Good day, and welcome to the Beauty Health 2024 Third Quarter Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Norberto Aja of Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. Thanks for joining the Beauty Health Company's conference call to discuss our Q3, 2024 Financial Results, which were released earlier this afternoon and which can be found on our corporate website at beautyhealth.com. Joining me on the call today is Beauty Health Chief Executive Officer, Marla Beck; along with our Chief Financial Officer, Mike Monahan. Before we begin, however, I would like to remind everyone 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. Listeners are cautioned not to place undue reliance on any forward-looking statements. For a further discussion of risks related to our business, please see the company's filings with the SEC. This call will present non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most comparable GAAP measure is in the earnings press release furnished to the SEC and available on our website. Following management's prepared remarks, we will open the call for a question and answer session. With that, I would now like to turn the call over to our CEO, Marla Beck. Please go ahead, Marla.

Thank you, Norberto. Good afternoon, and thank you for joining us today to review our Q3 results. In my short time as CEO, we've identified and made significant progress addressing the most critical issues facing the company. I believe we are in a much stronger position today. Our strategic initiatives have begun to take hold and are starting to flow through to our financial results. Third quarter revenue came in above the midpoint of our guidance, we lowered our operating expenses versus the prior year and delivered profitable adjusted EBITDA despite top-line pressures across device sales. Strong growth in consumables allowed us to make great strides in improving our adjusted gross margin to 69%. We've done a great deal of work to set the foundation for Beauty Health's future success. This work includes enhancing and strengthening our sales strategy in the face of near-term macro headwinds, simplifying our operations and manufacturing footprint, reducing our global cost structure, and investing in innovation for future growth. This foundation is critical as we drive toward long-term sustainable profitability. The current macro environment is challenging for new device sales due to tightened credit, high interest rates, and economic uncertainty most notable in the international markets. Our strategy continues to revolve around three core areas of focus that I outlined earlier this year: sales execution, operational excellence, and financial discipline. Let me walk you through some of our accomplishments and my thoughts on the opportunities we have in front of us. Starting with sales execution, we've made significant strides in strengthening our commercial leadership team with the recent appointments of a new Chief Revenue Officer and Chief Marketing Officer, both of whom have deep experience in medical aesthetics. They're leading a comprehensive review of our commercial activities to drive revenue and position us to capture the large addressable global market for Hydrafacial. As a first step, we recently completed a project to restructure our sales strategy in the US, our largest market. This project focused on improving processes, tools, and technology to drive better results in the coming year. Key learnings and actions from the initiative include expanding our lead pipeline, enhancing our sales team's execution to increase field time and provider touch points, and leveraging advanced analytics for more efficient management. These improvements are designed to empower our sales teams with the right tools to engage more effectively with providers and streamline decision making. As we implement these changes, we are confident they will boost our sales performance and drive stronger results moving forward. Starting in 2025, we plan to focus our efforts on core markets with the intention of consolidating the operations while strategically leveraging partnerships in other regions to maximize shareholder value. We will provide an update on these initiatives on our next call as we continue to evaluate the best strategic options in each market to simplify and optimize our global operating model. These actions are designed to ensure our commercial efforts are aligned, efficient, and focused on delivering long-term value. Moving to operational excellence, Syndeo performance has stabilized, particularly with the devices produced in our Long Beach facility. While some challenges persist in the field, the technical return rate remains low and continues to decline. The majority of service calls can be addressed easily and are often resolved over the phone thanks to the expertise of our technical support team. During the quarter, we made the strategic decision to realign our global manufacturing footprint. We will consolidate our manufacturing operations in our US facility by year-end and conclude our relationship with our Chinese manufacturing partner. This is a key step in simplifying our operations and aligning our business with the most scalable growth opportunities. It will also allow us to focus more closely on quality oversight and ensure consistency of product production. As a result of these efforts and the improvement in sales mix, we've achieved an adjusted gross margin in the upper 60s as we continue to focus on gross margin improvement programs for manufacturing to drive further efficiency and cost-effectiveness in our operations. We've also taken a more strategic approach to how we leverage our equipment portfolio. As we previously mentioned, in the U.S., we have opened up the portfolio and implemented a good, better, best tiered pricing strategy for our equipment sales. This is already allowing us to increase the adoption of our entry and mid-level offerings, Elite and Allegro, and address the entire spectrum of providers more effectively. Many