SkinHealth Systems Inc. Q1 FY2023 Earnings Call

Thank you, operator and good morning, everyone. Thank you for joining The Beauty Health Company's conference call to discuss our first quarter 2023 financial results which were released this morning and can be found on our website at beautyhealth.com. We also encourage you to join the webcast available on our website which contains a presentation that will be referenced during this call. With me today are Beauty Health's President and Chief Executive Officer Andrew Stanleick; and Chief Financial Officer, Liyuan Woo. Before we get started, I would like to remind you of the company's safe harbor language. Management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. For a further discussion of risks related to our business, see our filings with the SEC. This call will present non-GAAP financial measures. Reconciliation of these non-GAAP measures to the most comparable GAAP measures are included in the earnings release furnished to the SEC and available on our website. I will now turn the call over to Andrew.

Thank you, Eduardo. Good morning, everyone and thank you for joining Beauty Health's first quarter 2023 earnings call. Today, we'll discuss the drivers of our Q1 results and our raised outlook for fiscal 2023. To begin, I will discuss our performance and accomplishments for the first quarter. Later, Liyuan will provide more detail on our financial results, after which we will be happy to take your questions. As always, I want to start by thanking our Beauty Health team members, our aestheticians and provider partners who together make up our global HydraFacial Nation for their continued hard work, passion and creativity. During the first quarter, our team made meaningful progress against our 5-point master plan, positioning us well to capture the tremendous growth we see ahead for our business globally. All in all, we delivered a solid 14% net sales growth for Q1, continuing a quarterly trend of double-digit revenue growth. Quarter 1 was highlighted by a particularly strong March which was our second-highest net sales generating month ever, demonstrating a building momentum ahead of the Q2 international launch of our Syndeo system and reinforcing our confidence in our 2023 guidance. Q1 performance overall was anchored by 21% year-over-year consumables net sales growth, a signal of the strong underlying demand for HydraFacial treatments as consumers continue to prioritize products and treatments that make them feel good about themselves. On Slide 5, you see that consumables net sales in the Americas grew a staggering 34% for the quarter, demonstrating the continued strong consumer demand for HydraFacial. In EMEA, we achieved 13% growth year-over-year, excluding Russia's $1.2 million contribution to Q1 consumables net sales in 2022, EMEA's consumable growth was 35%. In APAC, COVID-related shutdowns in China created consumable sales softness in January and February. However, March saw a rapid acceleration as the country reopened. On the Delivery Systems side, net sales grew 9% year-over-year. As a reminder, we saw a very robust performance in the first quarter of 2022 with the launch of Syndeo which creates a difficult comparison for growth in the first quarter of this year when combined with the loss of the Russia business. Additionally, we saw a natural degree of holdback on the delivery systems from providers outside of the U.S. in anticipation of Syndeo international availability in Q2 2023. Finally, going back to China, prolonged COVID closures during the early months of the quarter weighed on device sales performance. However, we saw a strong resurgence as of March. In fact, March shattered the previous monthly record for delivery system sales in China by 2.5 times as providers ready to meet consumer demand. After visiting China in April, my first time since the pandemic, I am very optimistic about the potential of returning to pre-pandemic growth rates. The investments we made in China in 2022 provide a strong foundation for us and I can attest that we have a strong team and operational infrastructure in place in order to seize the large opportunity in this strategic market. Even with these factors at play, the number of new delivery systems sold globally during the quarter grew 4% and our ASP grew 17% year-over-year. As we have previously discussed, the first quarter is historically our smallest quarter of the year due to the natural seasonality of our business. Looking ahead to the second quarter, we are very encouraged by the return of consumer and provider demand that we see from China and the early performance of Syndeo international launch. This, together with the investments we made last year and favorable market trends gives us the confidence to raise our 2023 net sales target and reconfirm our 2023 adjusted EBITDA margin guidance and long-term 2025 targets. As we typically do, I would like to walk you through the progress we have made against our 5-Point master plan in Q1. Strategy remains consistent and is laser-focused on delivering profitable growth while moving with speed and agility to capture the tremendous opportunity we see ahead of us. Starting with our first pillar on Slide 7. In Q1, we marked the first anniversary of the U.S. launch of Syndeo, our revolutionary connected delivery system. On March 30, we announced Syndeo's international availability to great excitement at the AMWC trade show in Monaco. Today, Syndeo's systems are live in 14 of our direct markets with the balance to follow by the end of the year. One year on from its debut, we have placed nearly 5,000 Syndeo systems across the world. We are very pleased with this uptake to date and expect growth to continue as we execute on our international Syndeo launch and capitalize on broader sector tailwinds. Back in the Med Spa channel, the core of our business is expected to grow at a 14% CAGR for the next 5 years in the U.S. alone and we'll continue to roll out with the distributor markets in 2024. In the meantime, our Elite system will continue to be sold in our distributor markets, including those elites that we refurbished in connection with our Syndeo trade-up program. The second strategic pillar is a commitment to investing in our providers. Our world-class training programs and experience centers are instrumental in fostering these connections. To date, we have trained more than 40,000 professionals globally, turning them into ardent brand evangelists. In fact, those