Q4 2023 Airsculpt Technologies Inc Earnings Call

Participants

Dennis Dean; CFO; AirSculpt Technologies, Inc.

Aaron Rollins; Executive Chairman; AirSculpt Technologies, Inc.

Todd Magazine; CEO; AirSculpt Technologies, Inc.

Josh Raskin; Analyst; Nephron

John Ransom; Analyst; Raymond James

Presentation

Operator

Greetings and welcome to the Airsculpt Technologies fourth-quarter and full-year 2023 earnings call. (Operator Instructions) As a reminder, this conference is being recorded and is now my pleasure to introduce your host, Dennis Dean, Chief Financial Officer. Thank you again. Thank you, Dennis. You may begin.

Dennis Dean

Good morning, everyone, and thanks for joining us to discuss Aehr scope Technologies results for the fourth quarter. Joining me on the call today is the Co-Founder and Executive Chairman, Dr. Aaron Rollins, and Chief Executive Officer, Todd Magazine.
Before we begin, I would like to remind you that this conference call may include forward-looking statements. These statements may include our future good opportunities in our growth. Risks and uncertainties that may impact these statements and could cause actual future results to differ materially from currently projected results are described in this morning's press release and the reports we will file with the SEC, all of which can be found on our website at investors.elitebodysculpture.com
We undertake no obligation to revise or update any forward looking statements or information, except as required by law. During our call today, we will also reference certain non-GAAP financial measures. We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. A reconciliation of these measures can be found in our earnings release as filed this morning and our most recent 10-K when filed, which will also be available on our website.
With that, I'll turn the call over to Aaron.

Aaron Rollins

Thank you, Dennis. Good morning to everyone, and thank you for joining the call. I'm very pleased with our fourth-quarter results and our achievement of consistent double-digit growth in both revenue and adjusted EBITDA. We remain focused on reestablishing our same store growth trajectory, improving operating margins and making prudent investments that build upon our solid foundation as well as drive long-term success of the overall business.
In addition to increasing our revenue and adjusted EBITDA, the year included several noteworthy accomplishments. We generated strong free cash flow, which allowed us to pay down debt. We opened five new centers, marking the highest number of openings in the history of the company. We invested in brand building activities that drove 30% growth in brand awareness. We expanded our product and service offerings by adding AirSculpt Lift, the facial fat transfer procedure.
We expanded our talent, particularly at the executive level. And finally, we quantified our TAM of $9 billion as well as the potential opportunity for opening hundreds of their scope centers globally. I am proud of the many contributions of our teams and want to personally thank each one of them for their dedication that delivered our strong results in 2023.
I am also very proud of our strong track record in having safely completed more than 50,000 procedures. The safety and well-being of our patients is that our top priority, and we have policies and procedures that have ensured positive outcomes throughout our history. Our ability to achieve these positive outcomes is directly related to the professionalism of our staff. Our surgeons are respected in their field and together with our other clinical team members, are deeply committed to the care of our patients and achieving results that are in their best interest.
As we look ahead, our strategy continues to focus on strengthening their scope and further enhancing our profitability as we scale our business both domestically and internationally to further increase shareholder value.
With that, let me now turn things over to Todd.

