AIRS Conference Call

OPERATOR:

Greetings. Welcome to the Airtsculpt Technologies Incorporated's fourth quarter 2024 earnings call. At this time, all participants are in listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance today, please press Star zero from your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Allison Malkin with investor Relations. Allison, you may now begin.

Allison Malkin:

Good morning everyone. Thank you for joining us to discuss Aerscope Technologies results for the fourth quarter and full year 2024. Joining me on the call today are Yogi Jasnani, Chief Executive Officer and Dennis Dean, Chief Financial Officer. Before we begin, I would like to remind you that this conference call may include forward looking statements. These statements may include our future expectations regarding financial results and guidance, market opportunities and our growth risks and uncertainties that may impact these statements and could cause actual future results to differ materially from currently projected results are described in this morning's press release and the reports we will file with the sec, all of which can be found on our website@investors.aersculpt.com we undertake no obligation to revise or update any forward looking statements or information except as required by law during our call today, we will also reference certain non GAAP financial measures. We use non GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. A reconciliation of these measures can be found in our earnings release as filed this morning and in our most recent 10k, which will also be available on our website. For today's call, Yogi will begin with an overview of the fourth quarter and full year performance and share an update on our strategic priorities that we are implementing at the start of fiscal 2025. Then Dennis will review our financial results in more detail and provide our outlook. With that, I'll turn the call over to Yogi.

Yogi Jasnani:

