SkinHealth Systems Inc. Q3 FY2021 Earnings Call

Greetings and welcome to The Beauty Health Third Quarter 2021 Earnings Call. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Ms. Dawn Francfort, Managing Director at ICR. Thank you, Ma'am. You may begin your presentation.

Good afternoon, everyone. Thank you for joining The Beauty Health Company’s conference call to discuss the Company’s third quarter 2021 financial results, which we released this afternoon and can be found on our website at investors.beautyhealth.com. With me on the call is Brent Saunders, Executive Chairman; Clint Carnell, Chief Executive Officer; and Liyuan Woo, Chief Financial Officer of The Beauty Health Company. Before we get started, I would like to remind you of the Company’s Safe Harbor language, which I’m sure you’re all familiar with. 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. For a further discussion of risks related to our business, see our filings with the SEC. This call will contain non-GAAP financial measures such as adjusted gross profit, adjusted gross margin, adjusted net income, adjusted EBITDA and adjusted EBITDA margin. Reconciliations of these non-GAAP measures of the most comparable GAAP measure are included in the earnings release, furnished to the SEC and available on our website. Now, I would like to turn the call over to Brent Saunders, Executive Chairman of The Beauty Health Company.

Thank you, Dawn, and good afternoon, everyone. Thank you for joining us for a discussion of today’s third quarter results. As I’m sure you saw on today’s press release, I will be stepping into the role as the company's interim CEO effective January 1, 2022. As part of this transition, Clint will remain CEO through year-end at which point I will assume additional responsibilities of the CEO until a permanent successor is named. On behalf of the Board, I want to thank Clint for his dedication and commitment to Beauty Health over the past 5 years. He has been a driving force behind the company's success, navigating Beauty Health through COVID as well as our business combination in May. Under his leadership, Beauty Health has become a solid platform for us to build upon as we work towards our next pillar of growth and begin to accelerate our acquisitions. Given these objectives and the strength of Beauty Health, Clint and the Board thought that this was the ideal time to begin the CEO transition. We thank him for his contributions. While Clint and I had been working closely over the past few quarters, I’m excited to step in more fully and work with the team to continue to drive growth and focus on our strategic initiatives. This is a compelling time, and I’m excited about our future. The company has a strong foundation, and I look forward to the next chapter and the significant growth opportunities we have ahead. I would now like to turn the call over to Clint.

