Cutera Inc (CUTR) 2006 Q1 法說會逐字稿

Good afternoon and welcome to the Cutera Incorporated Fourth Quarter 2006 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode, and the floor will be opened for your questions, following the presentation.

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

Thank you. By now, everyone should have access to the first-quarter 2006 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 concerning future financial performance, the outcome of Cutera's patent litigation with Palomar Medical Technologies, the long-term international growth opportunity and strategy, anticipated increase in service revenue and expansion of Cutera's customer base, the expansion of our sales force to all of our target markets, 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 ability to effectively continue to increase its sales performance worldwide, unforeseen events and circumstances relating to its operations, government regulatory actions, general economic conditions, and adverse ruling or resolution in the litigation with Palomar, and those other factors described in the section entitled "Factors That May Affect Future Results" 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 relating to guidance on future financial performance, which speak 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.

As you will note from a review of our earnings release, we have provided pro forma non-GAAP reporting that excludes the impact of adopting FAS 123(R) with effect from Q1 2006. Cutera management believes that these non-GAAP measures provide the investment community with a better understanding of how our Q1 '06 results relate to our historical performance. Please refer to the company's earnings release for a more detailed definition, cautionary statements relating to the pro forma reporting, and a reconciliation of the GAAP financials to the pro forma financials.

With that, I'll turn the call over to 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 first quarter ended March 31st 2006. In today's call, I'll provide an overview of the first quarter. 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 first quarter results, which met or exceeded both our top and bottom line guidance. Our revenue in the first quarter increased 37%, to $20.8 million. We achieved revenue growth in all of our geographic regions, and are particularly, pleased with our 44% growth in the United States. GAAP diluted earnings per share were $0.08 per share. On a pro forma basis, our earnings per share climbed to $0.12 in the first quarter 2006.

Our 37% revenue increase was due to a number of factors, including; one, continued strength in our product portfolio, particularly, with our multi-application Xeo product -- platform products. Two, we made further progress with our 2006 sales force expansion. In North America, we added eight territories, resulting in 55 territories at the end of the quarter. Three, we continue to see strong growth in our Titan application, as demonstrated by our continued growth in Titan handpiece replacements.

Four, finally, our service revenue increased 49% from Q1 2005, as a result of our expanding customer base. After Ron has commented on our financial performance and guidance, I will give more detail on a number of growth drivers of our business, and I will update about our pending patent litigation with Palomar. As we had mentioned before, our patent litigation trial is scheduled to begin on May 30th. We remain confident in the positive outcome for this lawsuit. Obviously, litigation is uncertain, and we advice investors to refer to our quarterly and annual reports filed with the SEC for a more detailed understanding and the risks associated with this patent litigation.

Now, I'd like to turn the call over to Ron to discuss our strong financials in more detail. Ron?

Thanks, Kevin. And thanks to all of you for joining us today for the first-quarter 2006 results. First quarter 2006 revenue was $20.8 million, a 37% increase compared to the same period last year. GAAP net income for the first quarter 2006 was $1.1 million, or $0.08 per diluted share. Pro forma earnings were 1.7 million, or $0.12 per diluted share, which represents an increase from the $0.11 for Q1 of 2005.

During this first quarter of 2006, US revenue increased 44% to $14.9 million, and international revenue increased by 23% to $5.8 million. We experienced growth in both of our Asian and European regions. In particular, due to our sales force expansion effort, we experienced strong revenue growth in Japan. We have continued to invest in our direct international offices and are pleased with the traction of our products, internationally, and the results being achieved from these investments. We believe the international market offers us an excellent long-term growth opportunity, and with the investments made to-date, we are well established to take advantage of this growing market.

During the first quarter of 2006, our product revenue grew 39%, to $17.6 million. This was driven primarily by sales of our premium multi-application Xeo platform and our Solera platform products. We continue to see an increasing number of multiunit transactions from the higher volume practices. Additionally, our national account agreement with PSS, an organization with over 700 sales representatives serving physician offices in all of the 50 United States, continues to provide an extensive market penetration for our product.

