Cutera Inc (CUTR) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to today's Cutera, Inc. second quarter 2007 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 of Integrated Corporate Relations.

Thank you.

By now everyone should have access to the second quarter 2007 earnings release which went out today at approximately 4 p.m. Eastern Time. The release is available on the investor relations portion of Cutera's website at cutera.com, and with our Form 8-K filed with the SEC and available on its website at sec.gov.

Before we begin, Cutera would like to remind everyone that these prepared remarks contain forward-looking statements, including statements concerning future financial performance and guidance, including revenue projections; the planned expansion of our sales force, distribution networks and customer base; improvements in our distributor and national account relationships and increase in market share, long term domestic and international growth opportunities and strategies; future spending on various aspects of our operations; and the success of our recently launched Pearl product and the development of other 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 those forward-looking statements include its ability to improve its sales productivity and increase sales performance worldwide; its ability to successfully develop and market new products; unforeseen events and circumstances relating to its operations, government regulatory actions, general economic conditions; and those other factors described in the section entitled Risk Factors in its most recent 10-Q filed today 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, 2007. On today's call I'll provide an overview of our results and Ron Santilli, our CFO, will provide additional details on our operating and financial results, and comment on 2007 guidance.

Finally, I'll provide some closing comments and open the call to your questions.

Our revenue in the second quarter was $23.9 million, which is above the $23 million revenue guidance that was provided during our first quarter call in May 2007. Diluted earnings per share for the quarter was $0.14 compared with the $0.08 per share guidance we provided on that call.

We are pleased with the progress we've made on the strategic initiatives implemented during the second quarter and expect that they will improve our future revenue and profit growth.

In mid June, we initiated revenue shipments of our new Pearl product and have been pleased with the initial customer response, both in terms of clinical results and market acceptance. Pearl has been fully released for production, and we ended the quarter in a backlog situation. As of today, we are quoting a 30- to 45-day lead time on orders.

Pearl utilizes YSGG laser technology and is designed to provide a more pronounced clinical outcome than noninvasive light-based treatments only after one or two treatments of about 15 minutes each and with minimal patient downtime and discomfort.

Patient satisfaction, as reported by doctors and their patients, is high. People are reporting improvements in the overall tone and texture of their skin; they begin feeling softer and refreshed.

Pearl allows us to compete in an emerging market of the skin rejuvenation market, which gives us an excellent opportunity to sell more Xeo systems to new customers as well as upgrades to our large installed base. Pearl contributed to an appreciable increase in upgrade revenue during the second quarter. Further, by targeting our installed base, we are creating a valuable reference base which should position us for even greater sales to new customers.

We are continuing our sales force expansion efforts in North America and have made significant progress on the initiatives we laid out at the end of the first quarter. We've also increased our sales management team during the second quarter to help facilitate this continuing sales force expansion.

As mentioned in our first quarter conference call, we've made a large number -- we have hired a large number of newly hired salespeople. And our experience is that it takes approximately nine months for a new salesperson to achieve target productivity levels. That being said, the new hires that have joined our team this year have met or exceeded our expectations.

Also discussed during the last call, we increased our distribution efforts with PSS by dedicating additional salespeople and resources to this relationship. We are pleased with the initial results of these efforts and plan on adding more salespeople to expand that team. We expect that the sales force initiatives that we undertook in the second quarter will yield higher revenue growth for the second half of 2007 and continue to expect that we'll have 64 sales territories in North America by the end of 2007.

Our international revenue grew 10% when comparing the second quarter 2007 to the second quarter 2006. It grew 17% when comparing the first half of 2007 to the first half of 2006.

In particular, we're pleased with our performance in Japan, Canada and Australia, and with our international distributor network. We just recently received the CE Mark approval to sell and market Pearl in the EU community. We believe it will help increase international sales for the second half of this year. We'll continue investing in the international market as we believe it provides us with a good long term growth opportunity.

We are continuing to generate cash from operations, demonstrated strong leverage in our business model -- demonstrating strong leverage in our business model. We invested some of these funds by repurchasing shares of our common stock pursuant to the repurchase program that we implemented during the second quarter. We ended the second quarter with over $115 million in cash and marketable securities with no debt.

During the quarter, our average selling prices remained firm. We believe that we're able to maintain our pricing because of our ability to continue introducing innovative products on a scalable multi-application platform. For example, as a result of Pearl, we are able to offer high end Xeo with yet another application.

Similarly, with the introduction -- with introductions such as Pearl, customers are able to recognize Cutera as the leading supplier of next generation quality solutions.

