AirSculpt Technologies, Inc. (AIRS) Earnings Call Transcript

Greetings, and welcome to the AirSculpt Technologies Third Quarter 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Allison Malkin. Please go ahead.

Good morning, everyone. Thank you for joining us to discuss AirSculpt Technologies results for the third quarter of fiscal 2026. Joining me on this call today are Yogi Jashnani, Chief Executive Officer; and Michael Arthur, Chief Financial Officer. For this morning's call, Yogi will begin with a review of our third quarter results and highlight the progress made on our strategic priorities. Then Michael will share a detailed review of our third quarter performance and guidance. Before we begin, I would like to remind you that this conference call may include forward-looking statements. These statements may include our future expectations regarding financial results and guidance, market opportunities and 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.airsculpt.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 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 in our most recent 10-K, which will also be available on our website. With that, I'll turn the call over to Yogi.

Thank you, Allison, and good morning, everyone. Let me start with the quarter. Our third quarter results were disappointing. While we expected a revenue decline, our performance fell short of our goals, reflecting lower productivity from our marketing investments and underperformance in a handful of clinics. We understand what drove the shortfall, and we are moving with urgency to address it. This quarter presented challenges, but it does not change our conviction in the strategy or the opportunity ahead of us. 3 things reinforce that conviction. First, we performed 250 GLP-1-related procedures in the quarter, representing nearly 10% of total cases. We believe we are in the early innings of GLP-1-related aesthetic procedure growth. Second, conversion held steady, which indicates that we continue to be effective once we engage our patients. And third, we also continue to strengthen the foundation of the business. This morning, we announced the refinancing of our term loan, extending our maturity to 2031 and giving us greater financial flexibility to support long-term growth, including de novo expansion. Now turning to the 2 areas that held back performance in the quarter. The first is marketing, specifically the growing impact of Google's AI Overviews on how consumers find us. The second is performance issues in a handful of centers. Let me start with AI Overviews. AI is changing how consumers discover and evaluate aesthetic providers, and it is increasingly affecting many businesses that rely on search for discovery. According to separate industry reports, queries featuring AI Overviews have now risen to nearly 90% of health care-related queries. For us, this meant fewer Google clicks because Google increasingly keeps consumers on its own platform, while competition for those clicks remained unchanged. That led to 16% lower leads versus prior year and 26% higher cost per lead in the quarter, impacting both revenue and profitability. Consumers are still interested in aesthetic procedures. We are focused on ensuring we appropriately capture that interest while the consumer search behavior is changing. We are beginning to see early signs of improvement in our presence in AI-generated search results. We're also investing more in brand and local marketing to drive traffic that does not depend on Google. Second, we experienced performance issues at a handful of centers. We recognize varying performance across centers is expected. However, this quarter, certain locations experienced operational challenges that we are working to course correct. These are within our control, and we are implementing targeted actions to improve performance at these locations. As we have shared in the past, transformations are not always linear, and this quarter reflects just that. I remain confident that we are better positioned today with a larger addressable market and the right actions in place to achieve sustained profitable growth. Let me now turn to our progress on our 3 strategic priorities. As a reminder, these are: first, introducing new services to capture our GLP-1 market opportunity, enhancing our sales and marketing strategy; and maintaining strong financial discipline. First, introducing new services to capture our GLP-1 market opportunity. As a reminder, we introduced new services over the past year to capture the demand created by the GLP-1 transformation. We believe we are still in the early stages of this opportunity. According to Gallup, 11% of U.S. adults or approximately 30 million people were using GLP-1 medications for weight loss in 2026, up from 3% in 2024. Additionally, McKinsey reports that 60% of U.S. consumers are actively trying to lose weight, while the American Society of Plastic Surgeons reported double-digit growth in several skin removal and lifting procedures in 2025. Longer term, we believe procedures addressing the side effects of GLP-1s continue to represent a potential $100 million revenue opportunity across our existing center base. alloClae, which we announced last quarter, is another example of our focus on serving the GLP-1 patient population. With alloClae, we can reach patients we previously could not serve, including those without enough fat for a traditional fat transfer. It is currently available in a handful of centers. While early, we are encouraged by the initial response and are expanding it across our center network. As we evolve from traditional fat removal to a more comprehensive body contouring platform, we are learning and refining our approach to patient education and sales execution. While these new procedures fit well within our existing business model, they require us to modify our marketing and sales compared to our traditional offerings. We are improving our ability to capture patient interest and convert that interest into completed procedures. We believe these efforts will enable us to accelerate the volume of newer procedures across our center network and increase center productivity. Our second area of focus is enhancing our sales and marketing strategy. As I mentioned earlier, we are adapting our marketing strategy to changes in how consumers discover and evaluate aesthetic procedures. We continue to optimize our website for AI-driven search, including Google AI overviews and are strengthening our digital content, customer reviews and educational resources to improve visibility. While still early, we began to see encouraging movement in certain leading indicators following these changes. We are also leveraging AI tools internally to improve patient follow-up and sales conversion, which further contributes to the relative stability in our conversion rates. In addition, we are expanding our grassroot marketing efforts to build stronger connections within the communities we serve. We are increasing our focus on localized marketing initiatives and patient education opportunities to generate awareness, drive engagement and bring more prospective patients into our centers. Next week, on November 12, we will host our first-ever open house event across all 31 centers, bringing together surgeons and prospective patients through a combination of in-person experiences and virtual educational programming. The event is designed to engage prospective patients, reconnect with those who have previously expressed interest and drive consultations and bookings while extending our reach through local partnerships and digital content. As it relates to brand marketing, we expect to spend an incremental $3 million versus last year. This amount is lower than the $5 million we indicated last quarter, which we believe is prudent given the environment and current business performance. We're also focused on improving sales productivity and execution across our center network. To this end, we are actively implementing best practices from our stronger performing locations across the portfolio to improve sales effectiveness and conversion. Turning to our third priority, maintaining strong financial discipline. As I mentioned earlier, we have completed the refinancing of our existing term loan, providing greater financial flexibility to support our long-term strategy, including future de novo expansion. Michael will share more details on this shortly. We continue to make progress strengthening our financial position and ended the quarter with approximately $15 million in cash and $20 million in total available liquidity. While our near-term focus remains on improving same-center sales and strengthening execution across our existing centers, we continue to view de novo expansion, additional service lines and strategic partnerships as a meaningful long-term growth opportunity. In summary, while our third quarter proved more challenging, we continue to see evidence that our GLP-1 strategy is the right one with growing demand from these patients and increasing traction across our expanded procedure offerings. We continue to make progress advancing our strategic initiatives and strengthening the foundation of our business. We are implementing targeted marketing initiatives and taking steps to improve performance across our centers. Our updated outlook contemplates third quarter performance trends continue into the fourth quarter, which we believe is prudent. That said, we are intently focused on returning to stability and accelerating our path to growth. With that, I will now turn the call over to Michael to review our third quarter financial results and outlook.

