Venus Concept Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 14, 2023

There are 7 speakers on the call.

Operator

Day, ladies and gentlemen, and welcome to the Third Quarter 2023 Earnings Conference Call for Venus Concept Inc. At this time, all participants have been placed in a listen only mode. Please note that this conference call is being recorded and that the recording will be available on the company's website for replay. Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results To differ materially from those indicated, including those identified in the Risk Factors section of our most recent 10 Q and our Annual Report on Form 10 ks filed with the Securities and Exchange Commission. Such factors may be updated from time to time in our filings with the SEC, which are available on our website.

Operator

We undertake no obligation to publicly update or revise our forward looking statements as a result of new information, future events or otherwise. This call will also include references to certain financial measures that are not calculated in accordance with Generally Accepted Accounting Principles or GAAP. We generally refer to these as non GAAP financial measures. Reconciliations of those non GAAP financial measures to the most comparable measures Calculated and presented in accordance with GAAP are available in our earnings press release issued today on the Investor Relations portion of our website. I would now like to turn the call over to Mr.

Operator

Rajeev D'Silva, Chief Executive Officer of Venus Concept. Please go ahead, sir.

Speaker 1

Thank you, operator, and welcome everyone to Venus Concept's 3rd quarter 2023 earnings conference call. I'm joined on the call today by our Chief Financial Officer, Dominic Della Pena and by our President and Chief Operating Officer, Doctor. Hemant Varghese. Let me start with an agenda of what we will cover during our prepared remarks. I will begin with a brief overview of our Q3 results and notable operating developments in recent months.

Speaker 1

Then, Hemant will share an update on our recent progress And several key initiatives of our corporate turnaround strategy. Dominic will then provide you with an in-depth review of our 3rd quarter financial results And our balance sheet and financial condition at quarter end as well as a review of our 2023 financial guidance, which we reaffirmed in today's press release. Then we will open the call for your questions. With that agenda in mind, let's get started. As you would have seen in our press release issued today, in the Q3 of 2023, we delivered total revenue of $17,600,000 These results are within the range of preliminary revenue expectations we provided as part of our debt restructuring announcement on October 5.

Speaker 1

While our 3rd quarter total revenue declined on a year over year basis, the majority of that decline can be attributed to our accelerated activities in certain international markets. We were pleased to see improvements in revenue trends in the U. S. During the Q3, where sales declined modestly on a year over year basis, but increased 14% on a quarter over quarter basis in Q3. Similar to what we have discussed on our recent earnings calls, the year over year revenue decline is a direct result of the strategic initiatives we are executing Specifically, we are transitioning the company to higher quality cash revenues, exiting unprofitable direct operations in certain international markets and implementing a series of restructuring activities, which altogether are expected to enhance the cash flow profile of the business and accelerate the path to long term sustainable profitability and growth.

Speaker 1

We are pleased with the progress we have made In our strategic turnaround plan in 2023, macroeconomic headwinds continue to pressure the aesthetics sector As a whole, with higher interest rates affecting our customers' ability to finance new capital equipment purchases and deals are taking longer to close. In addition, the inflationary economy has impacted higher price procedures Such as those related to our hair business. Despite the tougher operating environment, there are early signs, Particularly in the U. S. That our efforts to reposition the business and to focus on key strategic and operational initiatives are beginning to bear fruit, including: 1st, we are pleased to report that cash system sales represented 69% of total systems and subscription sales, compared to 59% in the prior year period.

Speaker 1

Our progress on this initiative is even more evident when looking at the mix of Cash system sales in the U. S, which represented 76% of total U. S. Systems and subscription sales over the 1st 9 months of 2023 compared to 44% in the prior year period. Cash system sales to U.

Speaker 1

S. Customers increased 12% year over year in Q3 and have increased more than 40% over the 1st 9 months of 2023, which reflects the team's strong execution towards our strategic priority to transition the company to higher quality cash revenues. 2nd, our restructuring activities accelerated in certain international markets during the quarter. By way of reminder, one of our key strategic priorities in 2023 was to optimize our commercial and operational strategy in certain international markets and to reinvest those resources in higher opportunity markets to enhance the company's longer term growth and profitability profile. Our restructuring activities outside the U.