of these providers are finding the lower price point compelling, allowing them to offer the HydraFacial experience and enjoy the powerful increase it has on foot traffic and their business as a whole, while making an investment that they can more easily self-fund or find financing for. In addition, by focusing on more diverse price points, we've addressed many of the headwinds around higher interest rates and the overall lack of financing that an increasing number of our providers have experienced recently. In just a short time, we've seen the positive impact of this strategy with sales being more diversified across all three of our equipment offerings. In Q3, we saw an increase in non-Syndeo units sold in the Americas from 33% in Q2 to 38% in Q3. Globally, non-Syndeo sales were 29%. With regard to innovation, our strategy is centered around the concept of medtech meets beauty. The combination of our patented technology with our clinically effective solution serums and peels results in healthy, glowing skin that cannot be achieved with any other minimally invasive treatment. We are now refocusing our efforts on bringing innovation to the market. The work we're doing to reduce costs and improve inventory is enhancing our ability to accelerate the product pipeline and leverage our over 120 patents. To that end, we are excited about the reception by the market to our latest innovation, the HydraFacial HydraLoc HA Booster, the first in our portfolio to be backed by extensive clinical claims. The HydraLoc HA Booster has quickly become the most successful HydraFacial branded booster launch to date, setting a new standard for launch excellence. As the first booster in our future strategy, it's a clear example of how we're executing with precision backed by deep clinical results and a 360-degree marketing plan that resonates with our provider base. The launch was bolstered by well-timed sales training and strong clinical evidence ensuring maximum impact. We sold out in record time for a HydraFacial branded booster, showcasing what our organization can achieve when we work together with cross-functional planning and collaboration. In addition, we garnered over 4.3 million influencer impressions. This success proves the power of a coordinated approach and sets the stage for future product innovations. Moving forward, clinical data will play a leading role in our approach to innovation. Significant leverage can be achieved from the clinical data supporting the positive effects of HydraFacial across a number of skin conditions. We are working with leading dermatologists to validate the power of non-ablative lasers combined with HydraFacial treatments with clinical data and hope to see this study published soon. We now have a new commercial team in place focused on determining how to best introduce new products for 2025, including new booster launches. We are continuing to evaluate the opportunity for HydraFacial backbar and a skincare line. New product innovation remains a key piece of our strategy to wrap the treatment room and drive sales and margin expansion. In parallel, we're enhancing our digital capabilities and have brought in a new US e-commerce leader who is focused on reducing friction for providers and leveraging technology to streamline their experience. And with regards to financial discipline, something that Mike will touch on in greater detail, we continue to see great results from cost discipline and cost management. We have made strides in better aligning our costs with the realities of our business and have been able to achieve scale out of the business. Operating expenses for the first nine months are down $31.4 million versus the prior year period. This was achieved through diligent management of expenses and shifting the corporate culture toward cost consciousness and data-driven decision-making. It is important to note that our global footprint is a driver of our operating expenses. Beauty Health remains a unique company at the intersection of beauty, aesthetics, health, and wellness. We are committed to reinforcing our value proposition as a key business and revenue generator for our providers. Investment in a HydraFacial device offers the potential for payback in under six months and has proven to drive significant incremental revenue for those who invest in it. Long-term market trends are on our side with a growing demand for more natural aesthetics, the rise of weight loss treatments fueling the need for skin rejuvenation, and the increasing popularity of pairing lasers with HydraFacial treatments. As the market leader and category creator in minimally invasive skin health treatments, our brand is recognized and requested by consumers worldwide. A great proof point reflecting how this continues to be the case is the interest from national accounts, which has been rising as more providers explore expanding their service offerings with us. In closing, we are starting to see our transformation strategy take hold, with the business delivering the results we promised as we make progress against our strategy across our three major focus areas: sales execution, operational excellence, and financial discipline. While we are still facing near-term industry headwinds, particularly in the equipment segment, our consumables business is growing. Transformations of this scale take time, and we are focused on laying the necessary building blocks to position the company to return to growth once these headwinds subside. Our efforts are beginning to show promise, but we remain patient knowing that sustainable change doesn't happen overnight. Looking ahead, our primary focus within our core markets is to build on the momentum we've generated by continuing to refine our sales and operational approach and staying aligned with our strategic goals. We are confident in our ability to drive sales, margin improvement, and profitability in 2025. I will now turn the call over to Mike to discuss our third quarter financial results and revised guidance.