who have gone through one of our training programs not only generate double-digit growth in consumable purchases; they are much faster to purchase a second system for their practice. These trainings teach our providers valuable skills and best practices when it comes to HydraFacial treatments and offer business building acumen to drive practice growth. This month, we launched a new business-focused curriculum and mini-beauty MBA, if you will, which targets med spa owners, medical directors, and physicians, further deepening our relationship with our community. These programs are held virtually and in our experience centers across more than a dozen global cities, including New York, London, Paris, and Shanghai. The facilities serve as showrooms to host influencers, editors, and key opinion leaders in every region. As I recently had the pleasure of opening our new experience center in Beijing, our second in China after Shanghai, this state-of-the-art facility includes a live streaming studio for 24/7 production of localized engaging content. With the reopening of China, we are incredibly excited about the opportunity in this strategic market. Next, we continue to build awareness for our much-loved HydraFacial brand. The primary objective of our marketing engine is to drive traffic to providers, bringing buzz and hype through their doors. You may have seen this in our birthday cake takeover last week, photos of which you can see on Slide 9. The NASDAQ opening bell showed up on Times Square billboards and seeded birthday cakes to top influencers around the world. Together with our partners, we are creating unique attention-grabbing moments that capture the public's imagination. Just last week, our teams collaborated with Sephora's top stores across the U.S. to host exciting co-branded events. As a reminder, Perk HydraFacial treatments are available at Sephora in the U.S., Canada, the U.K., and Southeast Asia. We carefully measure a variety of consumer engagement metrics such as earned media value and Google search trends to ensure the effectiveness of our marketing programs. As I mentioned earlier, consumer enthusiasm for our brand remains as strong as ever with the 2 most recent quarters representing our top 2 highest consumables net sales quarters ever. You can see from the headlines generated and consumer awards earned that HydraFacial has never been hotter in the eyes of consumers. As one beauty editor put it, HydraFacial is having a renaissance. Concretely, you can see on Slide 10, the results generated in earned media value which grew 134% year-on-year despite comping against the Bazaar on Syndeo's U.S. launch in Q1 of last year. Today, HydraFacial is a leader in earned media value in aesthetics with more than twice the combined EMV of the next 5 peer brands. We are reaching towards the level of visibility only seen by mainstream beauty brands, cracking the top 50 U.S. skincare brands in March 2023, as measured by Tribe Dynamics. A rising consumer awareness also shows through in organic Google search trends which are up 13% year-on-year and 53% versus 2021. As we discussed last quarter, the planned elevated investments we made over the past 2 years were designed to build scalable global infrastructure. One of the important elements of that investment was building our foundation in China, a critical growth market for us. With a total addressable market of at least double that of the U.S., China presents a massive untapped opportunity for Beauty Health. Recent reports estimate that China's middle and upper classes will increase by over 80 million to account for 40% of the country's total population by 2030. This is HydraFacial's prime target consumer. While the COVID lockdown persisted longer than any of us reasonably predicted, we are pleased to see a budding resurgence in China as economic activity returned in earnest starting in March. Enthusiasm for beauty and aesthetics treatments in China is rapidly growing, particularly for noninvasive and minimally invasive treatments. HydraFacial, with its gold standard positioning and relatively low cost of capital, is the perfect gateway product for providers to capitalize on this sector tailwind. During my recent visit to the market with Liyuan, there was palpable excitement around the launch of Syndeo and its potential to revolutionize the future of preventative skin health. In fact, nearly all our providers now report operating at full capacity with traffic nearly back to pre-COVID levels. We look forward to sharing more on our performance in the region over the coming quarters as we continue to bring HydraFacial to the opportunity-filled Chinese market. Moving on to our strategy as it relates to M&A on Slide 12. Since our inception, our vision has been to build Beauty Health into a multi-brand platform through a build-and-buy strategy. We have a strong cash position to pursue inorganic opportunities and we continue to be opportunistic in evaluating opportunities that provide differentiated products or services, or are complementary to our platform and community, and are financially accretive. A tangible example of our approach to M&A is our recent acquisition of Skin Styles, an FDA-cleared micro-needling device that we discussed on our last earnings call. As an esthetician-founded brand, Skin Styles integrates seamlessly into our platform and expands our portfolio in the treatment room. I am pleased to report the integration of the business is now complete. While we continue to expect an immaterial contribution to net sales from Skin Styles in 2023, we are very excited about the potential upside in 2024 and beyond, the details of which we will share in due course. Before Liyuan begins our update, I would like to again thank our teams around the world for their strong performance. This quarter, we continued to drive double-digit top-line growth and now anticipate the highly-anticipated international launch for Syndeo and integrating a new product into our platform. The trends we are seeing in aesthetics play perfectly into our multi-brand ecosystem, supporting our strategy and validating our long-term growth runway. Continued strength of our consumables business, the growing consumer interest in our brand, and our unique third-party brand partnerships, combined with the international expansion of our breakthrough Syndeo system and competitive moat of patented technology fuels our ability to win in 2023 and beyond. And with that, I will turn the call to Liyuan.

