Cutera Inc (CUTR) 2005 Q3 法說會逐字稿

Good day, and welcome to the Cutera, Incorporated's Q3 2005 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. 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, Richard. By now, everyone should have access to the third quarter earnings release which went out today at approximately 4p.m. eastern time. The release is available on the Investor Relations portion of Cutera's website at Cutera.com and with our Form 8-K filed with the SEC and available on its website at 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 related to international operations, government regulatory actions; general economic conditions, litigation, and those other factors described in the section titled 'Risk Factors' in its most recent 10-Q and 10-K filed with the SEC.

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 undue 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 to discuss Cutera's results for the third quarter and nine months ended September 30, 2005.

On today's call, I'll provide an overview of the quarter and current trends. Ron Santilli, our CFO, will provide additional detail on operating and financial results and comment on guidance. We'll then provide some closing comments and open the call for your questions.

We're very pleased with our third quarter results. We've just set a new record for revenue for revenue and profitability and exceeded both our top and bottom line expectations. During the third quarter of 2005, we achieved a 49% increase in revenue to $19 million, compared to the third quarter of 2004 results and earnings per diluted share of $0.27, both significantly ahead of our previous guidance of $17.5 million in revenue and $0.13 in diluted earnings per share. Our gross margin and operating margins were also at record highs of 75% and 25%, respectively.

This quarter's results reflect the returns on significant investments we've made to-date in our organization's infrastructure and the improved leverage in our business model. Major contributors to our top-line growth were sales of our premium multi-application, a product - the CoolGlide Xeo system, continuing strong demand for our Titan application, and strong market acceptance of the Solera platform which is being driven by the fast emerging medi-spa market. This market is comprised of physicians who offer aesthetic treatments in a spa environment.

Our strong performance is a result of the following key strategic initiatives. The first is the continued expansion of our worldwide distribution network to support our new product launches and increase our market penetration and expanding aesthetic laser market. We've been aggressively expanding our global sales and marketing efforts.

In North America, our direct sales force now covers 40 territories. Our innovative sales training program enables our new hires to quickly and effectively gain traction in their sales territories. We are planning on adding another 15 sales territories by mid 2006, resulting in a North American sales force of 55 territories.

We are continuing to expand our international organization to capitalize on the significant potential for our products outside the United States. We have a direct presence in the major international markets. We have established two service and support hubs overseas to ensure that we have the infrastructure to deliver world-class service and support to our entire customer base. We have a Pacific Rim hub in Tokyo. And at the beginning of the third quarter 2005, we opened an office in Zurich, Switzerland. The Zurich office serves as our sales, marketing, and service headquarters for all of our direct sales organization and distributors in greater Europe. We believe the international market is as attractive as the U.S. market and will be a significant growth driver for us.

The second key initiative fueling our growth is the continuing introduction of new aesthetic products and applications. We're continuing to invest in research and develop, which we believe is critical to building and maintaining our leading product portfolio and customer base. It also enables us to leverage our install base for new product upgrades. Our current global sales base is approximately 2200 units.

We've been pleased with the market acceptance of our exciting new application ProWave 770, released earlier this year. The ProWave 770 is a significant innovation in light-based hair removal and an alternative to laser-based hair removal. The ProWave is the first hair removal system that allows practitioners to select the ideal spectrum of light for each patient and is designed to quickly treat large areas such as legs and backs. Some of our customers prefer this technology over laser technology. We are able to offer this alternative method for hair removal on both the CoolGlide Xeo and the Solera platforms.

In our research and development efforts we're constantly looking at innovative ways of addressing different customer-driven applications and solutions. Cutera 3D is a great example of this because it takes a three-tiered approach to skin rejuvenation by combining in one device the ability to improve skin tone, texture, and tightness.

Through this solution, our customers are able to offer a treatment package which incorporates the Laser Genesis, Titan, and our LP560 technologies all available on our multi-application CoolGlide Xeo.

Patients present doctors with different needs, and our 3D package allows the doctor to address the specific needs by delivering a noticeable improvement in skin tone, texture, and tightness. We introduced this solution in the third quarter 2005, and the initial feedback has been very strong.

Our history of innovation and successful product introductions is unrivaled in the aesthetic laser industry. We have successfully launched at least one new product each year since 2000.

