Cutera Inc (CUTR) 2005 Q1 法說會逐字稿

Please stand by, the conference is about to begin. Good afternoon and welcome to the Cutera Inc. First Quarter 2005 Earnings Conference Call.

[Operator Instructions]

It is now my pleasure to turn the floor over to your host Mr. John Mills of Integrated Corporate Relations. Please go ahead sir.

Thank you Betty. By now everyone should have access to the First Quarter Earnings Release that went out today at approximately 4:00 p.m. Eastern time. The release is available on the investor relations portion of Cutera's web site at www.catera.com and with our form 8K filed with the SEC and available on it's web site at www.sec.gov.

Before we begin, Cutera would like to remind everyone that these prepared remarks contain forward-looking statements including statements related to guidance about future financial performance and that management may make forward-looking statements in response to your questions.

Factors that could cause Cutera's actual results to differ materially from these forward-looking statements include its reliance on a limited product line, its ability to effectively develop, market and sell future products, unpredictable events and circumstances relating to international operations, government regulatory actions, general economic conditions and those other factors described in the section entitled "Risk Factors" in its 10K filed with the Securities and Exchange Commission on March 25th, 2005.

These forward-looking statements do not guarantee future performance and therefore you should not rely on them in making an investment decision without considering the risks associated with such statements.

Cutera also cautions you to not place undo reliance on forward-looking statements, especially those related to guidance on future financial performance which speaks only as of the date they were made.

Cutera undertakes no obligation to update publicly any forward-looking statements to reflect new information, events or circumstances after the date they were made or to reflect the occurrence of unanticipated events.With that, I'll turn the call over to the company's President and Chief Executive Officer, Mr. Kevin Connors.

Thank you John. Good afternoon everyone and thanks for joining us today as we discuss results for the first quarter ended March 31st, 2005. On today's call, I'll provide an overview of the quarter and current trends and Ron Santilli, our CFO will provide additional detail on operating financial results and comment on guidance. I will then provide some closing comments, and open up the call to your questions.

We're very pleased with the first quarter results which exceeded top and bottom line expectations and reflect the strength of our product portfolio and enhanced sales and marketing capabilities. As part of our commitment to increasing stockholder value, and building a strong foundation for Cutera's long term growth we have made significant investments in our product development efforts, and in our direct sales and customer service organization in the major global markets.

We believe our strong performance in the first quarter is evidence that these efforts are translating into continued revenue growth, expanding operating margins and increased net income.

In the first quarter we posted revenue of $15.1 million and earnings per diluted share of $0.11, ahead of our previous guidance of $14.5 million dollars in revenue, and $0.07 in diluted earnings per share. Our gross margin remains at record levels of 73%, and our net income as a percentage of sales was a healthy 10%. And we're continuing to generate positive cash flow from operations.

Ron will provide additional details regarding revenue and earnings comparisons in his comments in a few moments. But let me first provide some detail on how we're successfully executing some of our key strategic initiatives.

We are continuing to introduce innovative aesthetic systems that expand the range of fee for service applications we offer the marketplace. In terms of new product launches, the first quarter was the most exciting quarter in our history. We launched our Titan application at the American Academy of Dermatology Annual Meeting in February, and we're pleased with the market response.

Titan is a proprietary light-based technology that offers a noninvasive solution for treating skin laxity. The technology employs a broad spectrum of light that's aboard in the deep dermis, while safely cooling the epidermis. This deep heating changes the mechanical properties of skin with many patients observing positive results immediately.

We have focused considerable time and effort developing this technology and the associated clinical protocol. We began staging the introduction of this technology last summer and are please to have fully completed its launch in the first quarter. Titan represents 3 long-term opportunities for Cutera. First Titan was offered on our multi-application Xeo.

The majority of our Titan revenue has come form the sales of our Xeo systems where customers are able to offer their patients the most popular light-based procedures in a single console. Second, we are able to offer Titan to our entire installed base as a system upgrade and third we are able to offer Titan in a stand alone platform that I will discuss next.

In addition to the Titan launch we introduced a new technology platform, Solera. Solera is a compact, table top design that allows us to participate in an emerging more price sensitive segment of the market. We're seeing the emergence of Physician Medi-spas which provide full service health and beauty spas that offer their customers a complete range of aesthetic solutions. And we believe the Solera platform is well suited for this market.