Thank you, Andrew and thank you, everyone, for joining the call. I'd like to take a moment to echo Andrew's gratitude to our teams and partners around the world. We delivered double-digit top-line growth in the first quarter against the timing of last year's Syndeo U.S. launch. Today, I will walk you through our first quarter results, cost and balance sheet highlights and finally, our outlook for the rest of 2023. Turning to net sales on Slide 17. We delivered net sales of $86.3 million in the first quarter, up 14% year-over-year, driven by strong demand for consumables which grew 21% year-over-year. The net sales result is in line with our plan as we comped against Syndeo's U.S. launch from Q1 last year and reflects an unsurprising impact from January and February COVID-related shutdowns in China. Our delivery systems segment grew by 9% year-over-year. There are 3 primary drivers behind the moderated growth. First, we are comping against a strong launch in the U.S. last year. Second, the January and February COVID-related shutdowns in China; and third, providers outside of the U.S. holding purchases of delivery systems in anticipation of the Syndeo International launch in Q2 2023. Addressing the first driver, Syndeo's surprise and successful launch in the U.S. was in Q1 2022, making a year-over-year comparison difficult. On the second driver, as you recall, China broadly announced reopening at the end of last year. However, a wave of COVID infection shut down the market in January and February. Finally, in March, the market began rapid recovery. As Andrew mentioned, in March 2023, we sold 2.5 times more than China's previous high for systems sold in the month, giving us confidence around the opportunity in the region. Last, as is natural, international providers held purchases of delivery systems in Q1 2023 in anticipation of Syndeo's launch in Q2 2023. Importantly, Syndeo's international launch performance to date is promising, with strong traction across our launch market. As a reminder, the first quarter historically contributes the smallest net sales and adjusted EBITDA to our fiscal year. We have expected and continue to expect our growth to be back half-weighted in 2023. This is consistent with our historical business model and we contemplated in our sights. The momentum we see to date gives us the confidence to raise our 2023 outlook to a range of $460 million to $480 million in net sales and reiterate our 18% to 20% adjusted EBITDA margin target which I will explain in further detail in a moment. Turning to our regional performance on Slide 17, you will see the Americas segment was the strongest with 19% year-over-year net sales growth. Growth in this region was driven by strong consumables net sales which grew 34% year-over-year, a testament to the continued consumer demand for HydraFacial treatment. EMEA followed with growth of 10%, driven by prelaunch demand for refurbished EV systems and providers holding orders in anticipation of Syndeo's Q2 2023 launch. As Andrew mentioned, EMEA's performance was impacted by a lack of net sales from Russia in Q1 2022. Excluding Russia's 2022 contribution of approximately $1.5 million, EMEA's total net sales growth was 20% year-over-year. Turning to APAC, despite the COVID shutdowns in China for the first 2 months of the quarter, we achieved growth of 6% year-over-year. As Andrew mentioned, we're encouraged by the recovery we have seen starting in March. Briefly touching on our KPIs on Slide 18. We ended the first quarter with a net installed base of 27,406 delivery systems, an increase of 26% year-over-year. Consistent with what we discussed last quarter, we saw systems turn back on and become active again in Q1 in connection with China's recovery in March. Excluding trade-up, we placed 1,636 new delivery systems in the first quarter, representing growth of 4% year-over-year despite lapping Syndeo's U.S. launch. It is important to note, we expect trade-up volumes for Q2 2023 to materially step up from Q1 2023 as we execute our Syndeo international launch strategy and drive continued adoption globally. This would follow a similar pattern to last year's Q2 with the exception of a smaller contribution for international. Our ASP for the quarter grew 17% to $25,099, primarily driven by the increased mix of systems sold in Q1 of 2023 compared to the same period last year. As a reminder, Syndeo launched in the U.S. in early March 2022. As we have stated before, while full-year ASP growth will be heavily influenced by the extent of trade-up systems sold, we continue to expect a high single-digit increase in the blended ASP for the year. Turning to Slide 19. I would like to take a moment to remind you why we're so excited about our strategy and the future growth of our business. The top chart shows the annual consumables revenue per delivery system in the Med Spa channel, the core of our installed base. As you see, delivery system revenue productivity grows over time as providers utilize their systems more often, upselling booster treatments and expanding treatment beyond the face. We're just getting started in unlocking the embedded potential of our installed base. The chart is a demonstration of the long-tailed lifetime value each one of our system placements represents, a promising source of upside for consumables net sales in the future as our installed base matures. On the bottom chart, you can see how long it takes for our Med Spa installed base to ramp up its productivity. As we have shared before, it takes at least 4 quarters before meaningful gains are seen. As we continue to rapidly expand and build our footprint amidst the massively growing category, our installed base is getting younger, shifting where we fall on these curves to the left. This means using a per system utilization metric today understates the true potential and health of our business as we believe our installed base will ultimately mature and become more productive over the long term. Moving to Slide 20. For the first quarter, we reported a GAAP gross margin of 62.7% or 70% on an adjusted basis. Gross margin declined year-over-year on a GAAP basis due to $3 million of inventory optimization-related write-offs which were added back to adjusted gross margin. As we all know, the supply chain environment has been volatile since the start of the pandemic, forcing us to be resourceful with components to meet growing demand. As mentioned before, this means we have been inefficiently assembling systems during the supply chain volatility. Now that the supply chain is stabilizing, we are opportunistically value engineering our materials and processes by scrapping components in favor of more efficient options. We believe this will optimize our operations in the long term but it does come with near-term expenses as we streamline our inventory. On an adjusted basis, gross margin declined by 133 basis points, primarily driven by the sale of lower-margin refurbished systems during the