Upgrade revenue declined in the first quarter 2006 to $1.1 million. With our existing customer practices growing, they are choosing to purchase an additional system, typically a Solera product, instead of upgrading their existing systems. This approach allows a practice to increase their revenue, as they can provide services to multiple customers at the same time. Service revenue increased 49% to 1.1 million in the first quarter. We expect this revenue growth to remain strong, as our customer base and product offering increase. Finally, our annuity revenue stream of Titan refills grew significantly from 142,000 in the first quarter of 2005 to $944,000 in the first quarter of 2006.

Just like our service revenues, as the installed base of our Titan product increases and our customers continue to satisfy the fast-growing demand for Titan procedures, we expect revenue from this product line to continue increasing. On a sequential basis, revenue from Titan refills increased by 29%. I will now address our expense performance. Please note that our operating expense ratios and guidance figures discussed are based on GAAP financials, which include the impact of adopting FAS 123(R). For your benefit, we have included, in our earnings release, pro forma financials that provide a consistent and comparable reporting to the Company's historical performance.

Our gross margin remains strong at 72% in the first quarter, due to the following; continued strong demand for our premium multi-application Xeo product, higher gross margin associated with our Titan-related products, and increased level of US revenue, which tends to be higher margin. Our pro forma gross margin was 73%, which is comparable to our historical reporting. We're expecting our gross margins to stay in the range of 71 to 73% for the remainder of 2006.

Consistent with our strategy of expanding our sales force and distribution network, our sales and marketing expenses for the first quarter of 2006 were $8.5 million, or 41% of revenue, compared to 5.8 million, or 38% of revenue, for the first quarter of 2005. The growth in our spending was primarily due to our sales force expansion effort and the effect of implementing FAS 123(R).

For the remainder of 2006, similar to 2005, we expect to continue increasing our spending in sales and marketing in absolute dollar terms. However, when measured as a percent of revenue, we expect this to decline due to the projected increase in revenue. We estimate our spending to be in the range of 32% to 38% for the remaining three quarters of 2006. Research and development expenses were 1.3 million or 6% of revenue in the first quarter of 2006. Even though we will continue to increase our investment in this area, we believe our spending will remain in the range of 6% to 7% of revenue for the remainder of 2006.

General and administrative expenses for the first quarter were $4.4 million or 21% of revenue. We spent approximately $1.5 million of legal expenses or $0.07 per diluted share during the quarter for our patent litigation as we prepared for the trial beginning May 30th. We expect our total general and administrative expenses to be approximately 5.5 million in the second quarter of 2006. Included in this forecast is approximately $3 million or $0.14 per diluted share for this litigation. After the trial is finished, we expect our G&A to be in the range to 9% to 11% of revenue, which includes the additional share based compensation expenses associated with FAS 123(R).

Operating income for the first quarter of 2006 was $0.7 million or 3% of revenue. On a pro forma basis, our operating income was 1.6 million or 8% of revenue. The decrease in operating margins from 12% in Q1 '05 was mainly due to a significant increase in legal expenses, impact of expensing stock options for FAS 123(R) and increased investments in our distribution channel.

We expect our operating margin to improve in the second half of the year after the reduction of legal expenses as we reap the benefits of projected increasing revenue resulting from the sales force expansion. Our expected income tax rate for the first quarter 2006 was 34%. We expect our effective tax rate to be approximately 34% for the remainder of 2006. Turning to the balance as of March 31st 2006, Cutera had $95.5 million or approximately $7.75 for outstanding share of net cash and marketable investments and no debt. Our accounts receivables net at the end of the first quarter remained low at $6.6 million. Our DSOs remained strong at 29 days in the first quarter of 2006.

Moving to guidance, for the second quarter of 2006, we expect revenue to be approximately $23 million with earnings per share of approximately $0.08. For the full year 2006, we are increasing our revenue guidance to approximately $98 million and estimate our earnings per share at approximately $0.73. This is based on an effective income tax rate of 30%, and these EPS numbers include the impact of FAS 123(R).

Non-GAAP EPS for Q2 and the full year are estimated to be approximately $0.12 and $0.95 respectively. These non-GAAP numbers are comparable with our historical reporting. However, they include litigation expenses in the first half of 2006 of approximately $4.5 million or $0.20 per diluted share.