Thank you, Brent, and good afternoon, everyone. Before taking into our performance, I would like to express my gratitude for being part of building this category of creating brands over the last 5 years. This has been an exciting journey, and I am pleased with what we have accomplished. I would now like to thank our employees and providers across the globe for all of their hard work and commitment during this challenging environment. They are vital to our success and propelled us to record performance again this quarter. During today's call, I will provide color on our third quarter performance, as well as discuss our growth strategies and outlook for the remainder of the year. I will then turn the call to Liyuan for more detailed discussion of our third quarter results, as well as our updated 2021 financial outlook in more detail. We are very pleased with the results this quarter, as well as the strength of our year-to-date performance. Our sales and adjusted EBITDA continue to exceed our expectations and deliver new record results, while we continue to lead through macro challenges and select market closures related to the Delta variant surge. Our strengths speak to the diversification of our business across channels and geographies, as well as the favorable health and wellness tailwinds that remain strong and we believe are here to stay. We are executing across all key strategic initiatives we laid out for you last December. As of today, we grew our delivery systems to over 19,000 units as we leveraged our virtual and physical branding events to increase our consumer engagement with our Beauty Health community. We invested in international infrastructure, adding Indra and Stefan to lead APAC and the EMEA regions, respectively, to meaningfully expand our business in these markets. We are excited to add two additional products in the coming months. Now turning to our financial results for the quarter. Adjusted EBITDA was $5.8 million, once again driven by strong net sales growth of almost 100%; gross margin expansion and disciplined expense management despite challenges related to the Delta variant. We continue to accelerate our brand-building initiatives to capitalize on the enormous whitespace opportunity we see ahead. We further strengthened our financial position with the completion of our convertible senior notes offering, which was upsized to account for the strong investor demand. We raised approximately $900 million in dry powder from this offering to escalate our strategic investments and build upon a strong platform we've created in Beauty Health. Our brand-building initiatives effectively strengthen our connection between our consumers and providers, which further expands our Beauty Health community. Our vision of creating a deep consumer connection with the Beauty Health community is a top priority. And we continue to make progress this quarter, improving our engagement with our customers by reaching them where they live, work, and play. As a result of these achievements, we are well-positioned to deliver on our long-term strategic goals. We are raising our top line and EBITDA outlook for a full year 2021, to reflect the confidence in this business model, as well as our ability to execute against our multi-lever growth trajectory. During the quarter, we continue to make progress on our strategic growth initiatives to build brand awareness, accelerate innovation, and expand our international presence. Our investments behind these initiatives remain elevated in order to create a deeply connected and engaged consumer within our Beauty Health community and create a strong community at the center of our vision that is essential to our long-term success. So I will now focus on these key initiatives in detail. First, we invested in brand initiatives to drive consumer awareness. During the quarter, we accelerated our brand investments to engage with our consumers and providers both virtually and to a greater extent physically as we look to strengthen and build a Beauty Health community. We continue to invest in HydraFacial connect or clinical training, professional development, and holistic education programs designed for the esthetician, creating a highly passionate and educated community of influential providers. Our business in the retail channel improved this quarter as more locations reopened following COVID-related closures from March 2020. We further expanded our presence in the retail channel with select partnerships during the quarter, including Nordstrom. While we are still in the early days with these partnerships and have not generated meaningful revenue from this channel, we see it as a unique pathway to bring more consumers into our community. During the quarter, we've accelerated our marketing initiatives, building on our second quarter effective branding programs. Our global issue campaign has been highly successful by engaging consumers and estheticians on our U.S coast-to-coast bus tour that started on June 4 and continues through the end of September. At each stop, we treated 250 consumers of HydraFacial on-site during the 2-day period, working alongside our customers and delivering a compelling experience and reaching a meaningful number of consumers in each market we visited. We believe GLOWvolution has been highly effective at activating demand by driving community engagement with both estheticians and consumers. By creating a physical HydraFacial event, we draw brand awareness and consumer demand because you have to get it to get it. As we have previously discussed, two-thirds of consumers who try HydraFacial for the first time will become repeat customers. And of those two-thirds, approximately one-third of the customers will become frequent super users, which is why building brand awareness and treating new customers was one of our top investment initiatives. Over the past year, we have transitioned our business from B2B to B2C and back to B2B, effectively connecting our passionate communities. Second, we maintained our elevated investment levels in innovation, creating products and technology to deepen the consumer engagement in our adult Beauty Health community. Improving our product offerings and enhancing our technological capabilities to build upon our Beauty Health community is important. As we effectively increased our connection through our customers, our upcoming new product launches remain on track, including the November 11 launch of our Glow and Go at-home device, which I will discuss in more detail in just