pre-Syndeo international launch period. We continue to expect year-over-year gross margin expansion for fiscal 2023 as part of our journey toward our targeted 18% to 20% EBITDA margin. Given the similar trade-up dynamics with launching an upgrade, we expect the gross margin for the first half of '23 to be pressured as we work through the first half of 2022, with expansion expected sequentially in the second half of 2023 with increased volume. Moving to the bottom right, we reported adjusted EBITDA of a negative $0.5 million for the quarter. As mentioned earlier, international launch costs for Syndeo were incurred this quarter. But given the Q2 2023 launch timing, the associated net sales upside is expected in the second quarter and beyond. This, along with the operational burden created by the January and February shutdowns in China and the lower gross margin inherent in refurbished resales impacted our profitability for the quarter. Our adjusted EBITDA also included $1 million of patent litigation expense and $2.9 million of severance and restructuring expenses as we continue to optimize for profitable growth. I want to spend a few moments on Slide 21 to remind you of the seasonality of our business which bears repeating not only as we look at Q1 performance but also our expectations for the full year of 2023. On the left, you will see our sequential net sales growth pattern throughout the year. Q1's sequential growth rate represents a 12% increase compared to the previous year, resulting in lower net sales compared to the preceding Q4 and making it the lowest quarter of the year. As we mentioned previously, this Q1 is no different. With China shutdowns in January and February, and international providers holding back in anticipation of Syndeo's Q2 2023 launch, seasonality is amplified. The second quarter typically gains momentum sequentially due to the marketing activities conducted in the first quarter. As a reminder, the second quarter of 2022 saw a one-time $23.3 million benefit from trade-up demand in connection with the U.S. Syndeo launch. With the International launch now in full swing, we expect Q2 '23 to experience a similar but less pronounced one-time spike in trade-up demand. Q3 continues to build on Q2's momentum with relatively moderate sequential growth, excluding trade-ups. This is due to a seasonal summer slowdown that is broadly applicable across the beauty sector, particularly in EMEA. Lastly, the fourth quarter uses up the Q3 and is historically our highest revenue quarter of the year. It benefits from a peak in consumer demand, holiday promotions, and the desire of many of our partners to utilize remaining CapEx budget for the year. Moving to Slide 22. I wanted to reiterate how to think about the sequencing for our profitability during the year. We turn our strategic marketing investments early in the year which subside as we progress throughout the year. Our biggest and most productive trade shows occur in the first half of the year and the leads generated from these strategic investments support our funnel and fuel stronger sales and margins historically seen in the second half of each year. On this slide, you can see the results of this quarterly sequencing in adjusted EBITDA contribution in 2022. Similar to last year, Q1 generates a minimal amount of the full year's EBITDA. Given our substantial fixed cost base, the net sales seasonality we just walked through naturally makes us a back half-weighted business for EBITDA flow-through. We extract operating leverage from the higher revenue in the back half of the year and our marketing spend moderates as the year progresses. We expect our 2023 quarterly EBITDA contribution to follow a roughly similar cadence as shown on this slide, with the bulk of the EBITDA generated in the back half of the year as is customary for our business. Importantly to note, and as we just discussed, Q2 2022 EBITDA contribution reflects a higher trade-up volume than we currently anticipate for Q2 2023. I will now turn to Slide 23 to walk through our cost details. Selling and marketing expenses for the first quarter were $38.7 million compared to $36.4 million in the same period last year. The increase is primarily due to higher personnel-related costs, including sales commission expense. Selling and marketing expenses as a percentage of revenue increased 342 basis points year-over-year, partially due to the lapping of Syndeo U.S. launch costs and increased operating leverage from higher revenue. Fourth quarter G&A expenses of $30.4 million were $4.1 million higher year-over-year, primarily a result of an increase in software expenses, including certain contract termination costs and professional service fees, including patent litigation expenses, partially offset by lower recruiting-related expenses. On a run-rate basis, our G&A expenses continue to hover around $20 million to $22 million. Lastly, R&D costs continue to remain relatively flat. I will now move to our balance sheet highlights on Slide 24. We ended the first quarter with roughly $532.3 million in cash and cash equivalents. We remain well-capitalized to execute on our growth initiatives and continue to remain optimistic about M&A that accelerates the vision of our platform. As discussed during the last earnings call, we continued to make working capital investments during the first quarter in anticipation of the Syndeo international launch. With the launch now upon us, we expect to reduce our working capital balance going forward, primarily by working through our existing inventory. As we mentioned before, we expect to normalize to approximately 1 to 2 quarters worth of inventory on hand by the end of the year. Finally, our diluted share count at the end of the first quarter stood at approximately 132.6 million. In April, we completed the second $100 million tranche of our accelerated share repurchase program. With the $200 million of total share repurchases announced last year, we retired approximately 18.8 million shares at an average price of $10.78 per share. As Andrew mentioned, we continue to have strong underlying consumer demand. The global traction for Syndeo has been strong and China has shown a rapid recovery since March. These trends are part of what gives us the confidence to deliver the implied year-to-go net sales growth shown on Page 25. As I mentioned earlier, we expect value engineering to create gross margin expansion, and top-line strength to deliver operating leverage down the P&L, combining to reach an 18% to 20% adjusted EBITDA margin for the full year. As Andrew mentioned, we remain confident and on track to deliver our 2023 commitment. We continue to deliver double-digit year-over-year growth, fueled by our marketing efforts, driving sustained consumer demand throughout our markets and sector tailwinds. The execution of the Syndeo international launch to date has been promising, and we look forward to providing you with an update during our next earnings call.