All the indications suggest that our market remains strong and it continues to attract a broad customer base. We're continuing to see high demand for our products outside of the core specialties. During the second quarter of 2007 we booked approximately 18% of our system orders from traditional dermatologists and plastic surgeon specialties.

In contrast, 34% of our second quarter 2007 orders came from family practitioners, 13% from OB-GYNs, 16% from other MDs, and approximately 19% from non-physician medispa businesses.

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

Ron?

Thanks, Kevin, and thanks to all of you for joining us today on our second 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. 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 all stock-based compensation expenses and the patent litigation settlement charges, 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.

Second quarter 2007 revenue was $23.9 million, a 2% decrease compared to the second quarter of 2006. Also, net income for the second quarter of 2007 was $2 million, or $0.14 per diluted share, compared to a net loss in the second quarter of 2006 of $9 million, or $0.73 per diluted share. The loss in the second quarter of 2006 was due primarily to the patent litigation settlement expense of $18.4 million, or $0.80 per diluted share, net of taxes.

Non-GAAP net income for the second quarter of 2007 was $3 million, or $0.21 per diluted share, compared with non-GAAP net income of $2.8 million, or $0.20 per diluted share, in the second quarter of 2006.

Product revenue in the second quarter of 2007 decreased by 13% compared to the second quarter of 2006. These results reflect lower levels of revenue in the U.S. and were expected as we continued executing on the strategic initiatives that we began to implement in the second quarter.

As we mentioned earlier on the call, we've assigned dedicated sales management to the PSS relationship and are continuing to hire seasoned salespeople throughout North America. Although the return on these initiatives will not be immediate, we expect them to contribute to higher revenue growth in the second half of this year.

Upgrade revenue in the second quarter of 2007 increased by 84% compared to the second quarter of 2006. This growth was attributable to upgrades to our multi-application Xeo systems as well as to our new Pearl product, which commenced shipping in mid June.

We are pleased with our initial customer response to this new product and application, and anticipate our upgrade business will continue to grow in the second half of 2007.

Service revenue in the second quarter of 2007 increased by 47% compared to the second quarter of 2006. We expect this revenue source to continue growing as the size of our installed base continues to increase and customers continue using our services [to remain] their product after their initial warranty periods expire.

Titan refill revenue in the second quarter of 2007 increased by 10% compared to the second quarter of 2006. Titan remains a popular application that is sold on a majority of our Xeo systems. We expect this revenue to grow as we increase the size of the installed base of Titan owners.

I'll now address our operating performance. Our gross margin in the second quarter of 2007 was 67% compared to 68% in the second quarter of 2006. We estimate our gross margin to be in the range of 68% to 70% in the second half of 2007 as we anticipate higher revenue resulting in improved leverage.

Sales and marketing expenses for the second quarter of 2007 were $9.2 million, or 38% of revenue, compared to $8.3 million, or 34% of revenue, for the second quarter of 2006. The increased expenses were due primarily to our international expansion efforts. Although we're expecting to achieve higher revenue relative to first half of this year, we believe that our sales and marketing expenses as a percentage of revenue will decline due to favorable leverage. We expect sales and marketing expenses for the second half of 2007 to be in the range of 31% to 36% of revenue.

Research and development expenses in the second quarter of 2007 were $1.9 million, or 8% of revenue, compared to $1.6 million, or 6% of revenue, in the second quarter of 2006. We intend to continue increasing our investment in this area and believe our R&D spending for the remainder of 2007 will be in the range of 6% to 8% of revenue.

General and administrative expenses for the second quarter of 2007 were $2.9 million, or 12% of revenue, compared with $4.2 million, or 17% of revenue, in the second quarter of 2006. This decrease in administrative expenses reflects $1.7 million in legal expenses incurred in the second quarter of 2006 in connection with our patent litigation, which was settled in that quarter.

For the remainder of 2007 we expect general administrative expenses to be in the range of approximately $3 million to $3.5 million per quarter.

Our effective income tax rate for the second quarter of 2007 was 33% of revenue -- or 33%. We expect our effective tax rate to be approximately 33% for the remainder of 2007.

Turning to EPS, 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 second quarter of 2007 was $0.14. For the same period, non-GAAP net income per diluted share was $0.21. This $0.07 difference represents the after-tax impact of the $1.4 million non-cash stock-based compensation expenses recorded in accordance with FAS123R.

