STRATA Skin Sciences - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 revenue was $9.6M, up 10% year-over-year, with gross margin improving 480 bps to 60.1%; equipment revenue rose 23% to $3.8M amid strong international sales.
• Global recurring revenue increased to $5.8M (+3% YOY), while average net revenue per domestic XTRAC system rose 6% YOY to $5,906 on a smaller installed base (864 vs. 923) as the company removed underperforming units.
• Versus S&P Global estimates: revenue beat ($9.576M actual vs. $8.976M estimate); EBITDA beat ($0.864M actual vs. $0.605M estimate); EPS comparisons are complicated—SPGI “Primary EPS” showed +$0.287 actual vs. -$0.30 estimate*, while company-reported GAAP EPS was -$1.18—highlighting definitional differences.
• Management reiterated no formal guidance and emphasized seasonality (Q1 typically weaker after a strong Q4); narrative catalysts include international momentum, DTC-driven utilization improvement, and legal actions curbing competitor reimbursement claims.

What Went Well and What Went Wrong

What Went Well

• International strength: Q4 international sales reached $4.1M, up 27% sequentially and 41% YOY; equipment segment international portion rose 45% YOY.
• Utilization and margin improvement: Average net revenue per domestic XTRAC device increased 6% YOY to $5,906 as underperforming accounts were removed; gross margin rose to 60.1% (+480 bps YOY).
• TheraClear progress: U.S. TheraClearX installed base grew to 144 units; insurance pre-authorizations exceeded 3,700 patients year-to-date, with ~86% of patients preauthorized for ≥10 procedures (management commentary).

Management quote: “Our fourth quarter results highlight the success we are having in implementing our strategy to shift our existing installed base from underperforming centers to more productive ones… our operating margins… improved by 950 bps compared to the fourth quarter of 2023.”

What Went Wrong

• Larger GAAP net loss: Q4 net loss of $4.5M (GAAP EPS -$1.18) worsened vs. -$3.8M in Q4 2023; full-year net loss was $10.1M, reflecting non-cash impairment and the Q3 NY sales tax accrual.
• Domestic recurring billings modestly lower YOY: Q4 XTRAC gross domestic recurring billings were $4.871M, down ~1.5% YOY; domestic installed base declined to 864 as removals accelerated.
• Opex pressure before normalizing: Reported Q4 total opex was $10.0M vs. $8.2M prior year; normalized (ex-impairment) opex was $6.1M, only slightly above the prior year.

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to the STRATA Skin Sciences Fourth Quarter and Year End 2024 Financial Results and Corporate Update Conference Call. At this time, all participants are in a 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 questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Participants of this call are advised that the audio of this conference call is being broadcast live over the internet and is also being recorded for playback purposes. A webcast replay of the call will be available approximately one hour after the end of the call through May 13th, 2025.

I would now like to turn the call over to Louie Toma of CORE IR, the company's investor relations firm. Please go ahead, sir.

Louie Toma (Head of Investor Relations)

Thank you, operator. Good afternoon and thank you for participating in today's conference call. Earlier this afternoon, the company released its financial results for the quarter and year ended December 31, 2024. A copy of that press release can be found on the company's website at www.strataskinsciences.com under the investors tab. Joining me on today's earnings call from STRATA Skin Sciences management team are Dr. Dolev Rafaeli, Chief Executive Officer, and John Gillings, Vice President of Finance. During this call, management will be making forward-looking statements, including statements that address STRATA Skin Sciences' expectations for future performance or operational results. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements.

For more information about these risks, please refer to the risk factors described in STRATA Skin Sciences' most recently filed annual report on Form 10-K and subsequent periodic reports filed with the SEC and the STRATA Skin Sciences press release that accompanies this call, particularly the cautionary statements in it. The content of this call contains time-sensitive information that is accurate only as of today, March 27th, 2025. Except as required by law, STRATA Skin Sciences disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. It is now my pleasure to turn the call over to CEO Dr. Dolev Rafaeli.