Todd Magazine

Thank you, Aaron, and good morning, everyone. On the call, our business remain strong in Q4, highlighted by 17% revenue growth and 28% adjusted EBITDA growth compared to the prior year. Our robust top line performance continues to be driven by our de novo locations that opened over the last two years, with our 2023 centers continuing to ramp very favorably compared to their budgeted objectives. In fact, the average revenue of these centers in their first three months was the highest level in company history, excluding our 2021 de novos, which I shared in previous calls, had a pronounced benefit from COVID.
Our overall same-store revenue performance was minus 1.7%, which was below our expectations for the quarter. Just to put this in perspective, the difference between our actual same-store performance and our expectations represents about one procedure per location per month.
I'd like to briefly comment on our recent revenue performance. We did see some slight softness as we exited 2023, which carried into January. However, as the quarter has progressed, we are encouraged with what we are seeing the and fully expect a robust season. Importantly, our performance in Q1 is built in to the 2024 outlook that we issued in our press release earlier this morning, and that Dennis will go through later.
Our adjusted EBITDA margin for the quarter improved year over year by 180 basis points to 21.2%, which was driven by our increased focus on cost management. Importantly, our margin expansion would have been even more substantial, but we decided late in the quarter to make additional awareness building media investments as this initiative continues to achieve its objective of driving brand awareness and brand recognition.
With respect to our 2023 revenue guidance, we met expectations of $196 million, which represents 16% growth versus the prior year. Our full-year adjusted EBITDA of $43.2 million, which increased 11.2% versus the prior year, fell below our updated guidance of at least $45 million. This shortfall was mostly due to the additional investment in awareness building, where we also anticipating (technical difficulty) , leaving '24 to accelerate into Q4 2023, which would have put us above our $2.5 million of in-year savings for 2023. But this timing acceleration did not happen.
Having recently celebrated my one-year anniversary air scoped, I have come to appreciate even more the impact we have on people's lives, specifically the ability to improve self-esteem among people who have had a lifelong data with excess fat as well as people have had a debt in regarding certain areas of there body that can't be addressed by diet, exercise or even weight loss medications. There is nothing better on planet earth than AirSculpt for moving stubborn fat and transferring fat to places where people want it. And with a $9 billion TAM, we have only scratched the surface as a huge opportunity that exist. That's why I continue to be extremely optimistic about our future.
Just as I did last year, I'd like to share with you my focus areas for 2024, which reflect our learning and our latest thinking. Our first priority is to continue to drive double-digit revenue growth. Like always, we will focus on our de novo openings, an area where we have had a very successful track record, but we will also increase our focus on same-store growth, knowing that we have opportunities to drive productivity across the fleet.
Second, we will continue to strengthen our organizational capabilities. We have increased our focus on the broader team of employees in regional offices and across our locations t o ensure we have the right structure, talent and tools necessary to support larger and more robust fleet of centers. And lastly, we will continue to focus on cost management with an objective of redeploying savings into our growth investments while expanding EBITDA margins.
Let me go a little bit deeper and each of these priorities, starting with revenue growth. As previously shared, our work with a third party real estate analytics company has helped us determine that the run rate for AirSculpt locations in the hundreds, which gives us confidence to continue to increase the number of annual openings. That said, we also need to make sure that we have the organizational bandwidth and capability to open more locations each year. As such, we will expand our de novo program in a thoughtful and measured way.
As announced previously, we have increased our de novo openings to six in 2024. We previously announced funding in Kansas City, Kansas. I am happy to share we will also open locations in White Plains, New York and Columbus, Ohio as six de novo location will be announced at a later date. It's important to note that our guidance is based on all of these centers opening in the second half of 2024, the timing of which is driven by the additional analytics work we did last year with a third-party real estate company.
While we are excited about all these locations, three of which were in new states, I'm particularly excited about our Chicago land in New York metro locations. Expanding an existing markets represents an evolutionary step in our growth strategy as these centers will give us a tremendous opportunity to leverage scale in these markets, something we have not been able to do with our previous approach of one location per market.
We fully expect to take advantage of the awareness building operational efficiency benefits these multi-site markets will provide. Sticking with revenue, let me now turn to same-store performance. As noted earlier, same-store growth will be a key focus area for the company, particularly given the size and maturity of our fleet. A key aspect of this will be on our patient acquisition efforts. We have been working on new approaches related to our paid search efforts in order to maximize the return on investment.
We are already starting to see an improvement in our total leads, our lead quality and our console to case conversion rate. Let me now turn to my second priority of strengthening organizational capabilities. I shared previously, we are in the throes of transitioning from our legacy systems to an enterprise-wide Salesforce CRM implementation, which will take our sales and marketing processes to a completely new level.
Historically, our processes have been very manual and tracking relevant. KPIs has been very challenging. Salesforce will provide us more real-time data and will allow us to better analyze our sales and marketing performance as well as our patient experience, all of which will help drive growth. We anticipate this implementation to take the balance of 2024 to complete.
In addition to Salesforce, we are focusing on improving talent acquisition and talent development, with a goal of increasing employee retention as well as increasing the percentage of highly seasoned field level staff who will do this by building in-house capabilities for talent acquisition as well as for learning and development.
Finally, let me share some thoughts on our cost management priority. Our organization did a good job in 2023 in this area, and we are reiterating our previously shared objective of delivering $5 million of in-year savings for 2024, but we know we need to push for more. O ne of our most important there as a focus will be on customer acquisition costs or CAC.
As noted previously, we continue to see good outcomes from the investments we made in our celebrity program, which has helped increase our brand awareness by 30% over the prior year (inaudible) investment in local media, which could include initiatives such as over the top media marketing also referred to as OTT as well as radio, billboards or direct mail, just to name a few. We will be testing this approach in different markets in 2024 with the goal of driving more organic leads and reducing our reliance on paid search.
While we are not building any CAC savings in 2024, given the cost we are seeing related to paid search, we believe our top-of-funnel marketing tests will provide valuable learning that will help drive future CAC reductions will keep you posted as this initiative progresses.
To summarize, I'm very proud of our performance in 2023 and continue to be bullish on our ability to drive double-digit top and bottom line performance in 2024 and beyond.
Now let me turn the call over to Dennis to provide further details in the quarter and our 2020 for guidance.

