Cutera Inc (CUTR) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to today's Cutera, Incorporated Fourth Quarter 2006 Earnings Results Conference Call. As a reminder, today's call is being recorded.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Mr. John Mills. Please go ahead, sir.

Thank you. By now, everyone should have access to the fourth 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 and guidance, including anticipated increase in revenue, expansion of Cutera's customer base and an increase in market share, long-term domestic and international growth opportunities and strategies, future spending on various aspects of our operations and comments relating to the development of new products and applications and their anticipated introduction dates.

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 continue increasing 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 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.

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. Thanks for joining us today to discuss Cutera's results for the fourth quarter and year ended December 31st, 2006. On today's call I'll provide an overview of our results, then Ron Santilli, our CFO, will provide additional details on our operating and financial results and comment on 2007 guidance. Finally, I will provide some closing comments and open the call to your questions.

We are releasing our financial results earlier than usual, to enable us to discuss our 2006 results at the American Academy of Dermatology conference that begins this Saturday, February 3rd. We plan to return to our typical quarterly reporting in the future. Now to review our results. I'm pleased to report that we set a new record for quarterly and annual revenue for the respective periods ended December 31, 2006.

During the fourth quarter 2006 we also achieved significant increases in our gross margin, operating margin and cash flow from operations. A number of factors [continue to] the strong fourth quarter and full year results, including the following. One, our U.S. revenue grew by 18% when comparing Q4 2006 to Q4 2005 and grew by 29% when comparing the full year of 2006 to 2005. This growth reflects the continued strength of our multiple product offerings and investments made in our sales force expansion.

We remain optimistic on the overall growth of the U.S. market for the aesthetic systems and are planning on continuing our expansion of our sales force in 2007 to take advantage of this opportunity. Two, our fourth quarter 2006 international revenue grew by 57% when compared to fourth quarter 2005. It grew by 44% when comparing the full year of 2006 to 2005. We experienced growth in all of our major overseas markets.

We're particularly pleased with the revenue contributions from Japan, Switzerland and Canada. We believe the international markets offer us excellent long term growth opportunities. In 2007, we plan to continue our focus and investment in this expanding market and are well positioned to reap the rewards from it.

The third factor fueling our growth is the introduction of new product offerings. During 2006 we introduced three new products, Titan V and Titan XL delivery devices that enable enhanced visibility and faster treatments for our customers performing Titan procedures, LimeLight, the first programmable wavelength skin rejuvenation device that allows our customers to offer customized treatments for their patients, which result in better clinical results with fewer patient visits.

And our navigation technology on the Xeo Platform provides our customers with quick access to recommended operating parameters and stored patient data. This added feature improves treatment repeatability and a speed with which procedures can be performed due to the reduced setup and administrative time during patient visits. We are continuing to experience growth across all major physician markets with particularly strong growth in the more non-core specialties.

During 2006 we booked approximately 22% of our system orders for the traditional dermatologists and plastic surgeon specialties, 32% from family practitioners, 12% from OB/GYNs, 19% from other physicians and approximately 15% from non-physicians. During 2006 we resolved our patent litigation, expanded our sales organization, achieved 33% revenue growth, and ended the year with a very strong balance sheet. We believe we are strategically positioned for continued strong growth in 2007.

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 on our fourth quarter earnings release conference call. Before I begin, please note that all of our historical financial performance and guidance comments are expressed in GAAP numbers, which include the impact of patent litigation settlement charges and stock-based compensation expenses.

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 patent 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 insight to conduct a more meaningful and consistent comparison of our ongoing operating results and trends compared with historical results. A table reconciling the GAAP financial information to the non-GAAP information is included in our earnings release.

Fourth quarter 2006 -- fourth quarter 2006 revenue was $30.5 million, a 27% increase compared to the fourth quarter 2005. Net income for the fourth quarter of 2006 was $7.1 million, or $0.50 per diluted share. Non-GAAP net income for the fourth quarter of 2006 was $7.9 million, or $0.55 per diluted share. Our net income for the fourth quarter of 2006 was better than we projected earlier due primarily to higher gross margin, improved leverage of our sales and marketing expenses and a lower effective income tax rate.