Dolev Rafaeli (CEO)

Thanks, Louie, and good afternoon to everyone on the call. We had a strong fourth quarter with continued progress in our corporate turnaround and is highlighted through various metrics in the quarter. One of the primary elements of the strategy is helping our installed base improve the utilization of our machines. During this process, we are removing units from significant underperformance accounts while helping our other higher-performing accounts, higher-volume customers, to better utilize our XTRAC devices. We are expecting this strategy to be helping them understand the benefits of our systems for their patients, as well as the economics and the financial benefits to the clients, to the clinics themselves. During the fourth quarter, the success of our efforts was underscored by a significant improvement in average net revenue per device, which was up 11% over the previous quarter and up 6% over the prior year period.

While our US XTRAC installed base declined from 923 to 864 from Q4 2023 to Q4 2024, our average gross billing per device increased from $5,359-$5,637 over the same time period, which is reflective of the strategy I just mentioned. This quarter represents the highest quarterly average revenue per XTRAC device since the end of 2022. We expect continued progress as we continue to work with clinics to make better use of our devices. Our gross margin remained elevated at 60%, showing a 480 basis points improvement over the prior year Q4 and getting us closer to the range of roughly 70% gross margin the business enjoyed in the strongest quarters of 2019 and 2021.

As a result of higher revenue, strong gross margin, and operating cost controls, we saw significant improvement in operating loss, which adjusted for non-cash impairment charges in both periods, improved 68% as compared to the fourth quarter of 2023. During 2024, our direct-to-consumer advertising ramped up from $0 in 2023 and $25,000 in both 2021 and 2022 to just over $14,000 a week, generating approximately 2,800 patient appointments, surpassing the 2022 numbers of new patient appointments. The efficiencies gained in the DTC campaign now enable us to focus on enhancing in-clinic processes, identifying partner clinics with the greatest opportunities, those with the highest patients based on the number of existing patients in the indication, prescribed extract procedures, and completed procedures.

These consulting-like efforts have started in the fourth quarter of 2024, showing very meaningful upside with a small number of partner clinics across the country and are now being expanded to both individual and private equity group-owned clinics. Gross domestic revenue billings in the fourth quarter were $4.9 million versus $4.8 million, $4.7 million, and $4.6 million for the third, second, and first quarters, respectively. This was the third consecutive quarter of sequential increase, highlighting the results of our efforts, and we expect continued improvement in the periods ahead. We reached an installed base of 144 TheraClear X devices in the United States at the end of the fourth quarter, up from 92 devices at the end of 2023.

In 2024, we have focused on assisting with the adoption of the insurance-reimbursed non-cash billing for acne treatments with the TheraClear X device, with 108 of the 144 devices now billing insurance. I am happy to report that year to-date, we have secured pre-authorization for over 3,700 patients with acne in our partner clinics. Our international sales were particularly strong in the fourth quarter, with sales of $4.1 million, up 27% over the third quarter and up 41% over Q4 2023. This represents our highest level of international sales to date. Our strong growth in these markets is a result of refocusing our international partners on the technology and the clinical advantage of the XTRAC technology. The market dominance of the XTRAC in our key international markets is further demonstrated through multiple peer-reviewed clinical studies being published annually.

The most recent one was published just last month in Japan, validating the advantages of the high repetition rate, high-dose, coherent collimated narrowband Excimer laser technology over other sources of UVB light that are less accurate, lack the repetition rate and/or fluence capabilities for treating vitiligo, psoriasis, alopecia areata, and atopic dermatitis. Our Japanese market is growing rapidly, with almost 100 XTRAC devices sold or placed since 2019. While we are not providing guidance, we would like to highlight a historical pattern to help you refine your models. We tend to have a fairly strong seasonal effect between Q4, typically the strongest quarter of the year, and Q1, typically the weakest quarter of the year. This impact is stronger in years in which the fourth quarter is particularly strong.

Looking at the last two years, the difference between Q4 2023 and Q1 2024 was sequential decline of 22%, despite the fact that Q4 2023 was relatively weak, coming below Q3 of 2023. The difference between Q4 2022 and Q1 2023 was a sequential decline of 29%, with Q4 2022 representing the typical pattern of a very strong Q4. Now I'd like to turn the call over to John, who will review our financial results in more detail. John.