Thanks, Marla. I'm encouraged by the progress we're making to strategically position the company to benefit from the many opportunities in front of us over the mid- to long-term. Third quarter revenue came in above the midpoint of our guidance, at $78.8 million, representing a 19.1% year-over-year decline. In the current environment, providers remain cautious on capital equipment purchases, particularly in the international markets. To address this, we began to focus on a good, better, best strategy that offers lower device price points to providers primarily in the US market. As a result, we saw an increase in sales of Elite systems during the quarter, with America's non-Syndeo systems totaling 38% of units sold, up 11% from Q3 of last year. Global equipment sales declined by 45.9%, offset by a 10.4% increase in consumable sales. Total units sold worldwide during the quarter was 1,118 units with an average selling price of $24,699 compared to 2,140 units sold globally in Q3 of 2023. In the Americas, we sold 634 units compared to 776 units in Q3 of 2023. We sold 215 units in APAC compared to 752 in Q3 2023 and 269 units in EMEA compared to 612 units in Q3 2023. This brings the total year-to-date units sold to 3,820 systems and the total active machines in the field to 34,162 units versus 30,074 units at the end of Q3 2023. Consumable sales for the quarter totaled $51.2 million, which is a 10.4% increase versus Q3 2023. This brings our consumable sales for the first nine months of 2024 to $152.2 million, compared to $139.2 million for the first nine months of 2023. Consolidated revenue in the Americas was roughly flat, up 0.3%, while revenue across APAC and EMEA declined by 56.1% and 23.6% respectively. In APAC, China accounted for $5.3 million of the region's revenue, a decline of 68.5% year-over-year. The decline in China reflects an 84.2% drop in system sales along with a 5.8% decrease in consumables revenue. As a reminder, Zendaya launched in China in Q2 2023, driving increased sales in the prior year. Gross profit for Q3 was $40.6 million favorably compared to a loss of $12.6 million in the prior year period. Adjusted gross margin for the quarter was 69.5%, primarily driven by lower inventory-related charges and product costs, higher average selling prices for equipment net sales, and a favorable mix shift towards consumable net sales. GAAP gross margin for the quarter was 51.6%, improving versus the prior year period as well as sequentially from 45.2% in Q2 of this year. Total operating expenses decreased by 10.6% to $62.2 million as we continue to have success in strategically managing our expenses. Selling and marketing expenses were down approximately 10.1% to $27.6 million, reflecting lower sales commissions, compensation, and lower marketing trade show and event spending. R&D expenses were also down $0.7 million while G&A expenses were $33.4 million, down 9.6%, with savings primarily driven by lower compensation expense. This led to an operating income loss of $21.5 million versus a loss of $82.1 million in Q3 of 2023. Adjusted EBITDA of $8.1 million was above our prior stated guidance. This was driven by improvements in adjusted gross margin and a decline in our operating expenses. During Q3, we made the decision to exit our manufacturing partnership in China, resulting in a one-time charge of $7.6 million primarily for inventory disposal. Additionally, our partnership with Sephora is ending this year, and as a result, we have taken a charge of $2 million primarily for the obsolete inventory on hand. Moving to the balance sheet, we ended the quarter with approximately $359 million in cash. Year to date, we deployed $156 million of cash to repurchase $192 million of our convertible debt. We feel we have a healthy and robust liquidity position to adequately support the business, including our growth initiatives. This sentiment is further strengthened by the cost reductions we are gaining as we take additional actions to improve the efficiency of the business. Looking at inventory, we ended the quarter with approximately $73.4 million, a decrease compared to $91.3 million in December of 2023. The decrease was primarily driven by lower purchases and excess and obsolescence charges. We are now projecting full year 2024 sales of between $322 million to $332 million, and adjusted EBITDA of negative $2 million to positive $4 million. This implies a year-over-year revenue decline in the fourth quarter of approximately 21% at the midpoint of our revenue guidance range, which is consistent with the average year-over-year declines we recorded for Q2 and Q3 combined of this year. Compared to the third quarter, our fourth-quarter guidance assumes growth in the Americas, but declines in our international markets, specifically in China. Capital expenditures are expected to be approximately $8 million to $10 million for the full year 2024. In closing, we are pleased with the progress we're making as our strategic initiatives gain traction. We are focused on building on our third-quarter results to deliver long-term shareholder value by continuing to focus on sales execution, operational effectiveness, and financial discipline. While there's more to be done, we are confident that the actions we have taken lay a strong foundation for profitable growth and HydraFacial’s long-term success. I'll now turn the call back to the operator for Q&A.

