; units placed declined to 875 from 1,118 on macro and financing headwinds.
• APAC weakness tied to China transition: APAC revenue fell to $6.3M (-41.5%) as the company shifted to a distributor model, pre-positioning inventory to minimize tariffs.
• Elevated churn: management noted churn of ~1.8% vs. ~0.9% last year, citing small-provider closures and staff turnover; GAAP diluted EPS was -$0.09 (vs. -$0.15 in Q3 2024).

Transcript

Operator (participant)

Good day and welcome to the Beauty Health Company 2025 Third Quarter Earnings Conference Call. All participants will be in Listen-Only Mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask a question. To ask a question, you may press star, then one, on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn over to Norberto Aja, Investor Relations. Please go ahead.

Norberto Aja (Head of Investor Relations)

Thank you, Operator, and good afternoon, everyone. Thank you for joining The Beauty Health Company's Conference Call to review our third quarter 2025 results. We released our results earlier this afternoon, which can be found on our corporate website at beautyhealth.com. Joining me on the call today is Beauty Health's Chief Executive Officer, Pedro Mala, along with our Chief Financial Officer, Mike Monahan. Before we begin, I would like to remind everyone of the company's safe harbor language. Management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements are based on expectations and involve risks and uncertainties that could cause actual results to differ materially. Listeners are cautioned not to place undue reliance on any forward-looking statements. For further discussion of these risks related to our business, please see the company's filings with the SEC. This call will present non-GAAP financial measures.

A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is available in the earnings press release, which was furnished to the SEC and available on our website. Following management's prepared remarks, we will open the call for a Q&A session. With that, I would now like to turn the call over to our CEO, Pedro Mala. Please go ahead, Pedro.

Pedro Mala (President and CEO)

Thank you, Norberto. Good afternoon, everybody, and thank you for joining us today. Before I get into our quarterly results, let me start by thanking Marla Beck for her leadership during an important transition period. The Beauty Health Team did a fantastic job stabilizing the business and positioning it for the next phase of growth. This next phase is actually one of the reasons why I chose to lead Beauty Health. We have an incredible opportunity to leverage our HydroFacial device platform and expand it into a category-leading ecosystem of skin health technology solutions. This is a unique company with a proven and resilient Razor-and-Blade Business Model, which is anchored in recurring high-margin consumables and supported by a global network of providers who believe in our technology and in the outcomes of our treatments that are delivered every day to thousands of people around the world.

Beauty Health is also well-positioned to lead the skin health category as we continue to see the market shifting towards a less invasive, increasingly personalized, and more science-backed procedures and treatments. I say well-positioned because if we look across the landscape, very few companies are capturing the recurring economics behind procedure volumes. This is where Beauty Health stands apart because we participate on both sides of the equation: the capital equipment and the consumables, which creates a self-reinforcing Flywheel of predictable and profitable revenue. Since I joined Beauty Health a month ago, I've been very impressed by the passion and the commitment of our teams around the world and by the loyalty of our customers and providers. As we all know, passion alone does not create shareholder value.

We need to make sure that this passion is harnessed with a clear strategy, operational excellence, and consistent top-line growth and financial performance. We are going to go and over-index our capital and attention in four different areas. First, our priority will be protecting and growing our HydroFacial install base of over 35,000 devices worldwide because we know that for every device we place, that will drive years of high-margin consumable growth. Second, we will focus on driving consumable utilization. This is the engine behind our profitability. Consumables generate strong gross margins, so increasing device-to-consumable efficiency and usage across the install base needs to absolutely be a key focus area for us. Thirdly, we must keep innovating across both devices and consumable platforms.

We will do that by bringing to market superior clinically backed products that meet our providers' needs and deliver the desired results for our customers. Fourth, we will continue to strengthen our operational discipline around commercial execution, cost control, margin expansion, supply chain, and quality. This is an area where we already have done very good work and we will continue to focus on. Now, turning to our third quarter results. For Q3, total net sales were $70.7 million, down 10.3% year-over-year, slightly ahead of the high end of our forecast for the quarter. In our device segment, Q3 revenues were $20.8 million, a decrease of 24.6% year-over-year, primarily reflecting continued pressure on equipment sales globally and the impact of the China transition to a distributor partner. Looking at our consumable segment, Q3 revenues were $49.8 million.

