SkinHealth Systems Inc. Q3 FY2025 Earnings Call

Good day, and welcome to The Beauty Health Company 2025 Third Quarter Earnings Conference Call. Please note this event is being recorded. I would now like to turn over to Norberto Aja, Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. Thank you for joining The Beauty Health Company's conference call to review our third quarter 2025 results. We released our results earlier this afternoon, which can be found on our corporate website at beautyhealth.com. Joining me on the call today is BeautyHealth's Chief Executive Officer, Pedro Malha, along with our Chief Financial Officer, Mike Monahan. Before we begin, 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 and 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 further discussion of these 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 financial measures to the most comparable GAAP measure is available in the earnings press release, which was 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, Pedro Malha. Please go ahead, Pedro.

Thank you, Norberto. So good afternoon, everybody, and thank you for joining us today. Before I get into our quarterly results, let me start by thanking Marla Beck for her leadership during an important transition period. The BeautyHealth team did a fantastic job stabilizing the business and positioning it for the next phase of growth. This next phase is actually one of the reasons why I chose to lead BeautyHealth. We have an incredible opportunity to leverage our Hydrafacial device platform and expand it into a category-leading ecosystem of skin health technology solutions. This is a unique company with a proven and resilient razor and blade business model, which is anchored in recurring high-margin consumables and supported by a global network of providers who believe in our technology and in the outcomes of our treatments that are delivered every day to thousands of people around the world. BeautyHealth is also well positioned to lead the skin health category as we continue to see the market shifting towards a less invasive, increasingly personalized, and more science-backed procedures and treatments. I say we're well positioned because if we look across the landscape, very few companies are capturing the recurring economics behind procedure volumes. And this is where BeautyHealth stands apart because we participate on both sides of the equation, the capital equipment and the consumables, which creates a self-reinforcing flywheel of predictable and profitable revenue. So since I joined BeautyHealth a month ago, I've been very impressed by the passion and the commitment of our teams around the world and by the loyalty of our customers and providers. But as we all know, passion alone does not create shareholder value. So we need to make sure that this passion is harnessed with a clear strategy and operational excellence and consistent top line growth and financial performance. So we are going to go and over-index our capital and attention in four different areas. First, our priority will be protecting and growing our Hydrafacial installed base of over 35,000 devices worldwide, because we know that for every device we place, it will drive years of high-margin consumable growth. Second, we will focus on driving consumable utilization. This is the engine behind our profitability. Consumables generate strong gross margins, so increasing device to consumable efficiency and usage across the installed base needs to absolutely be a key focus area for us. Third, we must keep innovating across both devices and consumable platforms, and we will do that by bringing to market superior clinically backed products that meet our providers' needs and deliver the desired results for our customers. And fourth, we will continue to strengthen our operational discipline around commercial execution, cost control, margin expansion, supply chain, and quality. This is an area where we have already done very good work, and we will continue to focus on. So now turning to our third quarter results. For Q3, total net sales were $70.7 million, down 10.3% year-over-year, slightly ahead of the high end of our forecast for the quarter. In our device segment, Q3 revenues were $20.8 million, a decrease of 24.6% year-over-year, primarily reflecting continued pressure on equipment sales globally and the impact of the transition in China to a distributor partner. Looking at our consumables segment, Q3 revenues were $49.8 million, a decrease of 2.6% year-over-year, primarily reflecting the change in the China business model. If we net out the China impact, consumables sales would have actually increased modestly versus last year. As a result, our consumable mix moved from 65% of net sales in Q3 of last year to 71% this quarter. Now looking from a portfolio perspective, we continue to deliver on our new product launches. Hydralock HA and HydraFillic with Pep9 Boosters together contributed to 14% growth in the booster sales category this quarter. We also achieved significant milestones in operations. We are holding inventory below $60 million, which is the lowest in three years. This is the result of the work the team has done to improve demand planning, forecasting, and production quality. In terms of Q3 adjusted gross margins, we landed at 68%, a decline of approximately 150 basis points from Q3 of last year. This was driven primarily by lower average selling prices as our distributor markets held a larger unit share of the overall equipment revenue year-over-year. Looking at adjusted EBITDA, that was $8.9 million, up 11% from Q3 of last year and reflects a tight control of cost and solid operational execution. Looking ahead, we are confident in our outlook of raising adjusted EBITDA guidance for the remainder of the year as well as the midpoint of our full-year revenue guidance. This is because we are encouraged by the momentum we are building as we enter 2026. So with that, I'll turn the call over to Mike to walk you through our third quarter results in more detail.

