Hello, and welcome to the BeautyHealth First Quarter 2024 Earnings Conference Call. [Operator Instructions] I will now turn the call over to your host, Norberto Aja, Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to BeautyHealth Company's 2024 First Quarter Conference Call. We will start in just a minute with management's comments and your questions. But before doing so, let me take a minute to read the safe harbor language. Management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements are based on expectations that 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 a further discussion of risks related to our business, see the company's filings with the SEC. This call will present non-GAAP financial measures. Reconciliation of these non-GAAP measures to the most comparable GAAP measures are to be found in the earnings press release furnished to the SEC and available on our website. Joining me on the call today is BeautyHealth's Chief Executive Officer, Marla Beck, along with Chief Financial Officer, Mike Monahan. Following management's prepared remarks, we will open the call for a question-and-answer session. With that, I would now like to turn the call over to our CEO, Marla Beck. Please go ahead, Marla.

Thank you, Norberto. Good afternoon, everyone, and thank you for joining us. We are pleased to be with you today to review BeautyHealth's first quarter results and the progress we are making on our business transformation. As discussed on our last call, we continue to drive towards rebuilding and restoring confidence with a focus on laying the foundation for future growth. While this transformation will take time, I am encouraged by the progress we are making towards our 3 strategic priorities, sales excellence, operational excellence and financial discipline. Our teams are driven and focused, and I'm excited by the long-term potential of BeautyHealth. Turning to our first quarter results, we had a solid start to 2024. First quarter revenues came in above our guidance midpoint with healthy consumable sales. Profitability was also well ahead of expectations, driven by continued cost rationalization. While we are encouraged by our progress, there is still more work to be done, particularly on the device side of the business. We've addressed the core issues that impacted earlier versions of our Syndeo system with the release of Syndeo 3.0 last July. The quality has improved significantly. However, our field teams and customer service teams are finding some technical issues, most of which are resolvable by phone or an in-field technical visit. In the last 30 days, we have brought in a seasoned operations leader, who has decades of experience to rapidly bring our quality processing and our global production and supply chain processes up to superior levels. We will get this right over the next couple of quarters. Our number one priority is to make sure our providers have the devices they need to serve their customers and maximize their revenue stream. We are committed to this every day. We remain acutely focused on improving our…

Thank you, Marla. I will begin with a detailed review of our first quarter financial results and then provide an update on our financial guidance for 2024. Revenue came in above the midpoint of our guidance at $81.4 million, representing a 5.7% year-over-year decline. This was primarily driven by a slowdown in capital equipment sales across all regions, substantially offset by an increase in consumables. Gross margin was 59.4% versus 62.7% in the prior year period on a GAAP basis and 63.4% versus 70%, respectively, adjusting for noncash expenses and certain addbacks. The primary drivers behind the decline on a GAAP basis were higher indirect product costs, along with an increase in inventory-related charges. This led to an adjusted EBITDA of $400,000 or 0.4% of revenue versus a $500,000 loss or negative 0.6% of revenue in the first quarter of 2023. During the quarter, we saw growth in overall consumable sales across all regions, offset by lower capital equipment sales. Global equipment revenue declined 21.1% as we saw pressure across most of our end markets. While we continue to see strong interest in both our brand and products, we are seeing tightening credit and longer lags between lead generation and closing. During the quarter, we sold 1,417 systems at an average selling price of $25,253. This brings the total active machines in the field to 32,530 units versus 27,406 units at the end of Q1 2023. Consumables sales grew 11.5% to $45.6 million, continuing to demonstrate the growing interest and appeal of Hydrafacial from end consumers. From a geographical perspective, revenue in the Americas declined 5%, primarily driven by soft capital equipment sales due to credit tightening and customer caution. For the quarter, APAC revenue declined 12.1% to $12 million, while China accounted for $7.2 million of the region's revenue,…

[Operator Instructions] Our first question comes from the line of Oliver Chen from TD Cowen.

Hi, Marla and Mike. Regarding the current situation of the machines in the field, why are some problems fixable by phone versus in-person? And what's your expectation on timing of having those issues resolved? And are they surprising you or not really, this was in line with how you expected this to go? And on the revenue side, Mike, what drove -- what were the main drivers of the upside? And then a bigger picture question, you mentioned stabilizing the business. Just when you say stabilizing the business, Marla and Mike, like what are the key steps in terms of your thoughts on the overall stabilization plan? Thank you.

