Cutera Inc (CUTR) 2006 Q2 法說會逐字稿

Good afternoon, and welcome to the Cutera, Incorporated Second Quarter 2006 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 presentations. This call is being recorded.

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. By now, everyone should have access to the second quarter 2006 earnings release, which went out today at approximately 4:00 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 our website, or at the SEC 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 and financial guidance, long-term domestic and international growth opportunities and strategies, future spending on various aspects of our operations and estimates related to the patent litigation settlement payment and future royalty expenses.

Also, 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 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 risk 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 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 second quarter ended June 30th, 2006. On today's call, I'll provide an overview of our second quarter results, and then Ron Santilli, our CFO, will provide additional details on our operating financial results and comment on guidance. Finally, I will provide some closing comments and open the call to your questions.

I'm very pleased with the second quarter results, which exceeded both our top and bottom-line guidance. A number of factors are helping our organization achieve these expectations, including, one, a strong, unique portfolio of upgradeable products and applications that enable our customers to perform all of the popular aesthetic applications on the broadest range of patients and skin types.

Two, our investment in research and development continues to provide our customers with state-of-the-art technology that yields high returns on your equipment purchases. Three, another factor fueling our growth is our sales force expansion that continues to yield measurable results. These investments have made our sales force over the last few quarters -- have enabled us to expand to 55 territories in North America. These investments are expected to continue contributing to strong improvements and our operating margins during the remainder of the year.

Four, we have continued to experience growth across all of the major physician categories we market to, with particularly strong growth in the general and family practitioner specialties. During the second quarter of 2006, we booked approximately 22% of system orders from traditional dermatologist and plastic surgery specialties, 63% from OBGYNs, family practice and other physicians and approximately 15% from non-physicians.

We have always approached our business with the long-term goal of establishing Cutera as a leading provider of laser and other light-based systems to the aesthetic market. To further this, we have continued to make significant investments in R&D, which has allowed us to design innovative products that command a premium in the market. Sales force expansion, coupled with aggressive investments in marketing, have been important in our business to position us well for continued strong future growth. Because of these investments, we're expecting continued sales growth and operating leverage for the second half of 2006 and beyond.

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 our second quarter of 2006 results. Before I begin, please note that all of our financial performance and guidance comments are expressed in GAAP numbers, which include the impact of patent litigation settlement charges and stock-based compensation charges.

In addition, to supplement the GAAP numbers, we have provided non-GAAP net income and non-GAAP diluted income per share information that excludes the impact of the litigation settlement and all stock-based compensation expenses, both net of their related income tax effects. We believe that these non-GAAP numbers provide you with insights to conduct a more meaningful and consistent comparison of our ongoing operating results and trends compared with historical results. A table reconciling the GAAP numbers to non-GAAP numbers is included in our release.

Second quarter 2006 revenue was $24.4 million, a 39% increase compared to the same period last year. Net loss for the second quarter of 2006 was $9 million, or $0.73 per diluted share. Non-GAAP income for the second quarter was $2.8 million, or $0.20 per diluted share. The non-GAAP numbers enable you to view our financial performance without the effects of the patent litigation settlement and deferred stock-based compensation charges net of taxes.

Revenue for the first six months ended June 30th, 2006, was $45.2 million, a 38% increase from $32.7 million reported in the same period last year. Net loss for the first six months of 2006 was $7.9 million, or $0.64 per diluted share. Non-GAAP earnings for the first six months of 2006 were $4.7 million, or $0.33 per diluted share, compared to net income of $4.2 million or [$0.31] per diluted share in the first six months of 2005.

During the second quarter, revenue in the U.S. decreased by 44% to $16.4 million. This growth reflects the strong demand for our product offerings and productivity improvements from our sales expansion investments made over the last few quarters. On the international front, second quarter 2006 revenue increased by 29% to $8 million. International revenue in the second quarter as a percent of our total revenue was 33%. We continue to invest in our international business, and are pleased with the results we have achieved.