a moment. During the quarter, we launched a new booster collaboration with Epicutis, targeting the Neck and Décolleté areas and extending treatments beyond the face. We also continue to test our app that builds consumer awareness and serves as a direct connection to the customer. Taken together, all of these initiatives allow us to better connect with our consumers where they live, work, and play, further expanding our direct-to-consumer capabilities and relationships. Third, we continue to expand our international infrastructure to support our strong international growth. With our sales internationally up over 105% this quarter, these markets remain a top investment priority. During the quarter, we entered South Korea through a new distributor partnership, we continue to globally increase market initiatives to expand brand awareness as well as invest in our team to build the necessary infrastructure to support this growth. As previously announced, Stephan Becker joined us as President of EMEA in October, and we are continuing to make select hires, particularly as we build our teams in local markets. We also made progress on our plans for headquarters in our EMEA and APAC regions, which we will provide updates on during future calls. We are very pleased with our accomplishments this quarter and year-to-date, especially given the still volatile environment with respect to the Delta variant and increasingly challenging worldwide macro concerns, which Liyuan will discuss in greater detail. The sustainability of the momentum we're delivering despite these challenges was further supported by our almost 100% sales growth this quarter and proof of a highly resilient business model. We are focused on creating a unique and powerful consumer brand and platform in Beauty Health with significant growth ahead. As we look forward to our fourth quarter and beyond, we will continue to leverage our infrastructure and grow our install base in order to fund our investments, capitalizing on these significant opportunities. The combination of being well-capitalized and our broad geographic presence allows us to pursue strategic acquisitions in a disciplined manner. Turning now to a brief overview of our guidance as a result of another strong quarter, we are raising our top line and EBITDA guidance for 2021. We now expect net sales in the range of $245 million to $255 million, up from our previous guidance range of $230 million to $240 million. We also are increasing our EBITDA to $30 million from our prior guidance of $25 million, despite the significant investments we're making in our business. These upward revisions are based on momentum and our third-quarter results, and we will continue to invest ahead of our growth because we have a sense of urgency to capitalize on the category we have created. I will now provide you with details on our upcoming investments in our three key strategic growth initiatives. First, building and expanding consumer awareness remains a priority. Our marketing programs drive consumer awareness, which is proven to drive consumer demand. We are accelerating these marketing initiatives, building our team, and expanding our partnerships, especially in the retail channel in order to capitalize on a significant whitespace ahead. Our consumer activation programs are highly effective, and we will continue to leverage these events in select markets. Due to the success of GLOWvolution, which wrapped up at the end of September, we are preparing for events in New York City for the second week in December, to build consumer awareness and mark the 1-year anniversary of our business combination announcements with Vesper Healthcare. We are also excited about our Black Friday and Cyber Monday promotions, which historically generate meaningful customer engagement. On October 24, we participated in Nordstrom's block party. We also are expanding our presence in the retail channel through our new partnerships, including Ulta, Laser Centers of Australia, John Lewis in the U.K., and select Marriott international resorts and spas. Retail is an important channel to further build our consumer awareness and diversify our operating model as we continue to monitor and test new retail partnerships. Longer-term, we see this channel as a significant opportunity. Second, we are increasing our R&D investments in innovation initiatives in order to deepen and expand our consumer and partnership connections with our Beauty Health community. Our innovation initiatives will enhance our ability to meet our consumers where they live, work, and play. On November 11, we are launching a limited number of our Glow and Go handheld devices, with a broader rollout expected in 2022. While we are testing the at-home market with our initial launch, we see this as a bigger opportunity over time. Our app, which we officially launched in October, allows us to engage with our consumer by providing self-scan assessments and an educational component among many other features. We remain on track to launch our HydraFacial 2.0 connected device in early 2022, a major technology upgrade from our existing HydraFacial. Innovation in products and technology remains an important component of our overall strategy to building our long-term vision of seamlessly connecting and interacting with our customer through the Beauty Health community. Third, we are accelerating the rollout of our global footprint as we build on our international infrastructure directly in key strategic markets and expand distribution partnerships into new markets. We are continuing to build our infrastructure and team worldwide to capitalize on our significant international growth. Consistent with our strategy, we will continue to go direct in key markets where we see opportunities, as well as establish new distributor partnerships in select new markets. Over the next few years, we expect our international business to exceed the U.S., and we are building the necessary infrastructure to capitalize on this opportunity. In conclusion, we are proud of our third quarter performance. The results we have delivered thus far in 2021 support the power of the platform we have created and the community connection we are building in the dynamic Beauty Health category. We are a rapidly growing business capitalizing on our multiple levers of growth. I'm now pleased to turn the call over to Liyuan for a more detailed discussion of our third quarter financial performance, as well as provide you with our updated financial outlook for 2021. Thank you.

