So we're gonna get going. Yep, there we go. Thank you. Jon Block with Stifel. We've got Cutera with us, Taylor Harris, CEO and director, and Greg Barker, Vice President of FP&A and Investor Relations. Thanks, guys, for joining us, and welcome. Thank you. Thanks for having us. Fireside Format, guys, if you have any questions, let me know, and we'll get after it. I'm gonna jump right into things, Taylor. You know, I'll call it, like, the task at hand. On the earnings call, you said that since taking the job, you're convinced the company has the right products and team, but macro's been more pervasive, and the foundation of the company's been more fragile than you anticipated initially. I think that's sort of how you framed the scenario. Talk to us about what the company's doing to make Cutera's foundation more secure, and how long that will take. I'm gonna beat up a little bit how long that will take, because, you know, in speaking with investors, there's clearly just a cash and a burn rate that's front and center with investors. Sure. All right. Well, first of all, Jon's gonna force me to make forward-looking statements, so let me just disclose that and point you to our filings, for our forward-looking statement language. But thanks for having us here. So yeah, I would probably rephrase it. I think the foundation at Cutera is largely solid, and in that, I mean, we've got a 25-year-old company that was founded by engineers who were focused on making great products, great technology. And so the technology foundation at Cutera, I believe, is great. And we've got a great team of people who are committed and want the company to succeed. What had happened was there were, I think, some cracks that formed underneath that, and that were that made it challenging for us to grow off of. So specifically, we had some operational challenges, and we had a business model challenge with AviClear. So, what that led to was a misplaced focus on getting AviClear capital into the field, and not enough focus on building a procedure base for what can be a great new treatment for acne, and I really do believe it can be. And in that rush, we geared up on the infrastructure front to support that, so there was an expense build that occurred, and then also there was a flooding of the engines, really across all functions, that probably just put too much of a stress on that infrastructure. And that led to some operational challenges with product reliability and service levels is probably where it manifested the most clearly. But we also just developed some inventory management problems, some supply-demand mismatch. We got late on some critical parts that were required for supplying customer service needs and then had too much in other areas. Okay, so- A lot there, so. Yeah, yeah. So as we think about priorities, we'll shift this to timeline, there's a set of operational improvements, kind of getting back to operational excellence, that the team has a plan for and is already set in motion. I'll come back to that. And then we're coming back to market with an enhanced AviClear offering, and I think those are the two most important shifts in what we're doing. And then layered on top of that, of course, is just a focus on returning the company to profitability, to cash flow, breakeven. And the thought is, you know, the third quarter burn around $40-$45, the fourth quarter burn, something similar. Maybe that goes into the first quarter of 2024. You talked on the earnings call about the burn getting better in 2Q 2024. You know, how much better at that point in time, right? Because then the, the AviClear business model, you fully flipped. Right. Right? Where you're selling it, you're getting some cash up front, and the base business, you hope to be in a little bit better shape. Yep. The payables in a different place. So- Yeah You know, how do we think about that burn stepping down, call it 2Q-2024 and beyond? Sure. I think it should be pretty, pretty meaningful, starting at that point. And just to put a rough frame on it, so of the burn that we had in the third quarter, about half of it was related to working capital movements, and the biggest component of that for us is buildup of inventory, primarily for AviClear, which is our new treatment for acne, but also in the core, the rest of our business, largely for service need. Okay, now, AviClear is the biggest component here, and so we will, in the year and then in the first quarter of next year, with a significant balance sheet asset of AviClear. And this was an asset that the company used to be using in a rental model in the field. So company owns the capital, company puts it out into the field at a very low cost of ownership for the customer. It's a $5,000 annual lease. And then there was a sharing of the procedural economics as acne patients were treated. We're now shifting to a model where we're going to be... Well, for existing customers, we will allow them to stay on the model, if they wanna stay on the lease model. But we're also gonna offer the ability to convert into a purchase model, and then as we go to new customers, we're gonna be offering the purchase model. And we're