Our updated revenue guidance is on track to achieve annual revenue growth of approximately 30% for the full year 2006 compared to full year 2005. We plan on continuing to invest in our sales and marketing channels based on the growth opportunities we see in the market. As we have discussed in the past, we expect these investments to have a temporary negative impact on our Q2 '06 earnings and our operating margins will benefit beginning in the third quarter of 2006.

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

Thanks, Ron. As you can tell from the results that Ron reviewed, many aspects of our business enabled us to achieve strong results during the first quarter. Now, I'd like to expand on some of the reasons for our strong results and highlight key initiatives we believe will lead to record revenue for 2006. We are continuing to experience growth both in the core/non-core segments of our market, our plan to continue with our sales force expansion to accomplish the goal of increasing our reach in all these markets.

Another important aspect to our long-term growth is in research and development. We intend to continue investing in product innovation; which will always be a major part of our business. And keeping with our commitment to delivering innovative solutions for our customers annually and unveil two new Titan offerings that 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, and that the Titan XL handpiece enables faster treatments, as well as enhanced visibility while delivering the procedure.

Turning to our sales force, we significantly ramped up hiring of additional drug sales people in Q1 2006, and intend to continue investing in our distribution channels to increase our revenue in both United States and international markets. In summary, we have developed a strong portfolio of products, and assembled one of the largest direct sales organizations in the laser and light-based aesthetic market in North America.

We are continuing to invest in our international channels. We have built a strong business to continue the growth in revenue and profits. Our financial position remains very strong with $95.5 million of cash and marketable investments and no debt. We believe these investments, together with our business strategy and the fast pace growth of the market, position Cutera for continued growth, and revenue, market share and profitability for years to come.

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

[OPERATOR INSTRUCTIONS]

And we go first to Tom Gunderson from Piper Jaffray.

Hi. Good afternoon. Can you hear me okay?

Yes, Tom.

Great. There seems to be three things on the income statement that I wanted to touch on. Number one is sales came in a little bit higher than what we'd expected and your guiding up for the rest of the year. And it seems from the tone and some of description, Kevin, that everything steady as she goes, and the US remains strong and OUS continue to expand, is that a fair assessment?

Yes, Tom. In our last call, we've talked about a target of achieving 55 territories in North America by the end of the second quarter. And obviously, we were able to successfully accomplish that ahead of plan. Obviously, that also had am impact on the expense line in sales and marketing, but we believe the market dynamics continue to be strong and these aggressive investments in the past have been very fruitful.

Well, you jumped to my second part on the income statement and that was the S&M line. So you did add eight sales people in North America, is that right?

Yes

That's correct.

And you added six or seven, I think, last quarter?

We finished with 47 at the end of last year, and I'm not sure exactly we added in the fourth quarter.

I think that's about right. I think we were flat in Q3 from Q2. I think it's a good number.

Q1 and Q2 have in your projections now, you know, several more sales people all for the entire quarter in Q2, and you talked about Kevin, which is going to continue to expand. Can you give us an estimate of how many sales people you expect to have at the end of -- either at the end of June or at end of December or both?

Tom, we'll talk about that on the next call in more detail. Right now, we're pleased that we are -- we have been able to hire ahead of schedule. We're very focused on giving the new sales people the tools they need to be successful, then, we'll give additional guidance about our plans for continued expansion for the balance of the year on our next call.

Okay. And then, the legal costs were higher than what I had expected and I thought I had high costs already but that's California for you, I guess. Did -- is there anything else to be said about the Palomar suit at the beginning of May, I mean, is this just everybody shows up with the court house on May 30th and two weeks later we have a decision?

Well, obviously we've been working with that intention in mind. Unfortunately, we also had the same view, you had, Tom, set aside enough money to cover this in the first half. But to the best of our ability we got guidance from our legal team in terms of what our expectations would be, and we have a better visibility now as to what this quarter looks like. So we had to make some modifications to the G&A line.

Okay.

And again, that translates into the $0.20 per share of the expense associated with this.

And if you were in the final analysis, beyond appeals, beyond everything, if you prevail, do some or all of those expenses paid back or is that up to the judge?

Ultimately, it's up to the judge. We're certainly [not accounting] on that, but that type of thing has happened in the past.

Okay. Thanks.

Our next question comes from Phil Nalbone from RBC Capital Markets.