Turning to the balance sheet, our financial position continues to remain very strong. As of June 30th, 2007, we had over $115 million of cash and marketable securities. This represents over $8.50 per outstanding share. For the second quarter of 2007, cash generated by operations was $5.7 million. Accounts receivable net at the end of the second quarter of 2007 was $9.3 million and the DSOs were 36 days. Our DSOs continue to remain among the best in the industry and within our target of 35 to 45 days due to a thorough credit approval process and strong collection efforts.

Inventories as of June 30th, 2007 increased slightly compared to inventories on March 31, 2007 as a result of our planned ramp-up of raw materials for our new Pearl product.

During the quarter we implemented a prearranged stock repurchase program that authorizes us to repurchase up to $25 million of our common stock. Under its terms, trading could not begin until June 15th. By June 30th we had repurchased 123,800 shares of our common stock for approximately $3 million.

Moving to guidance, for the third quarter of 2007 we expect revenue of approximately $28 million with GAAP and non-GAAP net income per diluted share of approximately $0.21 and $0.28 respectively. For the full year 2007, we expect revenue of approximately $111 million with GAAP and non-GAAP net income per diluted share of approximately $0.88 and $1.15 respectively.

Non-GAAP net income per diluted share excludes the after-tax impact of non-cash stock-based compensation expenses recorded 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.

Thanks, Ron.

We made significant progress on the North American sales force initiatives we discussed on our first quarter conference call. We have increased our sales management team to help facilitate our sales force expansion. We have added dedicated people to our PSS relationship. We are pleased with their initial results and are adding more salespeople to that team.

We're seeing promising signs from our newly hired sales reps and continue to expect to have 64 sales territories in North America by the end of this year. We remain on track to achieving higher revenue growth rates in the second half of this year.

We are excited about the initial customer response of our new Pearl application and expect that Pearl sales will contribute significantly to our second half revenue and beyond. Pearl, as with our earlier introduction of Titan, will allow us to compete in a new market segment and will provide us with excellent opportunities to sell more Xeo systems to new customers as well as upgrades to our install base.

We have additional projects under development, and will be telling you about these in the coming quarters.

The fundamentals of our business remain strong. We have one of the most diverse product lines in this industry, enjoy high operating margins, and manage a strong balance sheet with over $115 million in cash and marketable securities with no debt.

We're enthusiastic about the opportunities for our Company as we continue to focus on developing new products and applications and expanding our worldwide distribution channels. We expect these efforts will enable us to increase our share in the growing market for light-based aesthetic systems.

Now, I'd like to open the call to your questions.

Operator?

Thank you.

(OPERATOR INSTRUCTIONS)

And we'll take our first question from Phil Nalbone with RBC.

Thank you very much. Good afternoon. Let's start with the share repurchase program, Ron. I wanted to be clear on the details you gave us. The roughly $3 million that you deployed in that repurchase, did that take place in that two-week window prior to the end of the June quarter?

Yes, it did.

Okay. Have you been active in the market since the end of the quarter?

We have a 10b51 that's in effect that was put into effect May 15th, and it became effective June 15th. And so it is still active.

Okay, very good.

Let's turn to the backlog on the Pearl system. Kevin, why the very significant turnaround times and does that apply just to the stand-alone units or does that include also the upgrades and the fully featured Xeo platform?

Oh, Phil, we're just delighted to see the response in the marketplace with the introduction of Pearl. As you know, this is a brand new technology. It's hard for us to gauge what the market response would be. We're very pleased with the orders that we got in the second quarter. And we are able to manage the strong interest that we have.

But to have a backlog situation is something that we think is overall positive for us, and we think we'll be able to expand our manufacturing operations to facilitate the demand in the marketplace.

Kevin, can you give us some sense for what your installed base is currently? And as you think about the kind of numbers that you're going to need to produce to achieve your objectives for the second half of the year, what would you say would be the number of Pearl customers that you would achieve by the end of the year? What percent of your installed base is likely to be Pearl-ready by the end of the year?

So, Ron, maybe you can comment on the installed base first?

Sure. The installed base is approximately 3,600 units at this time, Phil, with about two-thirds of those coming in the U.S.

And so getting back to your question, obviously the -- one of the things that really resonates with our customers is the fact that we are committed to finding a way to upgrade all of our installed base to new applications, and Pearl is the latest example of that. And the response from our existing customers has been very positive.

But more important for us is to offer the market new customers a broader range of applications. And so we really are looking to look at Pearl as opening doors for customers that are looking for a more pronounced clinical result than what we've been able to offer in the past.