gonna be able to do this with already a stockpile of inventory of AviClear machines and components that we don't need to build up. So we're gonna be converting an asset into cash as we move forward with AviClear. We think the AviClear technology, the clinical procedure, is sound. There are customers, doctors, getting great results with AviClear, but they haven't loved the business model. And I think the biggest part of the frustration there has been the high procedural economic cut that the company was trying to take. And so for our customers to feel really incentivized to drive growth of the procedure, they were asking for a different business model. So that's the, I think, the primary kind of big picture reason that we see cash flow dynamics being able to change. Okay, that's very helpful, and I'm certainly a fan of the new business model for AviClear, and it seemed like it was very necessary from a cash flow perspective. Let's explore the economics. So you were going from, you know, call it $500 or $1,500 per patient- Mm-hmm Right? 'Cause three treatments per patient to $250. So let's sort of say it's $750 for three treatments, and that doc is charging $3,000. This is more, you know, 20%, 25% economics rather than 50% economics. It reminds me a little bit of like Zeltiq-esque in that way. That's right. Is that gonna be, you believe, well-received from the docs? Will they feel incentivized of, "Look, this patient's coming back three times. That's a commitment, but the economics are in a better place, a better balance that allows me to get more aggressive here? We think so, absolutely. I think that there's two components of it. One is simply the reduced cost to the customer each time they're doing a treatment. The second, though, is the flexibility to be able to operate on a per-treatment basis as opposed to a per patient. Yeah. So previously, the model was $1,500 cost per patient, and there would be maybe some cases of discounting from that. And the rationale behind that was that the clinical study had been done with three treatments per patient, and we do think that three treatments for the vast majority of patients is the right number. But there are times when a doctor may wanna do a touch-up treatment. There may be times when a patient is home for the summer and goes to college, and is at college for the second or third treatment. And so, the flexibility of how to manage a patient was taken away with the original model. Mm. I think it works on both of those things. Yeah, we picked some of that up in the checks. I mean, you're sort of like, "Hey, you know, Mrs. Smith comes in and pays $3,000, and then she wants a touch-up for her son or daughter. How do I say no? Because if I don't, I'm have to undergo another three treatments, another $3,000." So different business model, a little bit more flexible, so to say. Let's walk it back to where you currently sit. So you said, you know, the AviClear number of devices out there were a little over 1,200, 1,250. Mm-hmm. You said maybe half of those come back. Okay, and then if we're dealing with 600 or 700 that are still out in the field, do you have, you know, thoughts on how many of those then opt to go ahead and make that purchase upfront? And how many may stay on that call legacy business model? Sure. I don't know in the near term, and what I would say is, we wanna be measured about this. So for sure, if someone already is having good practice dynamics, they're getting good patient flow through, then it will likely make sense for them from the get-go to convert, to own it, and to have reduced economics. To make more money long term. They know the model works. Yep. It's gonna map out on a spreadsheet. For other people, they may be relatively early in their AviClear journey, or they may have gotten it and treated a couple patients and not yet have their mind around, "Hey, how's this gonna fit into my practice long term?" So, we're not gonna try to force something to happen too soon. And in fact, with that customer, we'd rather we're gonna let the customer be on the journey they wanna be on, but our goal will be to help get them to a point where they see, "Oh yeah, this is this device works in my practice," and then convert at some later point in time. Okay. So, you know, I think the nice thing about this for us, as long as we have the patience to not try to force everything to happen quarter one, quarter two of the new model launch, is we can grow our support and sort of learn, learn as we go, as customers convert, and not flood the engines once again. So we're gonna do it right with each customer. Okay, and let's just go through some numbers. So you know, what I just mentioned in terms of systems coming back, I think you had commitments on boxes you had to buy for AviClear. When we get to the middle of 2024, like you said, that sort of flushes out and normalizes boxes coming back. You've got enough AviClear inventory at that point in time for two years? two and a half years? Could... Yeah, could be. We will, so one thing that we, we did mention on the call, we have 1,250 machines in the field right now. It could be that 600 of those, or half, roughly