A decrease of 2.6% year-over-year, primarily reflecting the change in the China business model. If we net out the China impact, consumables sales will actually increase modestly versus last year. As a result, our consumable mix moved from 65% of net sales in Q3 of last year to 71% this quarter. Now, looking from a portfolio perspective, we continue to deliver on our new product launches. HydroLock HA and HydroFillic with Pep9 Boosters together contributed to 14% growth in the booster sales category this quarter. We also achieved significant milestones in operations. We are holding inventory below $60 million, which is the lowest in three years. This is the result of the work the team has done to improve demand planning, forecasting, and production quality. In terms of Q3 adjusted gross margins, we landed at 68%, a decline of approximately 150 basis points from Q3 of last year.

This was driven primarily by lower average selling prices as our distributor markets held a larger unit share of the overall equipment revenue year-over-year. Looking at adjusted EBITDA, that was $8.9 million, up 11% from Q3 of last year, and reflects a tight control of cost and a solid operation execution. Looking ahead, we are confident in our outlook of raising adjusted EBITDA guidance for the remainder of the year, as well as the midpoint of our full-year revenue guidance. That is because we are encouraged by the momentum we are building as we enter 2026. With that, I'll turn the call over to Mike to walk you through our third quarter results in more detail.

Michael P. Monahan (CFO)

Thank you, Pedro. Good afternoon, everyone. I'm pleased to share another quarter of steady execution and disciplined financial performance, in which we once again exceeded our initial expectations. Our team, across all functions, continues to work tremendously hard to support our providers and drive shareholder value. As expected, revenue declined year-over-year, primarily due to device sale pressure. However, we delivered strong margins and profitability, reflecting the continued benefits of operational discipline and cost management. For the third quarter, net sales were $70.7 million compared to $78.8 million in the prior year, primarily reflecting lower device sales, which declined 24.6% to $20.8 million, consistent with the macro environment. Overall, consumable sales declined 2.6% to $49.8 million as international gains were offset by softer U.S. trends. The decline includes lower consumable sales due to our transition from a direct seller to a distributor model in China.

Excluding China, consumable sales would have increased modestly year-over-year. Price increases were partially offset by lower volume. From a regional perspective, revenue in the Americas declined by 7% to $48.3 million. APAC revenue decreased 41.5% to $6.3 million, while revenue across EMEA was relatively flat at $16.1 million. The decline in APAC reflects our planned go-to-market transition in China, where we have shifted from a direct-to-a-distributor model. As part of this change, we pre-positioned sufficient capital equipment inventory in China to meet anticipated demand through year-end, minimizing tariff exposure on devices. Our global footprint continues to expand, which adds to the recurring consumables revenue stream. In the third quarter, we sold 875 total units worldwide at an average selling price of approximately $23,794. As of September 30, 2025, total active machines in the field increased to 35,409 units versus 34,162 units at the end of Q3 2024.

GAAP gross profit increased 12.3% to $45.6 million, resulting in a GAAP gross margin of 64.6%. Adjusted gross margin came in at 68%. The GAAP margin improvement was driven primarily by lower inventory write-offs and a mix shift towards high-margin consumables revenue. Q3 2024 includes charges from our China manufacturing exit and our retail-specific perk write-offs. We have maintained tight control over expenses this quarter as sales and marketing spending was below our plan, reflecting lower headcount and disciplined spend management. Total operating expenses for the third quarter decreased by 16.5% to $51.9 million as we continue to manage our expenses. Selling and marketing expenses were $20.9 million compared to $27.6 million last year, a decrease of $6.7 million, or 24.2% year-over-year. The decline was primarily due to lower headcount and targeted spending.