Thank you Alison. Good morning everyone and thank you for joining today's Call. It is a pleasure to speak with you on my first earnings call as AirSculpt's Chief Executive Officer at a pivotal time for the company. While I have met many of our shareholders and analysts since joining the company in January, for those of you who don't know me, I will begin my remarks by sharing my background and why I believe my experience will enable our transformation and return to growth. I have driven profitable growth in consumer businesses spanning Fortune 500 companies to high growth private enterprises. Most relevant to Airsculpt, I was at Idle Image Medspa where I led a strategy that nearly doubled revenue and expanded margins by transforming marketing, sales and our go to market model. I was attracted to AirSculpt given its unique strengths and significant expansion opportunity. AirSculpt has a proprietary solution and a decade long track record, completing more than 70,000 successful body contouring procedures across 32 centers and we have meaningful growth potential as we operate in 11 billion total addressable market in the US alone. Since joining in January, I have spent time in our centers speaking with our teams, reviewing performance and assessing what's needed for a successful transformation. What is exciting to me is the passion for our business and our team's commitment to embrace the changes that are needed to support our return to growth. While challenges remain, I am confident we have the right plan to restore growth and increase profitability as we focus on executing better as a direct to consumer healthcare business. I will share our priorities and the initiatives we are implementing that we expect will allow us to achieve this objective. But first let me review our fourth quarter and fiscal year results. For the fourth quarter of 2024, revenue totaled $39.2 million, declining 17.7% from the 2023 fourth quarter with case volume down 16.7% from the prior year. Fourth quarter same store revenue declined 22.6% over the prior year quarter. Our fourth quarter results were in line with our revised expectations which were updated in January and reflected the challenging consumer backdrop which continues to pressure sales across the aesthetic space. However, our performance also highlights internal missteps that we must course correct, which is my highest priority. As you are aware, Airsculpt is a considered purchase with an average spend between 12 and $13,000. In this environment, it is common to see a longer time frame to convert leads into cases. Historically, our experience shows that it takes approximately 45 days to convert a lead to a case. For the second half of 2024 it was closer to 60 days. We also believe our cost saving efforts that included a reduction in marketing expense resulted in lower lead volumes which further pressured case growth. As a result, we did not experience the sales trend we typically see in Q4 and continue to experience sales pressure into Q1 of 2025. Adjusted EBITDA was $1.9 million or 4.7% of revenue versus $10.1 million or 21.2% of revenue in the fourth quarter last year, the decline in revenue accounted for approximately $6 million of the decrease, with the remaining mostly due to costs related to increased marketing and corporate costs. To support our recent de novo openings during the quarter we opened two locations, one in Birmingham, Michigan, a suburb of Detroit, and the second in White Plains, New York, giving us five new de novo centers for the year. While early these locations are also experiencing the same headwinds that are facing our mature centers. For the full year, revenues were $180.4 million and adjusted EBITDA totaled $20.7 million with adjusted EBITDA margin of 11.5%. This compares to revenues of $195.9 million and adjusted EBITDA of $43.2 million with an adjusted EBITDA margin of of 22.1% for the prior year as we begin 2025, we expect our first quarter same store sales performance to be similar to the trend we experienced in the fourth quarter as our lead volumes in late 2024 were negatively impacted by the reduction in our marketing spend associated with our second half 2024 cost saving initiatives. In addition, we continue to be pressured by the difficult macro environment. That said, as we have increased our marketing spend in 2025, we have seen an improvement in lead volumes. This, along with additional actions that are underway are expected to improve our ability to convert leads to cases as we move through the year. With that in mind, to accelerate our return to growth, we have two business imperatives. First, to enhance our culture and drive alignment on one vision with a singular voice across all aspects of our business and second, to improve our go to market strategy to drive consistent revenue growth. There are five key priorities that underpin our business imperatives. 1 marketing to drive more consumer interest and generate leads 2 sales to convert those leads to cases 3 new services to tap into more consumer demand 4 customer experience to ensure we consistently provide premium results and five is the technology that accelerates these priorities. Let me provide some perspective on each first, marketing we have focused our marketing spend on techniques that have proven successful for us in the past using a returns based approach. We are also testing new areas such as online video and other social marketing channels. This effort began in January under our new Chief Digital Officer and has already driven a significant increase in lead volume. Second Sales under our new Chief Sales Officer, we are strengthening our consultative sales model with enhanced training, improved sales processes and a greater focus on lead conversion. Early results show encouraging signs that and we expect momentum to build throughout the year. Third, New services Today we provide fat removal, fat transfer and skin tightening services. Almost always they are done within the same procedure. There is an opportunity for us to look at each of these services individually as well as introduce new services. I believe we already possess some of the best surgeons and we have an entire infrastructure of centers, nurses, managers and Salesforce. The opportunity exists to leverage our centers and people to further capture our addressable market. An example of this is skin tightening services which we plan to pilot in the second quarter. This way we tap into the complementary impact of GLP1 which has led to an increased demand for skin tightening. We believe this can be a sizable opportunity for us to expand our customer reach and generate incremental revenues with the procedure that we already do. Fourth is customer experience. We are evaluating our current customer journey and how we can make improvements to further enhance the experience. This will be an ongoing focus, especially in the back half of the year and into 2026. Lastly is the technology to accelerate these priorities. We are introducing new solutions to help our sales team close deals better and faster. For example, we plan to add new payment options that give consumers added flexibility to finance procedures. We believe this will be an effective way to drive incremental revenue and improve our margins while meeting consumer needs. Later this year, we will expand the use of our Salesforce platform to more efficiently and effectively convert leads to cases. We are also planning to test solutions that can improve the experience of our clinic teams, allowing them to spend even more time on patient care. All of these initiatives will enable us to improve our go to market strategy with a direct to consumer approach. I am convinced in airscalps ability to return to sales growth and generate strong free cash flow aided by our asset light business model. In the near term, we are pausing de novo openings to focus on improving our same center performance. As always, we will operate with rigor and adapt our strategy as needed, but our focus is clear execution and efficiency around culture and return to revenue growth. We have already begun to see an increase in our lead volume in the first quarter with the marketing changes. That said, this lead growth takes time to materialize to revenue. As I mentioned, we expect our Q1 same store revenue decline to be similar to Q4 2024 with an expected sequential improvement in quarterly sales trends as we move through the year. We expect to provide a full year outlook when we release first quarter results in May. This will give us additional time to evaluate the level of progress we are experiencing and help inform our expectation for when we expect a positive inflection in our business performance. Additionally, we have amended our credit agreement which enhances our ability to invest in the business while the transformation takes its course. Importantly, we have evaluated the various scenarios that may occur throughout the year and expect to be compliant with our bank covenants throughout 2025. Additionally, we are actively pursuing initiatives to reduce our leverage ratio to be closer to historical levels. Overall, I remain convinced that airsculpt is an attractive business with a competitive moat. I believe the best years lie ahead for airsculpt and its shareholders. And now I will turn the call over to Dennis to review our fourth quarter and fiscal year results in more detail.

