Cutera Inc (CUTR) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen and thank you so much for standing by. Welcome to the Cutera, Inc., fourth quarter 2007 conference call. At this time all participants are in listen-only mode. Following today's presentation instruction will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS) . As a reminder this conference is being recorded today, Monday, the 11th of February 2008. I will now turn the conference over to Mr. John Mills. Please go ahead,

By now everyone should have access to the fourth quarter and full year 2007 earnings release, which went out today at approximately 4:00 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 at its website at SEC.gov.

Before we begin, Cutera would like to remind everyone these prepared remarks contain forward-looking statements including statements concerning the planned improvements from our distribution network, long-term domestic and international growth opportunities and strategies, future spending on various aspects of our operation, the success of our recently launched Pearl product, and the development and acquisition of other new products and applications and their anticipated introduction dates, and increase in market share.

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 improve sales productivity and increase sales performance worldwide, the length of the sales cycle process, its ability to successfully develop and acquire new product and market them both as installed base and new customers, unforeseen events and circumstances relating to its operations, government regulatory actions, general economic conditions, and the other factors described in the section titled "Risk Factors" in its most recent 10-Q filed November 5, 2007, with the Securities and Exchange Commission. These forward-looking statements do not guarantee future performance and therefore you should not rely on them in making investment decision without considering the risks associated with such statements. Cutera also cautions you to not place undue reliance on forward-looking statements 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 will turn the call over to the company's President and Chief Executive Officer, Mr. Kevin Connors.

Thank you, John. Good afternoon. Thanks for joining us today to discuss Cutera's results for fourth quarter and year ended December 31, 2007. On today's call I will provide an overview of results and then Ron Santilli our CFO, will provide additional details on our operating and financial results. Finally, I will provide closing comments and open the call to your questions. Our revenue for the fourth quarter 2007 was $26.5 million, 13% lower than $30.5 million reported in the fourth quarter 2006. Revenue for the full year 2007 grew by 1% to $101.7 million, from $100.7 million reported in 2006. U.S. revenue for the fourth quarter 2007 was $15.4 million or 27% lower than the amount reported in the fourth quarter 2006. For the full year our U.S. revenue was $64.1 million or 8% lower than the amount reported in 2006.

2007 was a transitional year where we made significant investments in our business which included the restructuring and expansion of North American direct sales force, increasing our North American sales management team to help train and manage the sales force expansion and position us for future growth and expanding our product portfolio with the introduction of our Pearl application. Shipments of Pearl as part of a multi-application system to new customers and as an upgrade to our installed base commenced in June 2007. We mentioned during our third quarter call that we are disappointed with the new system sales that included Pearl. We are now pleased to report that during the fourth quarter the Pearl application accounted for a greater portion of our new system orders. We are continuing to receive positive customer feedback and clinical results and have additional clinical studies underway. We expect that Pearl will become an even more important part of our product offering in 2008 and beyond.

Now I would like to discuss the decrease in our U.S. revenue. As noted on our third quarter conference call we believe that domestic growth rate in our industry has slowed which has led to a challenging environment for our new and restructured North American Sales organization. However, we now have in place a seasoned sales team and are pleased with the level of talent of our new sales hires. We ended the year with 60 sales territories through out North America and don't have any expansion plans until we see signs of improved productivity. We will remain focused on improving North American sales performance in 2008. Our relationship with PSS strengthened in the latter half of 2007. They accounted for approximately 14% of our sales for the year. We are pleased with their continuing significant contributions to our revenue and are encouraged about our growth opportunities for PSS. We remain focused on the important -- on this important relationship in 2008.

Our international revenue for the fourth quarter and full year 2007 grew by 19% and 22% respectively when compared with same periods in 2006. The growth in revenue primarily came from sales to Australia, Japan, many European countries and Latin America. During the past few years we've made significant investments in international markets, specifically in 2007 we added new sales and service people to our international subsidiaries, appointed new distributor and expansion geographies, opened a second office in Japan and attained regulatory clearance to market our new product -- our new Pearl product abroad. Our long-term strategy, is to have half of our business come from outside the United States, we believe that our continuing investments in the international markets positions us to continue growing international business in 2008 and beyond. We are continuing to generate cash from operations demonstrating the strong fundamentals of our business model. We ended the year with approximately $107 million in cash, or $8.35 per outstanding share and cash in marketable securities with no debt. This $107 million figure is net of $25 million stock repurchase program completed earlier in 2007. We are continuing to see high demand for our products outside of the core specialties.