R&D expenses were $1.7 million compared to $1.1 million last year, an increase of $0.6 million, or 53.2% year-over-year. The increase was primarily driven by higher other professional service expenses related to early-stage future product investments. G&A expense was $29.3 million, down from $33.4 million in the prior year, a reduction of $4.2 million, or 12.5% year-over-year, driven by lower headcount and bad debt recovery, partially offset by higher legal and incentive-related costs. These results led to an operating loss of $6.2 million in Q3 2025, a significant improvement versus a loss of $21.5 million in the comparable prior year. Adjusted EBITDA was $8.9 million, up from $8.1 million in Q3 last year, with adjusted EBITDA margin improving approximately 240 basis points to 12.6%. The increase reflects continued cost control even in the face of lower top-line volume.

Moving to the balance sheet, we ended the quarter with $219.4 million in cash and equivalents compared to $370.1 million at year-end 2024. The change primarily reflects the completion of our convertible note exchange, under which we repurchased approximately $20 million of principal and exchanged $413 million of our 2026 notes for a mix of cash and $250 million of new 7.95% secured notes due 2028. This transaction significantly extended our debt maturity profile and enhanced our long-term financial flexibility. Cash used for refinancing activities was partially offset by cash flows from operations, reflecting a strong improvement over the break-even position in the prior year. Inventory declined to $56.1 million, down from $69.1 million at year-end, reflecting stronger demand planning and improved supply chain efficiency. We also continue to make progress selling through our Elite fair market value devices, with 131 units remaining, which we expect to sell by year-end.

As previously noted, our US-based manufacturing footprint is fully operational and remains a strategic advantage, enhancing product quality, increasing agility, and mitigating domestic tariff exposure. Given our performance through the first nine months and our visibility into year-end, we are raising the low end of our full-year 2025 revenue guidance to between $293 million and $300 million, and increasing our adjusted EBITDA guidance to between $37 million and $39 million. For Q4, we expect net sales between $74.5 million and $81.5 million, and adjusted EBITDA between $6.9 million and $8.9 million. The midpoint of this guidance reflects reduced year-over-year revenue declines and continued cost management discipline. Now, I'll turn the call back over to Pedro for final comments.

Pedro Mala (President and CEO)

Thanks, Mike. To close, it's important to highlight that we are operating in a tough and still unpredictable environment. Inflation remains an issue, access to financing continues to be challenging for capital equipment purchases, and consumer confidence continues to be uneven, especially in the discretionary categories where Beauty Health operates. Despite the Macro-Economic Backdrop, we will continue to prioritize and lean towards the levers within our control that will drive device footprint expansion and repeat consumer treatments, all with the objective to keep building the Hydrofacial Global Brand, accelerating our revenue growth and profitability, and position Beauty Health firmly as the leader in the global medical aesthetics market. With that, I'll turn the call over for questions.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press Star, then 1 on your touchstone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Star, then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Oliver Chen with TD Cowen. Please go ahead.

Oliver Chen (Managing Director and Senior Equity Research Stock Analyst)

Hi, Pedro, Mike. Encouraging on the guidance. Would love your thoughts on what's happening in Americas and also the more cautious trends you cited in Americas, how you weighed that against the guidance you gave. Also, to help us compare and contrast a little bit about Americas relative to EMEA being flat. Thanks a lot.

Pedro Mala (President and CEO)

Sure, Oliver. If you look at the regional dynamics of our business, it's kind of a mixed picture. I believe we're trending in the right direction here. Just to look at the Americas, which, by the way, is our largest business, 65% of our total revenue comes from that. Overall, yes, the Americas was down 7%. Out of that, devices was down 16.3%. The explanation for that and the driver for that was the lower device placements and because of the macro pressures that are currently affecting the country. Despite being a decrease, Q3 was less than the previous two quarters. You saw an average of 20% decrease in the prior two quarters of the year. We believe that we are seeing some stabilization here in terms of devices for the Americas. Consumables, a little bit of a different mix.