Thank you, Pedro, and good afternoon, everyone. I'm pleased to share another quarter of steady execution and disciplined financial performance in which we once again exceeded our initial expectations. Our team across all functions continues to work tremendously hard to support our providers and drive shareholder value. As expected, revenue declined year-over-year, primarily due to device sale pressure. However, we delivered strong margins and profitability, reflecting the continued benefits of operational discipline and cost management. For the third quarter, net sales were $70.7 million compared to $78.8 million in the prior year, primarily reflecting lower device sales, which declined 24.6% to $20.8 million, consistent with the macroenvironment. Overall, consumable sales declined 2.6% to $49.8 million as international gains were offset by softer U.S. trends. The decline includes lower consumable sales due to our transition from a direct seller to a distributor model in China. Excluding China, consumable sales would have increased modestly year-over-year. Price increases were partially offset by lower volume. From a regional perspective, revenue in the Americas declined by 7% to $48.3 million. APAC revenue decreased 41.5% to $6.3 million, while revenue across EMEA was relatively flat at $16.1 million. The decline in APAC reflects our planned go-to-market transition in China, where we have shifted from a direct to a distributor model. As part of this change, we prepositioned sufficient capital equipment inventory in China to meet anticipated demand through year-end, minimizing tariff exposure on devices. Our global footprint continues to expand, which adds to the recurring consumables revenue stream. In the third quarter, we sold 875 total units worldwide at an average selling price of approximately $23,794. As of September 30, 2025, total active machines in the field increased to 35,409 units versus 34,162 units at the end of Q3 2024. GAAP gross profit increased 12.3% to $45.6 million, resulting in a GAAP gross margin of 64.6%. Adjusted gross margin came in at 68%. The GAAP margin improvement was driven primarily by lower inventory write-offs and a mix shift towards high-margin consumables revenue. Q3 2024 includes charges from our China manufacturing exit and our retail-specific Perk write-offs. We have maintained tight control over expenses this quarter as sales and marketing spending was below our plan, reflecting lower headcount and disciplined spend management. Total operating expenses for the third quarter decreased by 16.5% to $51.9 million as we continue to manage our expenses. Selling and marketing expenses were $20.9 million compared to $27.6 million last year, a decrease of $6.7 million or 24.2% year-over-year. The decline was primarily due to lower headcount and targeted spending. R&D expenses were $1.7 million compared to $1.1 million last year, an increase of $0.6 million or 53.2% year-over-year. The increase was primarily driven by higher other professional service expenses related to early-stage future product investments. G&A expense was $29.3 million, down from $33.4 million in the prior year, a reduction of $4.2 million or 12.5% year-over-year, driven by lower headcount and bad debt recovery, partially offset by higher legal and incentive-related costs. These results led to an operating loss of $6.2 million in Q3 2025, a significant improvement versus a loss of $21.5 million in the comparable prior year. Adjusted EBITDA was $8.9 million, up from $8.1 million in Q3 last year, with adjusted EBITDA margin improving approximately 240 basis points to 12.6%. The increase reflects continued cost control even in the face of lower top line volume. Moving to the balance sheet, we ended the quarter with $219.4 million in cash and equivalents compared to $370.1 million at year-end 2024. The change primarily reflects the completion of our convertible note exchange under which we repurchased approximately $20 million of principal and exchanged $413 million of our 2026 notes for a mix of cash and $250 million of new 7.95% secured notes due 2028. This transaction significantly extended our debt maturity profile and enhanced our long-term financial flexibility. Cash used for refinancing activities was partially offset by cash flows from operations, reflecting a strong improvement over the breakeven position in the prior year. Inventory declined to $56.1 million, down from $69.1 million at year-end, reflecting stronger demand planning and improved supply chain efficiency. We also continue to make progress selling through our Elite fair market value devices with 131 units remaining, which we expect to sell by year-end. As previously noted, our U.S.-based manufacturing footprint is fully operational and remains a strategic advantage, enhancing product quality, increasing agility, and mitigating domestic tariff exposure. Given our performance through the first nine months and our visibility into year-end, we are raising the low end of our full-year 2025 revenue guidance to between $293 million and $300 million and increasing our adjusted EBITDA guidance to between $37 million and $39 million. For Q4, we expect net sales between $74.5 million and $81.5 million and adjusted EBITDA between $6.9 million and $8.9 million. The midpoint of this guidance reflects reduced year-over-year revenue declines and continued cost management discipline.