The third key initiative driving our growth in the -- is our continued marketing to physicians outside of the traditional dermatology and plastic surgery specialties, including the fast-growing and more price-sensitive medi-spa market. To attract customers in this fast-expanding market we have implemented several creative marketing efforts, including the introduction of our compact Solera platform that offers an entry-level product to this price-sensitive market.

The medi-spa market and sales to noncore specialties are expected to continue to grow as global demand for light-based aesthetic procedures continues to increase.

For physicians, including dermatologists, plastic surgeons and noncore specialties, the fee for service aesthetic treatments represent an attractive source of supplemental revenue over and above the typical fees earned for managed care providers. Cutera is uniquely positioned to supply this growing demand with innovative and easy-to-use products that are quickly gaining popularity and traction in this market.

And now an update about our pending litigation with Palomar. In this lawsuit, approaching its fourth year, Palomar is claiming that our laser-based hair removal systems violate three claims in a patent. We believe that our products do not infringe that patent and that the applicable claims are invalid. We have also filed a countersuit against Palomar for inequitable (ph) conduct alleging that their failure to disclose a material reference during the patent's (inaudible). We are asking the court to declare the entire patent unenforceable.

Earlier this year, in response to the introduction of Cutera's innovative Solera platform, Palomar filed a second lawsuit against Cutera claiming that our filtered broadband hair removal products infringed some patents. We believe the second action is frivolous.

The European patent office recently revoked a foreign counterpart to the patents because of attempts by the plaintiffs to unfairly broaden its scope beyond light sources with a selected wavelength, i.e, beyond lasers.

The second lawsuit has been successfully sidetracked and we are focusing on getting the original lawsuit to trial. Obviously, litigation is uncertain and we advise interested investors to refer to our quarterly and annual reports for more information about this matter and the risks associated with this litigation.

So to summarize, as the results demonstrate, we are continuing to exceed our expectations with our strategic and financial goals in every respect. For the first nine months of 2005 our revenue was up 41%, compared to the first nine months of 2004. And our profitability has shown significant improvement. Our balance sheet has strengthened substantially, and we're continuing to generate a strong stream of positive cash flows.

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 third quarter results.

As Kevin discussed, our third quarters results exceeded our expectations due to the increase in demand for our products and increased market coverage from our sales expansion efforts.

Revenue for the third quarter was $19 million, an increase of 49% from 12.7 million reported in the same period last year.

Net income for the third quarter was $3.8 million or $0.27 per diluted share, compared to 877,000 or $0.07 per diluted share reported in the same period last year.

The third quarter included pretax noncash stock-based compensation charges of 473,000, compared to similar charges of 356,000 in the third quarter of 2004.

The company's revenue for the first nine months ended September 30, 2005 was $51.7 million, a 41% increase from 36.5 million recorded in the same period last year.

Net income for the first nine months was $8 million or $0.58 per diluted share, compared to net income of 1.7 million, or $0.14 per diluted share reported in the same period last year.

Included in the first nine months of 2005 was $1.2 million of pretax noncash stock-based compensation charges, compared to 1.1 million reported in the same period last year.

U.S. revenue increased $6 million or 71% from 8.5 million in Q3 '04 to 14.4 million in Q3 '05. U.S. revenue increased 51% when comparing the first nine months of 2005 to the same period in 2004. This growth reflects the continuing investment in our sales force expansion and a strong demand for our product offerings.

On the international front third quarter revenue increased 6% when compared to the same quarter of 2004. Year-to-date international revenue increased 22% when compared to the same period in 2004. We continue to invest in our direct international offices and look for new distributors in countries where we have no representation.

Our new European hub office in Switzerland is developing quickly and strategically positions us to take advantage of the growing markets in greater Europe.

We are continuing to increase our market penetration with sales to new customers and leveraging our relationships with existing customers to secure upgrade and service revenue, as well as periodic resale of those who purchased the Titan application.

When comparing the third quarter of 2005 to the third quarter of 2004, our product revenue increased $7 million or 77% from 9.1 million to 16.1 million.

Upgrade revenue decreased $1.7 million from $3 million to $1.3 million.

Service revenue increased $439,000 or 72% from $608,000 to $1 million.

Lastly, we had $481,000 of revenue from Titan resales, which represents an 18% increase from the prior quarter.