One of the benefits of this compact design is the ability to offer customers immediate response for any technical issues and ship the system via overnight courier so that our customers won't miss their appointments.

We have 2 versions of this platform, Solera Titan and Solera Opus. Solera Titan is a cost-effective solution for customers interested in adding this single application to their practice while Opus allows Cutera to participate in the high growth filtered lamp technology market at attractive price points.

Our goal is to target various segments of the market and give our customers greater flexibility in choosing the Cutera solution that makes sense for their practice today with the unique benefit of allowing them to later expand their practice by adding more clinical capability to their Cutera product in the form of system upgrades.

In addition to these new offerings, sales of our existing product lines are continuing to exceed our expectations. We're seeing the marketplace continue to expand for all of our products and applications for both core positions which we define as dermatologists and plastic surgeons and our non-core practitioners which we define as physicians outside of these core specialties.

We are continuing execute on our strategy of expanding our global sales and customer service organization. We are expected to have a total of approximately 40 sales people in North America by mid 2005 and continuing to invest in the expansion of our direct international sales and service team.

In addition, we are continuing to expand our distributor relationships world wide where we don't have a direct presence.

With that I'd like to turn the call over to Ron to discuss our financials in more detail, Ron.

Thanks Kevin and thanks to all of you for joining us today for our first quarter results.

First quarter revenue was $15.1 million, a 31% increase over the $11.6 million recorded in the same quarter last year. Net income for the first quarter was $1.5 million dollars or $0.11 per diluted share compared to $221 thousand or $0.02 per diluted share reported in the first quarter of 2004.

The first quarter of 2005 included pretax non-cash stock-based compensation charges of $426 thousand compared to $372 thousand in the first quarter of 2004.

We are continuing to increase our market penetration with sales to new customers and upgrades to existing customers. During the first quarter of 2005, we had $12.6 million of product revenue, $1.6 million of upgrade revenue, and approximately $0.9 million of service and other revenue.

Each of these revenue categories increased form the Q1 2004 levels. The increase in product revenue is primarily attributable to our sales force expansion and higher sales of our premium multi-application Xeo product. Our recently introduced Solera Titan tabletop platform also contributed to growth.

Upgrades represented 11% of revenue, up form 6% in the same period last year. We have been particularly successful in leveraging our installed base to add the Titan application through associated upgrades.

Domestic revenue increased $3 million or 40 % from $7.4 million in Q1 2004 to $10.4 million in Q1 2005. This significant growth is largely the result of our efforts in expanding our sales organization and our strong product portfolio.

International revenue in the first quarter 2005 increased 14% from the same quarter of 2004, and accounted for 31% of our quarterly revenue. In particular, our products are getting traction in the European market.

Our gross profit margin was 72% for the first quarter of 2005, compared to 69% for the same quarter in 2004. Our gross margin continues to remain strong due to the demand for our premium multi-application Xeo product; higher gross margin associated with our newly introduced Titan related products and continued improvements in our product warranty and in reducing service expenses.

We expect our gross margin percentage to settle in the range of 71% to 73% throughout the remainder of 2005.

Moving to operating expenses, comparing Q1 2005 to the same quarter in 2004; sales and marketing expenses increased by 34% to $5.7 million from $4.3 million in the first quarter of 2004. We continued to invest in domestic and international expansion to build our distribution channel. In 2005 we expect to continue investing in the range of 36% to 38% of revenue as we continue to increase our market presence.

Research and Development expenses were $1.1 million or 7% of revenue. This represents an increase of 13% from the $959 thousand invested in the first quarter of 2004. We will expect in the range of 7% to 10% of revenue in R&D as we continue our efforts to develop new and innovative products and applications that expand our portfolio.

General and administrative expenses were $2.1 million, basically flat from the same quarter in 2004 and in line with our guidance of $2 million to $2.5 million per quarter. We continue to incur legal expenses associated with our ongoing patent litigation. In the future after we resolve the patent litigation we expect our general and administrative expenses to settle in the range of 8% to 10% of revenue.

Net income for the first quarter 2005 was $1.5 million, up from $221 thousand in the first quarter of 2004. The improvement was primarily attributable to higher revenue, strong gross margin, higher tax exempt interest income and a lower effective income tax rate.

