Cutera Inc (CUTR) 2005 Q4 法說會逐字稿

Good day and welcome to the Cutera, Inc. fourth 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, Mr. Mills.

Thank you very much. By now, everyone should have access to the fourth quarter earnings release which went out today at approximately 4 PM 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 regarding the timing and completion of our planned Sarbanes-Oxley 404 certification and concerning the outcome of Cutera's patent litigation with Palomar Medical Technologies, and that management may make additional 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; unforeseen events and circumstances relating to its operations; government regulatory actions; general economic conditions; an adverse ruling in its litigation with Palomar; and those other factors described in the section entitled 'Factors That May Affect Future Results' in its most recent 10-K and 10-Q filed with the Securities and Exchange Commission.

These forward-looking statements do not guarantee future performance and therefore, you should not rely on them in making investment decisions without considering the risk associated with such statements. Cutera also cautions you not to place undue reliance on forward-looking statements, especially those relating 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 statement 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, Kevin Connors.

Thank you, John. Good afternoon, everyone, and thanks for joining us today to discuss Cutera's results for the fourth quarter and year ended December 31st, 2005.

On today's call I'll provide an overview of the fourth quarter and current trends and 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 up the call to your questions.

I'm very pleased with our fourth quarter and 2005 results, which exceeded both our top and bottom line expectations and proved the key initiatives we have implemented have been working well for us. During the fourth quarter and full year 2005 we experienced record revenue growth. Fourth quarter 2005 revenue grew 49% when compared to the same period last year. Our full year 2005 revenue grew 44% over 2004's. When comparing 2005 to 2004 we achieved revenue growth in the Asia and Europe and are pleased with our 57% growth rate in the United States. Cutera has become a leading worldwide provider of light-based aesthetic devices.

Earning per share growth was even more significant, $0.41 in the fourth quarter 2005 when compared with $0.16 in the fourth quarter 2004. When comparing full year 2005 to 2004, our earnings per share more than tripled from $0.31 to $1. Our continuing efforts in leveraging our business model resulted in significantly improved operating margins.

During this past year we made significant progress in executing our strategic initiatives. We aggressively expanded our sales force and improved sales productivity. We entered 2005 with 32 sales territories in North America and ended the year with 47 territories. Our improved training program helped our sales organization realize productivity improvements even during this period of rapid expansion.

As a second initiative, we continued our commitment to annual product and application introductions. We successfully launched the following in 2005 -- a. Solera Opus, a new single technology compact platform that offers an entry level product to an emerging price-sensitive market; b. the ProWave 770, the first light-based 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; c. we introduced the AcuTip, a tailored handpiece that offers optimized spectrum flashlamp ideal for treating discrete vascular and pigmented lesions.

As another initiative, we increased our market penetration through the expanding group of physicians outside of the traditional dermatology and plastic surgery specialties, including the emerging medi-spa market. These strategic initiatives have enabled us to achieve record revenue and profitability performance. We are at record operating profit due to our continued strong gross margins and reduced operating expenses as a percentage of sales. After Ron has commented on the financial performance and guidance I will share with you some key initiatives that we plan to focus on in 2006.

And now, an update about our pending litigation with Palomar. In this lawsuit, now in its fourth year, Palomar is claiming that our laser-based hair removal systems violate [three claims] and a patent. We believe that our products do not infringe that patent and that the applicable claims are invalid. We have also filed a counter-suit against Palomar for inequitable conduct and we are asking the Court to declare the entire patent unenforceable. We are eager to get the facts in front of a jury and are pleased that the Court has scheduled our trial to begin on May 30th, 2006.

We believe that we have built a fundamentally different and higher capability laser-based hair removal system. Even before that product's commercial release, we obtained an independent legal opinion that it does not infringe that patent. We even told the U.S. Patent and Trademark Office about Palomar's patent when applying for our own rights and we were granted our own patents for our products.

Although the plaintiffs are asking the Court for a broad reading of the patent, entitled Hair Removal Using Optical Pulses, Cutera believes that it [risks] only laser-based hair removal application. Cutera has a broad range of product offerings. We use multiple technology platforms and have product solutions for a variety of noninvasive applications, including vascular, photo rejuvenation, skin tightening and pigmented lesion treatments, and our hair removal solution is not limited to laser-based products named in that suit.