Product revenue was driven by our premium multi-application CoolGlide Xeo platform and our Solera platform. The Titan application was in high demand on both platforms.

Our upgrade revenue decreased this quarter, compared to the same period last year. This was primarily due to the fact that during our third quarter of 2004 there was pent-up demand associated with the stayed (ph) launch of Titan, and several customers purchased Titan upgrades on the CoolGlide Xeo platform in that quarter.

As you may know, there is a recurring revenue stream of our Titan products as the handpieces require a periodic refilling process after a set number of pulses have been performed. Titan refill and service revenue business are annuity (ph) stream is performing very well and is expected to continue to increase each quarter during the next several quarters.

Our third quarter gross margin achieved a record 75% due to a favorable product mix towards our premium multi-application CoolGlide Xeo product and increased level of U.S. business.

For the fourth quarter we expect our gross margin to be in the range of 73 to 75% as we leverage our revenue growth and continue to see strong demand for our higher margin products.

Consistent with our strategy to expand our distribution presence, sales and marketing expense for the third quarter was $6.2 million or 32% of net sales, compared to 4.7 million or 37% of net sales for the third quarter of 2004.

As Kevin mentioned, we are very focused on expanding our distribution network and increasing the productivity of our sales force. We expect to see our sales and marketing spending to continue in the range of 32 to 34% of revenue during the fourth quarter.

Research and development expenses were 1.3 million, or 7% of revenue for the quarter, and in line with our plans to invest in the range of 7 to 10% of our revenue as we continue to develop new and innovative products and applications that expand our portfolio of offerings.

General and administrative expenses for the third quarter were $1.6 million or 9% of revenue, down from 2.2 million the same period of 2004.

Expenses during the quarter for our patented litigation were minimal as the case continues to move slowly through the court. We don't expect trial for the patent litigation to occur prior to 2006, but expect litigation costs to increase significantly in 2006 as the case advances to trial.

In the fourth quarter we expect G&A to be in the range of 2 to $2.2 million due to the ramp up associated with the final phase of Sarbanes-Oxley compliance and increased accounting and tax fees associated with our fiscal year-end.

Operating income for the third quarter of 2005 was 4.7 million, or 25% of revenue, up from 1.2 million, or 9% of revenue in the third quarter of 2004. This improved profitability is due primarily to higher revenue, continued strong gross margin, and improved leverage of our operating expenses.

Our effective income tax rate for the third quarter was 28%, which is slightly lower than the 30% we had originally expected. This decrease in effective tax rate is due partly to higher than expected deductions from disqualifying dispositions of incentive stock options. We expect our effective income tax rate to be approximately 30% in the fourth quarter.

Now, turning to the balance sheet, as of September 30, 2005, Cutera had $82.2 million of cash and marketable investments with no debt. Net cash generated from operations was approximately $6.3 million in the third quarter and 12.8 million for the nine months ended September 30, 2005.

Our accounts receivable net at the end of the third quarter were $5.3 million, compared to 6.6 million at December 31, 2004, and $5.9 million at the end of the second quarter.

We are continuing to improve the rate at which we collect cash on our accounts receivable, which we measure by counting day sales outstanding or DSO. Our DSOs were 25 days for the third quarter of 2005, as compared to 30 days for the second quarter of 2005.

And now to our guidance, as Kevin discussed earlier, the last nine months have been an exciting and high growth period for Cutera due to the combination of innovative product offerings, continued sales force expansion, favorable market conditions, and the leveraging of our operating expenses. As a result, we expect a strong financial performance in the fourth quarter of 2005, and we, accordingly, are raising our guidance.

For the fourth quarter of 2005 we are expecting revenue to be approximately $22 million with earnings per diluted share of approximately $0.29. Due to the significantly better-than-expected third quarter results and improved outlook for the fourth quarter, we are increasing our full year 2005 guidance as follows, revenue of approximately $73.6 million, up from the previous guidance of $70 million, and earnings per diluted share of $0.87, up from the previous guidance of $0.62.

This annual guidance represents a 40% growth in revenue from 52.6 million in 2004 to our current 2005 guidance of $73.6 million.

EPS guidance of $0.87 represents a significant increase from the $0.31 achieved in 2004.