Couple of questions. Kevin, you showed 37% topline growth in Q1, your upward revised guidance for Q2 sales would suggest 31% growth. So to get to about 98 million for the full year, the growth rate during the second half of the year would have to fall pretty significantly down to, kind of, the mid 20% -- 26% to there about.

So is your forecast for the year really based just on, kind of, a conservative view for the second half of the year or should something specific happen to cause the Company's growth rate or the market growth rate to decelerate?

No. We certainly don't see anything on the horizon now that concerns this in terms of softening in the marketplace, fortunate to have a number of our competitors reporting, we're seeing all strengthen in the overall market. So there is nothing out there that leads us to believe that there is a slowdown around the corner. And just looking at how we did in the second half of 2005, both in Q3 and Q4. We experienced 49% growth in each of those quarters.

So are you suggesting tough comparisons or should we think more in terms of the continuation of the, kind of, trends that we've seen recently, particularly with the lights of Palomar and sign assure reporting better than 40% growth in their March quarters?

Well, I think the point I am trying to make is that a lot of our growth does tend to happen at the second half of the year. We're comfortable with the revised increased guidance on revenue at this point.

Okay. And I understand your reluctance to these specific regarding the additions to the direct sales force for the remainder of the year. But could you give us some sense of what that numbers likely to look like by the end of the calendar year?

Really can't Phil, this is probably in terms of sheer number of sales headcount additions to the Company. This is -- the past two quarters that have certainly done record levels, and so we want to be sure that all these new hearts have the support and the tools be successful. And we will give more specific guidance in the Q2 earnings call.

Okay. Kevin, I think in the past we needed about two full quarters to get new hires up to, sort of, fully productive levels, would that be the expectation for this group as well?

It is. I will say that, with that said, our sales training program and the sales management infrastructure that we have in place is better than it's ever been. We are constantly looking at ways that we can pull that learning curve forward. But, just in terms of sheer numbers we ended -- we began 2005 with 32 sales people and at the third quarter, I believe that the 40 number that Tom mentioned and then, added seven in Q4 then add another eight. So relative to five quarters ago, we really have added a significant number of headcount to that North American sales force.

Great. I'll ask one more question and go back into the queue. Can you give some sense of how the ProWave is doing as a hair removal solution for the Company? And in particular, if the worst case happens and Cutera is enjoying from selling a laser based hair removal product in the future, how quickly could ProWave ramp as kind of a work horse hair removal product?

Well, there is no need for a ramp, it is already there. That product is extremely popular. And in the past several quarters, we've seen the lion share of our Xeo business incorporate the ProWave technology into the multi-application platform. We're also seeing that as a standalone product with the Solera Opus platform. So the reception has been extremely positive.

And I think one of the main reasons that since [I receive], well received in the marketplace is that they are that the general perception that programmable wavelengths is desirable because shorter wavelengths are -- tend to preferred for lighter pigmentations and longer wavelengths for darker pigmentations, with ProWave to have the ability, our customers have the ability, to reflect the right wavelength for each patients. So that's really, something that really does differentiate us in the marketplace.

And based on that good ramp for the ProWave, Kevin, do you think that Company has reached a point where it could see the laser base system, the old CoolGlide go away without causing any meaningful [divot] in the overall business?

Well, back in 2000, we were, primarily a hair removal, laser hair removal Company and we've been fortunately, in each year we have been able to launch one or more new application categories. So it is a different story today than it was back in 2000. And overtime we expect that trend to continue, where we are launching new applications to the marketplace.

So with that said, I think the laser hair removal part of our business becomes a smaller part of our business overtime. We do, we're quite happy with the CoolGlide laser technology for treating darker pigmented people in particular. However, we have other alternatives in front of us today.

Great. Thank you.

Our next question comes from Mark Taylor from Roth Capital Partners.

Hi, Ron and Kevin.

Hi Mark.

A couple of questions if I may. First on the 14.9 million in US revenue, do you care to comment on how much of that was traditional and how much was non-traditional?

We don't break out just the revenue side, but on the orders taken for Q1 of '06, the core business was actually down a bit about 12% with plastics and derms of which then we had a 46% with family practice and OB/GYN and non-physicians and other MDs took the remaining piece of that, which was probably about 42%.