Thanks, Mike. So to close, it's important to highlight that we are operating in a tough and still unpredictable environment where inflation remains an issue, access to financing continues to be challenging for capital equipment purchases, and consumer confidence continues to be uneven, especially in the discretionary categories where BeautyHealth operates. But despite the macroeconomic backdrop, we will continue to prioritize and lean towards the levers within our control that will drive device footprint expansion and repeat consumer treatments, all with the objective to keep building the Hydrafacial global brand, accelerating our revenue growth and profitability, and position BeautyHealth firmly as the leader in the global medical aesthetics market. So with that, I'll turn the call over for questions.

The first question comes from Oliver Chen with TD Cowen.

Encouraging on the guidance. I would love your thoughts on what's happening in the Americas and also the more cautious trends you cited in the Americas, and how you weigh that against the guidance you gave? Also, to help us compare and contrast a little bit about the Americas relative to EMEA being flat.

Sure, Oliver. So if you look at the regional dynamics of our business, it's kind of a mixed picture, but I believe we're trending in the right direction here. So just to look at the Americas, which, by the way, is our largest business, 65% of our total revenue comes from that. Overall, yes, the Americas was down 7%. Out of that, devices was down 16.3% and that's the explanation for that. The driver for that was the lower device placements due to the macro pressures that are currently affecting the country. But despite being a decrease, Q3 was less than the previous two quarters. So you saw an average of 20% decrease in the prior two quarters of the year. We believe that we are seeing some stabilization here in terms of devices for the Americas. Consumables, a little bit of a different mix. We were down about 2.7%, and that was driven by a combination of, again, consumer spending, some headwinds there, coupled with lower device placements that we had in the first half of the year. But if we look, our booster sales have increased. So that's kind of the picture of the Americas. If you want to contrast that with what's happening in EMEA, EMEA represents about 25% of the total sales from that region. But overall, we were flat because of the mix of different performances. We have strong momentum in Germany, strong momentum in the medical channel. But again, devices were down in EMEA about 21%, and again, very similar challenges as the U.S. with the consumer confidence being generally lower than a year ago. And with the added factor that in EMEA, we have a little bit more of a crowded space there. The local teams are very focused on training and education on the benefits of Hydrafacial versus other treatments. But that's taking effect. If you look at the consumables on EMEA, we are performing well. This is a bright spot. It has been a bright spot for us. We grew there double-digits, about 10%. That was driven by very strong performance in Germany and again, from the medical channel. Then we have a small portion of APAC, which is about 10% of our total sales, and which has been down substantially due to the China transition to a distributor market with both devices and consumables being down.

And then one broader question. As you mentioned, the four focus areas, which ones are going to be more near term in terms of what you're seeing in your hypothesis and which ones may be longer term? And as you mentioned, the skin health technology ecosystem, how do you envision that? Or how would you frame that in terms of device platforms, digital diagnostics or partnerships as you think more broadly?

Yes, sure. So the way we're looking at the business, there's a broader plan or strategy that is overarching for the whole company. We will definitely have a more surgical strategy for our device business and consumable business. And definitely, over time, I'll share much more in how we're shaping the future strategic roadmap as we go along. But my initial observation is that our competitive advantage really relies on our core value proposition. We need to keep driving utilization. We need to keep driving device placement, because we all know that for every device that we place, that drives multi-year consumable revenues after that on the tail. So then our job after that is just to make sure that we are capturing the long tail of recurring customers, the consumables. We need to focus on innovation, and that's going to be a play across both devices and consumable platforms. The intent is to continue to launch superior and most importantly clinically-backed products that meet our provider needs. Execution has been a very bright spot in the prior quarters. We will continue to focus on commercial excellence around our business with better targeting and lead conversion. As with every business, we'll keep a close eye on capital efficiency, making sure that every dollar is invested in driving profitable revenue or in margin improvements. If you look more specific into what we're planning to do for devices, I will definitely share more about my thinking here. But we have to attack this problem from a multitude of angles. First, we have to address the providers' financing challenges. That has been definitely a gating item for us in the prior quarters. We have to do that with smarter and more targeted pricing strategies. Secondly, we rolled out the good, better, best program, which basically gives customers more flexibility in terms of price points across our portfolio of Syndeo, of Elite, and Allegro. That is definitely helping now the consumers navigate the macro better. We have to reinforce the commercial discipline around targeting segmentation and conversion. The team is doing a great job there. A little bit of a different strategy that we're going to be exploring is going to go on the consumable side because that's where we're going to really lean in on the innovation. That's the formula that has been working for us. We will do that by launching differentiated boosters with real clinical proof. We will continue to equip our providers with marketing tools that are relevant, impactful, and we'll continue to invest in education because that's the gating item that will move the needle. Post-sales onboarding is very important. We have to continue to over-index on that to make sure that every provider knows how to maximize the return on investment of every machine that they commit to. Consumer mind share is essential. In the end, boosters and serums need inbound traffic to happen. Overall, still very high level, but these are the key areas I personally and the team are very focused on.