John Gillings (VP of Finance)

Thank you, Dolev. Our total revenue for the fourth quarter of 2024 was $9.6 million versus $8.7 million in the year-ago quarter, an increase of 10%. Global net recurring revenue for the fourth quarter of 2024 was $5.8 million versus $5.6 million in the fourth quarter of 2023. Excluding deferred billings and other GAAP adjustments, XTRAC gross domestic recurring billings were $4.87 million in the fourth quarter of 2024, down 1.5% from $4.95 million in the fourth quarter of 2023. Equipment revenue was $3.8 million in the fourth quarter of 2024 versus $3.1 million in the fourth quarter of 2023. The increase was a result of strong capital sales in international markets. Gross profit increased to $5.8 million in the fourth quarter, up from $4.8 million in the year-ago quarter. Gross margins improved to 60.1% versus 55.3% over the same period in 2023.

Total operating expenses for the fourth quarter of 2024 were $10 million versus $8.2 million in the year-ago period. Adjusting for non-cash impairment charges in both periods, normalized operating expenses in the fourth quarter of 2024 were $6.1 million, up slightly versus the prior year period at $6 million. Our cash, cash equivalents, and restricted cash position of $8.6 million at December 31st, 2024, along with our credit facility with MidCap Financial, supports our growth initiatives and leaner cost structure. The $8.6 million total cash balance includes $1.3 million of restricted cash related to the sales tax accrual we discussed on last quarter's call. We continue to believe we can execute on our strategic goals for 2025, given our current financial position. As of December 31st, 2024, the company had 4,171,161 common shares outstanding.

That concludes my prepared remarks, and I'd like to turn the call back over to Dolev for any remaining comments.

Dolev Rafaeli (CEO)

Thank you, John. Consistent execution thus far in 2024 led to a solid third quarter that points to stabilization in our financial performance and offers some early signs of growth. We remain committed to the strategies laid in the beginning of 2024 and are helping drive our performance. Now I'd like to turn the call over to the operator so that we can begin the question-and-answer session. Operator.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are 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 two. At this time, we will pause momentarily to assemble our roster. The first question comes from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.Go ahead.

Jeffrey Cohen (Analyst)

Hello, Dolev and John, and thanks for taking our questions. I guess firstly, Dolev, I misremembered. You talked about 144 TheraClear X's place, but there was some 108 number prior to that.

Dolev Rafaeli (CEO)

Yes. As we did in the prepared remarks, we are working on moving or migrating these accounts to non-cash insurance-reimbursed accounts, so accounts that are taking their patients and billing insurance. As we pointed out in the prepared remarks, 108 of the 144 are those accounts.

Jeffrey Cohen (Analyst)

I got it. That's clear. Could you talk a little bit about what types of practices that you're seeing the uptake on the newer accounts and also talk a little bit about the geographical presence domestically here, please?

Dolev Rafaeli (CEO)

For TheraClear X, your question is about TheraClear X?

Jeffrey Cohen (Analyst)

Yes.

Dolev Rafaeli (CEO)

Yep. Okay. TheraClear X, the initial uptake of insurance-reimbursed accounts started in the Northeast, and our first two or three quarters during 2024 were stronger in the Northeast. The characterization of these accounts would be mostly small to medium-sized groups where they would adopt this in one or two offices, and if it works, and I'll explain further what it means if it works, then they would expand this. What they did is they took it in, and they wanted to see that insurance or payers are actually pre-authorizing the patients for the treatment. What we saw is that across the board, most payers pre-authorized most patients were actually at the run rate of approximately 86% of patients being pre-authorized for 10 or more procedures that are done over a period of time.