Revenue for the 12 months ended December 31, 2006 was $100.7 million, a 33% increase from $75.6 million in 2005. Net income for the full year 2006 was $2.1 million, or $0.15 per diluted share. Non-GAAP net income for the full year 2006 was $16.8 million, or $1.18 per diluted share.

Product revenue in the fourth quarter of 2006 increased by 30% compared to the fourth quarter of 2005, and grew by 34% for the full year 2006 compared with 2005. This strong revenue growth was driven primarily by sales of our premium multi-application Xeo Platform and continued strong sales of our Solera Platform.

Upgrade revenue in the fourth quarter of 2006 declined by 17% compared to the fourth quarter of 2005, and for the full year 2006 declined by 9% compared to 2005. These declines were due in part to an increasing number of customers choosing to purchase a new Solera product in the lieu of upgrading their fully utilized Xeo systems.

Service revenue in the fourth quarter of 2006 increased by 45% when compared to the fourth quarter of 2005, and for the full year of 2006 increased by 52% compared to 2005. We expect this revenue growth to remain strong as our installed base continues to increase and customers utilize our services to maintain their products after the initial warranty periods expire.

Titan refill revenue in the fourth quarter of 2006 increased by 40% when compared to the fourth quarter of 2005, and for the full year of 2006 increased by 133% compared with 2005. Just like our service revenue, as the installed base of our Titan product increases and as our customers continue to satisfy the fast-growing demand for Titan procedures, we expect an increase in the number of Titan refills.

However, note that the new Titan V handpiece released in 2006 provides 15,000 shots compared to 10,000 shots in the original Titan S. As a result, even though Titan refill sales continue to be in very high demand, we experienced flat refill revenue in the past three quarters. We are continuing to monitor this emerging source of revenue and believe that once this initial ship of sales to the Titan V is complete, our Titan refill revenue will return to quarterly sequential growth.

I will now address our operating performance. Our gross margin in the fourth quarter of 2006 was 73% compared to 74% in the fourth quarter of 2005. This decrease was primarily attributable to $1.3 million of royalty expenses associated with our patent litigation settlement in 2006, which was partially offset by an increase in gross margin resulting from lower service and warranty costs. These costs were lower as a result of improved product reliability and manufacturing economies of scale due to the higher volume.

Our full year 2006 gross margin was 70%. We expect our full year 2007 gross margin to be in the range of 69 to 71%. In line with our historical trend, we anticipate the greatest leverage in our gross margin to occur in the fourth quarter of the year. Sales and marketing expenses for the fourth quarter of 2006 were $7.9 million, or 26% of revenue, compared to $7.2 million, or 30% of revenue, for the fourth quarter of 2005.

The growth in absolute dollars is primarily related to our sales force expansion efforts and an increase in stock-based compensation expenses, resulting from the implementation of FAS123R in 2006. In 2007 we are expecting to expand our market presence, which should result in sales and marketing expenses of about 30 to 35% of revenue. Research and development expenses were $1.9 million, or 6% of revenue, in the fourth quarter of 2006. We intend to continue to increase our investment in this area and believe our spending will remain in the range of 6 to 8% of revenue in 2007.

General and administrative expenses for the fourth quarter of 2006 were $3.6 million, or 12% of revenue, compared with $2.3 million in the fourth quarter of 2005. This increase in expense was primarily attributable to higher stock-based compensation expenses resulting from the implementation of FAS123R and due to a $505,000 nonrecurring charge for the estimated exposure relating to uncollected sales taxes in jurisdictions that we previously believed we did not have a taxable presence.

G&A expenses for the full year of 2006 were 15% of revenue, which included legal expenses related to the patent litigation matter that was settled in the second quarter 2006. We expect our G&A expenses to decrease in 2007 given that patent litigation spending and the previously mentioned sales-tax exposure are not expected to recur. We expect G&A expense to be in the range of approximately 10 to 12% of revenue.

We are pleased with our 29% operating margin for the fourth quarter of 2006. Historically, our fourth-quarter operating margins have been strong due to the financial leverage of our operating model resulting from the seasonally high revenue. For full year 2007 we expect our operating margin to be approximately 20% of revenue.