We are in the process of evaluating and modeling projections for 2006 and plan to share with you our guidance for the next year during our fourth quarter 2005 earnings release and fiscal year-end conference call. However, we would like to bring to your attention the following key matters that will impact our guidance for 2006.

One, we expect the absolute dollar of sales and marketing expenses to increase as we continue to invest aggressively in our distribution channels. Two, we expect our patent -- our pending patent litigation matter will go to trial. Three, in accordance with new GAAP guidance and FAS 123(R), beginning in the first quarter of 2006, we will be expensing the sur-value of the employee stock options and lastly, four, we expect our second tax rate will increase to approximately 35% because we have fully utilized the benefit of disqualifying dispositions and incentive stock options that can be used to reduce to the tax provision in the income statement. Now that I have concluded my overview of Cutera's financial performance, I will turn the call back over to Kevin.

Thanks Ron. I'm concluding we had an outstanding first nine months of the year, and we are very enthusiastic about our prospects for the remainder of 2005 and beyond. These strong financial results and outlook, an expanding global market and the leveraging of our business strengths and we're strategically positioned to pair (ph) up with the leading global provider of light base aesthetic systems. Now I would like to open up the call for your questions. Operator.

Thank you sir. Today's question and answer session will be electronically. [OPERATOR INSTRUCTIONS] Our first question is from Tom Gunderson with Piper Jaffray.

Hi, good afternoon. First, before I forget, Ron I missed the Titan refill number. What was that in the quarter?

$481,000 of revenue.

Thanks. Kevin, there were hurricanes and summer slowdowns and the economy is going down and you still do 49%. You are accelerating off of already good numbers in the summer quarter. Not many device companies do that, but the aesthetic companies in general seem to be doing well. How are you seeing this market and does the cost of oil really have any impact on your doctors' ability to market themselves.

We are certainly not seeing any evidence of that in our business. It would appear that consumer interest in these procedures is fairly independent of those kinds of concerns.

And either Kevin or Ron, do you have a sense of same-store sales? In other words, for the quarter? A remarkable quarter, as people well know it. How much was new business and how much was coming from customers that have been around for six, nine or twelve months?

Our general sense is that it is really a new business and one indicator of that is the product revenue grew 77% when you compare this quarter to the prior quarter, so we are placing a lot more new devices. Our unit accounts are continuing to increase.

And Ron are those new devices - I know you are saying this, I just want to ask it another way. Are they going to second (audio glitch) and third devices and a doctor's practice or brand new guys?

Yes, I believe most of those are new placements.

So you split a territory and the new guy goes out and finds brand new customers and that is why you are adding more sales guys?

That's correct.

Okay. Last question, and I will get back in queue. Kevin I am not as familiar - I know the European slowdown in the summer but you have had quite a bit of success with your Pacific Rim sales. What's the seasonal progress through the quarters for Pacific Rim?

It's not nearly as sensitive as what we experience in Europe, so I'd argue that there really is not a slowdown in our Pacific Rim business in the quarter.

Okay, thanks.

Our next question is from Jim Gorman with Tiedman Investment Group.

Hey, guys. thanks for taking my question. Can you give me some color on what the competitive landscape has looked like over the last nine months? Has it changed and how does it look headed in the fourth quarter of next year? Thanks.

Well first of all, we think that the market conditions continue to remain extremely robust and so demand from consumers for these procedures is growing at an extremely healthy rate. In terms of how we compete in the marketplace, I think the reference that Ron just shared is one that we look to in terms of how competitive we are with our product offering, and we are very pleased to see that our year-over-year growth was 71% in the U.S., and then in products sales our business was 77%. So we are really pleased that we are getting more placements of our products than we ever have.

Okay, great. Thanks, great quarter.

Thanks.

Our next question is from Mark Taylor with Roth Capital.

Hi, Kevin and Ron. Just an amazing quarter, but some questions if I may. Just first, I guess, starting on international. You had indicated 19 million of revenue for the quarter, and I count maybe 4.6 or so international. Is that number correct?

Yes, it's about maybe 4.5, but in that range yes.

Okay, so that's 24%, and you normally run or have a goal to get to 35 to maybe more of total reps coming from abroad. Is this just the summer slowdown? Is that why the percentage is lower or is it something else?

You are right, that is a little bit lower for this particular quarter, but if you remember last quarter we had actually a fairly large international number and when you look at the international number on a year to date basis for the nine months, it actually shows a 22% increase.