Speaker 1

S. Have included divesting our interests in smaller and less profitable markets And transitioning to partner with distributors.

Speaker 2

With the

Speaker 1

target of having our new distributor partners in key markets identified, signed up and up and running in the majority of our key international markets by early next year, we expect to be well positioned for a return to growth in 2024. We recognize that much of the work we are doing this year has yet to evidence itself in our top line results. This is largely expected when we outlined our plan earlier this year. Candidly, the macro environment Represented more of a headwind than we had contemplated. However, our team is executing well despite these unexpected challenges.

Speaker 1

Importantly, despite the softer than expected revenue results this year, the continued focus on restructuring and rightsizing the business, reducing costs And simplifying the organization are progressing well ahead of expectations. We have reduced our non GAAP operating expenses by nearly $17,000,000 over the 1st 9 months of 2023, representing a 22% reduction year over year. We have reduced our cash used in operations by 49% over the 1st 9 months of 2023 and continue to target a 50% reduction year over year for the full year 2023 period. We believe the reduction in expenses and cash used in operations to date represents the clearest evidence that we are on the right track towards our goal of enhancing the cash flow profile of the business and accelerating the path to long term sustainable profitability and growth. One other noteworthy item I wanted to discuss briefly.

Speaker 1

On October 5, We announced an agreement with City National Bank of Florida and Madryn Asset Management to restructure our existing debt obligations. As discussed on our recent earnings calls, we had been actively engaged in discussions with our key lenders to ensure the requisite runway that allows us to execute our strategic plan and successfully achieve cash flow breakeven in the second half of twenty twenty four. Restructuring our debt obligations represents the achievement of an important milestone for the company, one that reduces our total debt, Differs principal and interest payments and lowers our near term cash needs. These debt restructuring activities provide Venus Concept With additional liquidity to support the maintenance of ongoing operations, execution of our near to medium term, Strategic turnaround objectives and funding of priority investments in key R and D initiatives. We are appreciative of the valuable partnership and continued support from We look forward to continuing to engage with our lenders as we execute our strategic plan.

Speaker 1

I would now like to turn the call over to Doctor. Hemant Waggis, who will share an update on recent progress in our restructuring programs, New product pipeline initiatives and our recent company wide rebranding initiative, which marked an important inflection point in our strategic turnaround. Hamed?

Speaker 3

Thanks, Rajeev. As Rajeev described earlier, we've already made considerable progress against several key initiatives of our corporate turnaround strategy. We are executing the strategic plan we outlined at the start of the year on or ahead of expectations. Let me share a little color in key areas where we're making notable progress. First, our cost reduction and cash management initiatives designed to accelerate our Path to cash flow breakeven are progressing at or ahead of expectations.

Speaker 3

Notably, the decision we made in Q2 to target additional cost Containment initiatives, including identifying areas where we can implement phased R and D investments, has helped protect our near term cash runway and accelerate our path to cash flow breakeven in the second half of twenty twenty four. 2nd, we are encouraged by the Early momentum we are seeing as a result of the targeted programs implemented in Q2 to provide more operational flexibility to our U. S. Commercial teams, including new financial tools and transaction support needed to provide an enhanced level of customer and deal support. We continue to expect improvements to overall sales productivity and customer responsiveness in the challenging environment that many of our customers are facing.

Speaker 3

3rd, aside the U. S, our efforts to right size the business have been accelerated in recent months. We are rationalizing our international infrastructure, reducing costs and simplifying the organization with a keen focus on establishing the optimal mix of direct presence with distribution partners in key international markets around the world. Discussions are ongoing with both existing And several new distribution partners to align with our new international strategy. Multiple new distribution agreements are under negotiation, which has us on track to be substantially completed with our international repositioning by early 2024 and ready to return to growth outside the U.