Our effective income tax rate for the fourth quarter of 2006 was 27%. This rate was significantly below our earlier expectations due to the recording of a full year of R&D tax credits in the fourth quarter 2006, as a result of the legislation extending this credit in December 2006. We expect our effective income tax rate for 2007 to be approximately 33%. Turning to EPS, if possible, please now refer to the non-GAAP reconciliation of our net income and EPS provided in our earnings release.

On a GAAP basis, net income per diluted share for the fourth quarter 2006 was $0.50. For the same period, non-GAAP net income per diluted share was $0.55. This $0.05 differential represented the after-tax impact of the $1.3 million non-cash stock-based compensation expenses recorded in accordance with FAS123R.

Full year 2006 GAAP net income per diluted share was $0.15. On a non-GAAP basis, after adding back the net after-tax impact of the non-cash stock-based compensation expense and the nonrecurring litigation settlement expense, net income per diluted share for the full year 2006 was $1.18.

Turning to the balance sheet, our financial position continues to remain very strong. As of December 31, 2006, we have over $108 million of cash and marketable securities. This represents approximately $8.35 per outstanding share. For the fourth quarter of 2006 cash generated by operations was $14.6 million, a new record for Cutera. Accounts receivable net at the end of the fourth quarter 2006 was $9.6 million and DSOs were 29 days.

Our DSOs continued to remain amongst the best in the industry and below our target of 35 to 45 days due to linear shipments within the quarter, a thorough customer approval and credit check process and strong collection efforts. Inventory turns also improved during the quarter to approximately six times per year. This ratio is at a seasonally high balance due to the strong fourth quarter revenue, and is at its best since we went public in 2004.

Moving to guidance, in the first quarter of 2007 we expect revenue of approximately $26 million with GAAP and non-GAAP net income per diluted share of approximately $0.21 and $0.28 respectively. For the full year of 2007 we expect revenue of approximately $126 million with GAAP and non-GAAP net income per diluted share of approximately $1.30 and $1.57 respectively. Non-GAAP net income per diluted share excludes the after-tax impact of non-cash stock-based compensation expenses reported in accordance with FAS123R. Please refer to our detailed reconciliation of GAAP to non-GAAP financial information attached to the earnings release.

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

Thank you, Ron. As you can tell from our results, we're continuing to expand our global business. Our gross margin was particularly strong in the fourth quarter and we're now realizing the improved leverage of our operations. These have all contributed to higher profitability and cash flows from operations. During the past year we expanded our sales force in North America and now have one of the largest domestic sales teams in the light-based aesthetic market. We're continuing to see increased productivity from this expansion and will continue to monitor this performance as we plan to further expand our sales organization in 2007.

In addition, our continued focus and investment in the international market is now beginning to gain traction as shown by the 44% revenue growth in 2006 compared to 2005. In 2007, we expect to build on this impressive growth by continuing to invest in our international distribution network of direct sales and service employees, as well as third-party distributors.

We're excited by the introduction today of our new laser technology, YSGG, which has unique optical characteristics for minimally invasive aesthetic procedures. Our YSGG technology will allow us to participate in an emerging segment of the anti-aging market. The size of this market segment is approximately $150 million a year and estimated to be growing in excess of 30% a year. New product development has been the backbone of Cutera's success, and as such will continue -- we expect to continue increasing our investment in R&D in 2007.

In conclusion, we're very excited about the opportunities that lay ahead for our company. The light-based aesthetic market is growing at a robust rate, and we are continuing to capture global market share in this healthy market. We have developed a strong portfolio of products, [have] one of the largest direct sales organizations in North America and are continuing to focus on our international accounts. We believe these investments, together with our business strategy and significant financial resources, position Cutera for continued growth and profitability for the foreseeable future.

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

Thank you, sir.

[OPERATOR INSTRUCTIONS]

And we'll take our first question today from Tom Gunderson with Piper Jaffray.