We were down about 2.7%, and that was driven by a combination of, again, consumer spending, some headwinds there, coupled with lower device placements that we had in the first half of the year. If we look, our booster sales have increased. That is kind of the picture of the Americas. If you want to contrast that with what is happening in EMEA. EMEA, it is a little bit of the same narrative. 25% of the total sales comes from that region. Overall, we were flat. We were flat because of a mix of different performance. We have strong momentum in Germany, strong momentum in the medical channel. Devices were down in EMEA about 21%. Very similar challenges in the U.S. with the consumer confidence being generally lower than a year ago.

With the added factor that in EMEA, we have a little bit more of a crowded space there. The local teams are very focused on training and education on the benefits of HydroFacial versus other treatments. That has taken effect. If you look at the consumables in EMEA, we continue actually to perform well. This is a bright spot. It has been a bright spot for us. It is definitely a bright spot for the quarter. We grew there, double digits, about 10%. That was driven by very strong performance in Germany and again from the medical channel. We have a small portion of APAC, which is about 10% of our total sales, and which has been down substantially due to the China transition to a distributor market, with both devices and consumables being down.

Oliver Chen (Managing Director and Senior Equity Research Stock Analyst)

Thanks, Pedro. Very helpful. One broader question, as you mentioned the four focus areas, which ones were going to be more near-term in terms of what you're seeing in your hypothesis and which ones may be longer-term? As you mentioned, the skin health technology ecosystem, how do you envision that, or how would you frame that in terms of device platforms, digital diagnostics, or partnerships as you think more broadly? Thanks a lot.

Pedro Mala (President and CEO)

Yeah, sure. The way we're kind of looking at the business, there's a broader plan of strategy that is overarching for the whole company. We will definitely have a more surgical strategy for our device business and consumable business. Definitely over time, I'll share much more in how we're shaping this future strategic roadmap as we go along. My initial observation is that our competitive advantage really relies on our core value proposition. We need to keep driving utilization. We need to keep driving device placement. This is because we all know that for every device that we place, that drives multi-year consumable revenues after that on the tail. Our job after that is just to make sure that we are capturing the long tail of recurring customers, the consumables.

We need to focus on innovation, and that's going to be a play across both devices and consumable platforms. The intent is to continue to launch superior and, most importantly, clinically backed products that meet our provider needs. Execution has been a very bright spot in the prior quarters. We will continue definitely tying up the execution. Performance, continue to drive commercial excellence around our business with better targeting and lead conversion. As with every business, we'll keep a close eye on capital efficiency, making sure that every dollar is invested or driving profitable revenue or in margin improvements. If you look more specific into what we're planning to do for devices, again, I will definitely share more about my thinking here. We have to attack this problem from a multitude of angles here. First, we have to address the providers' financing challenges.

That has been definitely a gating item for us in the prior quarters. We have to do that with smarter and more targeted pricing strategies. Secondly, as you guys remember, we rolled out the Good, Better, Best program, which basically gives customers more flexibility in terms of price points across our portfolio of Syndeo, Elite, and Allegro. That is definitely helping now the consumers navigate the macro better. Also, on devices, we have to be reinforcing constantly the commercial discipline around targeting, segmentation, and conversion, and the team is doing a great job there. A little bit of a different strategy that we're going to be exploring is going to go on the consumable sides because that's where we're going to really lean in on the innovation, and that's kind of the formula that has been working for us.

We are going to do that by launching differentiated boosters with real clinical proof there. We are going to continue to equip our providers with marketing tools that are relevant, that are impactful. We are going to continue to invest in education because that is the gating item that will move the needle. Post-sales onboarding, very important. We have to continue to over-index on those, making sure that every provider knows how to maximize the return on investment of every machine that they commit to. Consumer mindshare, this is, in the end, boosters, serums. They need the inbound traffic to happen. We will definitely have to be invested in driving that consumer mindshare. Overall, still very high level, but this is kind of the key areas I personally and the team are very focused on.

Oliver Chen (Managing Director and Senior Equity Research Stock Analyst)

Thanks a lot, Pedro.

Operator (participant)

Thank you. Pardon me, ladies and gentlemen. You are requested to limit questions to two per participant. Thank you. The next question comes from JP Holan with North Capital Partners. Please go ahead.