Dennis Dean

Thanks, Todd. Our r evenue for the quarter was $47.6 million, a 17% increase over the prior year quarter. Our growth was primarily due to the addition of five de novo centers versus the prior year base. As of December 31, 2023, we operated 27 centers versus 22 at the end of the fourth quarter of 2022. Our same-store revenue was slightly negative in the quarter. Average revenue per case for the quarter was $12,937, a 6.1% increase over the prior year's quarter.
As we have said previously, rates can vary from quarter to quarter, mostly from procedure mix fluctuations, and we expect our rate to range from $12,000 to $13,000. We are pleased in our rates continue to pace on the high end of our expected range, which reflects the fact that our core consumer is in a higher socioeconomic group, which provides us more insulation from some of the economic volatility in the market.
Our percentage of patients using financing to pay for procedures has 48% during the quarter, which was consistent to prior quarter. As a reminder, we receive full payment of all procedures upfront, and we didn't have any recourse related to patients who finance their procedures with third-party vendors.
Our cost of services as a percentage of revenue was 37.5% versus 38.7% in the same period last year. This improvement was a result of certain cost management initiatives that were implemented during the quarter. Our customer acquisition cost for the quarter was approximately $2,600 per case as compared to $2,300 in the prior year. (technical difficulty)
For clarity, our calculation of customer acquisition costs includes both our advertising and media spend, plus the full salaries and commissions of our sales and marketing teams. For the quarter, our adjusted EBITDA was approximately $10.1 million compared to $7.9 million from the prior year period, an increase of 27.9%. As you know, our adjusted EBITDA results that exclude the impact of preopening costs for de novo centers in our calculation. This impact was approximately $100,000 in the quarter.
Our pre-opening costs will fluctuate from quarter to quarter based on the number of centers that are in the process of opening. Our adjusted EBITDA margin during the quarter was 21.2% compared to 19.4% in the prior year's quarter. Much of this increase was from our cost management initiatives. As Todd pointed out, we were able to achieve the $2.5 million of in-year savings, and our 2024 outlook includes an incremental $2.5 million in savings for a total run rate of $5 million. Our adjusted net income per share diluted for the quarter was $0.01 and $0.28 for the full year.
From a liquidity standpoint and our cash position as of December 31, 2023 was $10.3 million and our $5 million revolver remains undrawn. Our gross debt outstanding is now $72.9 million, and our leverage ratio at the end of the quarter as calculated under our credit agreement, was 1.4 times. Cash flow from operations for the quarter was $4.9 million compared to $6.6 million in the prior year quarter.
The decrease related timing of working capital payments primarily related to lease deposits on upcoming de novo projects. Also during the quarter, we invested $1.8 million, which was mostly related to new center openings. For the quarter, o ur cash flow from operations to adjusted EBITDA conversion ratio was 48.2%, which was slightly below our expectations and primarily due to the lease deposits previously mentioned on our upcoming de novo centers.
Our 2024 revenue guidance of approximately $220 million represents a 12% increase over 2023 and contemplates the trends that Todd noted in his comments. We expect contributions from our six de novo centers to drive the magnitude of the year-over-year revenue growth. We anticipate flat to slightly positive full year growth in our same-store sales, while revenue from our de novos will be weighted to the back half of the year with three centers opening in the third quarter and three in the fourth quarter.
Our adjusted EBITDA guidance for 2024 (technical difficulty) which represents growth a year-over-year growth of 15.6% and margins of 22.7%. Due to the de novos coming on later in the year. The 2024 denovos will have a negative impact to our margins of approximately (technical difficulty)
(technical difficulty) With that, I turn the call to the operator for questions.