We remain confident in a positive outcome in this lawsuit. 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.

In summary, we're pleased with our performance in 2005 and we're continuing to build the foundation for further growth. The light-based aesthetic equipment market is growing at a healthy rate and Cutera is strategically positioned, both financially, operationally, to harness this growth. We remain committed to annual product introductions and continued expansion of our direct sales organization in 2006. We have the financial strength to support our growth plans, as we now focus on new opportunities for 2006 and beyond.

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 fourth quarter and year ended December 31, 2005 results.

As Kevin discussed, we achieved record revenue in the fourth quarter and year ended 2005 due primarily to increased demand for our multi-application and multi-technology products and increased market coverage from our sales expansion efforts. From a profitability perspective we significantly improved the leverage of our business model and achieved record operating and pretax profit margins in the fourth quarter and full year.

Fourth quarter 2005 revenue was $24 million, a 49% increase over the 16.1 million recorded in the same quarter last year. Net income for the fourth quarter 2005 was $5.8 million, or $0.41 per diluted share, compared to 2.1 million, or $0.16 per diluted share, reported in the fourth quarter of 2004. Cutera's revenue for the year ended December 31, 2005 was $75.6 million compared to 52.6 million recorded for 2004, representing a 44% increase. Net income for 2005 was $13.8 million, or $1 per diluted share, compared with net income of 3.8 million, or $0.31 per diluted share, for 2004.

During the fourth quarter of 2005 compared to the same quarter in 2004 revenue in the U.S. increased $7.4 million, or 68%, from 10.9 million to 18.3 million. When comparing full year 2005 to 2004, U.S. revenue grew 57%, from 34.8 million to 54.5 million. This growth reflects the strong demand for our product offerings and continuing investment in our sales force expansion.

On the international front fourth quarter 2005 revenue increased 9% when compared to the same quarter of 2004. When comparing full year 2005 to 2004, international revenue grew 19%, from 17.8 million in 2004 to 21.1 million in 2005. We are continuing to invest in our direct international offices and are looking for new distributors in countries where we have no representation.

For the year 2005 we achieved revenue growth in both our European and Asian markets. In particular, we experienced significant growth in Europe where we have been aggressively investing in our infrastructure, including the creation of our hub office in Switzerland in July of 2005.

Our product revenue grew 50%, from 13.3 million in the fourth quarter of 2004 to 19.9 million in Q4 of 2005. When comparing full year '05 to '04, our product revenue increased almost $20 million, or 46%, from 43.5 million to 63.3 million. This was driven by sales of our premium multi-application Xeo platform and our Solera platform products.

We have seen an increasing number of multi-unit transactions from higher volume practices. The Titan application continues to remain in high demand on both the Xeo and Solera platforms. We are very pleased with the market acceptance of our Solera Titan and Solera Opus products, which are targeted to price-sensitive customers and the medi-spa market.

Our upgrade revenue remained relatively unchanged in the fourth quarter and full year 2005 compared to the same periods in 2004. This is primarily due to an increasing number of existing customers choosing to purchase a second system, typically a Solera product, instead of upgrading their existing system.

Service revenue increased 563,000, or 85%, from 659,000 to 1.2 million when comparing the fourth quarter of '04 to the fourth quarter of '05. When comparing full year 2004 to full year 2005, service revenue increased 60%, from 2.4 million to $3.9 million. A majority of our customers purchased service contracts enabling us to maintain their products for a fee after the warranty period has expired.

Finally, our Titan resale business, which started in late 2004, grew by 52% to 732,000 in the fourth quarter of 2005 compared to the third quarter of 2005. For the full year 2005, this annuity business generated $1.8 million in revenue.

Our gross margin remains strong at 74% in each of the fourth quarters of 2005 and 2004 due to the continued strong demand of our premium multi-application Xeo product, higher gross margin associated with our Titan related products, and increased level of U.S. revenue, which tends to be higher margins. We are very pleased with our fourth quarter gross margin and we are expecting to see it remain in the range of 73 to 75% in 2006.