JP Holan (Analyst)

Great. Hey, Pedro. Hey, Mike. Thanks for taking my question here. Pedro, maybe if we could start with you. As you kind of get your hands wrapped around the business a little bit more and get a better understanding, is there anything else you can share about the sort of international strategy and sort of where you feel makes the most sense to have direct-first distributor models?

Definitely. Thanks, George. Thanks for the question. We are a global company. If you want to grow, which is the intent, we have to address international markets as part of that formula. We have to obviously focus on that and have, in my view, very targeted commercial programs designed to fit the different regions' economics in where our products are present. We have been historically leading into an extensive distributor network that is part of our DNA, and we will continue to do that in order to drive penetration and reach. That is part of the way we go to market, and it has been quite a successful formula there. We will definitely continue to do that.

At the same time, we need to make sure that we invest in education and training as we scale and help out the distributors increase their penetration in their respective markets. That is kind of the national strategy. Not a big change overall. It is still a small portion of our business. We intend to explore the opportunities of growth in different markets, being those through direct channel or distributed channel. Definitely, just to respond to your question, George, definitely international has to be part of that equation for us.

Great. Just a quick follow-up. I believe you took the pricing on the consumable side in July. Can you just talk about how the reception has been to that price increase and what it says about potential pricing power in the future on the consumable side? Thank you, guys.

No, no problem, George. The team has been very pleased how the market not only digested but actually took that price increase, which was triggered around the summertime of this year. ASP, if you look at consumers, ASP is up. That is the reason because of the price, the 5% price increase that we drove. Another thing that we are seeing is that the boosters are driving that ASP also up for us. Overall, for our consumable category, ASP overall on average is up, which is a good thing.

Thanks. Best of luck.

Operator (participant)

The next question comes from Susan Anderson with Canaccord. Please go ahead.

Susan Anderson (Managing Director and Senior Analyst)

Hi, good evening. Thanks for taking my questions. Pedro, I'd love to hear maybe just kind of your thoughts on stabilizing the systems. I mean, it looks like they're already stabilizing, but what initiatives do you think you need to put in place to get those to grow again?

Pedro Mala (President and CEO)

Sure, Susan. Let me just anchor on our quarter performance. I think that's probably best as we start discussing how we're doing with devices. For the quarter, devices were down. Devices represent about 30% of our total revenue. By the way, Syndeo represents 70% of total device placement, so a big chunk there on our new platform. They are declining, indeed, and we feel that this is a direct, indirect correlation to the economic environment that we live in, which translates into a tighter landing environment as well. At the same time, we look at how we are expanding the footprint of our devices globally. Actually, we look at Q3, and we sold an extra 875 units. We continue to expand that footprint. We continue to broaden our reach, and that is definitely good news for us.

Now, we understand that devices keep coming down and have been coming down for some quarters. What we are encouraged to see is that those numbers are stabilizing. We are coming out of easier comps more and more. Our lead pipeline is improving. Our field teams are getting more disciplined about lead conversion. If I look at in the future, I definitely expect this trend to continue as the financing access improves and the sales teams are executing better. I look at devices and specifically the performance of our ability to sell devices into the market to get better and better as the quarters progress and the comps get easier and we do a better job in commercial execution.

Susan Anderson (Managing Director and Senior Analyst)

Okay, great. If I get to add one follow-up on the consumables front, I guess just curious your thoughts around, I guess I think Marla was creating some products, not just necessarily for treatment such as boosters, but also for use maybe during treatment or for purchase in front of the spa. I guess just curious on your thoughts around the consumables area and kind of where you're going to be focused at. Thanks.

Pedro Mala (President and CEO)

Yeah, absolutely. We have decided to actually pause the skincare initiative. That decision was a deliberate strategic decision. My opinion is that our competitive advantage lies rather on the clinical differentiation, on recurring consumables, on stronger provider partnerships. That is where we generate long-term value. After reviewing the business case, we basically concluded that skincare will pull us away from our core business model, which, by the way, is a business model that provides us with a very strong competitive advantage. We have decided to instead focus our capital on things that are core to our business instead of ventures where we have no expertise or actually no right to win. As we make this decision, we also look at the potential impact on the revenue. Actually, the project was pre-revenue.