So, 42% you would call medi-spa possibly?

We don't really capture it that way Mark, I think that the key takeaway is that plastics and derms account for 12% of the business, which is about half the level that they are typically at, so it kinds of bounce around from quarter-to-quarter, but the first quarter had abruptly low percentage of our business [going] into the core specialties, but we believe that our relationship with the PSS has allowed us to expand beyond the core specialties faster than the competition.

I guess, I'm trying to get maybe a picture of the health of your, what I call your ethical channel versus medi-spa, and the reason for that is and correct me if I am wrong, but I am thinking that on the physician side, you know, you are selling a device a laser or a light device. And you really capture that patient or that physician long-term and then that physician upgrades, and it's a good solid long-term healthy piece of business. And the medi-spa could be subject to contract, where you are selling a chain let's say, but perhaps that's a little more competitive. So I am just trying -- I am hoping that the ethical channel is continuing to be strong in your mix. Medi-spa is great as well, but maybe you could add some color there.

Well, just for clarification Mark, we only sell our products where doctors are directly involved, and the definition of [medi-spa] is a bit all over the map, in the case of dermatologist and plastic surgeons, buying our equipment often times they are interested in providing these services in a more spa like setting. So I think the lines are not quite as well defined as one might say. We are not selling to major chains, but we do have a relationship with a number of organizations out there, but relative to our revenue, it's relatively small portion of our business going through organizations that have franchise business model.

And Ron, unless you have a different view on this, but I am not aware of any change in terms of the future purchasing habits of any segment of our market, whether it's the core physician group or the non-core. Ron you want to comment on that?

No. We haven't seen any real big shift there, as you mentioned Kevin from quarter-to-quarter it may move around a bit, but we're still seeing very, very strong participation by the OB/GYN and family practice, general practice physicians and I think the outlook is very strong in that particular area, as well as the medi-spa and the core derms and plastics.

Okay. Great. I was reacting to that press release, we saw in the Arizona medi-spa chain and I guess, I wondered about that a bit. But moving on just -- this is a bit nit picky, but I noticed that service revenue was actually down sequentially, and I -- it doesn't really mean much, but I was kind of curious why that would be?

Yes. Good question, Mark. We actually had a one time favorable benefit in Q4 of '05 related to some service contract revenue in Japan and that's why it was artificially a little bit higher. If you want to take that out, you actually would have seen sequential growth from Q4 to Q1. So we expect those numbers to continue to grow quarter-over-quarter after our install base continues to increase.

Excellent. And then last question, on your International at least your 10-K indicated 16 direct reps overseas, did that increase in Q1?

Yes. It did, Mark. It's closer to 20-level, now it's 19 or 20, somewhere in that range.

And you are hiring where, in Europe or Asia or both?

It's really everywhere and in Japan we've done some as well in Europe.

Excellent. One -- again one last question on this breakdown, and again you may not want to comment here, but on the Titan, it's so exciting that that's growing much more than we expect forecasted [944 and a quarter], and is that again going more to the traditional channel or non-traditional or do you care to comment?

Traditional meaning derms and plastics?

Yes.

Well, the derm and plastic part of our business Mark is anywhere, typically from 20% to 25%. So by definition, most of our business is outside of that including Titan.

Okay. Thank you.

We'll go next to Anthony Vendetti from Maxim Group.

Hello.

Mr. Vendetti?

Thanks. Sorry, I'm on the road here, but a just a couple of quick questions. On the -- did you give the percent breakout, Ron on the North American international?

It was a growth in the US --. During the quarter?

Just a percent, well again percent of revenues not the growth.

Yes. I have the growth of -- I'm sorry.

We had [44%] growth in the United States, but I don't thing we did break it out international versus domestic?

Let me grab that for you Anthony, I can get it for you in just a second.

Okay, I will go on to my next question.

Yes. You could.

You were talking about laser hair removal as being, Kevin, less of the business going forward and has been progressively less especially with the other applications you now have and ProWave and so forth. Do you have the percent or a general range of what laser hair removal made up of your first quarter '06 sales, what percent that accounted for?