We believe the international market offers us an excellent long-term growth opportunity. During the second quarter of 2006, our product revenue grew 39% to $20.3 million. This was driven primarily by sales of our premium multi-application Xeo platform and our Solera platform products. We continued to see an increasing number of multi-use transactions from higher-volume practices. Upgrade revenue declined 6% in the second quarter of 2006 to $1.6 million. This was primarily due to an increasing number of existing customers choosing to purchase an additional system, typically a Solera product, instead of upgrading their existing systems.

Service revenue increased 63% to 1.4 million in the second quarter of 2006, as compared to the second quarter of 2005. We expect this revenue growth to remain strong as our installed base increases. Finally, our annuity revenue stream from Titan refuels grew 174% from 405,000 in the second quarter of 2005 to 1.1 million in the second quarter of 2006. Just like our service revenue, as the installed base of our Titan products has increased, and our customers have continued to satisfy the fast-growing demand for Titan procedures, revenue from this product line has continued to increase.

I will now address our operating performance. Our gross margin in the second quarter of 2006 was 68%, compared to 72% in the second quarter of 2005. This decrease was primarily attributable to the royalty expense, which represented 3.9% of the most recent quarter's revenue. Adjusting for that royalty's expense, our margins would have been 72%. Our margins have remained strong due to continuing demand for our premium, multi-applications Xeo product and higher gross margin associated with our Titan-related products. Including the continuing royalty expense, we are expecting our gross margin to be in the range of 68 to 70% for the remainder of 2006.

The blended royalty rate is expected to be in the range of 3.5 to 4% total revenue for the remainder of 2006. Consistent with our strategy of expanding our sales force and distribution network, sales and marketing expenses for the second quarter of 2006 were $8.3 million, or 34% of revenue, compared to 5.8 million, or 33% of revenue for the second quarter 2005. This growth in the spending is due to our sales force expansion efforts at the end of 2005 and in the first quarter 2006, and the effects of implementing FAS-123R.

For the remainder of 2006, similar to 2005, we expect to increase our spending in absolute dollar terms in sales and marketing. However, we expect the expenses to decline when measured as a percent of revenue. We estimate our sales and marketing spending as a percent of revenues to be in a range of 30 to 34% for the second half of 2006. Research and development expenses were 1.6 million, or 6% of revenue, in the second 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 second quarter were $4.3 million, or 17% of revenue. We spent approximately $1.7 million on non-recurring legal expenses associated with our patent litigation. After accounting for the income tax benefit of these expenses, this represented an $0.08 per diluted share impact in our second quarter. We expect our normal G&A expenses to decline from a more traditional 9 to 11% of revenue for the remainder of the year, now that our legal matter has been resolved.

Our effective income tax rate for the second quarter of 2006 was 40%, which was higher than we had originally expected, due to the patent litigation settlement expense. Excluding the impact of the $18.4 million litigation settlement expense incurred during this quarter, the effective income tax rate for the second quarter would have been 33%.

We expect our effective income tax rate to be approximately 33% for the remainder of 2006. Now, I would like to walk you through the final accounting for the Palomar litigation settlement. On June 5th, we disclosed that we paid $22 million to Palomar as a good faith estimate for royalties due on past sales, interest, penalties and reimbursement of legal fees. Once we closed the transaction, we embarked on the detailed work necessary to finalize our numbers, which required that we review each applicable sales transaction since our first product shipments in early 2000.

Please note that we sell primarily multi-application products, which are subject to different royalty rates, or no royalties, per our agreement. We have now completed this analysis and have determined that the actual amount due to Palomar was 19.6 million. These numbers are subject to an audit which will be performed this quarter.

Of the $19.6 million, we expensed 18.4 million and capitalized 1.2 million as intangible assets, representing the ongoing patent license that we received as part of the settlement agreement. The $1.2 million intangible asset will be amortized cost of goods over the next nine years, which is the remaining life of the applicable patents.

