CUTR - Easy Channel Check Shows Cutera Has A Hit Product

2023-04-29 06:00:41 ET

Summary

• Cutera has sold off on major boardroom drama.
• CUTR has successfully launched AviClear, the biggest advance in acne treatment in decades.
• Aviclear could easily produce more than $150m of recurring revenue at 50%+ margins.
• A simple channel check that anyone can do shows that the product is likely to produce a large amount of revenue.
• The combination of boardroom drama and the successful launch make CUTR extremely attractive.

Cutera (CUTR) has a major product, AviClear, which could become the market leader in the acne market. It is easy to do a simple channel check that shows that the product is generally being used by >3 patients at each office, and that means that the stock is very undervalued at the current $500m enterprise value.

Based on the location finder , AviClear appears to have fulfilled its goal of adding 200-300 offices in the first quarter, in addition to the over 600 stated in the Q4 call, the total is almost 1,000 currently. Within 100 miles of New York City for example there are 79 offices on the location finder, while Toronto has 21. There are none in Australia or Japan yet but more are being added all the time.

By simply calling 10 offices from that location finder and asking them how long they have had the AviClear device and how many patients they have treated, one will find that offices are generally treating more than 3 patients per month on average.

At $1500 for a course of treatment, 2023 revenue for AviClear is likely to be in the neighborhood of 1000*40*1500 = $60m. Margins should be very high as the cost to CUTR for each additional treatment is close to 0. CUTR also charges a rental fee of $5000 per machine which adds ~$5m to 2023 AviClear revenue.

2024 should also show enormous growth over 2023 as the company actually expects to achieve 4000+ placements 4 years from now. The average number of placements for 2024 is likely to be 2000+.

In short, CUTR, at this moment, has a $50m+ recurring revenue stream with over 50 % margins growing over 50 % per year. Recurring revenue streams of this nature are generally valued at $500m-$1B depending on what the revenue ramp looks like, yet the entire EV of CUTR is currently $500m. Next year the high growth recurring revenue stream from AviClear will be ~$100m and likely worth $750+ on its own.

Stock Decline And Boardroom Drama

How did the stock get to this point ? CUTR missed 4th Quarter earnings, largely because of a $15m drag from currency headwinds but also because the sales team was distracted from their other business lines by demand for AviClear, which does not generate a large amount of revenue on the initial sale, instead most of the revenue comes from usage. After this miss, CUTR delayed the filing of their 10-K, causing the stock to drift down further. Then a major boardroom drama resulted in a string of ominous press releases (eg. "CUTR Directors J. Daniel Plants and David Mowry Take Legal Action to Ensure Shareholders Have a Say in Composition of CUTR's Board and Selection of its Next CEO"). These events taken together dropped the stock 30%+.

The boardroom drama is largely a distraction from what matters, and that is AviClear adoption, but one useful thing it does indicate is that there are a lot of executives that are eager to lead this business, to the point that they put their reputation on the line by publicly fighting to do so. This is a bullish sign for the business.

Things On Track

Despite the drama, things are largely on track, Voce Capital said so in a filing made April 24th:

Since Sheila Hopkins stepped into the Interim CEO role on April 12, she has kept us apprised of her observations and interactions. It is clear from her engagement that each and every one of you believes in this company and our mission. We are fortunate to have a world-class, talented team in all of you.

We remain very optimistic about our future and our ability to meet the shifting demands of our customers while positioning CUTR for continued success in a large and fast-growing market. With your continued support and commitment, we are confident that we are positioned to realize the many opportunities ahead.

Withdrawal of Outlook is Not a Negative

One factor that may be suppressing the stock is the company withdrew 2023 guidance when they issued the press release firing Plants and Mowry. This may be part of the share price decline. Based on the channel check above the cause for pulling guidance is likely not related to the fundamentals but has more to do with the act of removing the CEO and chairman. InMode has also indicated it has a strong outlook.

How AviClear Adoption Compares to Company Guidance

One thing that came out in the boardroom drama is that the board thought the issued guidance for 2023 was conservative. This seems plausible because the AviClear guidance for 2022 turned out to be very conservative. The stated guidance for 2022 was:

we remain committed to our plan of adding an additional 200 active AviClear devices in the period and increasing the active installed base to greater than 360 units exiting fiscal year 2022.

Yet actually placements exceeded 600 units.

For 2023, the company has stated:

We expect to sustain a placement rate of 200 to 300 AviClear devices per quarter and exit 2023 and with greater than 1,500 AviClear devices in our active installed base.

So if they were to exceed their 2023 guidance anywhere near the degree they exceeded the 2022 guidance, end of year placements would be close to 2000.

Based on the location finder and the stated guidance, it appears is likely that currently the company is approaching 1000 placements, and adding an additional 750 over the remaining three quarters would get to about 1700 or so.

Global Distribution

CUTR has a global footprint with a substantial presence in Canada, Australia, Japan, and Europe. Of these, Europe is the only one on which AviClear is not yet marketable. AviClear is already being adopted widely by practices in Canada and should soon begin to be widely adopted in Australia and Japan. The total number of people suffering from acne in the countries in which CUTR will have rolled out to by the end of 2023 should be 90+ million, 50 % larger than the United States alone. AviClear should also be marketed in Europe at some point in the relatively near future.