They wanted to see that these patients actually show up for the procedures, actually go through the procedures, and then that they actually get paid. Once that happened, we started expanding across these groups. We currently have three groups in the Northeast that have more than 15 devices or clinics each. In Q4, we started expanding beyond the Northeast to other regions of the country, doing the same thing. We start with one or two accounts inside a group. We show them that it works. We show that they get the pre-authorization. We show them that the pay rate is the right rate. We show them that at the right way of operating this, they have a sufficient number of patients, and what they need to do is get them pre-authorized and then treat them and repeat. I hope that answers the question.

Jeffrey Cohen (Analyst)

Yes, that's great. One more, if I may. Could you talk a little bit about what's driving the strength internationally, geographically speaking? I'm aware of Japan, but talk a little bit about some of the other regions, please.

Dolev Rafaeli (CEO)

Yes. Our four strongest markets internationally are Japan, China, South Korea, and the Middle East. I'm going to speak about each one of them independently. The Middle East is steady as she goes. Historically, it used to be mostly tender business, so it would be public hospitals issuing public tenders for purchases and acquisitions. Over the past couple of years, it has migrated more towards private clinics, and that helps us enhance the business because we're not just reliant on public tenders. In China, at least in 2024, the business was strong. We saw more adoption by both private and public hospitals. Public hospitals are treating patients that are paying much, much lower rates than the U.S., but having a much higher patient volume. That's where the appreciation for the stability of the technology and the clinical efficacy of the technology comes.

The private clinics where patients are paying higher rates, and that's where, again, the appreciation comes for the ability to run a large number of patients. I'm going to refer specifically to quantities in a second. In Japan, as you pointed out, we've discussed in the previous quarter we're penetrating the market with XTRAC. In the market, we had historically placed and sold more than 400 VTRAC devices, and that market, the Japanese market, has about 1,000 clinical dermatologists. We've had the highest penetration rate in the market in the technology, and we're now in the process of replacing these gradually with the XTRAC devices. The devices are more expensive, but they're allowing faster treatment of existing patients. In Japan, all of the population is insured, and the reimbursement rate is approximately 20% of what it is in the U.S.

They need a higher patient throughput to justify the treatment. Hence, they need a more reliable platform. I kept Korea last on purpose because we are affected both in Korea as well as in China by what has happened over the last quarter, both the going out of business or the declaration of Chapter 11 of certain competitors in the market, which are pushing pressure on the local market distributors. The availability of their cash towards us is more limited than it was before. Despite that, we see more revenue coming from these markets and more growth because we've reemphasized the technology. We've shown them, the distributors, and through them the providers, that they're better off using a proven technology that has proven clinical efficacy and stability in the market.

In the Chinese market, we're facing the uncertainty of what's going to happen with tariffs coming in or not in the next few months. We work with partners. They work in their own markets. Both these markets, China, all these markets, China, Japan, and Korea went through currency exchange fluctuations because of the last few months, as well as some instability in Korea. I hope I answered the question, but it's a combination of much better appreciation to the technology and the availability for them to provide better services and offering to their end customers, the providers, the doctors in the market, as well as the economic changes in these markets. Now, as I pointed out, these markets mark a much higher volume use of these devices.

If an XTRAC device in the U.S. is being used several hundred times a year, these devices in Japan and South Korea and China are being used several hundred times a week. It is a multiple of 20, 30, 40, 50 times more times of use, and they need a very stable platform to use.

Jeffrey Cohen (Analyst)

Super. Thanks for taking our questions.

Dolev Rafaeli (CEO)

Thank you, Jeff.

Operator (participant)

Again, if you have a question, please press star, then one. Our next question comes from Jeremy Pearlman with Maxim Group. Please go ahead.

Jeremy Pearlman (Analyst)

Thank you for taking my question. Just maybe how do you determine what accounts are being underutilized and how many of those accounts, let's say, currently have you identified that you'll pull the device? On the flip side of that, the new clinics, I think you touched a little bit of this on the call, but if you could provide some more information, how do you determine new clinics to place the device?