Hi. Good afternoon. Those earnings and that cash flow is impressive. I guess, Kevin, to start off -- I need -- will be at AAD, but I'm wondering if you can give a little bit more color on this YSGG? Is this a separate box, is this an add-on, is that both? And when you're talking about this market being, I think you said $150 million, what's the current market product category? Are we talking about the -- well, I'll let you talk about it. But there's a couple of lasers out there that are doing this. And then, could you also help me understand what you consider to be moderate downtime?

I'll try to capture all those questions there, Tom. But in terms of what this offering is, it is both. It is a standalone device but it's also a new application that we're able to offer with the Xeo Platform. So yet another technology that's been integrated by our flagship platform, Xeo. We're also able to go back to our entire installed base and continue our tradition of offering this in the form of an upgrade.

In terms of the market size, and a few comments about the market itself, in recent years there has been a tremendous amount of interest in noninvasive procedures and that's been our core business to date. However, we're seeing some interest in more significant clinical outcomes with the trade-off of some moderate downtime in order to get more pronounced improvement in the treatment of wrinkles and fine lines as well as sun-damaged skin.

So we are excited about having a technology that we've developed that we think addresses this market quite nicely, and has a lot of features that we think will allow us to continue to market this product to our core practitioners, meaning not just in terms of plastics but all the other specialties as well. This would have no wound care like some of the other procedures on the market, and we think the downtime will be on the order of three-plus days. But in terms of the post-treatment regimen, it really is just applying moisturizer to the treated area. And again it's -- mainly it'll be faces and necks.

There are a number of products on the market that are trying to address the demand for these procedures, but certainly the devices that create small holes in the epidermis are - we're certainly trying to address that. But we think that there's some drawbacks associated with that technology, meaning the prep time as well as four to six procedures with an annuity-based revenue stream in some cases. So we're excited that the market has been identified and we think we've got an outstanding solution that we're looking to talk about at the upcoming Academy meeting.

And I'm sorry. Just a clarification on the end there. This is a one-time procedure?

We believe it's going to take a number of treatments, and we're thinking of one to three. But, again, we're still working through that right now with our clinical evaluation. But we're excited about what we see early on.

Okay. Then two other quick questions and I'll get back in line. Back in 2002, I didn't think I'd be saying this to you, but your return on assets is being held back by your increasing stash of cash. Are you looking -- what are you looking to do with that cash forward, and would it include buying back shares?

In the last call, Tom, we talked about that and this is something that the Board has been open to. And stock has improved slightly from the last call, but we still think that when we're generating -- Ron for the year it's --

Over $30 million.

Over $30 million for the year. So we certainly have nice cash reserves going into 2007, and haven't identified anything that's appealing from an acquisition perspective at this point. But we are looking at ways to expand our business faster by acquisition. But I think, a share buyback is certainly something that we think is a good use of our cash.

And then, the last question. It's pretty much anathema to compete against your customers in any kind of business but particularly in yours. Have you seen anything from the standpoint of a backlash against people that might be going to other formats for their light-based aesthetics? In particular, I'm thinking have you seen any benefit -- I'm picking up some of this anecdotally, but have you seen any broad-based benefit to partnering with your doctors as opposed to trying to do maybe some home-based products?

Well, we've always described our focus as selling into the professional physician market and we'll continue to do that. We don't really view our core competencies as developing products for consumers. But all along we've also acknowledged that consumer awareness is something that we think is something that needs to be addressed in this industry. And if there's a way that consumers can become aware that these procedures are available, and it's our belief, and to my knowledge the belief of companies that are working on home-based solutions, that the professional treatment will be much more significant than anything that's in the home.

Okay. Thanks.

We'll take our next question from Phil Nalbone with RBC.

Good afternoon, guys, and congratulations on some very impressive earnings numbers. Ron, back to the cash situation, based on your projections for '07 what would you anticipate would be the incremental operating cash flow for the year?

Certainly we should be able to generate something more than $30 million, which is similar to what we did this year, when adjusted for the legal settlement payment. But we probably will return to a taxable -- to remitting tax toward the end of the year, so I think that will have some impact. But overall, greater than $30 million I think is a fair way to look at this.

Okay. Kevin, can you walk us through the sales force headcounts, both in the United States and overseas? What happened sequentially, and what do you expect will be the headcount over the next few quarters?