Dennis Dean:

Thank you Yogi and good morning everyone. As mentioned, revenue for the quarter was 39.2 million, a 17.7% decline versus the prior year quarter with the same store revenue down 22.6%. The decline in revenue this quarter was mainly driven by lower case and lead volume due to reducing our marketing spend and the challenging consumer spending environment. The percentage of patients using financing to pay for procedures was 50%, which is below the 53% rate we have experienced in recent quarters. We remain pleased with the financing partnerships in place and are adding to our base of lenders to expand choices for prospective patients as part of our return to growth strategy. As a reminder, we receive full payment of all procedures up front. We have no recourse related to patients who finance their procedures with third party vendors. Cost of services decreased 1.1 million compared to the prior year period. However, as a percentage of revenue increased to 42.7% versus 37.5% due to our inability to flex certain fixed costs such as rent and nursing. As revenues begin to rebound, we expect this percentage to return to previous levels. Selling general and Administrative expenses declined 2.2 million in the quarter compared to the same period in fiscal 2023, primarily due to a decrease in equity based compensation. On a sequential basis, SGA decreased $2.1 million, of which $1.1 million was from equity based compensation and the remainder due to our cost reduction initiatives we initiated in the back half of 2024. Our customer acquisition cost for the quarter was $3,250 per case as compared to $2,600 in the prior year quarter. CAC has continued to be elevated beyond what we expect it to be due to the decline in our case volumes and to an increase in our cost to obtain leads. As our marketing sales efforts begin to improve our case conversion, we expect to see a reduction in our customer acquisition cost in future periods. Adjusted EBITDA was 1.9 million compared to 10.1 million for the fiscal 2023 fourth quarter driven by our revenue declines. Adjusted EBITDA margin was 4.7% compared to 21.2% in the prior year quarter. Adjusted net loss for the quarter was negative 4.5 million, or a loss of $0.08 per diluted share. For the full year, we reported revenue of 1 80.4 million, a decline of 7.9% from fiscal 2023. Adjusted EBITDA was 20.7 million for an adjusted EBITDA margin of 11.5%. This compares to adjusted EBITDA of 43.2 million, or an adjusted EBITDA margin of 22.1%. In fiscal 2023, adjusted net income was $1.1 million, or $0.02 per diluted share, compared to 16.3 million, or $0.28 per diluted share in fiscal 2023. Turning to our balance sheet, as of December 31, 2024, cash was $8.2 million. We drew down our revolving credit facility during the quarter and our gross debt outstanding was $75.8 million. Our leverage ratio was 3.0 times at year end and we are in compliance with all covenants under the terms of our credit agreement. Cash flow from operations for the year was 11.4 million compared to 24 million in fiscal 2023, and we invested approximately 9 million in 2024 in de novo facilities. In addition, as Yogi mentioned, we revised our credit agreement, relaxing various covenants with revised terms. We are confident that these new terms will provide us with the added flexibility to invest and support our return to growth. Turning to our outlook as Yogi mentioned, we are not providing a fiscal year outlook for revenue and adjusted EBITDA with expectations of introducing guidance when we report first quarter results in May. For the first quarter of fiscal 2025, we currently expect the decline in our same store revenue to be similar to the percentage decline reported in the fourth quarter of 2024. In addition, we do not expect to open De Novo centers as we continue to focus our efforts and resources on revenue growth in our existing centers and we expect to be in compliance with the terms of our credit agreement throughout the fiscal year. I will now turn the call back over to Yogi for some closing remarks.

Yogi Jasnani:

Thank you, Dennis. In summary, while we recognize that fiscal 2024 was a challenging period for our company, we remain confident in our strategy and are intently focused on enhancing our culture and improving our go to market strategy. We expect the execution of our five business priorities along with the actions to increase our liquidity and financial flexibility will enable us to return to same store sales growth. We look forward to sharing our progress with you as we move through the year. With that, I'd like to turn the call over to the operator for some questions.

OPERATOR:

Operator thank you we'll now be conducting a question and answer session. If you'd like to ask a question at this time, please press star1 on your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the cue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys to allow as many as possible to ask questions. Please ask one question and one follow up. You may then re queue for any additional questions. One moment please. For our first question, that question comes from the line of Josh Raskin with Nephron Research. Please receive your questions.

Josh Raskin:

Thanks.