Thank you, Clint, and good afternoon, everyone. Before I discuss our performance this quarter, I also want to thank our employees and providers worldwide for their continued dedication and effort that is underpinning our growth. This record performance, the successful completion of our convertible senior notes offerings, and a redemption of our outstanding warrants, all demonstrate the flexibility of our business model and the confidence of our investors in allowing us to continue our rapid growth trajectory. I will review our third quarter results, touch on our balance sheet, and then provide details on our updated 2021 outlook. I will make select comparisons to our third quarter of 2019, as we believe it is a more meaningful comparison due to the COVID-19 related market closures in 2020. Let me start with our third quarter results. As Clint mentioned, we're very pleased with our record performance this past quarter as we continue to build on our strategic initiatives, which drove better than expected third quarter results across all metrics despite Delta variant-related restrictions, especially in the APAC region. Our systems and products have global appeal, as reflected in our strong geographic segment growth in this past quarter. Net sales of $68.1 million increased almost 100% from last year's COVID-impacted sales. Our $34.6 million was up 72% from $39.6 million in the third quarter of 2019. The significant increase was largely due to expansion in our delivery systems, with over 18,500 active systems globally at the end of the quarter, and the continued strength in our consumables as COVID-19 restrictions lifted, and more of our partners reopened. Strong trends in the U.S., and EMEA businesses, and significant growth in the APAC region continued during the quarter despite worsening COVID trends. Now I'll share a few highlights from our three regions. Third quarter sales in the Americas region increased to $45 million compared to $21.2 million a year ago, and grew to over 50% from our 2019 levels. The strength was driven by continued traction in the U.S. and solid performance in LatAm, as markets reopened and consumer demand accelerated, as well as ongoing strength in our delivery system rollout. We continue to see select U.S. locations operate at reduced capacity to accommodate state and local regulations, especially in the non-medical channel. We also saw consumable orders increase for customers reopening, which drove acceleration from our 2019 levels. As Clint mentioned earlier, marketing and training activations, such as GLOWvolution, also positively contributed to the increase in sales. Given the strong performance of GLOWvolution, we're extending the event into Q4, and we're holding the event in New York City during the second week of December. The EMEA net sales of $12.6 million grew from $8.1 million in the prior year and expanded over 90% from the third quarter in 2019, driven by strength in the United Kingdom, Germany, France, Russia, and the Middle East. The region continues to see growth. Our creative marketing in Spain also helped increase consumer awareness and contributed to the sales increase. In addition, we have also started to expand pop-ups into Germany and expect to see further acceleration in growth. Turning to APAC, net sales of $10.5 million increased almost 100% from the prior year, and over 200% from the third quarter of 2019, primarily driven by growth in China and Australia despite a restrictive COVID-related lockdown implemented in Australia. In China, we're continuing to focus on our system rollout while building sales productivity and continuing to expand our presence in both the medical and non-medical channels. Our marketing and training programs in regional markets also drove growth. Trends in APAC decelerated from the second quarter, primarily due to Delta variant-related shutdowns in Japan, Australia, and parts of China during the third quarter. Overall, our growth has been demand-driven across all channels. We continue to see consumers asking for a HydraFacial by name, especially in our more mature markets. Even with the current brand recognition and our initiative to build awareness, as well as international global self-care momentum, Beauty Health is attractively positioned to continue to both expand this category and take share globally. Moving to profitability, our gross margin was 67.6%, up from last year's 60.6%. On an adjusted basis, we expanded our gross margin by 320 basis points year-over-year to 71.5%. The increase was largely driven by fixed cost leveraging of higher-than-expected sales, improved selling prices for delivery systems, as well as cost-saving initiatives. This was partially offset by higher supply chain and logistic costs. On a sequential basis, our gross margin declined 340 basis points due to supply chain challenges, increased logistic costs, as well as temporary impacts from transitioning higher-than-carrying inventory values related to the distributor acquisitions. We will continue to focus on enhancing our margin structure; however, we expect the continuous headwinds from global supply chain challenges and inflationary pressure to weigh on margins into 2022. We currently anticipate higher shipping costs to continue into next year, partially offset by an accretion in margins related to the acquired distributor and pricing initiatives. During the quarter, there were a few significant noncash accounting entries from the valuation of warrants and the convertible transactions, which we will address as non-GAAP measures to focus on discussions of core business performance. SG&A expenses in the quarter were $49.7 million compared to $17.6 million for the prior year. As a percentage of sales, selling and marketing increased by over 1400 basis points to 44.7% compared to 30.5% in the third quarter of 2020, which was constrained due to COVID. This increase was driven by greater sales commissions, higher personnel-related expenses, and increased marketing spending. During the quarter, we significantly ramped up our marketing spend as we strategically activated demand. We will continue to focus on optimizing our investments in sales, marketing, and training, particularly as we look to build upon our community engagement initiatives. Moving on to R&D, we invested $1.9 million in the third quarter of 2021 compared to $0.6 million in the prior year, as we accelerated our investments ahead of our launch of the HydraFacial Nation app, the initial test of our new home device, and the upcoming launch of an upgraded delivery system. As Clint has shared, innovation is one of our main pillars of our strategic investments. We will continue to prioritize investments in innovation. Our G&A expenses of $19.2 million include $3.9 million of noncash stock-based compensation expenses. Excluding this item, our G&A expenses were $15.3 million compared to $7.1 million in the third quarter of 2020. The increase in G&A expenses was driven by non-payroll related public company costs of $1.7 million, which includes D&O insurance, SOX compliance, and additional audit and tax-related services, as well as higher personnel-related expenses due to increased headcount. We expect such public company costs to continue at this level. During the quarter, we accelerated our investment in building out the necessary infrastructure to support the significant growth in our international markets, as well as continuing to strategically build the EMEA and APAC base camp, people, and technology. We have gone live on our first global ERP platform, which includes CRM and e-commerce. Partnering with Oracle NetSuite, we are positioned to extend our brand to global markets and improve operational agility. This will never be pain-free, and we expect execution challenges to continue. The new ERP platform advances our cloud-native HydraFacial ecosystem and will be expanded to include new capabilities in 2022. We expect these investments to remain elevated over the next few quarters. We will continue to invest ahead of our significant growth opportunities in order to capitalize on our long runway ahead. In addition to GAAP measures, adjusted EBITDA is an important profitability measure that we use to measure our business internally. For the quarter, adjusted EBITDA was $5.8 million versus an adjusted EBITDA of $7.6 million in 2020. The decline in our profitability is the result of increased commissions and bonuses related to strong sales, acceleration in our marketing and scaling spend, as well as increased headcount for future growth. This was partially offset by higher sales gross margin improvements. Our adjusted net income for the quarter was $2.5 million. Weighted average shares outstanding were approximately 132.3 million in the third quarter of 2021. Subsequent to the quarter end, we announced plans to redeem our 15.3 million outstanding public warrants. On November 3, we completed the exercise and redemption of our public warrants, which amounted to about $185 million in cash, which you will see in details in our press release dated November 8. Turning to the balance sheet. We ended the quarter with $718.6 million in cash and cash equivalents. During the quarter, we priced our convertible senior notes offering, which we upsized to account for strong investor demand and successfully raised $728.7 million. With the proceeds, we purchased shares covering the aggregate numbers of shares underlying the notes in order to reduce potential dilution and/or offset any potential cash payments. With nearly $900 million in cash, we have the dry powder to continuously invest in our business as well as pursue strategic acquisitions as we accelerate our initiatives to capitalize on our significant opportunities in the rapidly evolving beauty health industry. Now, I will share more details on our outlook for the full year. As Clint mentioned, we are raising our 2021 guidance. For our fiscal 2021, we now expect net sales in the range of $245 million to $255 million, barring any deterioration related to COVID-19 trends and up from our prior guidance range of $230 million to $240 million. We remain cautiously optimistic while observing select closures related to Delta variants in both the APAC and EMEA regions. We're raising our adjusted EBITDA outlook to approximately $30 million, up from our prior guidance of approximately $25 million. This upward revision largely reflects our better-than-expected top line trends so far this year. Despite our ramp-up investments in increased spending on branding and global infrastructure initiatives that are accelerating our share gain worldwide. We continue to anticipate capital expenditure of up to $50 million in 2021. Our revised guidance for this year reflects our strong performance to date and solid trends that have continued into the fourth quarter. As we look beyond 2021, we are excited about the long-term opportunity across our multiple levers of growth, as we capitalize on the significant opportunity in this category we created. However, given the uncertainty of the environment in which we operate, and the incredible growth we are lapping in 2021, we remain cautious. We continue to face potential risks from market closures related to COVID-19, global supply chain challenges, as well as inflationary headwinds related to higher raw material, shipping, and labor costs. Subsequent to quarter end, we have grown our delivery system install base to over 19,000. I would like to note that due to factors such as trading, trade applications, various system price points, and our international distributor model, our total delivery systems numbers do not directly correlate to sales. In summary, we're very pleased with our performance so far this year. We have confidence that our proven operating model and key strategic growth initiatives will drive long-term profitable growth that will increase even greater shareholder value. With those comments, I'll turn the call back to the operator to open it up for questions. Thank you.