The first question comes from Oliver Chen of TD Cowen. Go ahead, please.

Thanks a lot. Hi Marla. Hi Michael. The consumables sales being better were very encouraging. Which regions or aspects of consumables were better than you expected? And related to that on the guidance, on the pressure on delivery system sales, I was curious about why that may have been worse than you expected and when that may or may not stabilize. I know we're in a pretty dynamic macro environment. Also, second, as you concluded your relationship with the manufacturing partner what's next in terms of what you'll do next with a manufacturing partner and what you're looking for? And then Marla, there's a lot happening, you know, between the sales structure and the booster launches and the pipeline. And just how would you prioritize perhaps the hardest challenges that you have ahead and or, the most needle-moving if there's a way to contextualize, the many things happening.

Thank you, Oliver. I'm going to have Mike start with your first series of questions just with the preface that we're very pleased with our consumable sales, especially in the Americas and EMEA where we saw consumable sales per device increase year-over-year. But I'll have Mike take the rest of your questions and then I'll come back to sort of the overall priority list.

Sure. While I start, Oliver, with the manufacturing partnership. We're consolidating our manufacturing in our Long Beach facility in Southern California. And we're doing that because we believe that we can increase overall quality as well as manufacture more efficiently within one location. So that's the primary driver of that decision and we'll have that complete by the end of this year. Another part of your question, I think, was around guidance. So, let me talk a little bit about that in relation to consumables and devices. So, our year-over-year revenue growth declined in Q2 and Q3 this year on average 21% versus the same period in 2023. We're not seeing those trends materially change in the near term, so we carry that forward in our guidance. So, when you look at the midpoint of the revenue guidance for Q4, it's down 21% year-over-year. Typically, Q4 is seasonally a stronger quarter for us. But versus Q3, the guidance pinpoint implies growth in the Americas region, offset by declines internationally due to headwinds from equipment sales and softness in China. We're seeing favorable growth on consumables, specifically in the Americas and EMEA, where, as Marla mentioned, we saw consumable sales per device increase in Q3, which is encouraging.

Yes. So, in terms of our priorities, there are really a couple of main ones. One is our go-to-market globally and looking at how we structure for maximum scale. So that's the first one. The second is our gross margin improvement, which comes from simplifying and streamlining our manufacturing strategy, which we're in the process of doing. And then the third is really our consumables innovation strategy, which allows us to enhance our gross margin while also expanding our consumable revenue per device. So those are the three priorities and they fall under sales, operations, and costs.

Okay, Marla. And lastly, it sounded like the consumer challenges you've had with Zendaya are more normalized now. But what risk factors do you see? The customer satisfaction rates are where they need to be and the service levels are where they need to be? Or are you still monitoring certain factors in terms of the total experience with Zendaya and customer satisfaction?

Our technical return rate is way down and we're always monitoring sort of the satisfaction of our providers. So, I think we're on the right track. We still have minor issues in the field, but we can deal with most of them on the phone. So, we're happy with the progress we're making.

The next question comes from Macauley Kilbane of William Blair. Go ahead, please.

Hey everyone, it's Max on from Macauley. I was just wondering, with easier comps on capital sales and consumables, consumables growing double digits, is the consumables double-digit growth sustainable next year? Do you see a return to growth next year? Just curious to hear your thoughts on what your confidence for growth is in 2025. Thanks.