I will start. On Syndeo, we continue to make progress. The core issues we had with earlier versions have been addressed. Recent issues are related to noise and consistent flow and cosmetic issues. And to address this, we have a full customer and technical service team who work quickly to diagnose and potentially solve the issues over the phone. Most are resolved over the phone. And if it's not resolved over the phone, we send a member of our field service team to visit the provider in person to resolve the issue. And then regarding the future, we have recently brought in a seasoned operations leader who has decades of experience to really look at our global production and bring our processes up to the level we expect. We'll report on that in the next couple of quarters. She just joined our team. Mike, I'm going to pass to you for the remaining questions Oliver had.

Sure. The second question you asked, Oliver, was around revenue, the main drivers of it. In the first quarter, consumables was really a bright spot for us. We had nearly 12% growth on consumables on a consolidated basis, and we were able to deliver that across the regions. As we look throughout the rest of the year in terms of the guidance we provided, we further expect to continue to see that trend in terms of driving overall consumable sales. And we also expect to see improvement in new capital equipment sales, specifically in the Americas, as we get further along throughout the year. And those 2 factors, your third question around stabilizing the business, that along with really focusing on gross margin is where we're spending the majority of our time.

Our next question comes from the line of Ashley Helgans from Jefferies.

This is Sydney on for Ashley. Can you share a bit more about the health of perception from providers and where that stands? It sounds like you guys have done a lot of work there, but just wondering what feedback you're hearing, where you feel like you are kind of in that recovery of those relationships? Thank you.

Yes. I have been touring providers with our teams and talking with our teams every week. The provider is more confident than they've been in Syndeo and the progress that we're making. We even see that with our corporate accounts as they're continuing to invest in driving Hydrafacial as a gateway treatment for their other aesthetic services. The confidence is significantly up from before.

Our next question comes from the line of Allen Gong from JPMorgan.

I'll just ask kind of both of my questions upfront. You mentioned tightening credit as being a challenge to capital, but also said that you expect that to get better over the course of the year. Are you -- we're only a month or so into the quarter, but are you starting to see any improvement on that so far in May? And then when I think about your guide, the $96 million to $102 million for second quarter, and then I think about your full year target for flat to up low single digits, that does put quite a bit of your sales into the back half of the year. And given some uncertainties around the trajectory of the macro environment and your ongoing kind of remediation, what gives you confidence that you can hit that number?

Sure. This is Mike. I'll take both those questions. On the tightening of the credit, we're actively looking for different financing alternatives for our providers to make sure they have access to capital, so we're not seeing significant changes in May. However, we are working with them to make sure that we can support them going forward, and we expect to make some progress on that throughout the year. On the second question on the guidance and the revenue cadence, on a percentage basis we expect Q4 to be a higher percentage of this year's revenue than the last couple of years. The launch of Syndeo in the U.S. in 2022 and internationally in 2023, along with some of the device challenges we had last year, impacted the normal cadence of revenue in the business if you look at it historically. Historically, it has been very strong in the fourth quarter. That tends to be the largest quarter for this business prior to the last couple of years, and so we've modeled our guidance according to that as we think that from a revenue cadence, we'll start to return back to the more normal basis than we have in 2022 and 2023.

Our next question comes from the line of Susan Anderson from Canaccord Genuity.

On the system sales, I was curious how much of the weakness you thought maybe was caused by the higher interest rates versus just a general pullback in -- I mean from general pullback in spending at med spas versus just concerns around the Syndeo issues and maybe just holding off? And then also, I was curious if you have any thoughts on if providers were holding off from purchasing until the issues were fixed, or are they going to another competitor or something like that? Thanks.

I think it's a combination of both. We're seeing the higher interest rates are definitely having an overall impact on having our providers pause, some of them, and it's taking a little bit longer between the leads we generate and being able to close. I think as the combination of that, we really don't know the specifics between interest rates and some of the equipment challenges we've had in the past. But one thing I will say is we're starting to see that lessen. We don't really believe that we've seen a significant impact on kind of competitors. We think the opportunity is very strong. And that's -- as you look at our guidance for the rest of the year, when we look at our pipeline, we're really encouraged about what we believe we can deliver kind of over the near term.

Our next question comes from the line of Olivia Tong from Raymond James.