AviClear vs Accutane

Currently the most powerful treatment for acne is Accutane, which is an orally administered pharmaceutical with somewhat serious side effects. Accutane needs to be taken for 4-6 months, which results in a permanent or semi-permanent shrinking of the sebaceous glands, and clearance of acne in most people. Accutane is cheaper than AviClear, but in every other way is worse as it has dangerous effects, include mildly negative side effects in general , but also more serious liver and cholesterol side effects a small percentage of the time, and a high rate of birth defects if a woman is to become pregnant while taking Accutane. To address these issues, anyone taking accutane is required to do bloodwork monthly and women are required to get two negative pregnancy tests before starting and stay on birth control the entire time of the treatment. Daily pills are also required. Add all this together and Accutane is a slightly dangerous hassle. Nonetheless, over 400,000 people take Accutane in the US alone.

AviClear is comparable to Accutane in effectiveness, and a very large portion of these people are likely to consider AviClear instead. Most importantly, because of its side effects Accutane is generally only prescribed for moderate to severe Acne. Whereas AviClear can address all forms of acne.

Because of the favorable comparison to Accutane, it would be very surprising if less than 100,000 people use AviClear per year on a global basis in the long term, which would result in over $150m high margin revenue to CUTR.

Industry Background

The market for laser and RF based aesthetic devices is large and has grown substantially over the past five years. The increased effectiveness of technology to do things like improve skin quality via collagen production, remove surface fat, and other things is significant. The key point is that this industry is benefiting from technological improvements and revenue is growing accordingly.

Another player in this space is InMode ( INMD ). InMode trades around 7x EV/Revenue, which is much higher than CUTR which trades around 2x EV/Revenue. CUTR has historically been one of the weaker, less well run players in the industry. However, it has systematically improved its operations after Daniel Plants became Chairman via an activist campaign in 2016. Having systematically improved operations incrementally for the last seven years, CUTR now has taken it a step further and produced a company making a major hit product.

Rest of the Company Likely to Shortly Exceed $100m ARR

The non-AviClear portion of CUTR's business is also valuable on its own. In 2023 it will likely for the first time exceed $100m in high margin recurring revenue. Thus far the attractiveness of this business has been obscured by major investment in AviClear and significant foreign currency headwinds which held revenue back by $15.1 million in 2022.

Possible Short Squeeze

Although shares short decreased by 10 % in the most recent data , CUTR still has a high short interest, likely due to hedging of the large convertible debt transactions they did in 2023 and possibly due to the boardroom drama as well. At this price the board room drama should be priced in. As the market wakes up to the successful ramp that AviClear is having, there is a large chance of a major short squeeze in CUTR stock. The company currently is seeing daily volume around 400k, and that the number of shares short as of the most recent report is more than ten times that, so the potential for a short squeeze is large.

Valuation

CUTR should likely be valued at least 15x earnings when AviClear is semi-adopted but still growing in 2025. In 2025 AviClear revenue should be over $136m. That's calculated from at least 2000 practices using the product on average. That's very conservative because it's likely they will end 2023 just below 2000.

If each practice sees on average 3.5 patients per month, CUTR will treat 84000 total patients per year, and earn $126m in treatment revenue. AviClear also earns a $5000 yearly fee per practice, or an additional $10m.

At 50 % margins that would be $65m of EBITDA, approximately $50m after interest and taxes.

This would put the market cap around $750m for 60%+ upside, valuing only the AviClear earnings at 15x. It is also likely that the large footprint created by AviClear will provide cross selling opportunities with the rest of the business, which on its own is likely to surpass $100m in recurring revenue in 2023. In short, there is a solid, conservative case, for CUTR to be valued 60 % higher than it is currently value, based on the existing AviClear adoption and number of patients using it per month at each practice.

Risks

The biggest risk is that another, better treatment comes out for Acne. The risk of this is low in the near and medium term but possible in the long term. The good news is that AviClear probably has the right approach because it targets the sebaceous glands which are the root cause of acne, so they at least are very unlikely to lose to a technology that has a different approach. It's also very possible that they can improve AviClear fast enough such that they improve faster than any future competition does.

There is also a risk from a reduction in consumer discretionary spending. This is inevitable in the aesthetic industry, but something like acne is probably one of the least discretionary items in aesthetics so overall this seems to be a tolerable risk.

Conclusion

The combination of an extremely rare degree of boardroom drama and a successful launch of the biggest improvement in acne treatment in decades has caused a substantial opportunity to buy CUTR. The value of the AviClear product will likely prove to be $1B or more over the long term because Cutera is the first mover globally by a large margin with no one anywhere close, and will have a large installed base that they can iterate and improve on for years before there is any competition. While the stock has fallen dramatically over the past year, the launch appears to be going well and calling dermatologist offices will show that they are generally treating at least three patients per month. Taken together, all of this means that CUTR should be trading at least 25 % above the current share price but likely higher than that.

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