The quarterly charge for this amortization going forward is approximately $33,000. The $2.4 million difference between our $22 million estimated payment and the $19.6 million reconciled number will be used as a credit against future royalties. Coming to EPS, the cost of [technical difficulty] we now referred to the non-GAAP reconciliation of our net income and EPS provided in our earnings release.

On a GAAP basis, we had a loss per share in the second quarter of 2006 of $0.73. However, to arrive at the non-GAAP earnings per share of $0.20, we need to make three adjustments. Firstly, the litigation settlement expense of 18.4 million. After adjusting for the income tax benefit of 7.1 million, the net impact was 11.3 million. This represented $0.80 per diluted share. Secondly, our deferred stock-based compensation expense, per FAS-123R, was 911,000. After adjusting for the income tax benefit of $301,000, the net impact was 610,000. This represented $0.04 per diluted share.

The last adjusted required is related to the weighted average share count that we use as the denominator for computing the EPS. Our GAAP diluted share count was only 12.2 million shares, as compared to our non-GAAP diluted share count of 14.2 million shares. The 2 million share difference is related to the accounting treatment for dilutive securities, which are excluded when a company is in a loss position. The effect of dilutive securities is included in the non-GAAP share calculations, because we were profitable on a non-GAAP basis. However, the effect of dilutive securities are excluded from the GAAP share calculation because we were in a loss position.

The net difference of using the fully diluted share count, versus the non-diluted share count was $0.09. Turning to the balance sheet, our financial position after the settlement payment continues to remain very strong. As of June 30th, we had $82 million, or approximately $6.50 per outstanding share, of net cash and marketable investments, and no debt.

Our accounts receivable, net at the end of the first quarter remained low at $5.7 million. Our DSOs improved to 21 days in the second quarter of 2006, due primarily to our strong credit policies and effective cash collections. Cash used in operating activities in the second quarter was 11.9 million, which included the $22 million estimated settlement payment to Palomar.

Moving to guidance. For the third quarter of 2006, we expect revenue to grow to approximately $25 million, with earnings per share of approximately $0.21. For the full year of 2006, we are increasing our revenue guidance to approximately $100 million and estimate breakeven earnings per share. These EPS numbers include the impact of stock-based compensation charges and our recent litigation settlement.

Non-GAAP EPS numbers for the third quarter and full year are estimated to be approximately $0.27 and $1, respectively. These non-GAAP numbers are comparable with our historical reporting. Please refer to our detailed reconciliation of GAAP to non-GAAP guidance numbers attached to the earnings release.

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 our results, many aspects of our business performed very well in the second quarter. As we look into the second half 2006, with our patent litigation result, we're very pleased to redirect our management efforts to expanding our market share in a robust, growing market. We expect the investments we made in our sales and marketing team during the end of 2005 and beginning of 2006, will continue to show increasing measurable improvements in our operating margins.

The near and long-term opportunities we are seeing in our market are proving that our recent strategic expansion was a prudent choice for our company. In summary, we're very excited about our future. We have developed and have continued to add to a very strong portfolio of products, assembled one of the largest direct sales organizations in North America, and have continued to invest in our international channels. We believe these investments, together with our business initiatives and the fast pace of growth of the aesthetic market position Cutera for continued growth in profitability in years to come, with improved operating margins and raised guidance for revenue and earnings, we feel very confident about the opportunities we're pursuing in our market.

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

Yes, sir, thank you.

[OPERATOR INSTRUCTIONS].

And we'll take our first question from Phil Nalbone, RBC. Please go ahead.

Good afternoon, Kevin and Ron. I wondered if we could start with the discussion of the sales force headcounts. If I heard correctly, you still have 55 territories, or 55 direct reps. Is that unchanged from the end of Q1?

Yes, Phil, it is.