half of those, up to, come back. So we'll definitely have that. And then component inventory, we'll, we could easily have another 1,500 or so in component inventory that could be, with minimal cash costs, converted into finished goods. So we could have close to a couple thousand units that we then deploy into the field over time. So that's sort of my next question. Maybe you just gave me a little bit of a window to back into it. Do I think about 2,000 units as two years of inventory? Like- Well, we're not ready to— Well, let's explore that a little bit, though. I think there's a huge question in terms of the opportunity going forward, right? Yeah. You got the $1,250, you're gonna clean that up. What comes back? Who decides to purchase upfront? You'll work your way through that. But, you know, when we think about this going forward, the interest among new users for the device, right? The list is gonna be $100,000. The realized ASP will be lower than that. I was trying to look at analogs, right? I mean, are there any number of truSculpts or Secrets that you can, can provide? I went back, and not to beat this up, Zeltiq, before it really took off, was selling, before it took off, 500-600 devices globally per year, and the ASP was $75,000-$80,000, right? Which seems like that's where the ASP might fall, you know, somewhere in there. What can you point us to in terms of examples or reference for the number of new Avi's going out once you really push on the business model? Well, we're just not ready to point to an analog to say, this is really the paradigm that you should be thinking about. However, I would say that there are analogs that would get you to, you know, the numbers that you just mentioned. There are thousands of dermatology offices across the country that would be good homes, we think, for an AviClear. So we think the market is clearly there. Over time, we're gonna be adding functionality to AviClear. In other words, right now, it's a treatment for facial acne. There are other indications that we could imagine over time. So Different hand pieces, different parts of the body. Yeah, exactly. So, I think that it will grow over time, as you think, some of these analogs are devices that might have broader applicability than Avi does right now. And so that's why I hesitate to give you a, "This is the way you should think about 2024." But over time, we think that this is gonna be a highly functional device, and we're first to market with it right now. Okay, and, you know, I wanna be respectful with this next question. I love when I sort of throw that out there in advance, but is there damage done to this launch, right? This was not well executed by the prior management team at all, and there was a lot of overpromising and under-delivering, and there was isotretinoin equivalency, and, it was a bad approach, simply put. Sorry, those are my words. And so, you know, clearly you've got derms talking, you've got med spas. These boxes went in areas where they shouldn't have gone in the first place and may have alienated other doctors along the way, right? Why are you taking acne out of the core derm channel? Did that go on? Is that irreparable? I mean, you're, you know, running this company now. Is that going to impair the opportunity going forward? So I don't think that there's irreparable damage. I do think that there was frustration with elements of the way the launch was executed. I think there is a desire for among the dermatology community for us to take more of a partnership approach with them. And for sure we all learned that you've got to deliver the right set of expectations, both to a customer and to a patient, for how acne clearance is gonna work over time. But the good news is the results have been really, really good. The data that we do have supports a very safe and effective procedure. So the clinical data on file is really good. The results in the real-world experience are tracking. We have customers who are, you know, feel really good about the way AviClear has been integrated into their work. So I think there's enough goodwill out there with respect to the product, and there's a desire for it to be done the right way. Okay. So that's where we are. One last question on Avi, and then I wanna pivot to the base business. But how do we think about the flow through the P&L? So in other words, again, to go back to the $1,250, you get half back, so you're giving them the opportunity to purchase. You're launching this. So there's, like, pent-up demand upfront. Do we sort of start high, go low, and then go back high in terms of the units going out the door? Because in the first two quarters, you're arguably be able to draw down on those 600 practices and deciding if they wanna buy, right? So does it sort of do something like that in a way? So I don't think we're gonna see a spike effect for the reason that I mentioned earlier, partly because of just the way we're gonna be approaching the market and going in flights, in stages- Slower setting. Make sure we... if, as we convert accounts, that we're providing the right level of support. And then it may be that at the customer level, they're