I wanted to dig into the Q2 guide a little bit more. You mentioned the international Syndeo launch creating a tougher Q2 comp. Can you tell us how much of a contribution it was last year? And then you talked a little bit about your usual seasonality. This is a smaller sequential lift when we look at Q2 versus Q1 and implies that Q2 sales are lower even on a 2-year stack. Whereas it did improve in Q1. Could you just talk a little bit more, peel back the layers of the onion on what's embedded in your expectations? Perhaps any of the takeaways that you've had from the trade shows year-to-date that helped influence that Q2 view? Thank you.

Sure. Last year, our total revenue was $117 million on a consolidated basis in the second quarter. We had really strong, a really strong quarter in APAC and EMEA. They grew -- APAC overall equipment revenue grew substantially because of the launch and so did EMEA, which was largely impacted -- largely had an impact on the second quarter. When you look at this year in terms of the guide, we're obviously comping that internationally. In the Americas, what's putting a little bit of pressure is really on the capital equipment side. Again, the 2 things that we're seeing are take a little bit longer to close that sales pipeline. The way we modeled it in was in our expectation that we'll be able to close the pipeline a little bit later in the year, and we'll still see a little bit of softness in the second quarter. We modeled capital equipment sales to be down year-over-year in the Americas, and that's overall impacting the general guide.

Our next question comes from the line of Margaret Kaczor from William Blair.

This is Macauley on for Margaret. Last quarter, you mentioned some ordering disruptions, especially associated with some of those international distributors. I'm just wondering if we can get an update on how those ordering patterns have normalized, if they have normalized, specifically APAC as you called out. And did you see any change in the quarter? Or was there any catch-up maybe this quarter compared to the last quarters just as some of those Syndeo improvements were made over the course?

I think a large portion of the timing that we saw was on the distributor side of the business for consumables in Q4, specifically in APAC. We're starting to see that normalize in the first quarter, so there wasn't anything significant that impacted kind of the first quarter in terms of overall timing.

Our next question comes from the line of Jon Block from Stifel.

This is Joe Federico on for Jon. Mike, I guess to start, maybe just following up on one of the previous questions on kind of the back half of the year that was on sales, but I'll try it from an EBITDA perspective. The 2Q guidance implies that the first half EBITDA margin is around 3%. Full year guidance implies that basically the second half shakes out around 16%. Can you give us any more color on kind of the ramp there on the EBITDA margin? It sounds like a lot for accelerating consumable sales, so any detail on some of the other moving parts would be helpful. Thanks.

A lot of the expectation is as we grow revenue, we'll be able to manage the OpEx. And you saw we were able to do that in Q1. We're actively managing our operating expenses and expect to continue to do that and potentially improve throughout the year. And so what's really driving the EBITDA, if you -- as you grow revenues and hold or potentially slightly improve a little bit on the gross margin, as we're able to manage the operating expenses, you'll see that our expectation is that drops down to adjusted EBITDA.

[Operator Instructions] Our next question comes from the line of Korinne Wolfmeyer from Piper Sandler.

I'd like to ask on the utilization. I know you had some positive commentary on consumables, but it does look like overall utilization was a bit weaker. We're also hearing about from some other peers that there's some -- might be some weaker end consumer demand in aesthetics. And then you're also -- it looks like the marketing spend is coming down. What gives you confidence in the consumables being able to accelerate throughout the remainder of the year with all of these pressures? Thanks.

Thank you for the question. Consumables grew nearly 12% in the first quarter year-over-year, and our installed base has significantly grown. A bright spot is really our corporate accounts. They're expanding and focusing on marketing Hydrafacial which is adding to our utilization. Additionally, we see a pretty long-term opportunity as we expand our innovation pipeline for '25 and '26. The other thing is, we do need to and will invest in additional support, training and marketing activations to support our providers. We think we can be highly efficient in doing this. And we have the opportunity to focus on certain providers to support them in driving utilization. As we dig into the back half of the year, we'll be investing deeply and really supporting our providers from a resource allocation perspective and a time and attention perspective.

All right. Those are all of our questions in the queue. I would now like to turn the call back over to Marla Beck for closing remarks.

Thank you all for joining us today. Our progress is being driven by our passionate team and community. I want to thank the employees of BeautyHealth for their continued hard work and dedication, our providers for their loyalty, and our partners for their trust and collaboration. I am incredibly confident and excited about the future of BeautyHealth given our significant addressable market, compelling brand equity, deep provider partnerships and presence of the right team to execute and drive our success. Thank you.

This concludes today's call. Thank you for attending.