I'm going to have Mike take the comp question.

So overall consumables was, let me just clarify the question. Was it for Q3? The question was about easier comps on devices and consumables, I believe for this quarter. So, I wanted to have you address that. Got it. So, this quarter, overall consumables did grow, but what we're seeing and we talked about this a little bit in the script, is we were encouraged by the consumables per device. And so that was the main, one of the main things that we're tracking overall because that demonstrates points to the overall consumer and how many Hydrafacial’s they're getting, which is encouraging. We've also, even despite pressure on the capital equipment side, we're placing more devices each quarter into the market, which is further driving consumable sales. So, you know, we're very optimistic about continuing to place more devices and therefore being able to grow consumable sales into the future.

Great. And then just a follow-up, I know you guys mentioned you provide an update on the regional strategy next quarter, but with system sales down pretty significantly in China and then you're pulling your manufacturing operations. I'm trying not to read into that too much, but are you guys still committed to China going forward?

We're evaluating all of our global markets and looking at where we should continue to invest to achieve the growth rates we're looking for and achieve scale and where a strategic partnership or distribution partnership could potentially make sense.

Great. Thank you, guys.

The next question comes from Ashley Helgans of Jefferies. Go ahead, please.

Hi, thanks for taking our questions. So first maybe we can just, if you could talk a little bit about some of the underlying demand trends for Hydrafacials right now that would be helpful. And then, just back on the decision to centralize the global manufacturing footprint. Was the third party, did they have any kind of part for some of the Syndeo, any reason for some of the Syndeo issues? And then what percentage of your manufacturing was in China versus Long Beach before the decision to centralize? Thanks.

I'll start with the consumer behavior and provider behavior we're seeing, and then I'll have Mike take the manufacturing question. We're really pleased with our consumables growth. As Mike mentioned, the US and EMEA consumables per device are way up signifying that consumer demand remains healthy and strong. We are seeing this in the US especially across the medical channel where med spas, plastic surgeons, and dermatologists are increasing their consumables per device. So, we're pleased with sort of where we're headed on this. And the other area is the fact that EMEA is also seeing increases shows the strength in the region. So, we're happy with the provider behavior and the fact that the consumers continue to have demand for HydraFacial. Mike, do you want to take the manufacturing question?

Sure. We entered into the China partnership about a little over a year ago, in a meaningful way. So, we haven't been there that long. It was always below a third of the overall manufacturing on average. It moved up and down the last few months. We've really slowed down manufacturing there. And so, if you look at more recently, we've been doing primarily most production in Long Beach. So, this won't be a significant disruption to our overall operations.

Our next question comes from Allen Gong of JPMorgan. Go ahead please.

Just the first one, when we think about your margin profile going forward, obviously it's been pretty lumpy with the remediation you've been undergoing and the shift to more of a portfolio strategy. But gross margin was definitely a lot better than we had been expecting this quarter even though ASPs came down because of that mix shift. So how should we think about gross margin heading forward both for Q4 and for 2025 given that the ramping of Long Beach, I imagine might lead to some additional disruption in the near term?

Thank you, Alan, for the question. I'm going to Mike answer that one.

So, adjusted gross margin projected to improve versus in the fourth quarter compared to last year Q4 in 2023. But we're expecting it to decline versus Q3 of 2024, primarily due to higher overhead expenses. We lower our capital device production based on demand, along with plans for increased fair market value of ALLETE system sales. So, if you remember, those were the systems that we purchased as part of the trade-up program during 2022 and 2023. We're beginning to sell through that inventory, which puts a little bit of pressure on our overall gross margin. As you think about kind of moving forward our overall margin profile, we're not in a position to address 2025 specifically today. We'll talk a little bit more about that on our Q4 earnings call. But as we looked for overall profit margins, our goal is to drive towards and maximize profitability in 2025.