Okay, Kevin, last thing for now, can you give us the U.S. direct sales force headcount, how many people you added during the quarter on a net basis?

Let's see, I think we added about six people during the quarter, Phil.

And how many did you lose?

We lost about four, so we net up two.

Great. Thank you very much.

And moving on, we'll take our next question from Dalton Chandler with Needham & Co.

Good afternoon.

Hi, Dalton.

You mentioned that Pearl contributed significantly to the 84% growth in upgrades, but it didn't ship until mid-June so it seems like it couldn't have had that much impact. Could you maybe quantify that for us a little better?

Yes, Dalton. (inaudible - background noise) was up in the quarter significantly, which wasn't just Pearl. We saw a lot of other uptake from our CoolGlide to Xeo upgrades in addition to Pearl, which just started shipping in the last few weeks of the quarter. So it was a variety of things that led -- that contributed to that increase, including Pearl.

Okay. Could you give us a sense of what the Pearl contribution was?

We don't disclose the specifics; we just talk about the upgrades. But we're very happy with that level of contribution the last two weeks.

Okay. And just on the orders you're taking from Pearl, how have they -- what's the mix been between upgrades versus new customers?

Yes, we -- Dalton, it's Kevin. We had a significant number of Pearl orders and it exceeded our expectations. I think if you look at what we've done historically with the Titan launch, one of the first things we focus on is the installed base. These are Cutera customers that are familiar with our technology and are typically inclined to look at adding more capability to their platform. So we had a significant amount of upgrade business.

But we are also finding that Pearl is opening doors for us to sell new equipment where we haven't been able to provide an answer for more pronounced clinical result, and Pearl's been able to successfully achieve that.

Okay. And then just a final question on the Titan refills, up 10% on a -- year-over-year on the quarter. But it's been somewhat flattish for the last few quarters. I think last quarter you talked about some changes you'd made to the [shot count] in the refills. Can you just comment on whether you've worked through that issue and what we should expect from Titan refills going forward?

Yes, Dalton. The Titan application, as Ron mentioned, continues to drive the lion's share of our Xeo sales. And so it still remains a very popular application.

Recently, we commissioned an outside group to survey our customers, our Titan customers, to get a better sense of how they view the application. And even the low volume people we targeted in the study came back with a response that they're very pleased with what they're seeing with Titan.

And unlike some of the other offerings in the marketplace, our customers are able to utilize Titan on a per pulse basis as opposed to a fixed price for a disposable handpiece. So it's our belief that they're probably not using as many pulses per procedure as we've seen in the past but the customer is delighted with what they're seeing with Titan.

Okay, but the installed base, I'm assuming, then has continued to grow faster than the growth in refills?

That's correct.

Okay. All right, thanks very much.

And we'll now hear from Amy Sullivan with Piper Jaffray.

Hi, guys. Just a couple of quick things. One housekeeping thing on the numbers. You went through your split of the customer types and I missed a couple of numbers there. Can you go through those one more time?

Sure, I can grab those. Okay, we were talking about 18% of them coming from the traditional dermatologist and plastic surgeon specialties, 34% from family practitioners, 13% from OB-GYNs, 16% from other MDs, and approximately 19% from the non-physician medispa business.

Okay, thanks.

And then you mentioned the raw material increase in the inventory. I also -- I think it looks like the finished goods is also trending up some. Is there anything in particular that's causing that?

No, nothing in particular. Probably - clearly, we have to ramp up on raw materials for Pearl just because it's a new product being added to our line. The finished goods ramp-up would also support the higher revenue base that we anticipate in the second half.

Okay. And then on the product revenue [that's sort of] down again just slightly sequentially from Q1, I think Kevin mentioned that ASPs were firm. Is there something there as far as a mix that might be contributing to that or is it just sales force needing to ramp back up?

Yes, Amy, as you know, in the first quarter we talked about the initiatives to get the business back on track and the areas that we identified as responsible for the shortfall in the first quarter. So our plan was to achieve $23 million in revenue this quarter. We slightly exceeded that, but obviously the growth ramp for the second half is what we're really focused at this point.

Okay. So as far as the mix between Xeo and Solera and stuff, it's still somewhat consistent with what you were -- ?

It's consistent.

Okay.

We're pleased with the average selling prices.

Okay. That's it for me. Thanks.

And moving on, we'll take our next question from Anthony Vendetti with Maxim Group.

Good afternoon, Kevin. Good afternoon, Ron.

Hi.

Hi, Anthony.