Thank you, Yogi, and good morning, everyone. I'd like to begin with this morning's announcement that we completed our debt refinancing. This has been a priority for us over the last 9 months, and we are pleased with the results. The new $44 million facility made up of $39 million term loan and a $5 million revolver matures in 2031 and gives us greater long-term financial flexibility. We filed the credit agreement this morning under an 8-K with the SEC. This is a significant milestone, and it's worth putting in context. We successfully deleveraged over the last 2 years, and that combined with improved financial performance and stabilization we achieved over the past 9 months is what allowed us to complete this refinance on the terms we did. With that, let me walk through the third quarter results. Revenue was $31.9 million, a decrease of 8.7% versus the prior year quarter. On a same-center basis, excluding London, revenue declined approximately 7.5%, reflecting a 9.6% decline in case volume, partially offset by a 2.3% increase in average selling price. Average selling price was approximately $12,900, well within our historical range. Gross margin expanded to roughly 60% of revenue compared to 57.5% in the prior year quarter. That expansion reflects broad-based operating efficiencies and cost disciplines across our centers, including the benefits of closing our London center. SG&A was approximately $20.3 million, an increase of about $700,000 versus the prior year quarter, primarily reflecting higher marketing spend and professional expenses. Customer acquisition cost was roughly $3,800 per case compared to approximately $3,100 last year. As Yogi discussed, that increase is primarily driven by AI overviews, which impacted traffic and leads reaching our website in the period. We're responding by diversifying our channels and optimizing our digital presence to improve efficiencies. Adjusted EBITDA was approximately $400,000 or roughly 1.2% of revenue compared to $3 million or 8.7% of revenue in the prior year quarter. The decline primarily reflects lower revenue and reduced operating leverage, partially offset by continued cost disciplines. Turning to guidance. As you saw in our release, we're updating our full year 2026 outlook to reflect third quarter performance and our expectations for the balance of the year. We now expect revenue of $144 million to $146 million compared to our previous outlook of $151 million to $157 million and adjusted EBITDA of $9 million to $10 million compared to our previous outlook of $12 million to $14 million. This outlook assumes the challenges we saw in Q3 continue through the fourth quarter, which we believe is the prudent approach. As it relates to our balance sheet, we ended the quarter with roughly $15 million in cash and $5 million available on our revolver, resulting in roughly $20 million of liquidity available to the company at the end of the quarter. Transformations are rarely linear and Q3 was a clear example of that, but I'm proud of the progress that we've made, a much stronger balance sheet with greater long-term financial flexibility, a more efficient cost structure and a clear plan to address the challenges in front of us. With disciplined operations, continued cost efficiencies and the long-term financial flexibility our refinancing provides, I'm confident in our ability to execute and to capitalize on the growth opportunities ahead. And with that, I'll turn it back to Yogi for closing remarks.