Speaker 3

S. In 2024. 4th, as discussed on our Q2 call, we've advanced Certain new product pipeline projects ahead of expectations and are pleased with the significant progress made in new product introductions in recent months. After receiving FDA 510 clearance in September, we are pleased to announce the U. S.

Speaker 3

Commercial launch of our new multi application platform, The Venus Versa Pro on November 1. The Versa Pro is a next generation version of the Venus Versa, One of the company's flagship products with more than 2,200 systems sold globally since introduction. The new VersaPro provides our customers The system's ability to support 10 different applicators Addresses the growing demand for multimodal solutions in aesthetic clinics and med spas and offers a complete rejuvenation solution for addressing tone, texture and tightness. We see this as an important near term growth opportunity for new customers and an attractive upgrade opportunity for existing users. Finally, we are pleased to announce a company wide rebranding initiative in October.

Speaker 3

We introduced our new branding called Venus Aesthetic Intelligence or Venus AI. Venus AI captures Our strong commitment towards growing our global brand, focusing on emerging technologies and services, partnering with to build smarter practices and customizable treatments. The new Venus AI branding represents a forward looking approach to aesthetics innovation That is core to Venus' future aspirations. Our product portfolio will continue to evolve and deliver more than just leading device performance, but with a shift towards total practice performance, the moment the patient enters the clinic to post treatment recovery. Further, By staying connected to our customers, we can start to leverage real time data across our growing network of connected devices to uncover The meaningful business insights that define the best in practice performance and fuel the next generation of aesthetic device technologies.

Speaker 3

Customers will see Venus AI branding in all of our new product launches, including the VersaPro launch earlier this month. And importantly, with the launch of our next generation aesthetics robotics platform, AIMI, in late 2024. With that, Let me turn the call over to Dominic for a review of our Q3 financial results and balance sheet as of September 30. Dominic?

Speaker 4

Thanks, Hemant. For the avoidance of doubt, unless otherwise noted, my prepared remarks will focus on the company's reported results for the Q3 of 2023 On a GAAP basis and all growth related items are on a year over year basis. We've reported GAAP revenue of $17,600,000 down 18% year over year. The decrease in total revenue by region was driven by a 34% decrease year over year in international revenue and a 5% decrease year over year in United States revenue. Our international revenue results were impacted by the company's decision to exit 3 unprofitable direct markets in the past year, as well as the general macroeconomic headwinds that impacted customer access to capital.

Speaker 4

The decrease in total revenue by product category Was driven by a 39% decrease in lease revenue, a 20% decrease in products other revenue, A 6% decrease in products, systems revenue, partially offset by a 15% increase in services revenue. As Rajeev mentioned earlier, we continue to deliver on our stated goal of shifting our mix of systems revenue. Cash system sales represented 69% of revenue in the Q3 of 2023 compared to 59% last year. We continue to target cash system sales to represent approximately 70% of total subscription and system sales for full year 2023 compared to approximately 58% for full year 2022. Turning to a review of our 3rd quarter financial results across the rest of the P and L.

Speaker 4

Gross profit decreased $1,200,000 or 9 percent to 12,200,000 The change in gross profit was primarily due to a decrease in revenue in our international markets driven by the Accelerated exit from unprofitable direct markets. Gross margin was 69.2% of revenue compared to 62 0.1 percent of revenue for the Q3 of 2022. The change in gross margin was primarily due to significant inventory write offs In the Q3 of 2022, which should not repeat this quarter and a $800,000 foreign Exchange headwind as a result of certain foreign currencies depreciating relative to the U. S. Dollar.

Speaker 4

Excluding the inventory write offs in the Q3 of 2022 and the impact of changes in foreign exchange, 3rd quarter gross margin was 73.6% compared to 72.1 sent last year, an increase of 150 basis points year over year. On a regional level, the improved margin speaks Our continued focus on higher margin U. S. Operations. Total operating expenses decreased $5,900,000 or 24% to $18,900,000 The change in total operating expenses was driven primarily by A decrease of $2,500,000 or 26 percent in selling and marketing expenses, a decrease of 2 point $3,000,000 or 19 percent in general and administrative expenses, a decrease of $1,100,000 or 36% in research and development expenses.