Our first question comes from Oliver Chen with Cowen. You may proceed with your question.

Liyuan, Brent, and Clint, congratulations on all that you've accomplished. The connected device, the 2.0 connected device sounds quite exciting. How should we think about how that may be launched throughout the year? And also any guidance in terms of your thoughts on revenues in terms of the quarterly cadence? Also, the Glow and Go and the home device, would love to hear any initial learnings and how you're thinking about pricing. And more broadly, how this fits into the HydraFacial ecosystem. And then third, Liyuan, a modeling question. Just the guidance was encouraging. Was it the Americas that drove the most upside? We'd love context on that as well as helping us understand some of the factors you mentioned on supply chain and inflation and which factors may be outside of your control as we monitor those risks across the sector. Thank you.

Sure. Thanks, Oliver. I appreciate those kind words and the question. If you look at our organic growth on the HydraFacial system, our consumables, it's really been very, very solid and those products work. They feel good, and you get an immediate result. What we're doing is taking our technology now from analogue to digital. And I think that's appropriate, given we have over 19,000 providers out there who are launching the Glow and Go, which is an exciting home device that really allows you to take HydraFacial on the road. And so we're doing what, you know, I think best-in-class brands do these days. And that's connecting the consumers with our professionals, the estheticians, with the company to ensure that we can meet them where they live, work, and play. The Glow and Go, we've had really good alpha and beta testing. We're super excited about it. We don't have meaningful revenue in the model. So I would say this is test and learn and to build up with our community. Project Syndeo, we're very excited and remain on track with that product to be launched in H1 of next year. As Liyuan mentioned, there are going to be a lot of new product introductions, and we expect a lot of trade and trade-up activity. Most importantly, we're really, really excited about going to the next step and what we've committed to for the last several years of connecting the Beauty Health community. So that's the modeling purposes.

Yes, I'll just quickly interrupt, Clint, Oliver, and just say I saw this device in the office last week, and it's slick. It's going to be a really nice launch in the first half of next year.

Yes. Hey, Oliver. So on your questions regarding the guidance, we actually mentioned the fact that the Delta variant really impacted some of the regions, especially APAC. So there's that impact that we factored in as we look forward to Q4. In terms of the margin and supply chain, what we're really trying to say is, for the third quarter, there are some temporary impacts related to our distributors, as they have their inventory and balances they're carrying; it's higher, you know, as they were functioning as a distributor. And that's going to go away, as you think through Q4 and go forward. However, when it comes to supply chain and shipping costs, just like everybody else in the market, we continue to see pressure that will impact us going forward.

Thank you, Brent and Clint. As you think about Beauty Health of the platform, what should we know about in terms of what's on your mind for framework, as you think about opportunities, and you're well capitalized and you have a lot of expertise, in terms of this major structural change with the consumerization of healthcare. Thanks.

Yes, I think that's exactly right, Oliver. As we always maintain as we think about the perfect M&A candidate or candidates, it's a product or brand with a higher Net Promoter Score that allows us to leverage our call points, most specifically, with the esthetician, someone we really want to grow with and support. We have a lot of loyalty there. Ideally, it should add to the P&L. That being said, obviously, no deal is a perfect deal. Some deals are better; some deals are not. So we're pretty fluid, but there are a lot of opportunities. We look at many different things. But we don't feel any pressure. We want to do it in a very disciplined way. But we believe that's a true growth lever for us in the future. Absolutely.

Thanks very much. Best regards.

Thanks, Oliver.

Our next question comes from the line of Steph Wissink with Jefferies. You may proceed with your question.

Thank you. Good afternoon, everyone. Clint, it was bittersweet to see the announcement today; you'll definitely be missed. My question for you is, I think in the prepared remarks, the word 'accelerated' was used a number of times regarding marketing, R&D investments, the rollout of international, and the buyback of the distributor ships. Can you talk a little bit about how much of the revenue upside has afforded you to accelerate the investments in the business? Any of that pull ahead from what would have been investments in later years? And then if you think about the growth that could come behind that, where should we see the prioritization of growth? Do you expect International to be the single biggest growth driver? Or are there other attributes of the model we should be watching over the next couple of years? Thank you.