Our effective tax rate for the first quarter was 30% which was lower than we previously expected. For the remainder of 2005 we expect our effective income tax rate to be approximately 33%. The decrease in effective tax rate from the prior year resulted primarily from lower stock-based compensation charges for incentive stock options that are not tax deductible and a nonrecurring adjustment associated with release of tax reserves due to the settlement of a previously uncertain tax position.

Turning to the balance sheet, as of March 31, 2005 Cutera had $69.1 million in cash and marketable investments with no debt. Net cash generated form operations was approximately $1.6 million in the first quarter.

Our accounts receivable net at the end of the first quarter was $5.9 million compared to $6.6 million as of December 31, 2004. We continue to improve the rate at which we collect cash on our accounts receivable which we measure by counting Day Sales Outstanding or DSL. Our DSLs were 35 days the first quarter as compared to 38 days for the fourth quarter of 2004.

And now to our guidance, for the second quarter of 2005 we expect revenues to be approximately $16 million with earnings per diluted share of approximately $0.11. For the full year of 2005 we are raising revenue guidance approximately $67 million from $66 million to reflect the better than expected first quarter results.

In addition, we are raising 2005 earnings per diluted share projections to $0.48 from $0.40 reflected on strong first quarter results, lower effective tax rate and improved operating margin outlook for the remainder of 2005.

We expect our third quarter revenue to be approximately the same as the second quarter due to the normal seasonality associated with our business. Further more, we anticipate our third quarter EPS to be slightly lower than our second quarter guidance due to continued sales and marketing investments and legal expenses associated with an anticipated trial relating to our patent litigation.

Now that I've concluded my overview of Cutera's financial performance, I'll turn the call back to Kevin.

Thanks Ron. In summary, we had an outstanding first quarter and we remain very excited about our future. Now I'd like to open up the call for your questions. Operator.

[Operator Instructions]

Our first question today is from Tom Gunderson from Piper Jaffray. Please go ahead sir.

Hi, good afternoon. Ron, actually, let me ask something just on the Q2 guidance, a little bit more in revenue in Q1 but the same earnings and I think I heard you at the end say a little bit higher legal expenses as you prepare for trial; there's a higher tax rate, 33% versus 30% and then something with sales and marketing, is that right?

Yes, we talked about the additional litigation expenses that we expect, the higher tax rate that we're expecting and we've also guided the margins between 71% to 73% and our gross margins experience in Q1, which we were very pleased with, was on the very high end of the 73% rate.

And that will get me into the Q1 results then. What did drive the 73%, was it higher Titan sales mix or higher Xeo with Titan aboard mix?

Yes, it's really the Xeo with Titan, the premium multi-application device which sells for the highest selling price and afford amongst the higher gross margins. That's driving a lot of it, plus there was a lot of upgrades. We had $1.6 million for the quarter of upgrades, a lot of that being Titan related which also has a nice gross margin component.

And you said 11% upgrades and that was good compared to last year Q1, can you remind us what it was in Q4?

Sure. The Q4 number was approximately 13% because we had just released, we were just starting to see a lot more traction on the Titan upgrades.

Okay. What percentage of your base would you say is upgraded to Titan at this point?

I don't have a specific number, but it would be just a fraction, a very small fraction of the installed base.

Okay.

Less than 20%, wouldn't you think?

Yes, very low.

There's still some room there. And then, Kevin, maybe a little bit more color on Titan, can you tell us how many were sold and how much was U.S. versus oU.S.?

Well, as Ron alluded, and I alluded in the discussion earlier, most of our business came in the form of Titan added to the Xeo platform, so the multi-application component that's driving the lion's share of our Titan business. And in terms of mix, I would say OU.S. is very comparable to what we saw here in the States.

You could order the XEO with or without Titan on it -

That's correct.

-- and so I'm just kind of wondering from a, if we were putting hash marks up on the wall, is there a kind of a unit base? I think you did somewhere close to 100 last quarter, I would expect a little bit of a downswing in a Q1 in this kind of business and then pick back up. Is it in the neighborhood of 50 to 90 units of Titan capability that went out the door in Q1?

Some form of Titan, you're correct. It's in that range Tom.

And that would include not only the multi-application Xeo but the upgrades as well as Solera Titan.

Right. And then, on the legal update, do we have a court date yet?

We do not right now Tom. We had a summary judgment trial and until the judge has a ruling on that motion the judge is not willing to set a trial date. But we continue to anticipate that happening late summer.