Consistent with our strategy of expanding our distribution channel, sales and marketing expenses for the fourth quarter of 2005 were $7.1 million, or 30% of net sales, compared to 5.5 million, or 34% of net sales, for the fourth quarter of 2004. As Kevin mentioned, we are very focused on expanding our distribution network and increasing the size and productivity of our sales force. We expect to see our sales and marketing spending be in the range of [32 to] 37% of revenue in 2006.

Research and development expenses were 1.4 million, or 6% of revenue, in the fourth quarter of 2005. We expect this to increase to the range of 7 to 9% of revenue as we plan to continue developing new and innovative products and applications that expand our portfolio of offerings.

General and administrative expenses for the fourth quarter of 2005 were 2.2 million or 9% of revenue, compared to the same 2.2 million or [14%] of revenue in the fourth quarter of 2004. Expenses during the quarter for our patent litigation were minimal. However, a trial date has been set for May 30th, 2006. As a result, we expect our legal expenses to increase significantly during the first half of 2006 as we aggressively gear up for trial. We expect our general and administrative expenses to be approximately 3.5 million in each of the first and second quarters of 2006 during this litigation. After the trial has finished, probably in June of '06, we expect our G&A to fall into a more traditional range of 8 to 10% of revenue.

Operating income for the fourth quarter of 2005 was 7 million or 29% of revenue, up from 2.7 million or 17% of revenue, in the fourth quarter of 2004. This improved profitability is due primarily to higher revenue, continued strong gross margin, and improved leveraging of our operating expenses.

Our effective income tax rate for the fourth quarter of 2005 was 24% and for the full year of 2005 was 26%. These rates are lower than previously expected due primarily to higher tax deductions and R&D tax credits resulting from employee stock option exercises. We expect our effective income tax rate to increase to approximately 35% in 2006 as we have fully utilized the benefit from [disqualifying] dispositions from incentive stock options that can be used to reduce the tax provision in the income statement and the R&D tax credit legislation has expired.

Turning to the balance sheet. At December 31, 2005, Cutera had $92 million or approximately $7.50 per outstanding share of net cash and marketable investments. Our cash and marketable investments increased by an impressive 9.8 million in the fourth quarter of 2005, of which 7.6 million came from operations.

Our accounts receivable net at December 31, 2005 remained relatively flat at $6.5 million compared to 6.6 million at December 31, 2004. We are continuing to improve the rate at which we collect cash in our accounts receivable, which we measure by counting days sales outstanding, or DSO. Our DSOs improved to 25 days in the fourth quarter of 2005 compared to 38 days in the fourth quarter of 2004.

Moving to guidance, for the first quarter and full year 2006 we expect our revenue to grow by 25% when comparing to the same periods in 2005. First quarter revenue is expected to be approximately $19 million with earnings per share of approximately $0.11. For the full year 2006, we expect revenue to be approximately $94.3 million and earnings per diluted share of approximately $1.00, excluding FAS123R charges. This is based on average shares outstanding of approximately 14.5 million for the year and an expected income tax rate of 35%. These EPS numbers are comparable with our historical reporting.

For the second, third and fourth quarters of 2006, we believe revenue will be approximately 23%, 25% and 32% respectively of our full year 2006 guidance.

Effective January 1, 2006, Cutera will be expensing the fair value of our employee stock options in accordance with FAS123R. Prior to this change, and in accordance with GAAP rules contained in [APB25], we had stock-based compensation charges related to restricted stock units, stock options that were deemed to have been granted below their fair market value prior to our IPO in March 2004, and stock options granted to non-employees. Without the adoption of FAS123R, our quarterly expenses resulting from APB25 treatment would have been approximately 230,000 in the first quarter of 2006 and 940,000 for the full year of 2006.

With the adoption of FAS123R, our quarterly stock-based compensation charges will increase to approximately $1 million in the first quarter of 2006 and 4.5 million for the full year of 2006. After factoring in the impact of the new financial reporting requirements associated with expensing the fair value of employee stock options in accordance with FAS123R, our EPS numbers changed to $0.08 for Q1 '06 and to $0.85 for all of 2006.