Josh Raskin:

Good morning. So I certainly understand you want some time to implement the new strategy and sort of see how trends are going before you give full year guidance, but maybe if you could give a little bit more color as to what you meant in terms of sequential growth each quarter, is that a starting point of 1.9 million of EBITDA in 4Q and then there's typically a lot of seasonality. Would you expect EBITDA in 2Q to be higher and then 3Q to be higher than 2Q next year? I'm just curious to get sort of a little bit more color on what you mean by the sequential improvements.

Yogi Jasnani:

Yeah, Josh, this is Yogi. Thank you for your question. So as I mentioned, the reason for not giving guidance been in the role for a couple of months. I'm continuing to deepen my understanding of the business. The decision is not a reflection of business performance, but I want to make sure that our guidance is well informed and reflects a comprehensive view of our strategy and early execution results. Regardless of that, we do expect to see a similar seasonal trend that historically we've seen in the business with sequential improvement in particularly same store performance year over year. So we would expect Q2 to be higher than Q1 just on an absolute basis because that is historically our seasonal strength and then the rest of the year follow the similar seasonal curve.

Josh Raskin:

Okay, so you were taught the sequential improvement is same store revenue growth. It's not necessarily overall top line and certainly not ebitda. Okay, so I think I get that. And then just the follow up, can you speak to the liquidity improvement actions that you were taking? I'd be curious why you drew on the revolver during the quarter and then when you're stopping the marketing or slowing down the marketing and then you're not opening up to novos, that seems congruent with what would be driving revenue. Unless those are ROI negative. My understanding is The Denobos used to be performing better than the same store business. So I'd just be curious, the juxtaposition of all those pieces.

Dennis Dean:

Hey Josh, it's Dennis. So a couple things. One, we did, as you know, open up five centers in the back half of last year. That was pretty close to $10 million of capital used to open those. Those centers are still facing similar pressures. Some of the headwinds that our existing footprint is seeing, they are, with the exception of the one we opened late in December, they are generating positive cash flow, but just not quite to the degree as we would expect them to based on how the De Novos have historically performed.

UNKNOWN:

So we used a significant amount of.

Dennis Dean:

Capital and as Yogi mentioned in his remarks, our Q4 results were a little bit lighter than we had expected. That sort of caused some challenges there that as we were looking forward into Q1, we wanted to make sure that we didn't have to significantly reduce our marketing. So we drew down on the revolver so that we could kind of maintain our ability to market as we kind of move towards season. So that was kind of the thought process around that.

Yogi Jasnani:

And just to add to that, on your question on De Novos, we continue to be excited about the long term center opportunity and will open De Novos at the appropriate time. In the short term, my focus is on improving same center sales growth. We strongly believe that is the right place for us to be spending our energy for the long term, health for the business and as we improve those, the benefit of those activities will come into the De Novos and allow us to turbocharge De Novos when we get back to opening them.

Josh Raskin:

Okay, thanks.

OPERATOR:

Our next questions are coming online of Corinne Wolfmeyer with Piper Sandler. Please receive your questions.

Corinne Wolfmeyer:

Hey, good morning. Thanks for taking the question. I want to touch a little bit on what's going on with the marketing spend versus the cac. So it sounds like the marketing went down or was cut out or some was cut back a little bit in the quarter, but the CAC went up. Was that just the dynamic of the softer case volumes that you saw in the quarter? And then how should we thinking about that going forward and the level of pickup of marketing spend we should expect here in 2025 and how that should translate into CAC? Thank you.

Dennis Dean:

Hey Corinne, it's Dennis. I'll pick up and kind of give sort of the fourth quarter commentary and then I'll let Yogi supplement as it relates to as we kind of think through 2025. Yes, our CAC was continuing to be elevated. The softness in case volume was the key driver there. One of the things that we noticed or that we noted in previous calls is in the back half of last year, we were cutting our marketing cost pretty significantly from where we were spending in the first half of the year. And by doing that, it kind of reduced our lead volumes from that standpoint, which impacted our case volume case results.

UNKNOWN:

There from a revenue standpoint.

Dennis Dean:

And so those along with the case volume challenges that we were faced, kind of caused that CAC to elevate. But what I'd also, if you look at it on a sequence sequential basis, sequentially, our actual advertising expense stayed somewhat the same, Q3 to Q4, significantly less than the average spend in the first half of the year. But what you also have to see is that we opened up those five new centers and we're marketing those centers. So on a same store type picture of centers, we actually spent significantly less from that standpoint in Q4.