not ready to convert in the first half of the year, and then they are at some point down the road. So, my best guess right now is it's gonna be more measured. Okay. Maybe we can pivot to, like, the need to stabilize and free cash flow. And so I've followed Cutera for a number of years, but I monitored them for much longer, dabbling around aesthetics. And so I went back, and I pulled the free cash flow of the company from 2011 to 2021, and the free cash flow was never burned more than $20 million a year and never made more than $20 million a year during that decade, and it was, like, pretty tight during that time. AviClear is approved in March 2022. Cutera pursues a novel business model. The burn was $90 million in 2022 and likely $180 million this year. So never outside $20 million bands and then $270 million of burn in the past 24 months. How quickly can you get it back on the rails, right? Because you always had this neat little niche, sort of profitable- Mm-hmm. flow generating base business that just went into a tailspin on the heels of Avi. How long until you get that back where it needs to be, and then you're pursuing the new Avi business model? So if we break down the- I think there are four primary factors behind the shift- Okay. -that you just mentioned. So one would have been an infrastructure build, so expense build to support the coming new model for AviClear. Second would have been the AviClear business model itself and the working capital dynamics that we've talked about. A third would have been the operational challenges that we had that then led to... That also manifested itself in a higher cost of goods, just higher cost of service, running the business. And then the fourth is, that happened, and then we had a macroeconomic downturn on the business. So I'm not gonna- In terms of timing to get out of this, on the macro, I'm not gonna make a call there. We're gonna assume, when we give our 2024 guidance, that it's the same, that we're living in the same kind of environment that we have in the second half of the year, unless we see something, you know, change significantly. But that's the going in assumption. On the infrastructure, the operating expenses, so we have taken a right-sizing action, a cost restructuring that will save over $20 million of run rate expense. It will affect close to 25% of headcount in the company. That action will start to hit the P&L at the beginning of next year. On the operations front, we've got a multifaceted plan that will deliver results, improvement in stages over time through 2024. I think the majority of that should be complete by the middle part of next year. And then the last is the AviClear business model, and we've talked about that, where there should be a pivot starting in the second quarter next year. Okay. So most of this is phased, layered, as we move through 2024. Okay. And in there, you talked, you know, you touched on the base business, and look, it's not easy out there right now. I mean, Cutera was not the only aesthetics company in the third quarter that had, you know, a difficult time. It was littered throughout the public companies. But is there anything that you guys can do to sort of fight the macro headwinds? And you know, what I mean by that is, the prior management team did talk about some new products possibly coming through the pipeline in 2024, and I think about that, you know, one of two ways. One is, in a weak macro, do you wanna roll out new products, right? Is there really the appetite and the ability to go ahead and purchase them? But on the flip side, for aesthetics, it's usually innovation that prevails, right? You got the shiny new toy, and maybe in a different macro, someone wants to differentiate their practice by going in and purchasing that. So, you know, is Cutera gonna have to sit back and just sort of take the macro and see when it unwinds, or could we see some new products introduced that might help you get more on your front foot there? Well, I would start by saying we're not... AviClear is effectively a new product, and it's a new product cycle for us in 2024, and- I know more the base, but please go ahead. Yeah, yeah. Yep. Well, but it is... I think for a company like ours in our space, at our size, it is important to focus. And so I don't wanna distract from what we think is a really attractive opportunity with a, in a product category that should be less economically sensitive. There's a lot of things that line up for AviClear to be a good, product launch for us next year. But, for the base business, we do plan to have a product line refresh in 2024. Not a new category kind of opportunity, but, there are new things for the field organization to be talking about. We just recently launched a product line and extension in our Secret franchise- Mm-hmm. -the Secret DUO. So that's still relatively early in launch mode. So yeah, there is innovation. That's part of Cutera. Okay, so Avi, the focus- Yeah ... and then sort of some refreshers, if you would- You got it. ... across the base business. The feedback that I get from investors is not an easy situation. You're in there, you've been wildly proactive, and