Got it. And then I kind of just want to touch on I think it was one of the first questions. But just on the updated guide relative to your previous expectations, Q3 came in towards the higher end of the range, but your updated guidance is now towards, you know, let's say, the lower half of your previous guidance range. So, what changed for a strong Q3 to translate into a weaker full year guide? Was there improvement you were expecting to see in October, November that hasn't appeared? Have things gotten worse in specific markets? If you could just walk us through that? Thank you.

We're specifically seeing pressure in the international markets, really around China is coming in lower than we expected, and we still continue to see pressure on overall device sales globally. So, when you look at each region, they're just falling a little bit short from where we originally expected them to be. And as I said in the previous remarks, when you look quarter-over-quarter, you traditionally see in this business seasonally, kind of a step up from Q3. And we are seeing growth overall for revenue in the Americas quarter over quarter. It's just being offset by the international pressure.

Ready for the next question? Okay. The next question comes from Susan Anderson of Canaccord Genuity, go ahead please.

Hi, thanks for taking my question. I was curious on the consumables and the launches so far this year and going forward, how are you thinking about just, I guess, the cadence of launches? Is there a certain number you would like to have it every year and then any color that you could give on when you have launched a new consumable or a partnership, are you seeing an uptick in sales as consumers kind of want to go out and try the new offering? And then lastly, I guess you seem to think there's still opportunity to also offer a skincare product eventually down the road. Thanks.

Susan. Thank you for the question. So, I believe that innovation is key in the consumables market and it really creates a reason for our sales force to visit providers and for consumers to book a Hydrafacial treatment. And we're seeing that with the HydroLoc launch. I mean, we're still in the early days of the HydroLoc launch. We launched last quarter only in the US, and so there's still more to see, but it really is our first booster this year, and it is our first booster backed by clinical studies. So, it's really resonating in the medical channel. Also, I think with our new Chief Marketing Officer and Chief Revenue Officer, we're looking at the right cadence of launches for 2025. But new product innovation is a key piece of our go-forward strategy and we're looking at sort of how whether it makes sense and when to launch a Hydrafacial backbar portfolio and a skincare line. And we do have data that 36% of the consumers that have a Hydrafacial actually have experienced using other professional brands with the Hydrafacial treatment. And so, we see some good white space in the area and just need our new CMO and CRO to really get up and running to map out this strategy.

Okay, great. Thanks. And then if I could maybe just follow up on just the consolidation into the Long Beach facility. I may have missed this, but do you guys, did you guys talk about all how this kind of impacts the P&L and margins on the systems or any cost savings you're expecting as you do consolidate?

Mike, do you want to address that?

We took a charge in Q3 for $7.6 million that we took as an add-back. That's largely for inventory disposal as we get out. So, we don't expect future charges to come from this decision outside of Q3. As we consolidate into the Long Beach facility, we're expecting to continue to realize efficiencies being able to produce for the entire globe out of that facility going forward.

Okay, great. Thanks. Good luck the rest of the year.

Thank you, Susan.

The next question comes from Bruce Jackson of the Benchmark Company. Go ahead please.

Hi, good afternoon. Thank you for taking my questions. Just a couple of product questions here. You've already talked about the boosters quite a bit. I was hoping you could tell me a little bit more about the study that you're doing right now with HydraFacial in combination with laser procedures, and what it is that you're hoping to show with that? And then is that something, is this a process that you could extend to other dermatology procedures?

Yeah. I mean, this study really came because we found that dermatologists were actually using HydraFacial in conjunction with laser, having HydraFacial be the first step in a series of treatments. And so, we decided to do a study on it. The study is in process. We should be publishing soon. But the other advantage is that our new CMO actually comes from a clinical background. She's a PhD in Biomedical Science, so she will really be looking at our strategy around this and what other treatments we can investigate pairing HydraFacial with. So, it is a key part of our go forward strategy. So, thank you for asking, Bruce.

And then, just one follow-up, if I may. The with the instrument itself, are there any other features that you're contemplating adding to the Syndeo? That's it for me. Thank you.

Thanks, Bruce. We are looking at our device innovation strategy very closely and have our team working on that hoping to have more to talk about that in 2025.

The next question comes from Jon Block of Stifel. Go ahead please.