Sure. Yes. Thanks, Steph. Thanks for the kind words. I'll take the first part, then maybe hand it to Brent for the second part. You remember when we merged with Vesper back last December, we thought that we're going to see celebration but got hit by the Delta variant closures. I think Liyuan and the team have done a great job providing guidance on how we manage through not just the pandemic, but we're thriving out of it. What we've committed to investors is that we wouldn't spend on marketing and infrastructure and adding salespeople who didn't have visibility to driving growth. So I think what you see in the Q3 results, as well as in the first two quarters, is feathering in those investments, and simply putting down more placements, driving innovation to the two new products you're seeing. We've increasingly spent on marketing and global infrastructure to get ahead of the growth. So it's very consistent with what we laid out last December. We did the pipe, and it's very consistent with the three quarters now that we've reported. The team's done an amazing job working through this still challenging situation. There are good tailwinds, disciplined expense management, and being incredibly opportunistic where possible. Hopefully, that's what you've seen in the Q3 results. So no pull forward on revenue. Just to be clear, it's really just extending against those three pillars we laid out almost a year ago now.

I think as you think about growth, one of the things I find most exciting about our company is there are so many levers of growth. For us, it's about being very thoughtful, disciplined, and how to invest behind those levers. Clearly, International is a huge opportunity for us. You see that in this quarter, particularly in Asia. That is despite flare-ups with the Delta variant and COVID closures. New products will also be a strong source of growth for the future. Frankly, M&A is a completely unplanned source of growth. But given the firepower we have and the cash wave on the balance sheet, that could be a huge source of growth for us in the future. Trying to predict which one is going to be the greatest is hard to say because it's like asking which kid you like the most. International is probably the most significant opportunity for growth; it is also a mature opportunity for us.

Thank you. That's helpful. Liyuan, could I ask one follow-up question? I think you mentioned higher pricing on delivery systems in the quarter. Help us think through some of the inflationary pressure and the power you see in your model to price into some of that inflation, whether it's on the systems or the consumable side. Thank you.

Hi, Steph. Yes, so we actually shared that previously, as well. We have a natural increase in ASP, partially because of the strong demand and a significant mix. Historically, we're able to pass on costs and also increase prices. We're certainly considering that as we go for next year as well. So that's truly baked into our guidance, and as we think through it for the future as well.

Our next question comes from the line of an analyst with Piper Sandler. You may proceed with your question.

Hi. Thanks for taking the questions, and Clint, it was great working with you, and you'll be missed. First, can you just talk a little bit about the growth and delivery systems that you saw? Is there any channel that stood out in the quarter as being stronger than others? And then how are you thinking about contributions from each channel going forward, especially as you continue to grow your various partnerships?

Yes, great question. Thanks for the kind words. If you think about what we've done in the last three years, it's been quite a journey. But we've learned that to drive system placements, we need to drive consumer demand. We've flipped this upside down and worked to go from a pure B2B play to B2C back to B. We're finding it easier to sell HydraFacial units because more consumers are asking for it by name. People are buying multiple systems, which is really exciting. It's a testament to where the brand is starting to gain a nice tipping point. In terms of the channels, they are all growing nicely. There are emerging channels as we see experiential Beauty Health. That's a result of our relationships; not just the support, which is incredibly strong, but with Nordstrom and John Lewis and Laser Centers of Australia, we are really excited about these new and emerging business partners. The retail channel is still down due to flare-ups from government restrictions. But as we emerge from the pandemic, we should see all these channels growing. The average HydraFacial consumer gets treatments in 3.2 different locations. We haven't lost those consumers; we've moved them to different places, and I can't wait to help our retail partners get back on a strong footing.

Great. Thank you. You've invested time and consumer awareness through GLOWvolution and social media. Is there any way you can quantify how these investments may be translating to new customers or increased spend from your current customers? Understand it may still be early days, but is there any color you can provide that would be helpful? Thank you.

Yes, we do know the data for the last several years has shown that HydraFacial has had high single-digit awareness. When people get it, two-thirds of them stick, and one-third become super consumers. A few years ago, we started the world tour during the pandemic and designed a very cool semi that we call Global Lucian. What we find is, whether we're in Dubai in a pop-up shop or London or one of our GLOWvolution stops, the data looks the same: 85% of people we drive to one of our physical activations have never had a HydraFacial. Upon leaving, 85% want to get a HydraFacial. That has worked for us incredibly well. We track the ROI on all of these events, and I think the company is getting more sophisticated about the CAC to LTV relationship. It's safe to say we wouldn't be doubling our marketing spend, particularly on these types of activations, if we didn't believe it was well worth it. We aren't prepared to disclose all the details, but this targeted, surgical marketing drives physical sales, increases consumer awareness, and turns into consumable sales because they're going to our placements. It seems we have found a great ecosystem that is very supportive, marrying the consumer with great expectations that are well trained for HydraFacial, and just give them the experience and benefits of the treatment.