Okay. And then, last question, and I'll get back in queue or go offline, and that is on AAD you generated just a mountain of leads. Are you working your way through that and are you seeing a pick up in Titan as the year goes on?

We have a strong interest in the product and the AAD was a very good meeting for us. So we certainly are working through all those leads. It's a big meeting for us but we also have other meetings that are becoming an emerging part of our business including the American Academy of Gynecology meeting coming up in a few weeks in San Francisco. That's another strong source of leads for the company.

Okay, thanks.

And we will go next to Phil Nalbone from RBC.

Hello Kevin.

Yes Sir.

Hello. Your guidance on the top line now for '05 would suggest growth north of 27%. As you think about internal planning for '06, what would be a reasonable target for top line growth in that year?

Well we're continuing to see strength in the market. And we think the market's expanding north of 20% so we want to grow faster than the market's growing.

Okay. And can you give us a little more detail on the sales force expansion efforts in North America? How many bodies were added during the first quarter? And can you kind of gate that for us through the remainder of the year?

As I mentioned earlier, our plan is to be at 40 territories by the end of this quarter and we expanded the sales force by 4 territories in the first quarter.

Okay, so added 4 people.

That's right.

Okay. And you've been clear on that 40 number by mid year, does it expand from there?

We're looking at another expansion the second half.

Okay. And what will kind of inform that decision -When do you make it and what are the factors you're looking at?

Well I think that the overwhelming factor is what's happening in the overall marketplace. And we're continuing to see that show signs of great strength. So that's really driving us to continue to expand our sales force. We've not seen a drop off in productivity by expanding our sales force and so, we've monitored that very closely, so we will continue to expand because we think that's one of the key ways we can drive our business.

Okay. Just to clarify one issue relating to Tom's question on the Palomar litigation, what exactly are you waiting for to happen late this summer? Are you still expecting an actual trial late summer or just the judge's ruling on the summary judgment motions?

We're expecting the trial late summer.

Okay. And, any visibility on the likely timing of the ruling on summary judgment motions?

No. We don't.

Okay. Okay, but nothing further needs to happen from either party prior to that ruling, is that correct?

That's correct. We've ended the discovery phase and we're waiting for the ruling that we put forward with the court on the summary judgment and then after that we would expect a trial date to be set.

Okay, great. Final question, then I'll go back into the queue. Can you talk a little bit about the hair removal business? Really 2 questions here; can you give us any sense of how much of the existing business on a dollar basis would come from hair removal if in fact it's possible to divine that? And then second, talk a little bit about the sort of competitive and IP implications of the new flash lamp technology for hair removal.

Sure, in terms of the part of our business that's laser hair removal, and that's the only application that a customer's interested in, that's a very small part of our business. What would you guess Ron, about 5% or less?

5% of the unit sales.

Five percent of our unit sales. So the majority of our customers are opting for the multi-application capabilities that we provide in our product platform. And the dispute is over laser hair removal, with Palomar, and we do have another technology that we announced at the American Academy of Dermatology meeting that's not laser based. And it's a filtered flash lamp technology that we've been able to design with programmable wave lengths.

I think there's a tremendous amount of interest in the marketplace for lamp-based technology for hair removal because the spot size is much larger and I think there's a sense that the treatments can be faster. So with this new technology we're excited to be able to offer our customers to select the wavelength that makes sense for a given patient, and the treatment speed can be faster. We will begin shipping that technology this quarter.

Great, thank you very much.

[Operator Instructor]

We will go next to Dalton Chandler from Needham and Company

Good afternoon. I just wanted to follow up a little bit on the market and the market growth rate. I think most of the market research firms are estimating high teens to 20% and you've grown, especially this quarter but really fairly consistently, above that. Where do you think the real market is in terms of growth and how much faster are you growing?

I think what we're seeing that's different than when we first started selling products back in 2000 is that we're calling on a broader group of customers. Back in 2000 the lion's share of our business came in the form of dermatologists and plastic surgeons. Now about three-fourths of our business comes from specialties outside of derms and plastics and it's a much larger group of physicians.

Instead of calling on 18 thousand derms and plastics in the U.S. we're calling on about 130 thousand physicians that include OBGYN, Family Practice Physicians. And those 2 groups make up the 2 largest segments of our business today. So I think it's continued to expand beyond plastics and derms and we're seeing a tremendous traction in these other larger areas.