Maybe the first one, Marla, I thought I heard you correctly. The largest customer, I think you said the contract was up at the end of this year. Is there a percent of revenue that you can provide that they accounted for? Is there a chance that it's renewed in the coming months as we think about November, December? And then if not, does that mean what? Like they can continue to order consumables, but no new boxes? Just how we think about that customer going forward. And then I'll ask a follow-up.

Yeah. We had a successful 9-year partnership with Sephora. They are not a significant customer, so the sales over last year are not significant to our results. The partnership with Sephora introduced millions of consumers to HydraFacial through our Perc by HydraFacial treatment, so a different treatment. And during that time, we expanded our footprint to over 33,000 devices worldwide. So, I think the partnership was very valuable to us in terms of branding, but going forward in this year, it hasn't been material in terms of revenue.

Okay. And there will be, if it's not renewed, there will be just no revenue to Sephora starting in 2020 starting in January '25?

To clarify, Sephora used a different device for their product. Therefore, there will be no revenue from Perks for consumables at all from Sephora going forward.

Got it. Okay. Thank you. That was very clear. And then, Mike, just to shift gears, for the 4Q revenues, maybe this builds on an earlier question. I get the logic of sort of carrying forward the low 20%, 21% decline, but your comp is just is very different. It's much easier in 4Q than the prior couple of quarters. And there's seasonality inherent in the business, right? I mean, you're usually up in 4Q versus 3Q. So, is there any color that you can provide on, you know, the exit rate or the growth prospects for 2025? Is there a commitment from the company for growth top line next year? Thanks guys.

Thanks Jon. So, for 2025, we'll address that on our next call. So, we won't make comments on kind of the top line. We are focused on margin expansion and profitability as we mentioned in the script. But we'll give more color on that in February. I think what might be helpful is kind of, I can spend a little bit of time talking a little bit more about what we saw in Q3 and we're seeing those trends come through in Q4 and that's what makes up the guide. So, in Q3 and into the beginning of Q4 to get us to today, overall new device sales were down across the globe. With consumable growth in the Americas and EMEA, as we saw in Q3, device sales are pressured due to cautious provider spending and higher interest rates primarily is what we're seeing. And if you look at each market, you know, Americas’ revenue in Q3 was flat year over year. New equipment sales were down double digit. But that was offset by increased consumable sales both in total and per device. EMEA was down, revenue was down 24%, but equipment revenue was down more than that at 49% and was partially offset by 15% growth in consumables, again, total and per device. And then APAC was down much more than that on both equipment and consumables. So those core trends, you know, we continue to see kind of entering into the fourth quarter. And that's really what made up the guide.

Thanks guys. Appreciate the color.

The next question comes from Linda Bolton Weiser of DA Davidson. Go ahead please.

Yes. Hello. Thank you. So, I was wondering do you have any idea or projection or just rough idea of how much interest rates would have to come down in order to make a material improvement kind of in your system sales?

We don't have Linda an exact number, but I think it's important. It's a combination of interest rates are definitely a benefit if they come down because we are seeing providers slow to make a purchase because of the overall interest rate. And so that would help us. It's also the credit approvals that we've been managing through. It's not just the interest rates. So, we've been working with our financing folks to figure out how we can get more providers through the funnel who they're not able to extend credit. So those are most of the programs we've been really focused in on.

And can you remind us, like historically what percentage of systems sales, unit sales were financed?

We've been moving substantially towards third-party financing. It varies by region. But, you know, well north of three quarters of our sales are financed by third parties.

Okay. And then I was just curious on the gross margin when you explained it I think you said that it benefited from higher equipment ASPs, average selling price, but yet you're talking about your offering, lower price point kind of units to help sales to help unit sales. So I would think the mix is negative, but yet you said ASP helped gross margin. Can you explain that?

Overall ASP did improve year-over-year and that's largely due to less discounting that we've done kind of in the past. So that certainly does help. What's pressuring gross margin, there are really two things. One is higher overhead expenses. And so, as our production levels come down when we're seeing lower demand, we take more of our indirect costs that pressure gross margin. So, these are things like rent, labor, non-material related costs that flow through the P&L with lower production. The second piece is elite sales, the fair market value of elites that have a higher cost basis. We continue to sell more of those items through and while they contribute to revenue, they pressure our overall gross margin a bit.