Our next question comes from the line of Jon Block with Stifel. You may proceed with your question.

Thanks, guys. Good afternoon. Maybe just to start, the midpoint of the 2021 guidance, I believe, implies a flat for Q3. Usually we see a Q4 seasonal uplift. Maybe if you can just talk to that a little bit; is there conservatism? Just also talk about what would take you to arguably the high-end of the range versus the low end, as well as whether some of that is a function of what you've witnessed in APAC and some of those APAC COVID headwinds beginning to abate here as we work throughout the fourth quarter.

Hi, Jon. Yes, so I think there's definitely a viewpoint when it comes to the APAC market because that's the market that impacts us the most significantly regarding the third quarter. You probably saw the news about what happened with Shanghai Disney. China, as a market, has a lot of impacts. If the trend were to continue worsening, we're also starting to see some ease up in Australia. But there are also other countries in the APAC region showing worsening trends. Overall, we did take that into consideration. We have shared previously, we track our open and close rates pretty closely by region. So we built that into our guidance if that makes sense.

Okay. Yep, certainly does. And maybe I will follow up with you a little bit more offline. Just pivoting to the global supply chain pressures that you mentioned; does it impact 2.0, or does it impact how you roll it out? In other words, measuring the cadence of the rollout, we've done some checks, and there seems to be a high demand from your current install base for possible upgrades. Given those supply chain pressures, will you be able to fill all demand, new and potential upgrades, as early as the first half of next year? Thanks, guys.

Hey, Jon. Yes, so as you can appreciate, we're pretty thoughtful about making the main delivery systems. We historically roll out 3,500 to 4,000 every year, right? From a numbers point of view, while the supply chain remains constrained for all of us, we can plan ahead. The real supply chain issues we're seeing are more related to shipping or delays, more so than shortages.

It's not a component issue necessarily for us, so we should be okay.

Our next question comes from the line of Amit Hazan with Goldman Sachs. You may proceed with your question.

Hi. Thanks, this is Phil for Amit. Thanks for taking the questions. Maybe my first one follows on what Jon was just asking about. We're starting to see case rates increase in parts of Europe, some of the key countries that you all called out as areas of strength in this quarter. I'm just wondering if you can kind of follow on the APAC logic and talk about what you're seeing at this point from movement restrictions or otherwise in Europe that might be implied in the 4Q guidance? Thanks.

Yes, Jon, this is Clint. Look, as you know, we've been through the worst, hopefully. We've managed through it; we've never let that be an excuse. We just tried to shoot straight with the market on what our visibility is. There are no doubt that the macro trends of health and wellness and certainly the benefits that we have as macro tailwinds continue. Even when we see markets like Japan or Australia shut down, we see demand come back. Because we have such an omni-channel approach, geographic diversity, and no concentration, I'm obviously going to be handing the keys over to Brent and the team here. But I feel very comfortable managing through this. There’s no need to overthink that or be too optimistic about it. We're giving good guidance based on the reality of the marketplace.

Okay, that's fair enough. My second question was around utilization of the systems broadly. It's more of a broad question. I think about the seasonality that anticipates the business moving forward. The prepared remarks sounded like there were several factors that impeded what would have otherwise been even stronger growth. The crude math, just treatments divided by systems looks like a step down sequentially. Is that something we should anticipate going forward; that kind of 2Q to 3Q seasonal stuff down? And then recovery in 4Q? Is that what you see in the underlying business? Are there some one-offs we should be thinking about? Thanks for the question?

I can address that at a high level. As you know, the second and fourth quarters generally perform better than the first and third quarters. However, this pattern has been somewhat disrupted due to the pandemic and the related shutdowns. We are experiencing rapid market growth outside the U.S. Additionally, we are implementing a significant number of new systems, which will take some time to fully develop. Given the introduction of these new systems and the irregular cycle caused by the pandemic, I believe things will settle down over time. We will be ready to provide more detailed information when the time is right.

Our next question comes from the line of Kyle Rose with Canaccord. You may proceed with your question.

Great. Thank you for taking the questions. I echo all the sentiments regarding Clint's departure. So congratulations on everything you've accomplished. I wanted to touch a little bit more on the acceleration comments that I think were asked previously. One thing when I look back at where guidance started the year and where we're at now, you've had tremendous upside from a revenue perspective. You've reinvested the majority of that back into the business. You're raising EBITDA here a little bit. I'm trying to understand how we should think about leverage from a bigger picture perspective or over the medium term. When we think about some of the investments you're making with global ERP and CRM systems, I'm trying to really understand how much is one-time in nature versus going to be an ongoing expense line. What should we be thinking about?