Question and Answer Session

Operator

(Operator Instructions)
Josh Raskin, Nephron Research.

Josh Raskin

Hi, thanks. Good morning. I guess I just have to start with any response to the short report that we saw last week.

Todd Magazine

Hey, Josh, this is Todd, how you doing. In our view, the short seller report contains multiple inaccuracies and misleading information. And we advise shareholders to consult the company's public filings rather than third parties for accurate information about the company. With that said, let me share three things. First, we take the safety and well-being of our patient seriously, and we're proud of our safety track record.
Second, our ability to achieve positive outcomes for our patients is directly related to the professionalism of our staff and in particular, our surgeons. And third, our team strives to be transparent and honest in how we market our business and they consistently work hard to earn the trust of our patients. We do not intend to address the allegations in this report any further.
If you have another question, Josh, we'd be open to taking that question. Otherwise, we'll go ahead and move on to another caller.

Josh Raskin

(inaudible) The case came a little bit better and than we expected, the rate was a little bit low right now, up 6% on a year-over-year basis. So just curious, is there any sort of seasonality just after a particularly strong quarters in 2Q and 3Q, was there any change in discounting or anything like that that impacted the quarter?

Dennis Dean

Josh, This is. Dennis No, nothing really from that standpoint. I mean, we are very comfortable with kind of where our rates landed. We were pretty close to $13,000 for the quarter and for the full year. So rates held up very consistent from quarter to quarter. There wasn't really any kind of seasonal impact as it relates to that. Again, we kind of called out in the remarks that we still target a consumer that's in a higher socio economic class. And so I think that helped us kind of keep our rates where they were.

Todd Magazine

And Josh, with that on that. Also you always talked about there's this kind of bundling kind of strategy to help us kind of push up the ASP. And that continues to be a lever that we use. And it is definitely working giving people more discount as they do more procedures. And that's clearly been, I think, one of the strategies that's gotten us to that higher end of the range in that $13,000 ASP range.

Josh Raskin

Okay. And if I can just sneak in one more just for clarification. Just you talked about these costs that came in late in the quarter for brand awareness. I'm just curious -- well, one, could you give us some specifics on that? And two, maybe talk a little bit about the decision process there -- sort of we're tracking towards your full-year guidance and then accelerating cost in the quarter. I didn't know if there was an ability to defer that or if there was something that had to be done sooner?

Todd Magazine

Yes, thanks for the question. So when we reiterated guidance early November, we actually, we're seeing revenue come in even higher than ultimately where we netted out. And so really the strength of what we were seeing in terms of demand is what gave us the desire to go ahead and make that additional investment.
As we noted, some of that demand and some of that performance softened a little bit as we exited the quarter, but we decided to keep that investment. It was an really awareness building investment, which for us is obviously very important and more of a long-term benefit for us. So we decided to keep that investment rather than pulling back elsewhere.
The other thing in my remarks, I would tell you, that there was some cost savings that we thought we were going to be able to pull in from Q1 into Q4. And that would actually have put us over the $2.5 million that we had committed to for full-year 2023, but that didn't accelerate. So those were really the two components of that. And it was really a strategic decision at the end of the year. You know, whether we make some cuts just to get to a number or do we leave the investment in awareness building, which we believe is the right long-term decision for the business.

Josh Raskin

All right. Thanks for all the questions.

Operator

John Ransom, Raymond James.

John Ransom

Hey, good morning. This one's for Dennis. So you know, the company is a bit behind its IPO forecast, particularly same-store revenue growth. But just can you point out any other variances in the model over and I'm thinking kind of longer term view here, but just variance in the model versus your original forecast? Thanks.