I wanted to talk a little bit about the ASPs in regard to the Pearl. And then overall you said you're pleased with them, so are you saying that they're stable? And then could you talk about the Pearl in terms of the ASP as a standalone or as part of Xeo, and then the margin on that in terms of the gross margin?

So, you got a lot of questions there. Our blended product sale ASPs, we're pleased with that. In terms of Pearl and the various flavors of that, we're really focused on generating new Xeo sales with Pearl, and so our customers have the ability to purchase Pearl as a standalone product on a Xeo platform. Or where we think most of the business will be will be Pearl as part of a number of Cutera applications afforded by the Xeo platform.

The upgrade opportunity, 3,600 installed base is clearly an area where we can offer them a unique solution with their existing platform. And the upgrade price for that is set somewhere in the --

$50,000 range.

-- $50,000 price range.

Okay. And as a standalone, how much is the Pearl?

$75,000.

$75,000 for the Pearl-only solution and approaching $200,000 if they offer it in combination with all the other applications Xeo can support.

Okay. And the gross margin on some of these new products, like the Pearl, should we expect those margins to be slightly higher than some of the older products and therefore eventually start to see an uptick in the gross margin?

Yes, we target new product introductions slightly higher gross margins of what our current consolidated margins are.

Okay.

And, Anthony, another consideration for the second quarter is that we built the manufacturing organization for the larger top line expectation. And so as the revenue growth is expected to improve in the second half, we'll see some benefit there in terms of manufacturing absorption.

Okay. And lastly on the percent of revenues and then the percent of growth in the U.S. and international? I think you may have mentioned that but I missed it.

We went through that.

I think the U.S. -- I've got the numbers here.

So 10% international for the Q2 comparisons and 17% growth comparing the first half of this year to last year. And then --

And during the quarter, U.S. was 63% of our total revenue of the $23.9 million and international was 37% of the total.

Okay. And, Kevin, you were saying international growth year-over-year was 17%?

17% comparing the first half comparison of '07 to '06.

Okay, first half. Okay.

And U.S. was a little bit lower?

Down 1%.

Yes.

Down 1%.

-- for the same six month period.

For six months, okay. Okay, great. Thanks.

And our next question comes from [Rob Hallisey] with BlackRock Financial.

Hi. Thank you.

Just a quick question on Pearl upgrade versus new sales, Kevin. Is this the same as most other new product launches in that you might focus on upgrades for the first couple or few quarters and then the product sales really start to kick in? How should we think about that?

Yes, you're right. I mean, I think it's important that we were able to create an installed base of Pearl customers. And we tend to focus on our existing installed base in order to create that. And we saw that with the Titan launch where the first wave was exclusively in the form of upgrades. And that really did lay the foundation for future systems sales to new customers. So it's a very similar approach that we've taken in the past.

But I think one of the things that -- perhaps of note is the fact that with more feet on the street, we did see an uptick in our upgrade business. And we believe that a lot of our new sales reps are calling on the existing installed base and getting them introduced to some of the new applications. And we think that had a beneficial impact on our upgrade business during the quarter.

And can I ask of the 3,600 installed base, two-thirds in the U.S., are all of those upgradeable to Pearl?

All of our customers have an upgrade path to have Pearl technology in their practice.

Okay. And then one final question. While you mentioned you were pleased with your ASPs during the quarter, did you see any competitors out there competing on price? One in particular said that they might have done it a little. But would it have affected any of your sales, do you think?

The average selling price will bounce around from quarter to quarter, but we're not seeing anything, looking at the last four quarters, that gives us concern. But we do monitor it and we listen to how our competition is seeing their business develop as well.

But all in all, I can't say that we're -- that we see anything in our business that leads us to believe that we've got concern that average selling prices are going to be under pressure.

Great. Thanks very much.

And we'll move next to Gerry Heffernan with Lord Abbott & Co.

Good afternoon, everybody.

Good afternoon.

In regards to the Pearl upgrade -- we've talked about this in the Xeo platform -- is there any reason why customers out there may have abstained or put off a purchase of another upgrade item of yours waiting for the Pearl system to be available in the market?

It's hard to analyze the buying motivation for our customers whenever it comes to an upgrade. But oftentimes it's our experience that a customer can opt not to upgrade for several years and then whatever -- for whatever reason, there's a trigger point, not just that one application, but usually it's several applications when they decide to upgrade.

So we've had a number of new applications and technologies that we've developed in the last several years, and I think that the trigger point for each customer is different.