Andrew and I will now gladly take your questions.

The first question today comes from Korinne Wolfmeier with Piper Sandler.

I would like to discuss what you observed during the months of the quarter. You mentioned that some customers were postponing their purchases for Syndeo; have those customers returned to make their purchases since the launch? Additionally, as we look ahead to March, April, and early May, can you share any trends in demand you have noticed for both the delivery system and consumables? Specifically in China, has the strong demand observed in March persisted through April and May?

Thank you for the question. It's very relevant. Overall, we've had a solid first quarter that aligns with our plans. You're completely right about the typical seasonality we experience in Q1, which was expected. Looking back at prior years, it's been quite consistent. We did see that build-up, with March being our second highest month ever, which we are pleased with, especially considering it was before the international launch of Syndeo. This performance was bolstered by strong results across the board, particularly in consumables within our core products. This performance gave us confidence as we headed into April globally, especially in China, where Liyuan and I just visited to raise our guidance for the year. Everything we've seen so far in the second quarter is looking very positive. Additionally, Syndeo had an excellent start since its early launch in Q2.

The next question comes from Margaret Kaczor with William Blair.

I wanted to maybe go a little bit deeper on some of the commentary on March and China. I know Korrine had just asked that. But was that primarily Shanghai? Or are you getting some benefit from Beijing? And is there any commentary, I guess, that you could provide on the new experience center, whether that's driving demand and even a sense of scale, I guess, relative to what you saw early days in Shanghai as an example?

Yes. No, exactly. In terms of China, of course, January was very much impacted by COVID, February and New Year but really from March onwards, we saw a tremendous bounce back, both with existing providers turning back on the machine, retraining staff, and making orders. But then, of course, going into Q2, of course, the launch of Syndeo. And we've seen the pickup in Shanghai, Beijing, Shenzhen but really across the board, Margaret. I think what we're finding all over China is after a couple of years of lockdown, there is a real hunger for aesthetic beauty and skincare treatment. So we really felt very positive when we spent a week or so over there. Of course, the experience centers really help us in rapidly training those staff. We have obviously been locked down and bringing them up to speed on HydraFacial and of course, the new Syndeo system. So that's been working hard. The other great thing about the new experience center in China is that we've built a live-stream studio within it. So we can make content 24/7 to live-stream and you know that's a key revenue driver in China. So yes, we're really bullish with what we saw there.

The next question comes from Olivia Tong with Raymond James.