Can you talk a little bit about what your expectations would be for adding incrementally from this point?

We plan to continue to expand the sales force. This past expansion was a massive one, and we had to build a significant amount of infrastructure within the sales force and the marketing support to facilitate that expansion. We do intend to continue expanding, but right now we're not commenting on targeted headcount by the end of the year.

Okay. I believe you added eight new people during the first quarter. That was a very big step-up. Can you give us some color on how productive those people are? Are they adding meaningfully to the revenue stream, or should that be a second half phenomenon?

By and large, we expect that in the second half, Phil. It typically takes six to nine months to get the productivity we look for in our salespeople. Our investments in sales training and sales management I think have moved that forward from past periods, but we really are looking at the second half as the point where we start to get the returns on those investments.

Okay, Kevin. Can you talk any about sales force expansion activities in Europe and Asia? I think you were at 20 people at the end of Q1?

And we remain about 21 at the end of Q2 as well, Phil.

Okay, great. And, moving on, can you give us some sense of what percentage of your revenue base right now is not subject to any sort of royalty, and would you be comfortable at this point talking about sort of the proactive initiatives that you have in place to increase that to give more leverage to your income statement over time?

Let me address the first part of that, Phil. Approximately -- and it depends on the time that you look at -- what kind of number you run into when you're trying to look at a percent of the revenue base that is totally hair removal. But we estimate somewhere between 10 to 15% of our total revenue base is hair removal only revenue.

Then there's another piece that is not subject to the royalties, and that's probably another chunk that's in the -- I'm going to give a pretty high range here, between 15 and 30%, depending on the quarter, depending on the activity. And then the rest of the revenue base is subject to different rates, because it's multi-application and it's subject to different rates for the royalty agreement.

And, Phil, the second part of the question, we're obviously committed to launching new applications in this marketplace and products that don't feature laser light-based hair removal technology are not subject to a royalty, according to the agreement. We're working on a number of new applications that are in that category.

Kevin, I'm so glad you mentioned new applications and new products. You have a history of not talking about any of those, but in a general sense, anyway, can you talk about expectations for '07? Are we likely to see new products and new applications? Are we likely to see several? We're all going to start thinking about the academy meeting early next year before long. Is there any color you can give us?

Well, obviously, we have expanded our R&D efforts in hopes of expediting this, the product development activities. And we tend to take the academy meeting in the first quarter as an opportunity to discuss the new applications that we're working on. And it is our intent to have new product launch sometime during the year, with some more color of what we're working on at the academy meeting.

So do I take that as a single product, or single new application?

Well, we're working on multiple projects right now, and we believe that we should be able to launch at least one of those in 2006 or 2007.

Okay, Kevin. Thank you, very much. I'll go back into the queue.

And we'll take our next question from Tom Gunderson, Piper Jaffray. Please go ahead.

Hi, good afternoon. Just a clarification on the 911,000 stock-based compensation expense, can you break that out into the operating categories for us?

I do not have that information available at this moment. Very little of it -- just over 100,000 of it is in cost of goods sold. The rest is in the operating expense.

Okay, well, you guessed what I wanted it for, so that's good enough, thanks. And then I want to focus a little bit of discussion time on sales. Just to follow up on what Phil said, Kevin, you started at 55, you ended at 55. There were no adds or deletes during the quarter?

Well, we're constantly hiring salespeople, so there is some level of turnover that we deal with as part of the operation, but the 55 territories, and those are direct salespeople, so that doesn't include sales management. And I think we're likely to continue to expand the sales force. But at this point, we're really focused on executing well with this last major expansion.

Okay, and then can we talk a little bit about competition? First off, there's a sense out there that I'm picking up from investors, and I was wondering if you could give it from the industry's side, that competition is getting hotter, that there's more companies and more salesmen chasing the same market. And, I'm wondering, you've faced a lot of competition over the last three or four years and had good sales growth. Are you sensing any new trends in competition out there, or is it always -- is it at a constant level?