During the fourth quarter 2007 approximately 30% of our sales orders came from traditional dematologists and plastic surgeon specialties. The rest of the fourth quarter 2007 orders came from the non-core specialties including 28% from family practitioners, 12% from Ob-Gyn, 11% from other physicians, and 19% from Medispa businesses. Now I would like to turn the call over to Ron to discuss our financials in more detail.

Thanks, Kevin, and thanks to you all for joining us today on our fourth quarter and full year 2007 conference call. Before I begin please note that all of our historical financial performance data 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 after tax impact of all stock-based compensation expense. We believe that this non-GAAP information provides you with an 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. Beginning with our first quarter 2008 earnings release we plan to provide only GAAP information since stock-based compensation will be included in historical 2007 numbers thus providing you with meaningful and consistent comparison.

Fourth quarter 2007 revenue was $26.5 million, a 13% decrease when compared to the $30.5 million for the fourth quarter 2006. Revenue for the full year 2007 was $101.7 million, a 1% increase from $100.7 million in 2006. Net income for the fourth quarter of 2007 was $3.6 million or $0.27 per diluted share. Non-GAAP net income for the fourth quarter of 2007 was $4.3 million or $0.32 per diluted share. Net income for the full year of 2007 was $10.5 million or $0.74 per diluted share. Non-GAAP net income for the full year 2007 was $14.2 million, or $1 per diluted share.

The difference between GAAP and non-GAAP net income of EPS represents the after-tax impact of non-cash stock based compensation expenses recorded in accordance with SFAS-123R , which was $1.3 million in Q4 '07 and $5.6 million for the full year 2007. Product revenue for the fourth quarter 2007 decreased 27% when compared to product revenue for the fourth quarter 2006. This is primarily a result of lower product revenue in the U.S. The adoption rate for Pearl by new customers improved in the fourth quarter 2007 compared with the third quarter 2007.

Pearl is gaining traction in the market and we expect sales of new systems with the Pearl application to continue increasing as we further develop our clinical support, build our reference sites, and educate the market. Upgrade revenue for the fourth quarter of 2007 was $3.5 million representing a growth of 104% when compared to upgrade revenue for the fourth quarter 2006. This growth continues to be driven by the Pearl application as our existing customers continue to show interest in this new technology. Service revenue for the fourth quarter 2007 increased 59% to $2.8 million when compared to $1.8 million in fourth quarter of 2006. 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 for the fourth quarter 2007 increased by 24% to $1.3 million compared to $1 million in the fourth quarter 2006. Titan remains a popular application that run with a majority of ZR systems.

I'll now address operating performance. Our gross margin in the fourth quarter of 2007 was 63% compared to gross margin of 73% in fourth quarter 2006. Our full year 2007 gross margin was 66% compared to gross margin of 70% in 2006. The decrease in gross margins for the fourth quarter was mostly due to lower than expected revenue. Historically the fourth quarter is our strongest revenue quarter of the year. However, our fourth quarter 2007 top line did not allow us to properly leverage against our operating expenses. In 2008, with quarterly revenue of $26.5 million, we'd expect our gross margin to remain at approximately 63% and to increase at higher levels of revenue. Full year 2007 margin was also impacted by the royalty expenses associated with our patent license which we incurred through all of 2007 but for only three-quarters in 2006. Our royalty rate continues to be approximately 4% of total revenue per quarter.

Sales and marketing expenses for the fourth quarter 2007 were $9.4 million, or 36% of revenue compared to $7.9 million or 26% of revenue in the fourth quarter 2006. The increase in expenses in Q4 '07 in absolute dollars was due primarily to expenses associated with our worldwide sales force expansion. The increase in expenses as a percentage of revenue was due primarily to lower productivity of our North American sales force. Research and Development expenses in the fourth quarter of 2007 were $1.7 million or 7% of revenue compared to $1.9 million or 6% of revenue in the fourth quarter of 2006. We intend to increase our investment in this area in our continuing pursuit to develop new and innovative products and applications. General and administrative expenses for the fourth quarter of 2007 were $2.7 million or 10% of revenue compared with $3.6 million or 12% of revenue in fourth quarter 2006. The decrease in G&A expenses in the fourth quarter of 2007 compared with the fourth quarter 2006 was primarily due to nonrecurring expenses incurred in Q4 2006.

Our effective income tax rate for the fourth quarter and full year 2007 was 6% and 24% respectively. The rate in Q4 '07 was significantly lower than we had expected due to the lower than expected pretax profit for the full year of 2007. There is uncertainty in the projected tax rate for 2008, it will vary based on the projected revenue, the resulting profit before taxes, and whether U.S. Congress ratify the Federal R&D tax credit beyond 2007. For modeling purposes we suggest using an effective tax rate of approximately 30% for 2008.