It sounds like you had a strong April. Could you discuss the main factors driving that performance? Specifically, can you provide some insights into the exit rate for the March quarter and how the situation has evolved in April and May compared to that March exit rate? Additionally, can you compare and contrast the performance from January and February with that of April and the first half of May? My second question pertains to consumables, which have turned out to be lower than expected. I understand that there were lockdowns in Asia, especially in China, at the start of the quarter. Was the demand lower than you had anticipated? Did this impact only Asia, or was the sales distribution in the U.S. and Western Europe different from what you expected at the beginning of the quarter?

I'll start and then turn it over to Liyuan. We've discussed the consistent seasonality in our business during Q1 many times. It aligned with our expectations with a slower January and February, followed by a strong March and into April. Overall, we were pleased with a solid quarter. The key indicator of our business health is the solid growth in consumables, which exceeded 21% for the quarter, with a remarkable 34% increase in the Americas. Excluding lost business in Russia, EMEA grew by another 35%, while APAC growth was weighted towards the end of the quarter. The growth we experienced in March was significant, though January and February were slower, and this trend has continued into Q2. In international markets, we haven't had updates on the systems side for over five years, during which a lot has occurred. We’re excited to bring a major marketing campaign around the key trade shows typically happening in Q1 and early Q2, which has positively impacted revenue and the increase in consumables.

Yes. Olivia, just to build on that from a long chain dynamics point of view, as you can appreciate, it's almost ironic that we made the investment in Q1 and we're launching as part of the launch, we sold a lot of these refurbished leads, almost saying you can trade it up down the road. So as you can appreciate, these refurbished leads if we did sell instead, you can see a potential $46 million top line and complete flows through to the EBITDA margin as well. Of course, those revenue generation would actually take place in the second quarter. So again, marketing investment, a lot of the investments were made in Q1 but then the revenue really comes through a build starting in Q2. Now in terms of the consumables, the only other comment I'll make is, I think the churn really confused folks last time when we met because of the fact that China was shut down, we're measuring if someone hasn't purchased consumables over 12 months, we deem them churn. The fact that China came back has affected this, and that's why you're actually seeing the installed base increase because those stores or locations started opening again. So I think when you see it in the grand scheme of things, the other thing to keep in mind, we had shared with the market, we only run consumable promotions for the most part, twice a year. We do it during Black Friday, then we do again HydraFacial's birthday or Mother's Day right around May. So as a result, as you can appreciate, some of the APAC market, especially distributors, they kind of purchase based on the promotional period.

The next question comes from Jon Block with Stifel.

I'll ask a straightforward question. You have confidence in the business and have increased your revenue and EBITDA, but it seems you did not meet the implied figures for Q1 23 as discussed in late February. Is that EBITDA fair, or did it fall short compared to last year? You mentioned you expected it to be in line, so I want to clarify the messaging. If that is the case, what is the situation? You noted that China performed well in March, so is the disconnect due to delays in capital purchases for EMEA? Additionally, the growth of consumables by region was informative. The numbers for Americas were strong. Andrew, is that mainly due to the Q1 23 environment in the Americas being better than in EMEA and APAC, or is it related to Syndeo, which would be promising as it may indicate similar trends for EMEA and APAC in future quarters?

John, thanks for your question. The key message is, from our perspective, it's a really solid quarter in line with our plan. I mean, we expected that natural seasonality certainly across the Americas. I think the consumables at a plus 35 was something which we were extremely happy about. Outside of that, though, John, you're spot on. I think what we saw and I think you and I probably spoke over last year, I think with the U.S. last year, we were able to surprise the market with the launch of Syndeo. I think what we found outside of the U.S. in Q1, there was a natural degree of holdback from providers in EMEA and in APAC because they sensed Syndeo was about to launch, I guess it's human nature. They waited for that to come. And of course, then when we did launch it, we've really had very strong sales since into Q2. But that certainly explains that dynamic in any deviation you felt versus what you were expecting outside of the U.S. for Q1 but it was in line with our plan.

Yes. John, just to address your question in terms of the guidance. We were very thoughtful and purposefully sharing the seasonality when we had the conversation back in February. And the fact that given the launching time, there's anticipated potential weight and slowdown to Andrew's point earlier. I think on the gross margin point, we were fully anticipating being consistent with last year. But when you really think about the dynamic with the gross margin, there's a bit over 100 basis point difference, most of that is folks really choosing to buy those refurbished leads which is what we plan to do as part of the trade-up program, especially when it comes to APAC and EMEA. And as you can appreciate, those trade-up refurbished leads have very, very low margins because a lot of those came back from the trade-up with the U.S. So it's how we really booked the revenue and margin. So these are very temporary impacts. If we sold both the Syndeo and these refurbish leads, then we would have actually had a slight pickup. So there's a bit of the timing that's really impacting gross margin for Q1 and that's partially why we felt pretty confident going forward. Of course, we're going to continue to push for trade-up and we still have refurbished leads. But given the volume and the ASP coming with new Syndeo systems going forward, we believe consistently, we will see the sequential improvement in gross margin.