The next question comes from Korinne Wolfmeyer of Piper Sandler. Go ahead please.

Good afternoon. Thanks for taking my questions. So, to touch on the device sales a little bit more in Q3 and expectations for Q4, understanding there's still a macro impact and some more international pressure too. But I would think as well that as we start to offer this good, better, best offering that's supposed to get more people on the platform, that would maybe offset a little bit of these macro pressures. But the guidance implies, I mean, looks to be implying still very pressured device sales in Q4. So, can you help us try to better understand when we should start to see more of a lift in those device sales from this good, better, best offering you're now doing?

In the Americas, we primarily had good, better, best through most of Q3. And so, we carried those similar trends into the fourth quarter. And so, it's not going to be a major change in terms of product offering between Q3 and Q4. We do think over the long term that as we begin to market the program a little bit more, our sales force is able to go out and communicate the benefits of some of the more economical devices that we will see additional lift from that. But we're not in a position to talk about it today. We'd likely see it more in 2025, and we'll communicate more of the details on the Q4 call.

Got it. Okay. And then can you touch on as you're consolidating operations, but now you're offering more device options. Can you talk a little bit about the capacity in Long Beach to be able to do this? And I mean, does it require different lines for each type of device? And then as that demand picks up for all these different types of offerings, do you still feel like you have enough capacity to manage through that?

Thanks for the question. We definitely have the capacity to manage the device production of all three devices. The other benefit of consolidating to Long Beach is we can more closely manage the quality of the devices being manufactured. So, we're actually really pleased with the move to centralized manufacturing.

Thank you.

Our next question comes from Olivia Tong of Raymond James, go ahead, please.

Great. Thanks for slotting me in. In terms of the Q4 step down in sales and EBITDA, it sounds like you're planning some pretty big changes in terms of your international footprint. So, is that primarily China or are you taking a fairly deep look at all your international exposure across all markets as well?

Yeah, I mean, the question on go-to-market is really looking at where we don't have scale. So, we're taking a hard look globally at every activity we're doing to make sure that we're producing the profit that we expect. We're not really disclosing the different markets we're looking at. But we think it's critical that we move to really drive profitability throughout the globe for our business. And so, as we move to find distributors, it may be that our revenue may drop slightly in those markets, but our profitability in the expenses we have will change. So, we'll keep you posted on the decision-making, but we're not prepared to disclose that at this point.

Got it. And why do you think consumables per device are still increasing, especially when you consider all the macro headwinds, you know, the interest in lower-priced units? Given that backdrop, it seems pretty remarkable that consumables continue to grow. And just wondering if you had some insight into what's driving that?

I mean, a couple of things. HydraFacial treatments continue to be popular and asked for, so that's the first thing. The second thing, you know, we're seeing increases in the US and the dermatologists and plastic surgery channel as well as med spas. And so, the demand is there. And third is, we don't have evidence, but when you launch a new product, even a booster, it's a reason for BDMs to go in and talk to the providers, not just about the booster, but about driving their business. And so, as we have time to investigate the launch and the results because we're still really in early days, I think we'll have a better feel for how a new launch drives consumables revenue per device. But we're happy with the numbers this quarter, and you could hypothesize that it may be due to a launch.

Got it. And then just last question from me and I'll pass it on, is you mentioned the pressures on gross margin. Just a point of clarification because I didn't quite understand, but are you saying that in Q4 the margin is going to be down sequentially? So, you know, if we're using the numbers it'll be lower than the 69.5% that you had this quarter, or you're expecting gross margin to be down year over year from the 54.5 in Q4 of last year?

I was referencing quarter over quarter from Q3, so we expect it to be lower than the 69% we reported in the third quarter.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Marla Beck, CEO for any closing remarks.

Thank you everyone for joining us today. I want to take a moment to express my sincere gratitude to the entire Beauty Health team for your unwavering dedication and commitment. Your focus on putting our providers at the center of everything we do is truly appreciated. The hard work, passion, and collaboration, each of you brings to the table is what makes us successful. Thank you for your continued efforts and for driving our mission forward every day. We look forward to updating you on our next call.

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