We evaluated various alternatives to reduce our expense associated with FAS123R, including the acceleration of option vesting prior to January 2006. We chose to prioritize the best interests of our stockholders over the short-term non-cash accounting incentives that elected to -- and elected to not change our option vesting periods. For all of 2006 we will be providing summary non-GAAP comparisons that exclude the impact of adopting FAS123R that will enable you to better evaluate our 2006 performance against our historical performance.

Lastly, I am pleased to inform you that we believe we are on track to receiving an unqualified Sarbanes-Oxley 404 certification, which we expect will be filed with our Form 10-K on or before March 16, 2006.

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

Thank, Ron. As you can tell from the results that Ron reviewed, many aspects of our business contributed to a record year in 2005 and we expect that momentum to continue into 2006.

Now I'd like to highlight some of our key initiatives that we plan to focus on in 2006. We recently expanded our North American sales force by assembling a new dedicated sales team that's primarily focused on the price sensitive medi-spa market. It's a very large emerging market that requires a team committed to pursuing these customers. We have strategically positioned our entrance into this fast-growing market with our Solera product line.

As part of our second initiative and in keeping with our commitment to delivering innovating solutions for our customers annually, we launched just last week two new Titan offerings to enable enhanced visibility and faster treatments for our customers. The Titan V handpiece provides practitioners with enhanced visibility and 50% more pulses than the original Titan handpiece. The Titan Excel handpiece enables faster treatments as well as enhanced visibility. We remain committed to investing aggressively in our research and development efforts to deliver innovative solutions for our customers.

As a third initiative, we intend to continue investing in our international distribution channels to capture the significant market for our products outside the United States. We now have two international hubs, one in Japan and one in Switzerland, that now strategically position us to capture a larger international market share. Each of these offices provides sales, marketing and service support to their respective regions.

In concluding, we had an outstanding 2005 and we're very enthusiastic about our opportunities in 2006. We have a strong portfolio of products in addition to a well trained and expanding sales force. This combination strategically positions Cutera for continued growth in revenue, market share and profitability in the expanding market for laser and light-based aesthetic products.

Now I'd like to open up the call for your questions. Operator?

Thank you. [Operator Instructions]

Our first question will come from [Tom Gunderson] of Piper Jaffray.

Hi, good afternoon.

Hi, Tom.

Hi, Tom.

I've got some fundamental questions I want to ask, but I think we should just get one out of the way right away and that is you're trading down in the aftermarket on some pretty heavy volume. This despite the fact that you beat Q4 estimates and you're slightly ahead of in your 2006 yearly guidance what was out there for consensus. So I have to only conclude that people are a little concerned about your Q1 guidance, which is far below consensus. You've said that you're going to be spending maybe 1.3 million in Q1 and Q2 and for legal expenses to prepare and go through trial. Is there anything else in Q1 other than the additional legal expenses that's making it less profitable than other quarters?

No, the only other thing, Tom, I'd suggest you look at is the effective tax rate would also jump up to 35%. And let me also point out that our Q1 number of 19 million reflected 25% increase in the revenue in Q1 of '05.

Okay. Thanks, Ron. And can you give us a little bit more color as to what that 1.3 million is buying?

In terms of the litigation defense?

In terms of the litigation expense if this is what the focus is likely to be for the next few months in addition to the normal revenues and unit sales and earnings from that. Can you give us a little bit more sense of what you guys are doing to prepare? And I'm assuming that almost all of that is outside counsel expense.

Yes, it is. It's just about all outside counsel expense. And there's quite a bit that's involved in preparing for the trial. In fact, there's a mock trial that we're putting on and there's many different initiatives that go into place in preparing for this. But it is all outside spending.

And if we put in 3.5 million for Q1 and Q2, you're pretty comfortable that that encompasses all the costs?

Yes. Then, after that point when we believe this matter is completed, our expenses for G&A should fall back into the more traditional 8 to 10% of revenue.

Okay. Thanks for that. Then just a couple of questions. I got distracted right when you said this, Kevin, but I think you said you're starting a new sales force for the medi-spa market. Is that right?

Right. We really want to focus on the Solera product offering and so we rolled that out in the second half, that new sales force in the second half of '05.

And what's the size of that sales force and is it going to grow in '06 or too soon to tell?