Dennis Dean

Yes. Well, you called out -- you did call out the same store. Same store has been a little bit softer than what we did originally put in the IPO model a couple of years ago. And I would say probably the second area, John, is we have made significant investments in our in our corporate executive teams, kind of building infrastructure around the business. And I think that's probably come in a little bit higher than the original model than -- and I think the last years is in the area of the brand awareness, we kind of kept sort of a consistent sort of percent of revenue kind of model, if you will, as it relates to how we looked at advertising spend.
And as we've gotten more and more -- digging more into it, it's more of a we've got to look at brand awareness investments, if you will. I think probably if I were to kind of layer them out, it would probably be the brand awareness is higher from a marketing spend.
Second would be there's a little bit of softness from the same store that was in the model. And then lastly would be the corporate aspect of it.

John Ransom

And just secondly, it strikes me that the new market here going into or I guess, secondary markets, do you have any concern like some of these markets you burn through the first group of patients and then there's just not about enough growth or population to support long-term growth?

Todd Magazine

Yes. I mean, first of all, I'm not sure I would consider what definition of primary, secondary. I mean, we're in many markets today. I mean, we opened in Raleigh last year, Austin last year, San Jose. Those are performing, as I said in my prepared remarks, well above our expectations. So the markets that we're opening, we feel very, very good about.
And as I noted, I'm particularly excited about the markets where we're going with the second locations because we're a brand that today really only has one location in any given market and the ability to have any kind of critical mass in that market from operationally and awareness building, et cetera, et cetera, is very limited.
So it's going to give us an opportunity to really, we think, command a lot bigger share of voice and obviously, a lot bigger awareness in that market that'll help. But we have a lot of runway of markets. And I mentioned Columbus, Ohio and Birmingham, Michigan. I mean, these are very, very good in robust market that we feel good about. And there's many, many more markets on the docket to come that look like that as well.
So right now, we feel very good about it. And ws we stated before, our de novo performance has been very, very strong. So we continue to fuel that pump hard, and we're just going to only get smarter now that we have more analytics to pair with all of the work that the team's done historically.

John Ransom

Okay. And then lastly, like I'm not going to get into the short report, but I'd be curious, I'm sure you've gotten KPIs around net promoter score, complicatioon rates, maybe after the fact complaints about like a follow-up. Could you just get a high level tell us how those have trended over the past of years? And is there any work to be done there?

Todd Magazine

Look, I don't want to get into kind of the short report and kind of the back and forth. We can take some of the more detailed questions offline, if you'd like.

John Ransom

Okay.

Todd Magazine

So as we stated before, we just think it's best to kind of leave it at that and not given any more air time. We just don't think it has much credence given all the inaccuracies in the misleading nature of the information.

John Ransom

Okay. Thank you. That's it for me.

Operator

Korinne Wolfmeyer, Piper Sandler.

Hi, good morning. This is Sarah on for Korinne. Just one for us today on pricing. What are your willingness to take further pricing in the near to intermediate term to drive comps look like? And then have you done any work on what those levels -- if those would start to discourage potential patients?

Todd Magazine

Yes, thanks for your question. Pricing is a is a somewhat complicated -- when you say scrape pricing, you know, unlike a traditional retailer where you have a proposition or product that you're selling and you have the opportunity to take pricing. Because of the bespoke nature of our procedure and the fact that every person walks in the door obviously has different needs in terms of what we're removing or transferring and the number of body parts of their doing. So pricing -- scrape pricing is not as linear as it might be another kind of retail businesses.
All that being said, we do believe at some point that there might be opportunity for us there, just given the kind of uncertainty of the economic environment and everything that's going on in the marketplace, we think right now, it's best for us to continue down the path we're going on. But it's certainly something that we will discuss and talk about. And we think particularly given the quality of our procedure and the nature of the consumer who were going after, we believe there probably is some opportunity there.
But it isn't a kind of quite as linear as you would think at a retail business. And again, I think at some point, we may choose to do something, but right now, we're being measured in how we think about our ASPs. So that's kind of how we're thinking about it right now.

Okay. Very helpful. Thank you.

Operator

Thank you. There are no further questions at this time. I'll hand the floor back over to Todd Magazine for any closing comments.

Todd Magazine

Well, thanks, everybody, for your time today, and we look forward to speaking with you in the near future. Have a great day Tuesday afternoon.

Operator

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