I think the market has been growing at such an exciting rate that it has attracted a number of new companies and so I guess that's the bad news associated with being a part of a robust market. We expect to experience 44% growth in North America last quarter, and we think we're capturing the U.S. market faster than anyone else. But in terms of any trends that we're seeing, in terms of selling prices or disruptive competitive products, I can't say that we can see anything that looks like a radical departure from our past history.

Okay, and then a last question on the sales thing here is, prior to the settlement, there was at least some pushback from some customers that they were afraid that maybe you would be enjoined, and that maybe their purchase of a product wouldn't have the ongoing support that they had hoped, and that was also promulgated by at least some competitive salespeople. Have you seen any change in that? Has there been a bounce back since the settlement, in that maybe some decisions that were on the fence went your way?

Well, I think that was in the background for quite some time, Tom. The litigation was filed in February 2002, and there have been a number of challenging sales situations, where the customer was confused about what this meant to a customer that would purchase Cutera.

I think there has been a sigh of relief within the sales force that this is no longer a factor, and that we recognize that this has been here all along, and I think with the trial coming close, the volume of this certainly increased. So I think it's likely that we did have some negative impact, because this has been there all along and there are probably some customers that would opt not to purchase from us because of the uncertainty associated with litigation. That's been completely lifted now, and I think it should have a positive impact on business.

Okay, and then a product question on Titan. You gave us year over year, but it's often an awfully tiny number, so I looked at it sequentially and it's almost 18% in the disposable sequentially. Is that mostly from existing people buying more? Are you selling more new product? How would you add more color to what's going on with Titan disposables?

I think a lot of that just ties in to the installed base of Titan machines out there. We did introduce two new versions of Titan in February, and so those are more experience of hand pieces, and so we had some customers that opted to purchase the higher-performance model, but I think more than anything else, Tom, it's a function of how many customers we have out there.

Okay, thank you.

And we'll take our next question from Dalton Chandler, Needham & Company. Please go ahead.

Hi, guys, congratulations on a nice quarter.

Thanks, Dalton.

Actually, most of my questions have been asked, but I did want to just confirm on your guidance for the non-GAAP dollar earnings for the year, am I doing this correctly, that implies $0.41 for the fourth quarter.

I think it would imply about $0.39 for the fourth quarter, to get to the dollar.

Right, so I had 12 in the first quarter 20 this quarter, you're guiding for 27 in the third quarter.

It's actually $0.13 in the first quarter, 20 in the second, and then 27 to 39, and there may be a rounding in there that gets you to the penny.

Okay. All right, thanks very much.

And we'll take our next question from Jose Haresco, Merriman. Please go ahead.

Hi, guys, good afternoon. Great quarter.

Thanks, Jose.

Just a quick question on the products. Can you give us a sense, from your perspective, where there's still room for innovation in this space? I think there's a sense out there that a lot of innovations we're seeing are kind of a version 2.0 of something that was launched last year or a year before that. What are you seeing in terms of demand from the marketplace that there is still room left for innovation? Is it incremental or is there something out there that's completely revolutionary that we haven't seen yet?

Well, Jose, we're working in both categories. We're looking to expand the number of applications and enhance performance of our existing products. And I'd characterize that as somewhat incremental but pretty important for our existing customers to have that commitment from us. And we're working on some things that we really do think are going to make a significant impact in terms of the revenue contribution we can expect from those products in the future.

Okay. Just on the Titan [revenue], on the recurring revenue, can you give us some color as to whether those handset replacements are the first version, or whether some of those are the Titan XL or some of the newer Titans that were launched earlier in the first quarter?

Yes, Jose, we're continuing to see an increasing trend toward customers buying the newer versions, the Titan V and the Titan XL. But we still do sell the old Titan S in addition, so the line is made up of all three products.