Okay, and of that 4.6 can you tell us where that came from? I mean how much was Asia and how much was Europe?

We really do not disclose those specifics, but I can only tell you that we are continuing to sell in all of greater Europe and there are some Canadian sales in there as well.

Okay, and abroad is the Xeo the lead product?

We sell the Xeo (inaudible) as certainly the number one premier product we sell, but I will say that in distributor transactions, that's where they tend to go on the lower end side with the CoolGlide family, the Excel or the Advantage, but in our direct territories internationally the Xeo is still the flagship product.

Okay. Now the sales force expansion, you had indicated you will be adding 15 additional reps for next year.

That's right.

How should we book those in our '06 model, half coming in first quarter, half coming in second? What would be your advice there?

The real limitation (ph) is just getting the hiring process done as quickly as we would like, but for all (ph) purposes I would say that should be fairly linear throughout that time.

You may not be able to comment on this but on this Motion for Summary Judgment against Palomar. Will you be giving oral arguments on that?

We have already had the trial, that was in March, so we are just waiting the judge to make a ruling on it.

Okay, and how long has the judge been - is this a new event, or why is the judge taking so long?

Well noth sides of this are really waiting for the judge to make a ruling on this so we can proceed with this matter.

And then lastly, in the U.S., just a phenomenal market and your placements are just really amazing. Great job, but could you give a little color on where those are going? How much of the placements are derma plastic, how much are medi-spa, and how much are, say, obgyn and other family practitioners?

I think strategically, Mark, one of the things that we thought was important in 2005 was to focus on increasing our unit growth. We have seen nice growth on the top line. A lot of that is due to increase in selling prices, so we are pleased to see our unit growth step up substantially from a year ago.

In terms of the breakdown by physician category, it is fairly similar to what we have seen in the past with plastic surgeons and derms making up about a quarter of the business and then obgyn and family practice making up almost half, and then there are other physicians and medi-spas making up the balance.

Okay great, and then one last question, if you can comment on your average selling price. Is it holding or increasing, record levels?

75% gross margin indicates that it might be going up.

Yes, I think in general we are holding very, very nicely but keep in mind we are selling a lot more Solera platform products which are at alower price point. So the overall ASP depending on how you are looking at it would depend on if you are looking at with just CoolGlide, Xeo, or the Solera platform.

Great, thanks again.

Thanks Mark.

Thanks Mark.

Our next question is from Phil Nalbone with RBC.

Hi. Thank you very much. First, just kind of a record keeping discrepancy, perhaps. Did I hear you correctly that you now have 40 territories in North America?

Correct.

How does that compare sequentially?

It is flat from last quarter.

Okay, and why is that?

We are out actively recruiting, so we are looking to hire more people. We just - with these larger numbers it is more challenging scaling up the sales force on a percentage basis than it was a few years back, but we are actively recruiting for the sales expansion today.

Okay, and in terms of the pipeline, Kevin, obviously, it was a great quarter. You have guided (ph) us for the remainder of the year, so now it is going to be all about what you do for us in the future. So I am hoping for a little visibility on that pipeline. In past years, the company has used the AED meeting as an opportunity to rollout its latest and greatest. Can you talk a little bit about the expectations for this coming March and what the products are going to be?

We do also set the AED as the target for announcing new exciting developments and we are still planning to do that, but I think it is also important to recognize that we are launching quite a bit this year, 2005, and with the Solera launch as well as Titan and some other handpieces that have been launched this past year. I think we have got a sales force with a very full bag of fresh products to market.

Okay, understood. And then finally, we now have probably a fair number of Titan patients out past a year after treatment. Can you give us some sense of what the durability of results looks like and when we might have an opportunity to kind of see some new data or some new presentations that speak to the success of the treatment?

We are dealing with that at every major trade meeting today. We have podium presentations - just about all of them regarding clinical experience with Titan so that story is continuing to develop and we are actually stepping up our clinical programs to expand the Titan presentations as well as the published clinical research, but in terms of long-term results, we do not have an active program that compares the results from a year out.

We are just continuing to work very closely with our clinical researchers and conduct other clinical studies that look at specific parts of the body, but we do not have an active program to report on that.