Right. In North America, Phil, the number of territories has been fairly constant the last couple of quarters at about 57. And I think on the last call we talked about some of the expansion we embarked upon at the beginning of this year, at the end of -- or the December month of '04 where we wanted to have a more junior sales force focus on a certain segment of the market. We didn't get the productivity we're looking for with that.

However, the portion of our sales force -- the senior portion of the sales force showed modest improvement in sales productivity. So we have since made modifications to the [alignment] of the sales organization, and we anticipate having improved productivity from the sales force as a whole. But we will continue to add on the space of 57 as we progress through the year. We're not giving any firm numbers at this point because we're continuing to work with sales management to lay out that plan.

On international, Ron?

About 22. We're remaining constant at about 22 people.

And we have sales force expansion plans in Japan for '07 as well.

And would that be by partnering, or by adding direct employees?

Predominantly by adding direct employees, Phil.

Okay. And back to the gross margin, how much of the gross margin improvement can be attributed to better mix as you, I think, work really hard to stress the Solera Platform, and to stress any product configuration that's going to get you out from under the Palomar royalty burden? Can you talk a little bit about that strategy and how it's working, and how you intend to follow through with that with the YSGG?

Yes, Phil. First of all, in terms of how we handle our customers and prospects in the field, we really don't even go down that path of trying to guide them towards a solution that's dependent on the royalty amount. We really try to understand the needs of that customer to find the right Cutera solution for that customer. Obviously working on new technology that doesn't touch on laser light-based hair removal will not be subject to the royalty agreement, so long as it does not incorporate the hair removal solution.

And then, was there a question there for Ron there?

Well, let me stay with that for a moment in terms of strategy. It strikes me that the ongoing decline in your upgrade revenues would suggest that something meaningful is happening to steer the customer base toward a standalone unit as opposed to upgrading. So, I guess I'm trying to understand why that's happening.

I think that's the price point on the Solera product, which was one of the intentions that we had with that. The Xeo products that are in many of our customers' offices are fully utilized. And so, instead of spending additional money to upgrade the unit with a price point that we have with the Solera line, they can choose that and have an additional device in their office.

Okay, great. And I guess the other part of that question, Kevin, was how the YSGG rollout would be shaped and whether there would be an effort to sort of push the Solera configuration of that, the standalone configuration?

Well, Phil, the detail, it won't be offered in the Solera Platform at this point. We will offer it as a standalone supported by the Xeo Platform. But again, we are more focused on trying to find the right solution for our customers, and we think there's an exciting market here that we can finally address with the YSGG technology.

Okay. Kevin, a final question and I'll go back in the queue. For those of us who are laymen, could you just try to be really clear about what YSGG is doing to the skin that your existing arsenal of projects for pigmented lesions and wrinkles and so forth does not do? What's the fundamental distinction here?

Well, what we're trying to do is gently treat the superficial epidermis and create a thermal effect in the underlying dermis. And it's been demonstrated in dermatology for 15, 20 years now that by heating the dermis, it results in the generation of new collagen, which improves the mechanical properties of the skin, as well as the appearance of the skin. So we're trying to do that, while minimizing the thermal injury to the treatment area.

And with this particular wavelength, it's unique because it has a absorption characteristics that allow it to operate in a zone that hasn't been explored in dermatology to date. So either it's a fairly deep significant effect in the dermis, which results in about a month of healing, or it's extremely superficial and it's almost a planing type device. So, we're operating in a zone in between those two that really hasn't been explored before.

Okay, so you're aiming this directly at the fraxel laser market, I assume?

That's right. And I think it's also worthwhile to get an education on what that really means because originally it was a technology marketed for creating discrete holes, separated -- very fine holes separated by a large amount of tissue. But there are a number of offerings on the market that really don't incorporate that type of solution to the skin.

So it's not uncommon for this market to have a lot of me too offerings in the market, but I think a lot of the organizations that have products that are going after this type of procedure aren't really fraxel-like, but there is an ability to have improved wrinkle as well as sun damaged skin.

Okay. Thank you, very much.

We'll go next to Alex Arrow with Lazard Capital Markets.