Well, the last call we talked about having a target of a total sales organization of about 55 by the midpoint of '06 and we feel very comfortable that we'll be at that level or even potentially higher.

Okay. And then does the medi-spa or international sales get any different kinds of terms or would we expect, as those sales go up, that DSOs might increase?

No, we're really not looking to do that. We're not looking to change any of our policies with regard to credit terms. And so no, we're not looking to extend our DSO levels, although at 25 days we really think we're at an exceptionally low DSO level. But when we go after this market we're certainly not looking to get more aggressive on the credit side of it.

And that market primarily is finance type -- they finance their purchases and we have many relationships with leasing companies in order to facilitate that level of financing. But it's independent of us, providing those credits.

And then last question and I'll get back in line. On the -- the AAD is coming up in a few weeks and it's in your hometown. Are you planning any special activities and should we be looking for anything new and different at that meeting?

Well, obviously we just announced an extension of the Titan family within the week and so we're really excited about that. And the customers that have used that -- those new versions are extremely positive on the new capability. We always have events planned for that meeting; it is a big meeting with attendance in excess of 15,000 and somewhere between 25 and 30% of it being international. So we'll have representation not just from our North American sales organization but we'll also have a lot of our international people present.

But normal sales and marketing costs for the AAD meeting?

Yes.

Okay.

Traditional spending.

Yes. All right...

And keep in mind that most of our business is outside of dermatology and plastic surgery.

Right. Well, I said last one but you brought it up, Kevin. You want to break that out for the quarter or the year?

Yes, Ron, do you have that available?

Yes. For the quarter, derms and plastics comprised about 26% of the U.S. transactions, OBGYN and family practice combined for about 43%, and then other MD and non-physician combined for about 31%.

And do you have a way of breaking the medi-spa out of the 31?

We don't capture it by that...

Okay.

...by that category, Tom.

Okay.

It really is kind of hard to draw that distinct line.

Okay, thanks.

Thank you. Our next question will come from Phil Nalbone of RBC.

Hi, Kevin and Ron. On average over the last three quarters Cutera's revenue growth was 47% or thereabouts and yet you're targeting growth in the first quarter and for the full year '06 of 25%, which is probably pretty consistent with the rate of market growth right now. So what's going on? Are you just being ultra conservative or are you expecting some sort of competitive change in the landscape or a slowdown in the market? Why only 25% top line growth?

It's obviously a subject that we spend a lot of time in the management team about formulating the plans for the year. We're not seeing anything in terms of a change in the market from what we've seen in the past, so I think we remain confident that the market drivers remain intact and we believe that the opportunities in front of us for '06 remain very exciting.

As you know, this is the market that has a very short sales cycle so in terms of visibility, it's really a 90-day sales process. And obviously we're assembling plans to grow faster than the market's growing, but it's difficult for us to have accurate forecasting out beyond 12 months and we'd rather err on the side of being able to achieve what we can commit to.

As you look ahead using that 90-day window, is there anything that would lead you to believe that 25% top line growth in the first quarter is an inevitability or that you're being very conservative relative to the kind of growth we've seen in recent quarters?

Well, we've been public since Q1 of 2004 and we take our forecasting commitments very seriously here, Phil. So no, we're not seeing anything that leads us to believe that we can't achieve these levels.

Okay. The Titan system has obviously been a very big source of growth and a key differentiating factor for Cutera over the past year. And obviously that application is going to attract some competition, probably a lot of it. So what is your sense right now as to competitors who are lining up to take on that application? When are we likely to see that competition and how are you thinking about how that's likely to impact the pace of adoption for Cutera? And in particular, if you can give us some sense of how much of Cutera's installed base has been penetrated so far with the skin tightening application and how much do we have to go before we see saturation of your existing customer base?

Why don't we start off with that question first? Ron, that's a relatively low number, but do you have a better sense in terms of percentage of our installed base that has Titan in one form or another?

I don't, Phil, have any specific numbers. As you know, with a multi-application, multi-technology, it's tougher always to find out what people have. But what I can say is the products that we've been selling for this past year in '05, I would say of the product revenues, over half of those include a component of Titan in them. So we're certainly seeing it as a popular procedure being added to the purchase cycle. And then of course it's a major component of our upgrade revenue. So it is everywhere, although I don't have the specific numbers to answer your question.