The next question comes from Oliver Chen with TD Cowen.

Andrew and Liyuan, on the guidance raise, what underpins your confidence there? And also, what's assumed in the China situation in terms of your guidance? A modeling question on your comments about trade-up. How should we think about the margin impact this year relative to what you saw last year in the U.S. for our models? And you covered a lot of great detail on consumables. Just what's the bottom line on near-term growth versus long-term growth that we should incorporate into our thinking and algorithms? And then I should enroll in your beauty MBA; congrats on that.

I'll kick off and allow Liyuan to follow up. But we feel good about raising the guidance on the year. I guess, two very clear factors: first of all, what we have in the plan but just combined with the momentum, frankly, we've seen coming out of March globally and also with the really encouraging start to Syndeo. I think when you add on the real strong acceleration from China in March, that's what gives us the confidence to raise. And I think we spent the last couple of years, we spoke many times about building up that infrastructure, putting the sales team in place, the training and education centers, getting the right partners. And that's all in place now, and we're reaping the rewards of that. So it's a really positive signal for us.

Yes. Just to build on that, Oliver, as you can see for Q1, we actually did positive comp when it comes to America's new system sales which speaks volumes. The part that's missed is really trade-up when it comes to the fact that we were launching last year. So we sold much more trade-up last year's Q1 because it was a fresh launch when it comes to the U.S. As we look at the margin, again, if you really think about the dynamic with the EV refurbished, if those, call it, 200, 300 units, we didn't sell the refurbished, we actually sold a Syndeo, you would have seen a $4 million to $6 million top line and directly flow through to the bottom line. So in that vein, we are going to push pretty aggressively as we shared before on trade-up overall and that's going to be around the globe because we really want everybody to be on side because not only does it provide data to everybody better services and new product offerings but also it really helps from a consumable management point of view. So in that vein, I think we will still anticipate sequential build when it comes to gross margin percentage because all the new units with the margin now gradually with the optimization should start to really flow through, especially also with the volume as we increase in volume, you should start to see those leverage as well.

The next question comes from Allen Gong with JPMorgan.

I just had a quick one on, I guess, the language in your presentation. I think historically, you've really talked about new systems sold in the quarter and this is the first time, I think, that you've phrased it as new systems placed. Should we read into that as you're seeing maybe a bit more financing, maybe a bit more leasing if you could double tap on that a bit? And also, I think something that would really be helpful is this China dynamic, right? We understand that it really impacted the system build numbers in fourth quarter and we've seen a little bit of a reversal of that in this quarter. But is there any way to quantify that in terms of number of systems that turned back online in the first quarter? And whether or not you expect that to be a similar dynamic to really keep in mind for the second quarter?

There is no difference. We should have consistently used the term sold instead of both placed and sold. We highlighted the placement to stress that it refers to new systems sold without trade-up. I want to clarify that the trade-up is less significant compared to last year. Regarding churn, we continually assess it based on purchasing patterns, which can also vary depending on who buys consumables again. We have observed that the numbers from China should reflect this, as they resumed activity in February. Additionally, in the U.S., we are seeing encouraging signs as we run consumable promotions targeting different customer tiers, leading providers to start purchasing consumables again. We expect this trend to improve as we refine our approach in encouraging these providers to buy consumables.

The next question comes from Bruce Jackson with the Benchmark Company.

It's about the new guidance. Last quarter, you said that the swing factor in the guidance was China and you just took guidance up for the year. So reading between the lines, should we interpret that to mean that you're more confident about China? Or are there some other geographies that are doing better than expected?

I think it's twofold. I think we've had a very, very encouraging start internationally to Syndeo overall on top of the continued strength in the U.S. You saw that in that consumable number here in the Americas. But yes, Bruce, the China recovery is a key element of that. I think we've been extremely pleased with what we've seen so far from March and going into Q2, and we're following that very closely but that's what's giving us that real confidence along with the Syndeo launch to raise the guidance.

The next question comes from Linda Bolton-Weiser with D.A. Davidson.

Yes. One of the metrics we look at sometimes is Google search trends for HydraFacial. And what we've noticed lately is that the trend is still positive, like growth in searches year-over-year but quite frankly, less positive than in the past. So in the past, maybe it'd be up 40%, 50% year-over-year, and now it's more up like 5% to 10% year-over-year. Is there any reason that those Google Search trends would look differently?