Speaker 4

Q3 of 2023 GAAP general and The company's liquidity and overall ability to execute our near term strategic initiatives. The total operating loss With $6,800,000 compared to $11,400,000 in the Q3 of 2022. Net interest and other expenses were $2,500,000 compared to $3,200,000 in the Q3 of 2022. The year over year change in net interest and other expenses was driven primarily by a reduction in non cash foreign exchange loss, which was $900,000 in the Q3 of 2023 compared to a loss of $2,000,000 last year. Net loss attributable to stockholders for the Q3 of 2023 was $9,100,000 or $1.64 per share compared to $14,600,000 or $3,360 per share for the Q3 of 2022.

Speaker 4

Note, our net loss per share calculations in the current and prior year periods reflect the 1 for 15 reverse stock split in May 2023. Adjusted EBITDA loss for the Q3 of 2023 was $4,600,000 compared to $7,700,000 for the Q3 of 2022. As a reminder, we have provided a full reconciliation of our GAAP net Loss to adjusted EBITDA loss in our earnings press release. Turning to the balance sheet. As of September 30, 2023, The company had cash and cash equivalents of $4,900,000 and total debt obligations of approximately $79,000,000 compared to $11,600,000 $77,700,000 respectively as of December 31, 2022.

Speaker 4

Cash used in operations for the 3 months ended September 30 was $4,200,000 compared to $2,100,000 in the 2nd quarter and $3,900,000 used in the prior year period. The sequential increase in cash used in operations was driven almost by timing of restructuring payments and changes in 3rd party lending cycles creating delays in payment receipts. Nonetheless, we delivered another strong quarter of working capital performance with more than $2,500,000 of cash Generated from working capital in the period. Cash used in operating and investing activities during the Q3 of 2023 was Partially offset by $2,800,000 of cash from financing activities in the 3rd in the period driven by the net proceeds of $2,800,000 from the sale of senior preferred stock from the second and third tranches in the 2023 Multi tranche private placement, which occurred on July 12, 2023 September 8, 2023. Turning to a review of our guidance.

Speaker 4

As detailed in our press release, we reaffirmed our revenue guidance for the full year 2023 period, which was previously updated in our press release on October 5. The company continues to expect total revenue for the 12 months ending December 31, 2023, in the range of $80,000,000 to $82,000,000 representing a decrease in the range of approximately 15% to 20% year over year. While we are not providing formal profitability guidance for the full year 2023, We are providing the following modeling considerations for use in evaluating our outlook for 2023. First, the 20% decline in revenue at the low end of our full year guidance range continues to reflect the expectation That cash system sales represent approximately 70% of total subscription and system sales for full year 2023 compared to approximately 58% for full year 2022. Our total revenue guidance 2023 now assumes year over year headwinds to our revenue growth from lower lease revenue in favor of cash system sales of approximately $15,000,000 versus $16,000,000 previously and the impact related to the Acceleration of strategic initiatives we are implementing in our international business this year of approximately $17,000,000 compared to $8,000,000 headwind assumed at the low end of our prior guidance range.

Speaker 4

Excluding the impacts from prioritizing cash system sales And the strategic changes in certain international markets this year, we believe our total revenue growth would be 13 2nd, at the low end of our full year 2023 revenue range, We now expect gross margins of approximately 68%, up roughly 200 basis points year over year as compared to prior guidance assumptions, which called for 67% gross margins year over year in 2023. And based on better than expected expense performance in the 1st 9 months of 2023 and our updated expense assumptions for Q4, We now expect GAAP operating expenses for the full year 2023 period in the range of approximately $81,000,000 to $83,000,000 compared to our prior guidance of $87,000,000 to $89,000,000 Note, this updated GAAP operating expense guidance This range includes approximately $2,400,000 of restructuring severance and other non operating expenses compared to $1,900,000 previously. The updated GAAP operating expense guidance range also includes approximately $7,000,000 of non cash expenses, including stock Compensation, D and A and bad debt expenses compared to $9,000,000 previously. Excluding the aforementioned non operating items and non cash expenses, we now expect our cash operating expense target to be approximately 72 to $74,000,000 for 2023, down $5,000,000 from our prior guidance range.