And another point, Phil, is that, and we didn't mention in the script, but one thing that we've been focused on this past year and remains an important objective for 2006 is the Titan solution incorporated as a component of our [3D] technology. With our 3D procedure, our customers are giving their patients the Titan procedure in conjunction with our other technology. So that's photo rejuvenation such that they can remove pigmented lesions and improve-- diffuse redness, and with the Genesis procedure, they're able to reduce pore size and improve skin texture. So the 3D solution has been a very popular procedure that's been developed with our key clinical investigators, and we remain very excited about the prospects for that going forward.

But a general comment about the competitive landscape, I think that anytime there's a new application, this is an industry where many companies claim to have that same solution in one form or another in their bag. And our development work with Titan has gone on for a number of years and it really has taken a long time to develop that and we think we really have achieved strong traction in the marketplace. And our main competitor is a company that has a solution that's a different technology, uses radio frequency energy, and we think that our technology really is distinguished in the marketplace for its safety and performance profile.

Okay, one more question and then I'll go back into the queue. With a 47 person North American sales headcount at the end of the year, are my records accurate? Did you add two during the December quarter?

I believe at our last call, was it 40 that we talked about?

I thought it was 40 as well.

Yes. So for the month -- or the quarter ending in September I believe we commented on 40 with a plan to be at 55 by mid 2006.

Okay, so you're up seven people. And to Tom's question earlier, can you give us a clearer picture of how these people are being split between the traditional sales force and those focusing on the medi-spa business?

Right. I think more than anything else, Phil, we are excited about the medi-spa market. But one of the objectives in bifurcating the sales force the way we have is to get our entire portfolio of products well represented in the marketplace. Since we started the company our average selling price has increased in excess of 50%, so we are commanding a premium in the marketplace for our technology.

But we recognize that there's another segment of the market that we haven't been penetrating very well and we now have this new sales organization that's focused on representing the Solera Opus product line and we believe that we had to do something structurally to do that. We have designed this such that they -- that this new sales rep is working in conjunction with the existing sales organization, so it really has been a very positive program that's been very well received by the existing sales force.

Okay, thank you.

Thank you. Our next question will come from [Mark Taylor] of Ross Capital.

Hi. Good morning, Kevin. Great quarter. And Ron as well. Thanks for taking my question. I have a few. I'd like to zero in, if I might just ask a question on your total revenue for domestic and international in Q4, if you might tell us how much of that was like device sales versus upgrades? I think in the U.S. you indicated you did about 18.3 and international I think 21.1. How much of that was laser and light and how much was upgrade?

Right. Within the geographic categories we don't disclose the breakdown of the product sales. We either disclose it by geography or by products.

Okay. All right. Well, then we'll just -- you do -- yes, we do have the upgrade number so...

Yes, we...

...ration that out.

...was part of the release this time as well.

On a percentage basis, okay. Then back to the sales productivity highlights and clearly we see that in this very robust business you have. According to my numbers you had ended the second quarter with 40 sales people in the U.S. and I think ended the third with 40, so you added seven in the fourth, as you mentioned. Do you care to comment on what maybe the average productivity is in the per dollar for each rep or how soon a new rep can get to a certain number, what you would call your average production level?

Right. Just in rough terms, Mark, for a sales person that's been with us for three or four quarters, our productivity improved pretty substantially in North America percentage-wise, around -- what was that -- ?

It was around 30%.

Yes, 30% improvement for our, what we call the veteran sales people. Obviously, if we do hire people that come from within the industry they're able to hit the ground running. But we've done a number of things to plan for this aggressive sales expansion and one of the key components is to have the support infrastructure to really ensure that these people are able to get traction. We've made significant investments in sales training and that program, we think, is the best in the industry.

We've also expanded our sales management team in advance of the expansion, so we'd rather have more bandwidth on the management side than be challenged on the light side. But we're pleased to see that the new hires are certainly contributing beyond our expectations and our seasoned people have achieved record sales productivity in the company's history.