I mean, twofold. I mean, first of all, for the quarter, just to clarify, Google search, organic search was up 13%, which I think when you take it back and think that's a pretty amazing result because it comped the launch of Syndeo last year in the U.S. and we had a huge push around that, as you're aware. So to comp that number with 13% is honestly, frankly, a tremendous effort. And of course, we're happy with that. I think ongoing, growth remains very positive. It's just one measure we look at. But of course, the bigger you go, getting those huge comps will naturally slow down. It's just mathematics. But it's, of course, a key focus for us at search.

The next question comes from Navann Ty with BNP.

Do you feel more confident about the low end of the 18%, 20% with the rebound in China in March, April, and early May versus the gross margin impact in the first half? And then my second question, have you seen any signs of macro headwinds on HydraFacial in the U.S. and Europe at all? And maybe if I can add a third one. Have you submitted the 510(k) application for the skin status facial indication? And should we expect more information during the next quarter?

I'll start and then pass it on to Liyuan. Regarding the economic environment, we often mention that consumables reflect the health of our business. While no business is completely recession-proof, I believe that our beauty, health, and HydraFacial categories tend to be more resilient in skincare aesthetics. There seems to be a significant disconnect between the headlines we're seeing and what providers are sharing with us during our global travels. Many of our providers are fully booked for months ahead, and their biggest challenge can be finding enough staff to provide services. The demand has remained strong throughout Q1 and into Q2, which gives us confidence in raising our revenue expectations.

In terms of your question on the margin, we commit absolutely to the 18% to 20%. I think what we want to do is come out of Q2 and then look at giving further clarity on any raised guidance for EBITDA for the rest of the year. But at the moment, we're absolutely committed to that range of 18% to 20%. To elaborate on that point, our confidence in the EBITDA flow-through stems from several factors. First, regarding gross margin, we've not only established a production site in China for local manufacturing but are also actively engaged in value engineering and managing our inventory flow. We have already incorporated trade-up assumptions into our prior guidance. With the anticipated growth in China, which offers the highest average selling price and gross margin percentage, combined with expected increased sales of the Syndeo product, we believe we will see significant sequential improvement in gross margin. Additionally, we made substantial investments in sales and marketing during Q1. The 300 basis points of leverage indicates that as sales continue to rise, this will positively impact our bottom line. It's important to note that G&A expenses in Q1 typically include higher professional service fees since we recognize these expenses as they occur. This includes costs associated with tax testing and audit fees, which tend to be heavier in Q1. Therefore, we anticipate seeing improved leverage on a quarter-over-quarter basis.

And to address your final question you raised on Skin Styles. That's an acquisition which we, of course, completed in Q1. We're extremely excited about that. At the moment, as you know, it's FDA-cleared for abdominal scarring and we're in the process of securing approval for other indications. And we'll, of course, keep you posted as that's progressing during the next quarters.

The next question comes from Ashley Helgans with Jefferies.

This is Sidney on for Ashley. Just wanted to ask if you've seen or heard about any pullback in treatment add-ons or boosters kind of given the macro or if you have any expectations for those levels going forward?

No, that's a great question. Thank you. In fact, quite the opposite. I mean, our consumables strength in Q1 was, of course, driven by consumption but I think what we've been finding is the attachment rate on our boosters. As we really double down on our storytelling with new exciting products, be it JLo, Dr. Babor, and Moore, of course, we announced the new partnership last quarter. The attachment rates are increasing and it's becoming a key element of our business as it grows, offering that kind of unique level of personalization and customization which really no other aesthetics or beauty procedure can do other than HydraFacial. So that's been a strong driver behind the consumables growth.

The next question comes from Kyle Rose with Canaccord.

I just wanted to kind of ask a dovetail on the previous question there is on utilization. Maybe just any trends you're seeing from a utilization perspective in the Syndeo versus the non-Syndeo accounts? And then similarly, U.S., when we think about actual treatments provided or body areas treated, whether it's Karaviv or treatment outside the base. Just overall, if you could break down some of the utilization trends, that would be very helpful.

Absolutely. So we didn't really push for boosters as hard prior to Andrew's joining. I think with both of the booster push which really finished off the treatment, provide that personalization but also extending to the body, we actually see that trend picking up around the globe, especially when we were visiting in China, just the excitement and anticipation that we see folks are creating for that noninvasive personalized treatment. So we're seeing a lot of upside. And when you look at the data, Kyle, I would say it's a 50-50 split in terms of number of treatments increasing versus ASP and these different pricing that we added to the fold. We're just getting started. So we're really looking forward to seeing we continue to make improvements in that regard.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you, operator and thank you all for joining us on today's call. In closing, we are pleased with the progress of Q1 and are positive about the momentum we see for Q2 and beyond. There is a sustained enthusiasm for HydraFacial treatments across the globe, together with the rapid rebound we are seeing in China, excitement for Syndeo international availability and sector tailwinds that are very much in our favor. We are confident in our outlook for 2023 and beyond. Once again, thank you for joining today's call and have a great day ahead.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.