Thank you, Michael. In closing, I want to thank our team for their hard work and dedication. While our third quarter performance was below the stability we achieved in the first half, we have made meaningful progress strengthening our business and have identified and are focused on the right strategies to improve our performance. Since last year, same-center sales trends have improved approximately 19 percentage points. We believe our expanded GLP-1-related procedures, evolving AI search strategy, enhanced lead generation efforts and continued focus on center-level execution position us well for growth. The combination of these efforts, along with the increased financial flexibility from our new term loan gives us a stronger platform to achieve sustainable, profitable long-term growth and value creation for our shareholders. With that, I'd like to turn the call over to the operator to begin the question-and-answer portion of the call.

[Operator Instructions] Our first question will come from Sam Eiber with U.S. Bancorp BTIG.

Maybe I can start on some of the challenges called out related to the Google AI search engine. And I just want to make sure I'm understanding this right. So it sounds like there's still patient interest in aesthetic procedures. They're using the search engines, but maybe they're just not being funneled at the same rate to your website. So I just want to make sure I'm understanding that right. And then I guess, second, how are you looking to maybe overcome some of those challenges? Do you need to redirect investments elsewhere? Just curious how you're looking to respond to that.

Sam, this is Yogi. Thank you for the question. Look, you're absolutely right. We continue to see that the demand for overall aesthetic procedures is staying consistent with past quarters, which is encouraging. And we are also seeing that our conversion rate is holding steady. So when we capture the lead, we are able to convert the patients, they are still showing the same interest and engagement with the AirSculpt brand. A little bit more on what's been changing in Google AI search. So over the past few months, Google updated their AI search capabilities. That has progressively impacted how consumers research and find our services. Google tends to keep them within their own platform. This change in Google is impacting many consumer companies and many have called it out in the Q3 results. We have implemented countermeasures. That's things like being cited within AI answers and starting to see good traction there. That's within our control, and that will help us overcome some of these challenges. Secondly, we are building out our channels that don't depend on Google, such as local and community marketing and open house next week across all of our centers. And lastly, continuing to engage with patients to make sure that our conversion rate holds strong. So I have confidence that we are taking the right steps, and we're starting to see early signs of that. It will take some time for that to show up in our revenue numbers for sure, which is where the guidance comes in.

Okay. That's a really helpful explanation. And then maybe I can just use my follow-up here. It's a little bit of a higher-level question, but just curious on AirSculpt's brand and ability to still win and capture new patients. If that's changed at all just in terms of consumer reception to the brand? Is it still -- has it changed at all? And how you view AirSculpt within the marketplace generally versus other independent plastic surgeons?

Yes. Sam, thanks for that. We still see a very strong reason for us to win and take market share in the long term. Based that on 3 things, 1, as I said, when people engage with our brand, people are still searching for the AirSculpt brand and when they engage with us, we are seeing conversion holding steady. Secondly, our strategic bet on changes in aesthetics, particularly as it relates to GLP-1 procedures, you're starting to see that play out. So consumers are responding positively to that. That's partially the strength of the brand, which is coming into play. And thirdly, as you think about whether it's Google AI overviews or the likes, everyone is impacted equally with that. We have the marketing depth and frankly, the strength of the organization to be able to pivot, invest in that and overcome those challenges. I would argue, faster than anybody else. We just need to bring that to bear.

And our next question will come from Kyle Bauser with Titan Partners.

Maybe can you talk a little bit about trends in October and early November? It looks like the full year guidance assumes a step down in Q4 as well. So just kind of curious how things are kind of trending so far.

Yes. Kyle, this is Michael. On guidance, I think where our guidance landed in -- for the full year is basically a reflection of kind of Q3 trends continuing through Q4. And it's really what kind of will dictate that really is just the pace in which we're able to kind of evolve those 2 key areas that Yogi mentioned on the call, which is around our ability to kind of meet or evolve our marketing strategy around the AI reviews. And then second, there are a handful of centers that had executional issues in Q3 that we are improving and the pace of that is going to dictate, kind of, where Q4 lands in the full year.

Got it. And then I'm not sure I caught all the details, but any more terms of the refinance debt you can walk through kind of interest rate, et cetera?

Yes. Yes. So the terms, we're excited about where we landed on the refi. So it's a 5-year term loan, $44 million facility, $39 million term loan, $5 million revolver. Interest rate is around -- is SOFR plus 775 and it steps down as leverage decreases over time. That's about a 300-basis point increase from the old facility that we had in place. We also structured in a way and designed in a way that provides us a lot more flexibility short term, lower amort payments, more cushion on covenants to allow us to execute these key initiatives that we think are important for us and provide necessary liquidity short term to make necessary investments. And so yes, we're excited. It's -- frankly, it's a pretty plain vanilla term loan, but glad to have it past us and extend the maturity out to 2031.