Okay great. Maybe one last question before I go back into the queue. It is probably a little unfair, but I will ask it anyway. You are not yet ready to give explicit '06 guidance, but I am just curious with some moderating of the gross margin and with a high reflective tax rate expected for next year, is it likely that the bottom line could continue to grow faster than the top line pace?

You know, I certainly think the bottom line will grow. We still need to model in all these other charges associated to FAS123R, the litigation, these items, and until we have that completely modeled, I do not have any specifics to provide you, but outside of those items, I certainly expect that we are going to continue to grow that bottom line.

Okay, thank you very much.

Thanks, Phil.

Our next question is from Dalton Chandler with Needham & Company.

Good afternoon.

Hi, Dalton.

I wondered in the three markets - the traditional and the non-traditional and the medi-spa market - if you could talk about specific product trends or things that are especially appealing within those specific markets that you are seeing.

Dalton, in terms of the physician market, we really do not see any trends in terms of product mix between the physician categories. In other words, our experience is that an obgyn or family practice physician is likely to buy the same equipment that a dermatologist or a plastic surgeon will buy, but with the medi-spas, we think it's more price sensitive and we think the Solera platform is likely to make even larger impact in that emerging business.

Okay, and you gave an overall installed base. Would you be willing to share with us how many Titans are in the installed base at this point?

We do not have those specifics because of it being a multi-application product. Some people choose Titan and some don't, but I can tell you within the last few quarters a high share of the device going out the door includes a Titan application.

Okay, all right. Thanks very much.

Our next question is from Mike Bozeman with Peninsula Capital.

Hi, Ken and Ron.

Hi, Mike.

Question for you, can you maybe comment on where you guys see the R&D dollars being focused for 2006?

Well, we have a number of exciting programs that we are working on right now and not to be difficult here, but we have been silent as to the new applications that we are working on for competitive reasons. The only caveat that I will share is that the things that we are working on are all aesthetic and they are all non-invasive procedures for very sizeable markets, and we do tend to talk about these things at the major trade meetings. So once we get closer to product launch, we will become more descriptive of what we are working on.

Great, and then on your comment about the medi-spa being a little bit more price sensitive, are you seeing any competitors this early in the stage direct, direct or head to head when you are going in there in the sales cycle and then maybe if you could just comment about the length of the sales cycle to the medi-spa versus a traditional derm and plastic?

Yes, we are seeing other companies that we had not seen as often before and they tend to be flashlamp (ph) type technologies that we see, Cyneron (ph) more now as well as Palomar. In terms of the sales cycle, it seems to be relatively similar to what we find with the physician market, and that sales cycle is about 90 days.

And the fact that you are seeing a little bit more Cyneron (ph) and Palomar, is this because you guys are coming into their kind of sweet spot or market or the other way around?

Well I think that we have not had portfolio (ph) products at this price point in the past. We have recognized this as an attractive market, but we have been successful in selling the (inaudible) Xeo which is a multi-technology, multi-application platform which sells - the system sells at a price almost $200,000. So we have recognized this an attractive market, and we just did not have the product offering until the launch of the Solera.

Great. Very impressive quarter. Thanks, guys.

Thanks.

Our next question is from Jose Haresco with Merriman Investments.

Hi, good morning, good afternoon guys. Congratulations on a great quarter.

Thanks, Jose.

First, I have a follow-up on some of those that were asked earlier. The Titan has been out for some time now. Do you have a sense, or can you give us a sense, for what the reorder rate look like at this point in time for people who have had it for six months or nine months?

You know, we are seeing a wide range there where some people will order every month. Some people will order every six months, so it hasn't been out long enough for us to really get the pattern, but clearly you saw a sequential growth in the handpiece replacement revenue from Q2 to Q3.

Is that more a function because roughly a few quarters ago more handsets, more units were placed in the field or because you have more people ordering this quarter for the same number of installation?

Well, it is a combination of the two, Jose. The majority of (inaudible) business had the Titan application populated. So we are seeing Titan continue to be extremely popular with the (inaudible) platform and we have excited customers about this application, but it can take - on average we think it is about three months for our customers to reorder. So from the time we deliver a system, there is a lag there before we get their first order.

Okay. You mentioned that Europe and overseas has held a very significant opportunity for you. Can you give us a sense of what kind of work that you will have to do there? I know you opened the office direct. Is it hiring of more sales people, is it more customer service and technical support, or really all of the above?