Dolev Rafaeli (CEO)

Great question. If you had followed the business, the XTRAC business over the past many years that it was in the market, what you would have seen that in a stable year, we would be churning through approximately 10% of the accounts. That relates to accounts that either the original owner has moved out of the business, decided to sell the business, decided that he's no longer interested, or it had to do with our decision to looking at the account saying there's not enough money coming from that account. Now, since we look at our expense structure as being more of a fixed expense, we have the sales team, which are farmers, not hunters. They take care of accounts. We have approximately 25 territory managers. We have approximately 900 accounts. That gives us about 36, 37 accounts per territory manager to work with.

Adding more accounts without removing accounts adds to the fixed expense basis of the company. It adds the cost of the sales team. It also adds the depreciation and the cost of service of an existing device. That fixed expense is the level we look at as a threshold for looking at an account and saying, "Does that account make sense for us or not?" If you look at the P&L, that fixed expense calculates to approximately $15,000-$16,000 per device if you look at the 900 devices. That can be very easily calculated from the cost of sales. If we see an account that drops in run rate below that, there are two options. One, we bring them back up, or two, we remove.

It is a question of the territory manager, the relationship with the account, the reasons for why the account is going down, and the optionality of working with the account and bringing them back up. I'll speak about both. Removing the account is easy. Our agreements with the accounts have, in general, 30 days out. We tell them we are going to be removing the device within 30 days, and we come and we take the device and we move it out. That is easy. Bringing them back up is an involved process, and we need to understand what is going on within the account, whether it is the patient population or it is the provider that made decisions, whether consciously or not, to prescribe or not.

Is it the actual extenders, so the nurses or the medical assistants or the people, the technicians that work in the clinic that are utilizing the device correctly or not? I'm going to use specific examples. On average, an office is going to have somewhere between 1,000 and 1,500 relevant patients in the indications in the office. Every patient represents approximately $3,000 of revenue for the office. Every patient represents about $1,000 of revenue for us. If you look at an office that does that break-even point of $15,000-$16,000, you're talking about five, six patients. If they cannot find within the 1,000 patients they are seeing these five, six patients that are going to be prescribed and then scheduled and then treated, then they're not a good match for us.

If they can't find these patients and they prescribe them, but they're not doing a great job of scheduling them and having them show up and get treated, we have a work cut out for us, and we work with them, whether it's with the owner of the office to point out that they have the patients, they have prescribed them, but they have not followed up with them, or it's with the XTRAC champion in the office, or it could be with the front office that doesn't schedule or the back office that doesn't do the right job in billing. I hope I answered the question, but it's a more involved answer than just that historical 10% ratio. We have a higher number of offices that are an opportunity at any given year, and we look at these offices and we remove, and then we replace.

The number you see, the number of devices you see as an actual install base at the end of the quarter is actually the composition of the two. We started with an install base, we removed some, we placed some, and that's what you see at the end of the quarter. Now, to your question, what makes a good new account for placement, that would either have to do with the historical number of patients they treat and number of patients they're going to prescribe, or in many, many cases, that account used to be an account that we have worked with that has walked away from the business and is now wanting to come back because they want another revenue source.

If it is of the second kind, we call them comebacks, and it is a much easier approach because they know the business, they understand the procedures, they understand the billing. All we need to do is to see that they actually have the right staffing in place to start it and go ahead with it. Now, in a normal stabilized year, we are going to have somewhere around 10% of removals and somewhere around 10% of placements. In 2024, and as we look into 2025, we are going to have more removals and more placements because we are removing more non-productive accounts and placing more productive accounts.

Jeremy Pearlman (Analyst)

Okay. Understood. Thank you. That's really great information. You answered my second question about how you work with the clinics to increase utilization as part of that answer. I'll hop back in the queue. Thanks again.

Dolev Rafaeli (CEO)

Thank you, Jeremy.

Operator (participant)

Seeing no further questions in the queue, this concludes our question-and-answer session. I would like to turn the conference back over to Dr. Dolev Rafaeli for any closing remarks.

Dolev Rafaeli (CEO)

I want to thank all of you for participating on today's call, for your interest in STRATA Skin Sciences. We look forward to sharing our progress on our next quarterly conference call when we report our first quarter 2025 financial results, likely in May of 2025. Thank you again and have a good day.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.