Speaker 4

4th, We expect interest expense of approximately $6,600,000 Finally, we continue to Expect our updated total revenue guidance and supporting modeling assumptions across the P and L for 2023 to result in a reduction in our Past views from operations of more than 50% year over year. With that, operator, we will now open the call to your questions. Operator?

Operator

Thank And our first question comes from Jeff Cohen with Ladenburg Thalmann. Please proceed with your question.

Speaker 5

Hi, Rajeev, Hemith and Dalmanic. How are you?

Speaker 1

Hey, Jeff. We're doing all right. Thank you.

Speaker 4

Good. Thank you.

Speaker 5

So, I guess I'll start from what I heard latest. And, Dominic, talk a little bit about the margin and some of the assumptions you are getting to that 68% for this year and aspirationally in 2024, would you anticipate that that could be held?

Speaker 4

Yes, we're pretty comfortable with the 68% range. We're trending a little higher than that now. So there's a little bit of room for slippage in the Q4, but we're pretty confident in the 68%. And in terms of maintaining it going forward in 2024, We think somewhere between 66% 69% is probably where we will sort of target. We have a fair bit of confidence in that sort of range for 2024.

Speaker 1

Yes, Jeff, obviously, we will finalize that when we get to our guidance call early next year for 2024, but we are pleased with how the gross margins are progressing.

Speaker 5

Super. And could you talk a little bit about the Versa and The equipment that's getting out there now, are you expecting that existing users will upgrade or would you anticipate that they'd be purchasing 2nd units and in the case of upgrading, could those systems be refurbished and reused or sent elsewhere?

Speaker 3

Yes. I think both are opportunities. As we mentioned, there's a large installed base, over 2,200 units out there. There is an upgrade path On the existing systems to actually upgrade to some of the new functionality without the updated color and look, but Updated functionality, but there's also great opportunities for those that have initial system to either expand with the new system, To have the higher powered VeevaMD handpiece incorporated or to add to their practice. So It's a great installed base to build off of, but for those that have a Versa, there's also an upgrade path if they want to move to the Versa Pro.

Speaker 5

Okay, got it. That's helpful. And then lastly for us, could you talk a little bit about some of the other territories? I know that you called out completing that Some of the divestitures in the smaller markets by early 'twenty four, could you give us a sense of geography and perhaps How much of that work has concluded thus far and how much is left to do in the coming couple or few quarters?

Speaker 1

Yes, Jeff. So the geographies are focused in our EMEA region, which is primarily Europe And APAC, and within APAC, primarily in East Asia. So I would say we are probably about 80% to 90% through our various Wind down and restructuring efforts, what is a little bit off cycle is the onboarding of new Right, which is always difficult to time, and especially because we are working on making sure that we have the right Distribution partners in each of these markets. So that part of it is a little bit more fluid. We expect, a large amount of that to be done by year end, but some of it may slip into the Q1, but we would expect all of this to be concluded in the Q1 by the Q1 of 2024.

Speaker 5

Okay. That does it for us for now. Perfect. Thank you very much for taking the questions.

Speaker 1

Thanks Jeff. Thanks Jeff.

Operator

Our next question comes from Marie Thibault with BTIG. Please proceed with your question.

Speaker 6

Hey, good afternoon, everyone. You've got Sam Weiber on for Marie. Thanks for taking the questions. Maybe I can start here on the U. S.

Speaker 6

Numbers indicating it fared a bit better this quarter. I'm wondering what's driving maybe some of the resiliency there. And you mentioned some macroeconomic headwinds that are starting to impact customer access to capital. Is that something we could start seeing Elongating purchasing cycles in the U. S?