It is definitely all of the above, and we have competitors that have a larger portion of their business coming from outside of the United States, and it is just that we have been in those markets for very long, and it's a question of us getting the brand recognition in those markets. We have direct sales people in those regions, and so it requires not just sales support but also a new business development-type mentality as well as customer support, technical support and administrative infrastructure.

How many sales people do you have overseas right now, direct?

It's around the 17 range and that's the direct people. But the infrastructure, as Kevin was talking about earlier, is very, very important to create that before you can start adding high levels of sales people.

Okay. Thank you.

Our next question is from Anthony Vendetti with Maxim Group.

Thanks. Can you talk a little bit more about the Solera? I know that this is a product that goes right into Palomar's sweet spot in terms of the platform, the (inaudible) platform, and you said that there's a lower price point. What's the price for, I guess, the base platform and then the handpieces, and how does that differ from Palomar in terms of the technology?

The list price of our Solera platform is somewhere around the $75,000 range.

And in terms of technical things or features of benefit that are unique in the market, there is a long list, and I think some of the key things that we've been able to accomplish with this technology is provide controlled results. In other words, when our handpiece is used in a procedure, the output of the device is regulated real-time, and that's important because the range between an under-treatment, where there's no therapeutic result, or an over-treatment can be very, very tight. And so by having regulated output, we can control that very closely.

All these handpieces have a technology that ages and by regulating the output, it makes our device independent of how old the handpiece is. And then, we've come up with some proprietary cooling approaches that allows us to have, once again, a very controlled result. The other changes that we've done or the other things that are unique about ours is that it is a lightweight device and we're able to provide 24 hour customer response time for any technical issues and then we're able to support a number of different flashlamp handpieces for various applications.

And then last, with the ProWave, we've been able to launch a new hair removal technology that allows us to have programmable wavelengths. And the reason that's favorable in the marketplace is that there's a perception that shorter wavelengths are preferable for lighter pigmented patients and longer wavelengths are preferable for darker pigmented patients as well as patients with tans. And so with our technology there's an electronic wavelength selection capability built into the device and I think we really are well differentiated in the marketplace with that feature.

And, Kevin, in terms of the handpieces for the Solera, how many do you currently have and in terms of the life expectancy of them, do they -- is it based on the pulses and do they last longer than Palomar's or is there anything there that's differentiating?

Yes, we have four different handpieces and developing a number of them. We warrant the system for a year and so we really are able to address cost of ownership up front. And I think on that front we're extremely competitive with our offering.

Okay. And in terms of the Solera and the ProWave, are you able to comment on whether or not these platforms infringe in any way on Palomar's patent?

Well, the dispute we have with Palomar is over hair removal. The issue that we're looking to take to trial next year most likely is over laser hair removal. And there are a number of companies in the marketplace that have devices that are light-based, not laser-based, that are offering a solution for hair removal. Palomar is receiving a royalty income for two manufacturers of laser hair removal devices. There's no one in the market that uses light-based technology for -- that's paying a royalty to Palomar.

We've obviously looked at the IP thoroughly on both our laser device as well as the flashlamp-based device and we believe we don't infringe. And obviously I cited the European development in terms of what happened with the EPL (ph). So it's our belief that it doesn't, but Palomar asserted that they believe it does for the flashlamp.

Okay. And last, Ron, on FASB FAS123, I know you don't have to worry about that until first quarter '06, but in terms of the options out there right now, do you have a best guess as to what impact it could have? I mean some companies have said, oh, maybe 5% of earnings per share impact or 3%, 7%. Do you have any type of at least a best guess at this point?

Anthony, it's a good question. We haven't finished our modeling so I really don't have anything to provide you at this time, but certainly will in the next conference call.

Okay. And in terms of the court case, because I missed part of the call, I don't know if you commented on the timing of that. But it looks like that that's being pushed out until first or second quarter '06?

Yes, we think it's unlikely at this point that we'll see anything in '05.

Okay.

This does conclude our question and answer session of the call today. At this time, I'd like to turn the call back over to Mr. Connors for any additional closing remarks.

Well, thank you for participating in our call today. We're very excited about the growth opportunities we see for our business as we head into the final quarter of 2005 and into 2006. Thanks again.

This does conclude today's conference call. We thank you for your participation and have a great day.