Yogi Jasnani:

And then just on the go forward basis, certainly we have reversed some of those pullbacks in marketing spend on a sender basis. It's not just about spending more, it's also about spending differently. So as we go back to a returns based focus and innovate in our marketing, we expect that our marketing investments will get better in terms of the tax that we would see as the year progresses.

Corinne Wolfmeyer:

Great.

Corinne Wolfmeyer:

Thank you so much for all that helpful color. And then can you just give us a little bit more context around the cost savings program? Sounds like there's going to be about 3 million in annual savings. One, where is that all coming from? And then two, do you have a projection as to when those savings will start to be realized?

UNKNOWN:

Thanks.

UNKNOWN:

Yeah.

Yogi Jasnani:

So Karim, this is Yogi, the cost out for us. Look, as we set the strategy that I talked about, we realized that there were areas within the business which were not exactly aligned with where we were going. And those were the places where most of the cost reductions came from. For example, a lot of it was in corporate headcount that we felt was not aligned with our current go forward strategy. Now as a reminder, the 3 million we have already executed on most of it, and that is a net number because there is cost out. But then there's also investments that we have made in areas like technology, data and analytics and as we said, marketing. So we implemented the net number somewhere in the middle of Q1. So we should see the benefit of that. That's a full year number which we should start to see the benefit of that starting Q1 itself.

Corinne Wolfmeyer:

Great.

Corinne Wolfmeyer:

Thanks so much.

OPERATOR:

Thank you. As a reminder, if you'd like to ask a question, you may press Star one from your telephone keypad. We ask you please ask one question and one follow up and you may re queue for additional questions. The next question at this time comes from the line of Sam Iver with btig. Please proceed with your questions.

Sam Iver:

Hi, good morning. Thanks for taking the questions here. Maybe I can start on some of the new efforts on the marketing side to drive those leads. And you know, I heard you mention online video and some other social marketing initiatives. We'd love to maybe better understand more specifics in terms of what those entail. And if those are being complemented with maybe some of the historic programs like paid search, is it more of an offset of that? We'd love to better understand those dynamics.

Yogi Jasnani:

Sam, thank you for the question. It is definitely a combination. So what we are doing is we are still spending heavily on paid search and paid social as we have done in the past. The difference is we are with a returns based approach that we are taking. We're looking at every sub segment, for example within those and how those are performing and making sure that we are rebalancing whether it's across centers, whether it's across areas. We're seeing pockets where there is opportunity for us to reach more customers and be more efficient with our spend. The areas like online video, we are expanding our use and that would be for example, things like YouTube in the pipeline. We'd also have things like connected TV. We're seeing encouraging early results from those and we expect to refine our strategy as we move along. We are keeping our spending dynamic to make sure that we are able to direct it wherever we are seeing higher returns in the market.

Sam Iver:

Okay, that's helpful, thanks for that. And then maybe as my follow up here on some of the new services you mentioned, particularly in the skin tightening area, you know, from my understanding there were already a few centers that were maybe implementing those skin tightening procedures. So this may be more of an effort to expand that throughout the 32 centers you have, is it adding additional types of skin tightening? Want to better understand that as well? Thank you.

UNKNOWN:

Absolutely, Sam.

Yogi Jasnani:

So as a quick refresher, just like you mentioned, today we offer skin tightening in all of our locations as a complement, as an add on to our fat removal services. What we're planning to do, what we are looking to pilot is doing that as a standalone service in our centers. We have done that on one off basis. But the goal over here would be to have a pilot program which helps us capture that not just from a center performance perspective, but align the entire organization from marketing to sales to clinics and everything in between so that end to end we are making that offering available. This is in many ways our efforts to capitalize on trends we are seeing with the consumers we continue to see. Skin tightening is a pretty big area of interest for consumers. Some of that we see as a outcome from GLP1s where customers who've been on GLP1s tend to have many of them tend to have loose skin and they're looking for solutions for that. We believe we have one of the best solutions in the marketplace and how do we meet that consumer need? So that's really the why and the how around it. We'll start with a pilot in certain centers and based on our learnings, we expect to expand later in the year.

Sam Iver:

Great. Thanks for taking the questions here.

OPERATOR:

Thank you. At this time I would like to turn the floor back to Yogi Jaishnani for closing remarks.

Yogi Jasnani:

Thank you everyone for joining and look forward to providing an update at our next quarterly call.

OPERATOR:

Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.