Okay. Could you comment, then, on the rate of substitution for those handsets. Have you seen any decreases or declines in the rate at which -- the folks that have had the Titan for a while, the rate at which they're re-upping?

No, Jose, I don't think we're seeing any trends that are breakout from what we've seen in the past. And again, I think the key thing is that any customer that buys a product that has Titan capability, that seems to be the biggest driver in terms of growing the recurring revenue.

Okay, thank you.

And we'll take our next question from Anthony Vendetti, Maxim Group. Please go ahead.

Thanks. Hey, Kevin, Ron, how are you doing?

Great.

I wanted to just -- I guess most of my questions have been answered, too, but the breakout between North America, or U.S., and international, I know you said U.S. grew 44%. But what was the percent [inaudible] there in terms of just total revenues?

Right. The international piece was 33% of the quarterly revenue. Is that the number you were looking for?

Yes, yes, 33%. Can you talk a little bit about that. I know -- I think last year you opened the international headquarters in Zurich. Can you talk about how that's going, kind of your growth prospects there, which particular countries are growing faster than some of the others?

Right, Anthony. That office has been a great success for us and we're looking to continue to expand our international reach. We've had good performances from a number of regions where we're directed, as well as our distributorship business. Switzerland itself has been a nice market for us and we're continuing to expand our business in the Middle East as well.

Did you say the number of direct salespeople you have is 21?

Twenty-one, that's correct. As of the end of June, there's 21.

21. And how many distributorships right now?

There's about 25 in the country that we're not direct in.

Okay, okay. And in terms of quotas, I don't know if you give those numbers out, but are certain countries where have much higher quotas, would you care to categorize those, where there's just right now better opportunities or --?

Well, view the largest single market outside of the United States as Japan, and we have a large direct presence. In fact, that's growing substantially for us. But we have a number of great success stories where we have strong distributor partners in parts of the world that people may not consider to be a major market. So, I think the formula that we've seen that works for us that really comes down to the team that we have in place in any given market, because we had those success stories in some areas of the world that are more challenged from an economic perspective.

Okay, okay. And in terms of the products that you're working on, the new products that you're working on, is there any therapeutic category that you'd like to talk about as terms of your focus, or where you might be going, or choosing not to go?

Well, I think where we are choosing to go is to continue to develop products for the professional market. We think that really does play to our core competency, and we don't have any programs for home use or areas outside of the aesthetic market, either. So it's capital equipment, and we're looking for goods and services that make sense with our current sales and marketing alignment.

All right, perfect. All right, thanks a lot.

And we'll take our next question from Mike Bosman, Peninsula Capital. Please go ahead.

Hi, good afternoon. Great quarter, guys.

Thanks, Mike.

Question for you. Currently, the Titan refills are running about 4.5% of total revenues. Can you just give us an idea of how large you think at some point this could be? I mean, is this something that could get up to double-digit revenues for you guys at some point?

Mike, it certainly could. We are in uncharted territory to some extent, and we haven't given guidance in terms of what we think that number could be, but we've been experiencing very robust growth in the procedure annuity fees.

And then, Ron, just circling back to the EPS guidance, I also got $0.41 implied in the fourth quarter, so I'll have to check my rounding as well.

Easily a one penny rounding of some type within that.

Okay. And then for the first quarter, you grew revenue year-over-year at 37 and 39%. You're guiding the year revenue growth at 31.5%. This implies fourth quarter of about 30 million, or just under, and that's 24% year-over-year growth. Is this just being a little bit -- not to really box you into the guidance, but is this kind of a conservative number for your Q4 revenue, or is there some sort of seasonality that maybe you might start to experience?

Well, Mike, I think you've got those numbers all correct. I guess in the fourth quarter, we're looking at $30 million of revenue, and we're comfortable with that number at this time, so we're not looking to increase that, and that will also be a record for us in terms of revenue growth. So, these are the revenue figures that we're comfortable with at this time.