Speaker 1

So, look, I think in the U. S, we have a lot of moving parts. Obviously, there has been a large impact on the U. S. To the positive in terms of Higher quality of revenues by shifting to cash systems and subscription sales.

Speaker 1

So a lot of that is beginning to gain traction. We've also made a number of changes in our U. S. Field organization and continue to make those changes to further improve it. So those are also coming together.

Speaker 1

Now in terms of our expectations around the macroeconomic headwinds, so those have been Present for most of this year. So they're not particularly new. I think what's new is that Customer buying patterns, especially when it comes to kind of the deal cycle is becoming longer and longer because many customers are Shopping deals, which is certainly we likely saw, and as Dominic mentioned, certainly cash collections So that kind of phasing will probably continue. But obviously, those the cash that we don't collect in the 3rd We're collecting the Q4 and so on and so forth, right? So we certainly don't predict an improvement in the customer buying patterns in the 4th But we do believe that the impact and implications of those headwinds are already present in our 3rd quarter results.

Speaker 6

Okay, understood. Maybe I can use my follow-up here on Astera. I didn't catch it on the call. Just wondering an update on that platform for next year.

Speaker 3

Sure. Yes, Astera was internal name, What the actual name will be going into next year, probably still to be determined. But we have discussed, I believe, on our last call We are still planning a launch of a new body system by mid next year and that is Still planned ahead. So as we discussed, we've faced some R and D investments, but in doing that, we've actually still been able to maintain and accelerate others. So VersaPro actually was accelerated.

Speaker 3

We're able to launch that this year and the body system that we're planning on launching is still anticipated for mid next year.

Speaker 6

Okay. Sounds good. Looking forward to that. And maybe if I could just squeeze in a last clarification question. You mentioned OUS being able to grow year over year in 2024, is that on a year over year basis 2024 over 2023?

Speaker 6

Or is that just meant to mean a quarter in 'twenty four, growing over 'twenty three?

Speaker 1

We would Expect to see some growth for the full year in 2024. But as we've described, The distributor onboarding will continue into the Q1, right? So I think the trajectory of that return to growth is slightly in the more in the second half.

Speaker 6

Got it. Thanks for taking the questions.

Speaker 1

Thank you.

Operator

Our next question comes from the line of Anthony Vendetti with Maxim Group. Please proceed with your question.

Speaker 2

Thank you for taking the question. This is actually Jeremy on the line for Anthony. So just in terms of just general macro, the economic, You talked about the customers from your end, but where are your customers being in terms of patient traffic, patient volume? Is there some have they see anything a rebound in there Is that still lagging?

Speaker 1

I think as we described, where we are seeing A difference in end customer behavior is primarily for the higher price procedures. So that is primarily for us the hair So that dynamic still continues and we talked about that in the second quarter that has continued into the 3rd quarter and will likely continue into the 4th quarter as well. In terms of end customer demand for other procedures such as hair removal, body contouring, skin tightening, We are not hearing from our customers any major downward trend in those types of procedures.

Speaker 2

Okay, understood. And then just I know you mentioned on the call that Amy, you said it's still on schedule for commercialization in the second half of 2024, late 2024. So what is going to happen? Maybe just walk us on some of the steps a year out? What has to happen until the information whether that commercialization is successful?

Speaker 3

Yes. So as we've announced in previous announcements this year, we launched a medical advisory board with a top Flight group of physicians to work with us around the AAMI development and launch. We already received clearance. The majority of work that's ongoing would be clinical supporting specific indications, generating the kind of data that would actually support a Strong commercial launch at the back end of next year. So that's what you'd expect to see as well as the Ramp up preparation for manufacturing that would be occurring next year.

Speaker 3

But from a regulatory perspective, it's largely complete. It's working on specific applications and indications that will support the launch. That will be the focus.

Speaker 2

Okay, understood. Thank you for taking my

Speaker 1

questions. Thank

Operator

you. And we are currently showing no additional participants in the queue. That does conclude our conference for today. Thank you for your participation.

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