Well, it looks that way because if we just do a quick back-of-the-envelope of your competitors and their quarterly performance, it looks like you entered the year in the number three spot and you're leaving the year in the number one spot. So if this continues, you're now the number one laser company in the U.S. Do your numbers agree with this and if so, as the market continues is there more share gain ahead or is it just grabbing your piece of the pie as it continues to grow at a hefty clip?

We think there's plenty of share out there for us and we've -- we believe that aggressive investments and sales expansion have made great sense for us in the past and we're continuing on that path as we go into 2006. So we are ahead of the trajectory of having 55 reps by midpoint and we think the sales force is well positioned to continue that expansion.

Just two last questions. On international, is the U.S. market just so robust that international, while growing, can't compare? And if that's the case, is there something that we could look for that would make -- that would change the international picture such that it takes off as well?

Your point's a good one, Mark. We're very pleased with our domestic -- our North American sales growth and what's nice about the North American market is it's just so large. And it isn't straightforward to scale the sales force, but it is a challenge that we believe we can develop the skills to do that. We see the market outside the United States as larger, even slightly larger than the U.S. market, and we have competitors that have been established in the market a lot longer than we have. But two of our bigger competitors have as much or more of their business outside the United States and so we're very focused on continue to execute our aggressive investments outside the United States.

Just last question. On the Titan, does that handpiece revenue flow straight to the bottom line or are there any costs associated with that, like commission and such?

There is a cost of sale associated to it. I'd characterize it closer to our service kind of revenue margin as opposed to non-service or products.

Okay, good. Thank you.

Thank you. Our next question will come from [Anthony Vendetti] of Maxim Group.

Thanks. Good afternoon. I just wonder if we could focus a little bit, Ron, on the first quarter again because that seems to be where I'm getting most of my questions as well.

Okay.

And I know the 3.5 million is -- well, hopefully a one-time, but it sounds like it's going to be first and second quarter as you ramp up for this trial. And prior to this you had been spending I guess 1.25 or 1.2 to 1.3 per quarter and then it tailed off as you waited for this trial date to be set. So the ramp-up to 3.5 is a significant ramp. Is there anything else, I guess, other than that that's accounting for maybe slightly greater than expected -- so it's that, the tax rate, are those the only two things, just to be clear on that?

Those are the two major things that come into play here.

Okay. And in terms of breakout of just revenues in general, just end of the year kind of thing, not for the quarter, what did ProWave -- do you have any numbers for that with percent of revenues or units sold of that?

We don't break down our revenues into that level of detail. As you know, we do the products, the upgrades and the service and Titan refills, but we don't break down that level.

Anthony, it's Kevin. I guess we could comment on our Xeo business, so much of it did come with the ProWave 770 as part of the Xeo solution.

It's a good point. With the multi-application, multi-technology product, what we're seeing with the Xeo is that [inaudible] includes a Titan component and [inaudible] includes a ProWave component.

Okay, so that's helping propel the Xeo sales?

Yes.

Okay. And would you say that that is replacing to a large extent the CoolGlide CV or is it in addition to?

Well, it's in addition to. In this case, on the Xeo platform you've already got the [NVA] component that's capable of doing laser hair removal, the vascular as well as the rejuvenation. So they have two technologies. With the Xeo -- with the ProWave they have two technologies to do hair removal, so it's in addition to.

Okay. Now, on the sales force it seems like 55 seems to be the magic number since one of your competitors mentioned that number as well. And that's the U.S. Now, I know you guys opened up in Zurich, I think, your international sales operation, I guess, headquarters for international sales operation. How many direct OUS sales people do you have right now and where do you want that to go to?

Okay. First of all, coming back to the 55, that's North -- that's a North American number so it would include Canada as well as the U.S.

Okay.

And outside of North America, then, our direct sales force is still under 20.

Under 20, okay.

And we're looking -- again, we needed to invest in the infrastructure to support these people before we could add them, unlike the U.S. and Canadian markets where we've got the infrastructure and it's just really strategically placing people around.

Okay. And it sounds like you've invested in the infrastructure. Obviously you're probably still investing in it. But I guess what's the goal there, what else do you need to do to ramp that up to get to the level that you're talking about because obviously the revenue opportunities, as you said, internationally are fairly large?