We haven't done that analysis Anthony and I would really don't want venture or guess either, but as you follow the company's history, I think you get the sense that we are very committed to finding new [aesthetic] application categories each year and we've been able to successfully grow our business that way. The laser hair removal market remains a robust market. We just believe that the strategy of identifying new applications is one that allows us to grow our business faster.

Okay. And I just wanted to verify. So you have 55 sales reps was that by the end of first quarter or is that as of now?

End of first quarter.

End of first quarter. Okay. Great. And lastly, as Ron is trying to get that question for me. In terms of the legal expenses obviously they increased and the estimate for second quarter '06 is now 3 million, is that right for legal?

That's correct.

Okay. And, I mean, I guess you mentioned at least G&A would go down to 9% to 11% expected after that. But I was, Kevin I was wondering if you could talk through what if you did -- if you were to lose, would there be --what would the costs or what would the estimated costs be? What was the appeal process look like? How long do you think this could drag on? Do you have an idea?

Well, obviously, it's up to the court to determine what the number is, it's been our view that we were aware of this [patent] when we started the company and received opinion from one of the most prominent IP firms in the valley, that we don't wrench this particularly patent. So we believe that [inaudible] would be very difficult to establish with that in mind. And Palomar has licensed the patent in question to at least two company's, and the royalty rate is anywhere from 5% to 7.5% for the laser hair removal products.

We have shipped some around -- maybe $200 million with the product, all products since conception. So you can try to get a sense of what that cash royalty amount, the damages would be. Obviously we are focused on multi-application products so we'd argue that we should be subject to a lesser rate for the multi-application products. There would be an appeal, the process, the timing of that has some uncertainty associated with it, but it could be anywhere from, six months to significantly longer than that for that field process to run its course.

Okay. But most of the cost, the legal cost that you have incurred would not have to be repeated during the appeal process, because you've already gone through that, is that correct?

That's right.

Okay. And then lastly, Ron, were you able to get that number?

Sure. Actually, and its in some of the supplemental information that we provide, maybe you [are] not able to see the release, but US was 72% and the international was 28% of the total during this most recent quarter.

Okay. Great. All right. Thanks guys.

Our next question comes from Dalton Chandler from Needham & Company.

Yes, hi. Just a follow-up on the legal appeal question. The 9% to 11% you are talking about going to in the second half of the year. Does that anticipate anything for the appeal process or, does that assume you zero out the patent related cost?

Hi Dalton, this is Ron. It actually assumes a very low burn rate in the second half of the year, because we would expect the appeal process to be a fairly inexpensive process after the trial would be done.

Okay. And then just another, sort of nit picky question on the gross margin, obviously still very high, but it was down a little bit year-over-year and sequentially and higher revenue, just wondering if you could comment on what happened there and what you expect going forward?

Really, it's within the range that we've given. We've given guidance when we compared the non-GAAP numbers between 73% to 75% we were a little bit on the low end. But it depends on the product mix, warranties provided and what not. So it's kind of, it's still within the range that we were expecting.

Okay. So it wasn't, like any -- sort of product discounting related to the AAD show or --?

No. There was no special promotion that would have caused that to occur.

Okay. Thanks, very much.

Our next question comes from Jose Haresco from Merriman.

Thank you very much for taking the question. Just a couple of housekeeping items. What is the cost of the CoolGlide loaded with the ProWave 770 versus the [VI] laser?

We don't have such a product Jose.

I mean if you had to replace all laser handsets with a ProWave how much -- was there a significant reduction in cost?

Again, I don't understand the question.

Okay. You said that the multi-application, Xeo platforms are now starting to ship with the ProWave on board?

That's correct.

What does that go for?

There is a broad range of prices for the Xeo, basically the idea was that our customers can select any of our applications, and have that populated in one machine. So the pricing for Xeo was anywhere from the low 100, I suppose Ron-- to $200,000 depending on what they decide to populate.

Does the top end of the range come down a bit, if you have ProWave on there, as one of the apps?

Again Jose, we offer that today, the customer can buy a fully loaded [DL] with ProWave, and that's represented by the $200,000 price tag that we talked about.

Okay. Is the ProWave selling at all overseas?

Yes, it is.

Okay.

We have [regulatory clearances] for it in all the major markets.

Okay. Could you comment -- you mentioned that there was an enormously low percentage of sales in the traditional market. Do you have any sense of why that is?