Okay. And as a follow-on, someone else had asked about the direct sales force, that there were six people added, four lost, giving a net plus two. But I don't know if you gave a final number as to where we were at the end of the period for the U.S. direct sales force.

Right. We have a -- in North America we have 57 territories at this time.

Okay. And going to 64, as per the release?

Going to 64 by year-end, yes.

Okay. Thank you very much.

Thanks.

And we'll hear next from Jose Haresco with Merriman.

Good afternoon, gentlemen.

Hi, Jose.

Hi. How you doing, Jose?

Just starting at the top line, you've raised guidance at $111 million for the year and we're typically -- we're heading into what's typically the weakest quarter of the year sequentially. Could you give us some sense of where the growth into Q3 and Q4 is going to come from? Is it the system sales or is it a lot of that -- is all of that upgrade?

We're certainly not -- we didn't develop Pearl just as an upgrade opportunity, Jose, so we're expecting to generate a more significant portion of our revenue coming from new system sales with introduction of Pearl.

But we continue to see signs that the overall market is performing well and we believe that the trailing 12-month growth rate is somewhere close to the mid 20s. And with our sales force expansion, we think that we're going to have a lot more feet on the street to have a big impact in driving our business going forward.

Is the -- given your experience with the Titan, how long does it take to get to a stable transition rate for something like the Pearl? Because it obviously doesn't happen in one quarter.

What do you mean by stable transition rate?

Meaning you've got most of your people transitioned over.

Most of our people meaning our customers?

(inaudible) our customers transition to a Pearl, where you can start selling -- you can focus on [the new boxes]. You've got 3,600 accounts, two-thirds in the U.S. When would you expect the majority of those would have upgraded to a Pearl?

We have customers today that are upgrading to Titan, and that's been around for several years now, Jose.

So as I said, it's hard for us to understand how our customers view the upgrade opportunity each time we launch a new application. But we tend to have long-term relationships with our customers and frequent upgrading is part of the Cutera model.

As a point of reference, Jose, Xeo was introduced in 2003 and this past quarter we had quite a few customers go from the CoolGlide platform to Xeo, which of course has been around for a long time. So it really takes years for the installed base to truly get penetrated.

Okay. Just one last question. You mentioned you're planning on moving to 64 reps by the end of the year. Could you give us a sense of how these new folks are either the same or different than your existing reps? Are they as tenured? Are they primarily folks from other laser companies? Are they coming in from other device companies?

Well, Jose, I think first of all, kind of looking back where we came from, we initiated a junior sales force program last year and then reported that we weren't satisfied with the productivity of that expansion and of the 16 salespeople that we had.

And in the first quarter call we pointed out that we're resuming the practice of having senior salespeople. And the profile of that rep is a person that sold typically into the medical space and preferably capital equipment experience.

We have in the quarter really stepped up a lot of the activities associated with hiring, and the recruiting efforts have been more extensive. And we've directed resources to really improve both the quality of our recruiting on the candidates as well as the quantity. We have a very significant sales force expansion planned for the year, and in order to accommodate that we mentioned that we've expanded our sales management organization to facilitate that.

So there are a number of components to it and we believe that the caliber of salespeople that we've been able to recruit during the quarter was outstanding. And I think it's also important to recognize that most of the people that we're recruiting are not from within this industry.

Okay. Thank you very much.

And our last question today comes from Sean McMahon with Kennedy Capital Management.

Hi, guys. Can you just comment on the PSS program?

What specifically would you like to know about PSS?

Well, you had the new initiative. Can you comment how -- I know you said it's going well. Can you just give me how many markets have you rolled that out in and how many you plan to roll it out?

Well, I think we mentioned on the call that we were exploring a new sales organization model with PSS and we talked about it on the first quarter conference call.

At that time we had identified four salespeople to focus on the PSS relationship exclusively and we set really the quarter as the go, no go, in terms of whether to continue with that model or to discontinue it.

We are pleased with the results from these four salespeople that were dedicated to the relationship. And as we mentioned in the script, we are now taking actions to expand on this model such it will have more PSS dedicated salespeople.

So that'll be part of the 64 total salespeople or is that separate?

That's part of the total. So we're expecting productivity levels to be on par with the existing model and the PSS model.

Okay, thank you.

Okay, there being no further questions, I'd like to thank you for participating on our call today. We'll be presenting at a number of conferences later this year, including the September 20th Maxim Growth conference. We look forward to updating you on our progress next quarter.

Good afternoon and thanks for your interest in Cutera.

That does conclude today's conference. We appreciate your participation, and wish you all a great day.