Okay. Could you give us an update on where you think your installed base is right now?

Sure, we're about 1800, is that right?

About 1800, 1 thousand 8 hundred units.

Okay. Well, all right, thanks very much.

Thanks Dalton.

And we have time for 1 more question today which will be from Anthony Vendetti from Maxim Group.

Thanks, good afternoon Kevin and Ron.

Hi Anthony.

Hi Anthony.

I wanted just to, I may have missed this part, did you give the actual mix between core and non-core?

We didn't but Ron has it here.

And then I've got a couple of quick follow-ups.

The core plastic surgeons and dermatologists represented about 31% of the orders received this quarter.

Okay, so that's actually up for the quarter-

And I think a lot of that is due to Titan. It allows us to get in front of the derms and plastics more than we have in the past.

And I know you're in the process for a 510k clearance for wrinkle reduction for the Titan; do you have any status update on that?

We're still working with the FDA on that so we don't have the clearance yet.

Okay, and you had mentioned 40 sales people by mid '05, do you have an idea for the end of '05, what you're looking for?

We're working with sales management to plan the next expansion.

Okay and I think you may have mentioned this but I didn't catch it, the breakout between, of those 40 how many of those are, is that all domestic and then you have international on top of that, right?

That's correct. Actually it's North America. We're direct in Canada as well as the U.S.

Okay, and what's the international number right now and what do you expect that to be by mid year?

We're in the range I think of around approximately 17 direct sales people outside of North America.

Right now.

We also have a support team on top of that so we have technical service as well as other resources in our outside the U.S. business.

Right. And so that's 17 now and by mid year do you have a number in mind for that?

We really are looking at that on a regional basis and we see the market outside the United States being as large there as it is in the states. But you know, the real trick is to be able to make sure that you're hiring the right talent and so what we are monitoring that very closely but we've not set a target for the international sales force.

Okay.

The other thing with that Anthony is making sure the infrastructure for the international side is there to support those sales people, and we've continued to invest in that as well.

Okay. And a question on the flash lamp, is that, can that be sold alone like the Titan or with Solera or is that a whole different platform -

It can. The Solera Opus will be able to support the flash lamp hair removal hand piece.

Okay, and that's the, the Opus is what you can use to upgrade to other or add other applications for it.

That's correct.

Okay. And then just quickly on this, the legal action with Palomar, are any of these developments that you're sharing new since last quarter or is it still, are you still just waiting for this court date? And if so, the court date and the trial which should be, from what I understand, this will probably be a 1 or 2 week trial though you can't predict. But all that, barring unforeseen circumstances should be concluded by sometime in the fall to the end of the year at the latest is kind of your best estimate on that, or?

Yes, we're expecting it to be a fairly quick process once we get the trial date set. So yes, in the 2 week time frame, and we're anticipating that happening at the end of the summer.

Okay, and you're still spending around $1.25 million per quarter for legal expense, is that about right?

I don't think we disclose any of the specifics with regard t the numbers, but we do talk about after - we're expecting to spend $2 to $2.5 million per quarter in G&A until this is resolved. Once it's resolved we're expecting to spend between 8% to 10% of our revenue in G&A.

Okay, okay, so we can kind of figure it out on our own that way.

Yes.

In terms of the, what you're targeting, obviously you target the 130 thousand physicians, are you finding it, are you focusing your sales force on the new physicians as opposed to going back to your installed base and trying to sell them add-ons? Are you trying to do both simultaneously? Has that shifted at all since fourth quarter?

Well we're trying to do both. But obviously we're interested in finding new customers for our products and so I think we really are trying to direct our sales force to look at new business opportunities rather than dwell on the installed base.

Okay and you don't give out a percentage breakout of what was to the installed base versus what's new do you?

I'm confused.

In other word the sales, the number of units sold this quarter, what percent was to brand new physicians as opposed to existing customers?

In excess of 90% easily.

In excess of 90% was new customers?

That's right.

Oh great, okay good, thanks.

That does conclude our question and answer session. I'd like to turn the call back over to our speakers for any additional or closing remarks.

Well thank you for participating in our call today. We look forward to updating you on our progress next quarter.

That does conclude today's conference call. Thank you for your participation. You may now disconnect.