Yes, Kyle, I'll start; thank you for the kind words. I'll start with the first part, and then hand it over to Liyuan. From the beginning of this, from the pilot to the go public lease back, we wanted to be clear to investors that this was a growth story. There were investments that we felt would accelerate shareholder value and allow for a predictable revenue and expense model that was heavy on investments. Traditionally, this company or historically has been CapEx light. We agreed that we'd signal to investors we wanted to double our marketing spend, as consumer awareness drives revenue. We wanted to launch new products, which had been paused due to the pandemic. So with two new exciting products coming up, and we wanted to build out international infrastructure. We've also committed to focus on M&A. What Liyuan and I have committed to is that for the next 18 months, we should think about it as a growth story. Historically, under private equity management, we ran this at 25% to 30% EBITDA; there's no reason this company couldn't be run to produce cash flows at that same level in the future. This is the growth story out of the blocks, and we've delivered on our commitments. Now we will focus on that fourth pillar. I don't know if Liyuan wants to add to that.

Yes. To add to that, we've mentioned previously that a big focus this current year has been R&D. We're buying speed because we want to accelerate processes, and then we can start to test and learn some of the new product lines Clint has discussed. Historically, we have a three to five year cycle when launching a significant product, but we're going to be more active. So think about this year: a big chunk of R&D investments; you won't see the revenue until the following year. Marketing spend will continue as we see how we get a return on investment. We will anticipate continuing investment in ERP and other areas for a few quarters; but overall, you should be at a good position to leverage growth for the future.

Thank you. That's very helpful. We spent some time already talking about Syndeo and Glow and Go, but I wanted to touch on just, if we can go back to Keravive and Epicutis. I'm not sure if I'm pronouncing that right. But when I think about that, you're moving beyond the face into the scalp, and now you're moving into the Décolleté and the Neck. I'm trying to understand what uptake has been of both of those products and just how you expect to see utilization trend from a longer-term perspective, as we think about moving beyond just the face and into some of those other areas.

Yes. Thanks, Kyle. I'll start with the first part. I mean, I think three steps, 30 minutes, best in your life. HydraFacial has increasingly become synonymous with owning the healthy skin category. We cleanse, extract, hydrate, and I think the team has done a fantastic job of increasing consumer awareness. Beauty Health is a natural extension, and increasing that influence makes sense. If you look at the data, healthy scalp is a big market. Keravive is a highly differentiated product. It works just like our skin health products, it makes everything else better, and healthy scalp is key to healthy new hair growth. I think the team is excited about it. I would consider Keravive the first product in our portfolio for healthy scalp. Epicutis is new. Looking to improve the system, enhance the ingredients, and launch new products, skin is your largest organ; it's all over your body. It's a natural extension to the Décolleté, and the team is excited about Epicutis, which is a proprietary product with very good results. It is early days, but the market data suggests that if we execute upon it, it should be a promising area of opportunity for the company.

Our next question comes from the line of Linda Bolton Weiser with D.A. Davidson. You may proceed with your question.

Thank you. I was wondering if you could share whether the revenue growth and EBITDA growth projections you provided during your de-stacking still hold true for 2022. Alternatively, could you discuss any potential differences from your original estimates? Thank you.

I don't want to give Brent and the team a number that I don't want to write a check that he can pass, Linda. I feel really good about what we've achieved. I feel very good about finishing the year and transitioning the business. We haven't ever had a better market position, a senior team that's reloaded, and a strategy we're executing upon with exciting new products and a connected community. I think I'll leave it to Brent and the team on what future guidance is, but I felt it was essential to deliver this company with a strong team, a strong product offering, and good market presence. I'm sure he'll be here to provide further guidance on it.

Yes, I'll just chime in and say if you look at the numbers we've provided in the de-stacking or in the spec IPO or bridge data, we will surpass those numbers. The company is in a strong position. We're very excited about future growth. However, we will provide guidance in the normal course, which will be in the next couple of months or thereabouts.

Okay, thank you. And can you comment on how churn is looking? As your number of systems continues to increase, is there churn increasing too? Or is churn staying relatively stable?

Hey, Linda, so far it’s been relatively stable and consistent.

Yes, the nice thing if you look back, the product has been around since '05, it's been consistently strong, historically. So I don't think the addition of newer, higher volume production should be a sign of weakness with the brand; I won't be concerned. Nothing has changed so far.

And then finally, just on the M&A strategy, I was just curious if you wanted to take advantage of the channels that you're strong in? Would you consider acquiring a DERM cosmetic brand that was distributed to doctors' offices? Or do you think you want to stick more in the device area?

Yes, I think we want to take advantage of the distribution we have, whether the esthetician sits in a doctor's office, a spa, or a hotel, or retail channel; it's really that call point. It could be skincare, it could be a device, it could be anything that really supports her practice and helps her benefit her customer. That's how I think about it at a high level, for sure.

Okay, thank you very much.

Thank you, Linda.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Brent Saunders for closing remarks.

Yes, thank you, operator. Just want to kind of end and say how pleased we are with our results for the quarter and how excited we are for our future. We focus on executing our next phase of growth. We really thank everyone for joining us on the call today, and we look forward to keeping you all updated.

Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.