you're making tough decisions, right? And one of those was, you know, the 25% cut to the workforce, and I think it comes to $20 million in annual savings. At a high level, can you talk where that's coming from in order to sort of preserve, you know, when you interface with the customer? Let's start with that, and then I'll go to the other question. So it is affecting all functions across all geographies in the company. There were a number of consolidation or efficiency opportunities that we saw, where there were teams, functions, doing similar activities, and we were able to bring those together, which was not only a cost savings opportunity, but it was just an organizational efficiency. We think we're gonna have better clarity of responsibility, ownership, single point of accountability. So there's a lot that we think will be good and energizing that comes out of this. We did in our field organization, there's a cut there, but I think, and it was actually higher on a percentage basis than corporate average. But we're in an environment where there is less. It's going to be tougher to have productivity levels what they were before, and so we think that the types of changes we made are responsive to the environment that we're in. We generally have team approaches. It's not like we backed out of any geography. So we were. Look, these are not easy decisions to make, but we were thoughtful. Okay. Maybe just to push on the balance sheet a little bit. On the last call, the third quarter call, you know, you gave some of those cash flow metrics. You also talked about with the balance sheet at hand, that will enable you to what? To turn the corner on free cash flow. Yes. Is that fair? Yep. But, you know, what was embedded from a macro perspective in that? Is it the same- Yeah ... we're assuming what's 2H 2023, we're extrapolating out to 1H 2024 when we made the comment on this cash being sufficient, it sort of embeds that macro outlook? That's correct. Yeah. So, you can't run every single scenario. Yep. We ran different scenarios. Our base case that we sort of pointed to was revenues being below $200 million next year, which that reflects is our base business or the core outside of AviClear, which has been you know took a hit, especially in the second half of 2023, and our assumption there is that doesn't rebound. And so effectively, hey, we're living in a tough climate here in the second half of the year. We assume that that persists through 2024. So you've got a down comp in the first half of next year. Sure. We, we built that in. Could it get better? Could it get worse? Yeah, both are possibilities. We, we assumed that what we're seeing now is what we're gonna see through the end of 2024. Just to lay it out for investors, like from the optics, from an optics perspective, 1H 2024 is tough for those reasons, also skincare. So the 2H 2024 year-over-year looks very different for those reasons that you just laid out. Well, yeah, so our skincare business was a distributed product line. This is in Japan only, and that contract will end and not be renewed in June of 2024. So, in the back half of 2024, we assume no contribution there. Can I push on one thing? And maybe I should have led with this or asked this much earlier in the talk track, but what's leading to such a difficult environment, right? I mean, we're dealing with 3.9% unemployment. Yeah, consumer confidence is down, but I think a lot of us, certainly I can remember, you know, GFC and unemployment hitting 9%. So what's leading to the slide we've seen in aesthetics? Is it the interest rate environment? Is it you're overweighted to the med spas, which I've been hearing, you know, have tougher access to capital? Why does it seem so acute and really coming together in the past two to three months? I think there are two issues that I feel like anecdotally, I've heard more than others, that I'll throw out there. So one, I don't think it's purely a rate thing, but I do think that access just became more challenging for people. And I think part of that was actually banks and other lending sources started to see default activity as we moved through 2023, and I think that just tightened up standards as to who would be able to qualify for financing. So I think that's part of it. Not just a rate thing, but rates are- Yeah ... rates are challenging for people. And then I also think as we move through the year, I heard customers saying, "Hey, I felt like there was summer seasonality, but then it didn't pick up the way I was expecting it to in the third quarter." And that might have quelled some enthusiasm to go buy a new machine. Yeah, I'll just end with... I mean, I've heard this in dental as well. It seems like that third quarter's always back-end weighted, like, at least internationally, right? The lights go down in July and August, and then a lot of the estimates are predicated on how quickly in the curve it comes back in September, and I just heard about a much more sort of dampened return- Yeah ... in September in aesthetics and dental. Any last-minute questions for the team at Cutera? Great. Guys, thanks very much. Appreciate it. Thank you. Thanks, Todd.