On top of that, we will have to require, it will have to require heavily invested investment before we could scale up. By not pursuing the skincare initiative, we actually preserve capital, which indeed will absolutely help us in our near-term profitability profile.

Susan Anderson (Managing Director and Senior Analyst)

Okay, great. Thanks for all the details. Really helpful.

Operator (participant)

The next question comes from Olivia Tong with Raymond James. Please go ahead.

Olivia Tong (Managing Director and Senior Analyst)

Good evening. This is Lillian for Olivia. I'm wondering if you could talk through the trends you're seeing in different channels and then also any color on what you're seeing from an end consumer standpoint and whether you've noticed any incremental weakness as macros remain pretty choppy.

Pedro Mala (President and CEO)

Yes. Olivia, as you know, we divide our consumable business between the medical and the non-medical segments. Medical, just for reference, includes your med spas, your dermatologists, your plastic surgeons. That segment itself represents about 70% of our providers in the U.S. This is just the U.S., with the largest segment being about two-thirds med spas, which, by the way, is the channel that keeps the market growing overall. The plastic surgeons, from what we understand, are experiencing some slowdown because basically consumers now are prioritizing less invasive care. On the other side, the non-medical segment includes the day spas and the single room estheticians. Here, we are seeing a stable progression there as well. Basically, the U.S. and EMEA have the largest portion of the medical side and medical spas.

With all the challenges that they are facing in the macroeconomic realm, that is impacting their business. The bright spot here is Germany, as I think I mentioned before, and on the consumable medical channel. Overall, we still believe there is growth opportunity in both of these segments or channels, both the medical and the non-medical. Our job from now on is to make sure that we design products and have the right pricing strategy and positioning to capture the opportunity in both of these segments. Hey, Mike, do you want to chime in?

Michael P. Monahan (CFO)

I just wanted to add about the end consumer piece. One of the things we saw during the quarter were booster attachment rates were very high. They've been a real bright spot in the business. That can really highlight the impact of the innovation that we've been investing in over the last year. You look at a year ago, the company launched Hydrolock. In the second quarter, we launched Hydrophilic. They've had a real positive impact on the overall business. Utilization rates on our install base, we've seen a little pressure, highlighting that the end consumer who's coming in for just a normal Hydrofacial without electing kind of boosters has been under a bit of pressure. We have really focused on the sales and training aspect of the business to make sure there's outreach there.

We're leaning into education to make sure our providers are equipped with the tools they need to communicate the benefits most effectively around the Hydrafacial treatment.

Olivia Tong (Managing Director and Senior Analyst)

All right. Great. Thank you. I'll pass it on.

Operator (participant)

The next question comes from Alan Gong with JPMorgan. Please go ahead.

Allen Gong (VP and Equity Research Analyst)

Thanks for the question. I guess starting just with a broader strategy question, this has been a reset year for Beauty Health. You are hopefully stabilizing. This will be a nice baseline for you to grow off going forward. When I think about the outlook for 2026, how should I think about how you're going to prioritize top-line growth versus profitability and diving deeper into existing accounts and focusing more on consumables versus trying to drive a reacceleration in delivery systems?

Pedro Mala (President and CEO)

We're actually going to be focusing on all of those lines. You have to bring top-line revenue growth to this business. We can definitely flex our spend. The team has been doing that for some time very successfully, increasing our gross margins as well, which translates in an expanded profitability and inhibitor. If the top line is not there, we're always going to find ourselves behind the eight ball. Our total focus will be to drive that top line. We have a very strong business model. That keeps delivering recurrent revenue. The team has to be focusing on that for sure. In terms of next year and the way we are looking at it, I'm not going to provide any guidance because I think it's a little bit premature to start talking about specifics about 2026. We'll actually share more detailed commentary on our next call.