The next question comes from JP Wollam with ROTH Capital Partners.

Pedro, maybe if we could start with you. As you kind of get your hands wrapped around the business a little bit more and get a better understanding, is there anything else you can share about the sort of international strategy and sort of where you feel makes the most sense to have direct versus distributor models?

Definitely. Thanks, John, for the question. We are a global company. If you want to grow, which is the intent, we have to address international markets as part of that formula. We have to obviously focus on that and have, in my view, very targeted commercial programs designed to fit the different regions' economics where our products are present. We have been historically leading into an extensive distributor network that is part of our DNA, and we will continue to do that to drive penetration and reach. That's part of the way we go to market and has been quite a successful formula. We will definitely continue to do that. But at the same time, we need to ensure that we invest in education and training as we scale and help out the distributors increase their penetration in their respective markets. That's our strategy. Not a big change overall. It's still a small portion of our business. We intend to explore the opportunities for growth in different markets, whether through direct channel or distributor channel. International has to be part of that equation for us.

And then just a quick follow-up. I believe you took the pricing on the consumables side in July. Can you just talk about how the reception has been to that price increase and what it says about potential pricing power in the future on the consumables side?

No problem, John. The team has been very pleased with how the market not only digested, but actually accepted that price increase, which was triggered around the summertime of this year. The average selling price (ASP) for consumables is up, and that is the result of the price increase of about 5% that we drove. Another thing that we are seeing is that the boosters are driving that ASP up for us. Overall, for our consumable category, the ASP is generally up, which is a good thing.

The next question comes from Susan Anderson with Canaccord.

I'd love to hear maybe just kind of your thoughts on stabilizing the systems. I mean, it looks like they're already stabilizing, but what initiatives do you think you need to put in place to get those to grow again?

Sure, Susan. To anchor our quarter performance, I think that's probably best as we start discussing how we're doing with devices. For the quarter, devices were down. Devices represent about 30% of our total revenue. Syndeo represents 70% of total new device placements, so a big chunk there on our new platform. They are declining indeed, and we feel that this is a direct correlation to the economic environment we live in, which translates into a tighter lending environment as well. At the same time, we look at how we are expanding the footprint of our devices globally; in Q3, we sold an additional 875 units. We continue to expand that footprint and broaden our reach, which is definitely good news for us. Now, we understand that the devices keep coming down and have been coming down for some quarters. However, we are encouraged to see that those numbers are stabilizing. We are coming off rather from easier comps more and more. Our lead pipeline is improving. Our field teams are getting more disciplined about lead conversion. In the future, I definitely expect this trend to continue as the access to financing improves, and the sales team executes better. I expect device performance to get better as the quarters progress and the comps get easier.

I would like to follow up on the consumables area. I'm interested in your thoughts about the products Marla has been developing, which aren't just for treatment, like boosters, but also for use during treatment or for sale in private spas. What is your focus in the consumables sector?

Yes, absolutely. We have decided to actually pause the skincare initiative. This decision was a deliberate strategic one. My opinion is that our competitive advantage lies in clinical differentiation, recurring consumables, and stronger provider partnerships. That's where we generate long-term value. After reviewing the business case, we concluded that skincare would pull us away from our core business model, which provides a very strong competitive advantage. By not pursuing the skincare initiative, we preserve capital, which will help us in our near-term profitability profile.

The next question comes from Olivia Tong with Raymond James.

This is Lillian on for Olivia. I'm wondering if you could talk through the trends you're seeing in different channels? And any color on what you're seeing from an end consumer standpoint and whether you've noticed any incremental weakness as macros remain pretty choppy?

Yes. So Lillian, as you know, we divide our consumable business between the medical and the non-medical segments. The medical segment includes med spas, dermatologists, and plastic surgeons. This segment represents about 70% of our providers in the U.S., with the largest segment being about two-thirds being med spas, which, by the way, is the channel that keeps the market growing overall. Plastic surgeons are experiencing some slowdown because consumers now are prioritizing less invasive care. On the other side, the non-medical segment includes day spas and single room institutions. We're seeing stable progression in that area as well. The U.S. and EMEA have the largest portion of the medical side and medical spas. The challenges they face in the macroeconomic realm are impacting their business. A bright spot is Germany, which I mentioned earlier, particularly in the medical channel. Overall, we still believe there is growth opportunity in both segments and our job from now on is to design products and have the right pricing strategy and positioning to capture the opportunity in both segments. Mike, do you want to chime in?