Thank you. Hello. Kevin, if I could ask about the impact of the new YSGG product on the percent royalty that the company is likely to be paying to Palomar. I understand this is probably part of your strategy of launching non-hair removal products over time, to decrease the total portion of the revenue that would fall into that royalty payment. Can you make any comments on how much this might push down that number from 3.5%?

You know, Alex, it's hard to tell at this point because we don't know what our customers are likely to do. If we have a strong mix of customers that want to incorporate the YSGG with a fully loaded Xeo product, meaning that it would be all of our hair removal solutions, and vascular solutions, and photo rejuvenation solutions, we'll get 1 percentage. If the interest is more towards people looking to add this as a standalone device, it's a completely different answer. So we'll have better -- a better sense of that as we get some experience at marketing this.

Okay. On your customer base, you've given us some guidance in the past about how it breaks down between the traditional plastic surgeons and dermatologists versus the newer types of customers, the general practitioners, OB/GYNs and in particular the medi-spas. Can you update us now on how that is going? Is it becoming more diversified? In particular, how much of your business is to medi-spas?

Ron has that data.

Yes. We mentioned a little bit earlier for all of 2006 the orders received in the U.S. were about 22% for the traditional derms and plastics, 12% into the OB/GYN market, 32% family practice/general practice practitioners, 19% other MDs and about 15% for non-physicians.

That's more the medi-spas.

Yes.

Okay. And any comment you can make about the medi-spa component of that? I mean this is part of the -- part of the [bare case] is whether that component is going to continue the way it's been. Can you give us any of your qualitative comments about the medi-spa component?

Well, in terms of the sheer numbers right now, as you're probably aware, Alex, it's relatively small relative to the 500,000 physicians that we're calling on worldwide. So we're interested in it because it is an emerging -- anticipated to be an emerging part of our business. But we have competitors that are more focused on the non-physician opportunity in the market than the physician or professional market. So we'll continue to be involved where doctors are buying equipment.

Okay, but as far as regulations that would limit the growth of medi-spas, there's nothing like that you can tell us that you're hearing from the field since you've probably got more -- your reps hear more about that than we do by interviewing docs.

It's constantly changing and we stay very close to the regulations in each state. But, again, we obviously need to be completely compliant with all the federal and state laws when it comes to this. But I think it's important to note that we're not interested in getting involved in the non-physician market.

Okay, but there is a physician portion of the medi-spa market that you are interested in growing your business?

That's right, where physicians are involved.

Okay. You just said that the legislation is constantly changing. Can you tell us what you mean by that? Is it constantly changing in a particular direction? Is it becoming such that physicians can have multiple medi-spas, whereas previously a lot of states only allowed one medi-spa to one physician? That kind of thing would be helpful for us to forecast.

Well, all I'm saying is that we have a regulatory group that stays very busy with these things, Alex. But we're continuing to expand our business across the country, so we remain bullish that even the changing landscape doesn't have an impact on the overall business opportunities across both the United States and abroad.

Okay. Thank you, Kevin.

Dalton Chandler with Needham & Company has our next question.

Hi. I was wondering if you could give us the list price you're expecting for the new YSGG?

Dalton, we don't have FDA clearance on it yet, so we can't quote pricing.

Okay.

We put in our 510k application with the FDA in December.

Okay. Could you just say relative to other projects where we should expect this to come out?

Well, again, we can't market it. The FDA gets funny about any implied marketing of a product. We're not going to be at the upcoming meeting quoting pricing for the product.

Okay. And did I understand that you do not -- there's no disposable associated with this product?

There is no disposable.

Okay. And you compared it to some of the fractional technologies, which generally have no downtime. But at the other end of the spectrum, short of an actual face left, you've got CO2, which has considerable downtime. So are you looking for an aesthetic effect that falls somewhere between those two extremes of light technology?

Well, it's our understanding from the various other products in the fractional category that there is some downtime associated with it. We're not looking for something between that and the CO2 by any stretch. We're looking for similar effects with some clinical benefits that we're hoping to demonstrate.

Okay, but your expectation is you would have a superior benefit to some of the fractional --

Right.

products [around] the market.