We feel good. We feel good about the setup. We're coming from two consecutive quarters of good progress, which basically gives us a strong base heading into next year. Again, I think it transpires throughout the call. This momentum that we feel strong about will depend on several factors kicking in. First and foremost, the market that we are participating in is still under some pressure versus prior years. I think that we're going to definitely continue to see some lumpiness in the near term. Overall, consumer spending, again, is still a big rate-limiting factor for us, and so we're going to keep an eye on that as well.

Looking at next year, if the macro conditions improve even slightly, and if our device momentum improves, which will be the focus of the team, then we can expect operating leverage and further expansion on our bottom EBITDA. Where we stand, I think we have the elements that we need going into next year with a good momentum.

Operator (participant)

Mr. Allen, does that answer your question? We'll move on to the next question. It's on the line of John Block with Stifel. Please go ahead.

Joe Federico (Equity Analyst)

Hey, everyone. It's Joe Federico on for John. Thanks for taking the question. Maybe to start, and Mike, this might be more for you, just to flush through some of the updated guidance dynamics, revenue expectations, I think, came up by $4 million at the midpoint, and EBITDA came up by $7 million. A decent clip more. Can you just maybe walk us through some of the moving parts more specifically as to why there's so much more of a drop-through on the incremental sales? I know gross margin outperformed in the quarter. Is that just sustainable in coming quarters? Any additional color would be helpful.

Michael P. Monahan (CFO)

Sure. A big portion of the fall-through happened in Q3, Joe, as well. We obviously exceeded kind of the midpoint of our expectations on Q3. I think the midpoint of our original guide was around $3 million, and we obviously came in well above that. That is the piece. When you look to your point around adjusted gross margins, as I think about kind of Q4, seasonally, those margins tend to be a little bit lower quarter over quarter because we run the consumables promotion in the fourth quarter, the Black Friday, Cyber Monday promotions. I would think about gross margins in the fourth quarter coming in more similar to the second quarter versus the third. OPEX, I would expect it to go up quarter-over-quarter, about $2-$3 million versus Q3. That is primarily due to.

Higher commission dollars because of sales growing and marketing spending associated with that. The key themes, those are the financial. The key themes Pedro touched on are. While devices still continue to be under pressure, it's a lot less as we've moved throughout the year and really executed on the sales initiatives that we've had and introduced kind of the good, better, best. We've also put together different pricing portfolio bundles for Syndeo that we've started to see some success with. Our expectation behind the guidance is that you'll continue to see those trends improve through the fourth quarter.

Joe Federico (Equity Analyst)

Okay. Got it. That's really helpful. Maybe just quick follow-up. We're calculating that churn in the quarter was just under 2%, which is a modest improvement compared with last quarter, but it's still pretty elevated compared to the last seven or eight quarters, call it. I know you had planned actions to moderate that. In the back half of this year, maybe just how are some of those progressing or starting to see them moderate more in Q4 to date? Just your latest thoughts there.

Pedro Mala (President and CEO)

Yeah. I'll take that, Joe. Churn is definitely higher than usual, about 1.8%, versus I think about 0.9% last year. We're looking at this very seriously. We believe the causes could be actually multifactorial. Our data points and the team are still running a lot of analysis here. Our data points to financial pressure being the primary factor. This is driven by the economic challenges on the low-volume small providers that are closing down. Simply, they're closing their doors, or they have a higher staff turnover, and that comes with less consistent device utilization. I believe, or we believe, rather, that these factors are the main culprits behind the increased churn that we just saw this past quarter. Now, what are we doing about it? Actually, there are ways you can see this.

You can see this as a loss, or you can see this as an opportunity. We rather are looking at this as a reactivation opportunity, and we are taking a very proactive stand in reengaging particularly these low-volume providers. We are going in and offering more support and improving our training to them. The goal that the team has is to bring these churn numbers back to what we think are the historical levels. We will do that over the next few quarters.

Joe Federico (Equity Analyst)

That's really helpful. Thanks again.

Operator (participant)

Thank you. That was the last question. This concludes our question and answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you.

Olivia Tong (Managing Director and Senior Analyst)

Goodbye.