I just wanted to add about the end consumer piece. One of the things we saw during the quarter was that booster attachment rates were very high. They've been a real bright spot in the business. This highlights the impact of the innovation that we've been investing in over the last year. A year ago, the company launched Hydralock. In the second quarter, we launched HydraFillic, and they've had a positive impact on the overall business. Utilization rates on our installed base have seen a little pressure, indicating that the end consumer coming in for a normal Hydrafacial without opting for boosters has been under some pressure. We're focusing on the sales and training aspect of the business to ensure that there's proper outreach. We're leaning into education to make sure our providers are equipped with the tools they need to effectively communicate the benefits of the Hydrafacial treatment.

The next question comes from Allen Gong with JPMorgan.

I guess starting with a broader strategy question. This has been a reset year for BeautyHealth. You are hopefully stabilizing. This will be a nice baseline for you to grow off going forward. When I think about the outlook for 2026, how should I prioritize top line growth versus profitability and diving deeper into existing accounts and focusing more on consumables versus trying to drive a reacceleration in delivery systems?

We're actually going to focus on all of those lines. You have to bring top line revenue growth to this business. We can definitely flex our spend, and we've been doing that very successfully, increasing our gross margins as well, which translates into expanded profitability and EBITDA. If the top line is not there, we're always going to find ourselves behind the eight ball. Our total focus will be to drive that top line. We have a very strong business model that keeps delivering recurring revenue. The team has to focus on that for sure. In terms of next year, I won't provide guidance because it's premature to talk specifics about 2026. We'll share more detail on our next call. But we feel good about the setup. We're coming from two consecutive quarters of good progress, which gives us a strong base heading into next year. Again, this momentum we feel strong about will depend on several factors. First and foremost, the market we participate in is still under some pressure compared to prior years. We'll continue to see some lumpiness in the near term. Consumer spending again is a limiting factor for us. We'll keep an eye on that. If macro conditions improve slightly and our device momentum improves, that will be the team's focus going forward. We can expect operating leverage and further expansion on our bottom EBITDA.

We move to the next question. It's from the line of Jon Block with Stifel.

It's Joe Federico on for Jon. Maybe to start, and Mike, this might be more for you, but just to flush through some of the updated guidance dynamics. Revenue expectations came up by $4 million at the midpoint, and EBITDA came up by $7 million, so a decent clip more. Can you walk us through some of the moving parts more specifically as to why there's so much more of a drop-through on the incremental sales? I know gross margin outperformed in the quarter. Is that sustainable in coming quarters? Any additional color would be helpful.

A significant portion of the fall-through occurred in Q3 as we exceeded the midpoint of our expectations for that quarter. Our original guidance midpoint was around $3 million, and we surpassed that figure. When analyzing adjusted gross margins, they typically dip slightly quarter-over-quarter due to our consumables promotion in Q4, specifically during Black Friday and Cyber Monday. I anticipate that gross margins in Q4 will resemble those from the second quarter rather than the third. Operating expenses usually increase quarter-over-quarter by about $2 million to $3 million compared to Q3, mainly due to higher commissions linked to growing sales and increased marketing expenditures. The key points mentioned by Pedro indicate that while device sales are under some pressure, the situation has improved as the year progressed, thanks to our sales initiatives such as the good, better, best program and new pricing bundles for Syndeo, which are beginning to yield positive results. We expect that these trends will continue to improve into Q4.

Got it. That's really helpful. Then maybe just a quick follow-up. We're calculating that churn in the quarter was just under 2%, which is a modest improvement compared with last quarter, but it's still pretty elevated compared to the last seven or eight quarters, call it. I know you had planned actions to moderate that in the back half of this year. How are those progressing? Are you starting to see them moderate more in Q4 to date? Just your latest thoughts there.

Yes. Churn is definitely higher than usual, about 1.8% versus about 0.9% of last year, and we're taking this seriously. We believe the causes could be multifactorial. Our data points to financial pressure being the primary factor driven by the economic challenges on the low-volume small providers that are closing their doors or have a higher staff turnover, leading to less consistent device utilization. We believe these factors are the main reasons behind the increased churn we saw this past quarter. However, we see this as a reactivation opportunity. We're taking proactive measures to re-engage these low-volume providers by offering more support and improving our training for them. Our goal is to bring these churn numbers back to what we consider historical levels over the next few quarters.

That was the last question. This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you.