While again, Jose I commented that that's does tend to balance around from quarter-to-quarter and at this point we are not getting too excited about the data from a single quarter of the that analysis. It's been hovering anywhere from 20% to 25% for quite some time and it just gets down in the first quarter for some reason, turn out to be the PSS's fiscal year-end. And so one theory could we that the strong interest in PSS's year-end could have driven more non-core physicians, but that's purely speculation.

Okay. Do you have a sense as to with how different segments within the market might be migrating to different types of products? Is it still the general consensus that derms and plastic tend to go towards more the high-end lines, and the newer segments of the market tend to gravitate towards the lower medium price point?

Sure. Its -- that's something we analyze every quarter Jose. And I think many assume that the non-core specialties are more price-sensitive and often pursue products that are lower price point. Our experience has been that the non-cores have identical buying habits to the derms and plastics. We aren't active in the spa market and I think in the spa market there is significantly more price sensitivity. We are active in what we consider the medi-spa, which is physician assisted spa environments and we are not seeing from our experience any difference in the product selection.

Okay. Two other questions related to the lawsuit. The first one is, first one is if for some reason, the worst case scenario happens out and there is an any junction against laser based hair removal products, does your council have any sense or given you any sense for whether or not that sets a precedence for the second lawsuit, that Palomar has against you?

Does it set precedent? Well, the second lawsuit is relative to flash lamp technology in hair removal. So --

This patent is under -- some of the same claims are being discussed within the original complaint. So is there any sense from your council as to whether we should be worried about that or not or, is it too early to tell?

It's too early to tell. That second lawsuit -- it hasn't really progressed much. So we really don't have anything to update there. It's really in it's infancy and the technologies are radically different. One is the laser-based technology for hair removal and the other one is lamp-based, incoherent light.

Are we passed the point -- I guess is there still a chance here that we could reach some sort of settlement [with the] two companies or is it -- are we -- are you hoping at this point that it just goes to trial?

Well, were ready to get this resolved. And, we believe that our technology does not infringe, but this is has been something that we've been working through since February 2002. So it has been a long process. So it's hard to answer that, Jose. We are just preparing for trial. And we've got an excellent team to represent us in this matter.

Well, thanks, guys.

Operator?

And we have time for one last question from Mike Bosman from Peninsula.

Hi, guys. First of all, I'd like to just [preface] the question with congratulations. You guys are really growing this business nicely here. I was wondering, Kevin, if you could just comment on the general competitiveness within the market. Your space is closing in on a billion dollars. Are you seeing any new competitors come in or is it the usual suspects in the marketplace?

To a large extent, Mike, it is the usual suspects. But being at the market, it is growing at a very robust rate, there are number of companies that are popping up. A lot of them are development stage companies. But the space is getting a lot of attention because of the excitement. And anytime one is in a strong market with great growth drivers identified, it will get attention of folks out there looking to take advantage of that.

With all that said, we are certainly not seeing anything in our business where there is any sign of saturation or price erosion. We're continuing to experience strong growth and do it in a market where both Cutera and most of our competition's not reporting any of those things.

That's great to hear. I mean can you just comment about the sale cycle length of the time and the ASPs? Are they starting to get higher or stay the same?

Well, I will turn the ASP question over to Ron. But one caveat with ASP is that we launched a new product platform last year, the Solera platform. We are pleased that we were able to grow our ASPs in excess of 50%, probably closer to 75% by now, since we launched our first product in 2000.

But we intentionally launched the new product platform to participate in a more price sensitive segment of the market. And so, we knew that that would result in some impact on average selling prices. But we are not seeing, as I said earlier, any issues of pricing, and the individual product lines are holding up quite nicely. And maybe, Ron, you could talk about our blended ASP.

Yes. Mike, just in general, the blended ASPs are doing very nice. We have not been seeing a lot of discounting. And as a result, we have been very pleased with what we have been able to achieve there.

Right. Well, I like to thank you guys for doing a good job.

Thank you very much, Mike. Okay. Thank you for participating in our call today. We are very excited about our future and look forward to updating you on our progress next quarter. Good afternoon. And thanks for your interest in Cutera.

That concludes today's conference. Everyone have a great day.