There are all sorts of considerations that we think are important. Patient prep can be quite extensive with some of the products out there and it can take several hours to do a procedure. And we think that our technology will allow our customers to provide this treatment in a 25 minute timeframe or so, with no post-op, no wound care or trauma. So, it's a different approach to what we think the real market interest is.

Okay, but would you anticipate a topical anesthetic as part of the procedure?

Topical, yes.

Okay. And let me just shift gears for a minute and get back to your comments about the Titan refills being flat and you think that that's due to the 15,000 shots in the Titan V versus 10,000 in the original. Can you talk about the pricing differential? Is the Titan V 50% more expensive than the original Titan?

It's moderately higher priced than the Titan S.

Okay, but it's not 50% higher?

It's not quite 50%.

Okay. All right, that's all I have for now. Thanks, very much.

We'll go to Matt Arens with Kopp Investment Advisors for our next question.

Hey, guys. Can you hear me okay?

Yes, Matt.

Great. Say, I just wanted to ask with your substantial cash balance now, could you speak to the environment for acquiring technologies and/or products?

Well, I think there's tremendous interest in the minimally invasive/noninvasive aesthetic market. And lots of startup companies are focusing on various opportunities in this space, which I think is good for the overall market as new applications are brought to the consumer. I think that expands the potential market for it.

It has gotten a bit hot from the private equity investor side. VCs are making pretty substantial investments into the space. And we have had some discussions and probing whether there's some interest in partnering with some of these early-stage companies and so far we haven't come up with anything that looks like it would work for both sides. But we're continuing to take a look at a lot of things.

Okay. Thank you.

And we'll go next to Chris Sasaoni with Eagle Asset Management.

Good afternoon. Could you help us to understand on the YSGG whether -- how close something like the fraxel technology is to this particular type of laser?

It's a different approach altogether. Again, as I said, what's described as the fractional approach has a broad range of technologies in the market that are considering themselves in that category. But the original offering in the space had a design that bored small holes into the dermis, and relied on a healing effect to generate improved cosmetic appearance. We're not generating that type of effect. This is more of a superficial effect that uses a wavelength that penetrates at a predetermined depth into the skin to create a dermal effect that will generate new collagen.

So, but there is some degree of oblation that's occurring during the administration of that wavelength of light?

In all these technologies whether it's the fractional [work or] they are vaporizing some tissue, and we're vaporizing a controlled amount. But the approach that we are pursuing results in what we call natural dressing. In other words, the area that's been ablated does not get wiped, and its re-hydrated with moisturizer after the procedure. So, it's a different technology for the same market.

[OPERATOR INSTRUCTIONS]

We'll go next to a question from Sean McMahon with Kennedy Capital Management.

Great Quarter. All my questions have been answered. Thank you.

We'll move on to Anthony Petrone with Maxim Group.

Hi, guys. Great quarter. Just to start on the sales force side, was there any turnover during the quarter or did -- domestically or overseas?

Nothing appreciable.

Just normal turnover levels; nothing unusual.

All right. And going to the Palomar royalty, if you could quantify that during the quarter in terms of absolute dollars and on a percentage basis, that would be helpful, and possibly compare it to last quarter.

It was about $1.3 million, or 4.3% of revenue. And that's up maybe -- I think it was -- last quarter it was about 4.1%, so it's in the same range.

Okay. Turning to YSGG, is there any risk that the FDA comes back and requests a PMA, just due to the longer wavelength? I mean, I don't think this is a Class III device or anything, but do you think, just from the wavelength standpoint, is that a possibility?

Well, any submission to the FDA always has risks associated with it. We don't think that we're taking huge risks with this, but until we get a definitive ruling from the FDA, we will not market the product.

And that concludes our question and answer session. Gentlemen, I'll turn the conference back over to you for any closing remarks.

Thank you for participating in our call today. We look forward to updating you on our progress next quarter. As a reminder, we'll be exhibiting at the American Academy of Dermatology meeting in Washington, D.C. from February 3rd to 6th, and will be attending the Roth/Credit Suisse conference in the coming months, and hope to see you there. Good afternoon, and thanks for your interest in Cutera.

And this concludes today's conference call. Thank you, everyone, for joining us. You may now disconnect.