CUTR - Cutera: A Mix Of Positives And Negatives

2023-03-07 10:42:35 ET

Summary

• The key negatives for Cutera, Inc. are that its 2023 revenue guidance was below expectations, and the future performance of its aesthetic solutions might be affected by the weak economic environment.
• Cutera's key positives relate to the strong revenue growth momentum for AviClear and the favorable impact of AviClear's increased top line contribution on the company's future profitability.
• My rating for Cutera is a Hold after considering both the positive and negative factors for the stock.

Elevator Pitch

I award a Hold investment rating to Cutera, Inc. ( CUTR ) stock. I like the intermediate term revenue growth and profitability improvement potential of CUTR supported by its new growth engine, AviClear. But I am concerned about the risks of Cutera registering below-expectations results in the near term as a result of weak economic conditions. Taking into account the positives and negatives for the name, I determine that a Hold rating for Cutera, Inc. is fair.

Company Description

Cutera calls itself a "provider of aesthetic and dermatology solutions for practitioners" in the company's press releases .

CUTR's Historical And Planned Product Launches

Cutera's Focus In Terms Of Research & Development

CUTR derived 65%, 17%, 9%, 7% and 2% of its 2022 revenue from capital equipment, skincare solutions, services, consumables and AviClear (acne treatment product), respectively. In the most recent quarter, North America and foreign markets accounted for 51% and 49% of Cutera's top line, respectively.

Both CUTR's Quarterly Performance And Near-Term Outlook Were Disappointing

Cutera, Inc.'s top line expansion slowed considerably from +31% YoY in Q4 2022 and +10% YoY in Q3 2022 to +3% YoY for Q4 2022. The actual fourth quarter revenue for CUTR amounting to $67.4 million fell short of the Wall Street analysts' consensus sales forecast of $69.5 million by -3% .

The Q4 revenue miss for CUTR was mainly attributable to a decrease in consumables sales. Revenue generated from consumables dropped by -22% YoY to $4.2 million in the recent quarter. Cutera explained at the company's Q4 2022 results briefing that the lower consumables revenue was the "result of not doing as many promotions" because of "a staffing issue and a capacity issue."

CUTR's most recent quarterly net loss of -$0.40 per share was wider than the sell-side's earlier expectations of a Q4 2022 net loss per share of -$0.38. Also, the company's net loss per share for the last quarter of 2021 was a narrower -$0.22.

Cutera noted in its Q4 2022 financial results press release that its operating costs rose by +10% YoY in the recent quarter due to "$7.6 million in AviClear spending and $1.5 million in ERP (Enterprise Resource Planning) implementation expenses." In Q4 2022, CUTR incurred additional costs relating to the introduction of AviClear across the country in November 2022 .

Moving ahead, CUTR expects to achieve $284.5 million in sales for this year as per the mid-point of the company's financial guidance, which is -5% lower than the prior Wall Street consensus top line projection of $301 million (source: S&P Capital IQ ). Furthermore, Cutera's operating profitability guidance for 2023 is also pretty modest taking into account its expectations of generating approximately a couple of million dollars in EBITDA this year.

CUTR acknowledged at its Q4 2022 earnings briefing that "macroeconomic headwinds are indeed present and that these will have an impact on our 2023 results." Considering the company's focus on aesthetic products which tend to be discretionary in nature, it is reasonable to assume that the weak economy will affect its near-term financial performance in a negative manner.

Solid Medium Term Prospects Driven By AviClear

As per the consensus financial forecasts obtained from S&P Capital IQ , the analysts are predicting that Cutera will be able to deliver a reasonably strong revenue CAGR of +16% for the FY 2023-2025 period and see its EBITDA margin improve from 1.4% in 2023 to 23.8% for 2025.

The increased revenue contribution from AviClear is expected to be the key driver of faster top line growth and operating margin expansion for CUTR.

AviClear just represented 1.8% of Cutera's revenue for the fourth quarter of the previous year following its nationwide launch in November 2022, so there is lots of room for AviClear to grow and account for a larger proportion of CUTR's top line in the years ahead. Notably, CUTR's actual AviClear device placements for 2022 exceeded 600 units, and this was way better than the company's prior guidance of 360 units. CUTR refers to AviClear as "the first and original FDA cleared laser treatment for mild to severe acne," and the numbers suggest that AviClear is gaining significant traction. Looking forward, Cutera is guiding for as much as 1,500 AviClear device placements in 2023 based on the top end of its guidance.

The robust growth of AviClear should also result in a substantial improvement in profitability for the company as a whole. At its most recent quarterly earnings call, Cutera highlighted that growing AviClear sales will translate into an "expansion of gross margins" and "increased positive impact on EBITDA." While CUTR hasn't disclosed the actual profitability of AviClear, it is clear from the management's comments that AviClear boasts relatively higher margins than the company's other products and services.

Concluding Thoughts

There are both pros and cons associated with a potential investment in Cutera, Inc., which is why I have decided to rate Cutera as a Hold. On the negative side of things, CUTR's results in the short term could potentially be hurt by a challenging economic environment. On the positive side of things, Cutera, Inc. has the potential to achieve accelerated top line expansion and higher profit margins in the future, assuming that its new product AviClear is successful.

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