Well, they're pretty impressive. And then just lastly, kind of to piggyback on Tom's question about the competitiveness -- my question is more geared toward the consumer. Are you hearing from your OBGYN customers, or GP customers, since that's the majority of your business, any pushback from the consumers? Is it getting soft at all? I mean, obviously, the revenue growth is amazing, but is there any sort of consumer softness out there that you're hearing from?

Yes, we're somewhat removed from the direct patient perspective, but if you look at the growth rates, you look at the balance sheet and our accounts receivable, DSO being at record low levels, our average selling prices remain strong. So, every indicator that we have seems to indicate it's more of the same.

That's what it looks like. Well, great quarter, guys. Thank you.

Thank you.

Thanks, Mike.

We have time for one more question, and we'll take that question from Matt Arens, Kopp Investment Advisers. Please go ahead.

Great. Thanks for taking my question. Can you comment on -- in terms of the new product introductions, is getting additional consumable streams an important parameter for new product introductions? Or are you looking at that more universally in that if there's a consumable stream associated with it, all the better, but that's not a requirement for new products going forward?

Yes, Matt, it's more the latter. We certainly like the predictability associated with the annuity revenue stream, and if we can provide a solution where our customers see the value associated with that offering, with the understanding of what the other competitive alternatives are, then we certainly will do that in the future. But we won't limit product launches with that constraint.

So, is it fair to say that there may be a consumable stream associated with the products that you're speaking about introducing possibly next year, but don't necessarily count on that being the case?

That's right. That's right.

The other question that I have, in terms of the competitive landscape, one variable that I don't have a real good sense for, maybe others do, but as you're going into accounts and competing for business, could you give me a ballpark feel of what percentage of the time you're going in replacing older equipment? And maybe a feel for what percentage in -- and I'm thinking about the U.S. market here, kind of the traditional applications, so kind of ex Titan.

And what percentage of the time you're going into an account that doesn't have existing equipment, because I think that that could have implications for how the competitive landscape may play out over the next several quarters and years?

I think you look at where business is coming from, the lion's share is coming out of the OBGYNs and family practice categories and 35,000 OBGYNs in the United States, and about another 65,000 [GPFPs]. Almost without exception, when we're selling into that, the physician category, it's the first time they're buying equipment.

And dermatology and plastic surgery, which represented 22% of our revenue in the second quarter, most cases, they own existing laser and light-based technology. Sometimes they're looking to obsolete the existing products that they have, but other times their practice has become so busy they need to buy additional equipment to keep up with the consumer demand.

Okay, and one last question, if I can sneak it in, we have a model for an aesthetic procedure during a slower economy, which is going back several years to Botox, and what happened with the growth of Botox during a slowing economy. What parallels can we draw between the aesthetic procedures that you provide, and what we saw in a softening economy with Botox? Are there parallels there, or is that not the way that you model things out?

Well, I think there are certainly lessons to be learned from that experience. I think the demand from consumers for these elective procedures continues to be robust, even in a soft economy. And we've been out here since 2000, and we didn't see much pullback during the choppy times in early 2000. But oftentimes physicians are looking to purchase equipment that we provide, because they're seeing a shift in the procedure demand from their patients.

Some of the higher-priced procedures are getting some pressure, and alternatives that can be offered to their patients for treatments that cost anywhere from a couple hundred dollars to a couple thousand dollars, allows them to keep their practice healthy.

Great. Okay, well, thank you for taking my questions.

And, Mr. Connors, I would now like to turn the conference back over to you for any additional or closing remarks.

Thank you, Operator. Thank you for participating in our call today. We're very excited about our future, and look forward to updating you on our progress next quarter. As a reminder, we will be attending a number of conferences in the coming months, so we look forward to seeing you there. Good afternoon, and thank you for your interest in Cutera.

And that does conclude today's presentation. We thank you for you participation, and you may disconnect at this time.