I don't have any specifics on that other than again, we have continued to invest in the infrastructure, we've continued to hire people and we will continue to do so as we see that as a good market opportunity. But as Kevin had mentioned earlier, we just -- we didn't have the presence because we haven't been there as long as some of our competitors. But we do believe and, as you just heard and saw, we did experience nice growth in the international market last year. It was just nothing like what we saw here in the U.S.

Okay. And what was the -- I probably missed it, the breakout for the fourth quarter, international made up what percent of revenues?

In the fourth quarter, international went up -- I'm sorry, let me [inaudible - microphone inaccessible] so I give you the right number.

Okay, while you're searching for that, Kevin, just in terms of the back and forth a little bit with Palomar, you counter sued for inequitable conduct and now they are suing also for the ProWave in terms of that product, saying that that also infringes on their [IPL] patent. Is that -- can you just clarify that a little bit?

It is the second case that [inaudible]. It's not linked to the case that is being heard in May. We're not aware of anyone that is paying a royalty for flashlamp-based technology. It certainly hasn't been disclosed to us if that is the case. We view it as a response to the ProWave technology being launched in the marketplace.

And, Anthony, coming back to your question on the international revenue, fourth quarter revenue in international increased 9% and for the full year 2004 compared to 2005 it grew 19%.

What was the percent of revenues, though? Do you have that or no? The percent of -- just a breakout of...

Oh, percent -- ?

...North American versus international.

Percent of the total? You know I don't have that but it's -- actually it's part of the press release. If you look back, it's included on the release and you could do the math to get there.

Thank you. Our next question will come from [Dalton Chandler] of Needham & Co.

Yes, hi, good evening.

Hi, Dalton.

Hey, Dalton.

I wanted to ask just a bit more about the medi-spa strategy, if you're [incentivizing] the sales force differently and if you have any targets for the number of sales reps in that group?

Dalton, it's Kevin. We have approximately 40 of the senior sales positions established and we're looking to continue to expand that in 2006. And so rough numbers we're targeting 55 by the midpoint.

I was talking specifically about the medi-spa strategy.

I pointed out earlier it's really the Solera Opus representation...

Right.

...and we see the medi-spa as a very significant component of that focus, but it really is that product line getting focus within the sales force.

Okay, maybe I misunderstood, but I thought you were saying that you were going to hire a different group of sales people to focus on that market.

That's correct.

So, are those people incentivized any differently and how many of them are you targeting, how many would you like to have?

Well, approximately we have 40 reps that have the senior territories and then we're planning to be at 55, so approximately 15 or so would be in that category.

Okay.

And there is a different incentive plan, but for competitive reasons we'd rather not disclose that.

Okay, thanks. And then your marketing partner, [PSS World], are they any help there or did they not really call on that market?

That relationship has really blossomed in 2005, a very, very strong contribution for our U.S. business. And yes, we see them everywhere so I think they can be very helpful with that point as well.

Okay. And lastly, on the Titan refill business you said you did 1.8 million for the year, but it looks like you did almost half of that in the fourth quarter. So what are you expecting there for '06 and how do you think that could ramp up?

Well, that certainly indicates a good usage of those handpiece and the need for refills because, as you know, we introduced Titan at the end of '04, so our '04 business for Titan refills was almost nonexistent, I think it was about $72,000. So we've been exponentially building that up. And we do expect to see a significant growth rate next year on that refill business, although I don't have any specific numbers to give you on that. We do think every -- quarter over quarter it will continue to grow.

Okay. All right, thanks very much.

Thank you. We do appreciate all of your questions, but due to time constraints we will have to end the Q&A session at this point. I'd like to turn the call back over to Mr. Connors for any closing remarks.

Thank you for participating on our call today. Please note that we will be speaking at the Roth Capital Conference on February 21st. This presentation will be webcast and available on our website. Also, during March 4th through 6th we'll be exhibiting at the American Academy of Dermatology's annual meeting in San Francisco. We're looking forward to updating you on our progress next quarter. Good afternoon and thanks for your attention.

Ladies and gentlemen, that does conclude our presentation for the day. We do appreciate your participation. At this time you may disconnect.