Turning to the balance sheet, our financial position and cash flows from operation continues to remain very strong. As of December 31, 2007, we had approximately $107 million in cash and marketable securities. This represents approximately $8.35 per outstanding share. For the fourth quarter and full year of 2007, cash generated by operations was $5 million and $16.9 million respectively. Net accounts receivable at the end of the fourth quarter of 2007 was $10.7 million and the DSOs were 37 days. Our DSOs continue to remain among the best in the industry and within our target of 35 to 45 days due to thorough credit check approval process and strong collection efforts. Now that I've concluded my overview of Cutera's financial performance I'll turn the call back to

Thanks, Ron. 2007 was a challenging year for Cutera as we experienced slower growth in the domestic market. We, however, remain confident about trends in our industry and our business and we believe that worldwide market for laser and light-based aesthetic equipment will continue to grow in 2008 and beyond. We made significant investments in our business during the year, including the restructuring and expansion of our North American sales organization and expect to leverage that team in the coming years. We are continued to experience solid growth in our international business both through our direct sales and expanded distribution network, and we remain excited about Pearl's significant potential as evidenced by its continued market acceptance. We believe that as we continue developing clinical support and educate the market about the benefits of Pearl over competing technologies we confirm and prove our performance in the skin rejuvenation market. We have one of the most diverse product lines in the industry and understand the importance of intermedial product launches . Later this year we plan on introducing a new product which historically has always provided us with a strong catalyst for growth. We enjoy healthy operating margins, generate positive cash flow and manage a strong balance sheet with $107 million in cash and marketable securities with no debt and the most valuable asset isn't even shown on our balance sheet it's our employees. I'd like to take this opportunity to thank our employees and partners worldwide for their continued loyalty, dedication, and valued contributions. We're all committed to making Cutera the leading global provider of laser and light-based aesthetic equipment and believe we have the necessary improvements and develop the appropriate infrastructure to achieve higher performance in 2008. Now I would like to open the call to your questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) . Our first question is coming from the line of Thom Gunderson with Piper Jaffray. Please go

Hi, guys. I think investors are mostly concerned about the the current economic environment, what the consumers doing, et cetera and the connect the dots here is that if the consumers are spending less on elective product, if you will, then doctors are less likely to buy capital equipment. I'm not sure if that's a correct equation. I think in tough times I might want to get extra income in from something like a laser but that's currently the worry. Can you give us, Kevin, any -- you're talking to sales guys, you're talking to your customers, you're out in the field. Can you give us a sense of the way the buy, the purchase equation may have changed over the last three of six months?

Sure, Thom. Well first of all I think this is a phenomena that we believe is isolated to the U.S. market. We're continuing to see signs of strength in our international business and don't anticipate that changing any time soon from what we can see here today. The business model that these products represent for doctors continues to remain compelling. The ROI is one of the strongest tools that we have to present this equipment to doctors. They recognize that they can generate incremental revenue for their practice, and in some ways it's a defensive move for doctors that are seeing pressure in other parts of their practice. What we've -- what we've seen in the past is that new applications have been a strong catalyst for growth, and I think we're looking to extract more from the Pearl opportunity and we think it's important for us to have some new applications in the future and we look forward having to something to talk about later in the year. But with all that said, we still think the U.S. market is growing. The growth rate is probably half of what it was about a year ago.

And the doctors that either you're getting indirectly through the sales force or directly through your conversations there, their views of the market out there?

Well, we get mixed bag of comments. I think a lot of the physicians are just more jittery now about making a major capital equipment purchase. But we think that from the discussions we've had with customers that they certainly aren't turning the off these purchases, and I think if we look at the growth rate and the overall market it supports that the U.S. market is growing. It's just at a cooler rate.

Okay. And then switching to the income statement, Ron, gross margin of 63%, you it attributed to lower sales, except in Q1 and Q2 you had 23 and 24 million in sales with higher gross margins. What -- is there any pricing pressure that would contribute to lower gross margin in Q4?

Not pricing pressure per se, we had ramped up projecting a higher revenue base. When we didn't realize that, that caused a depression in the growth margin in our fourth quarter. You will see in that our other Q4 of the prior years, since it is such a big revenue period for us, we typically are ramped up, and we were prepared for it this year. You can also see in that the inventory side that had grown from the end of last quarter.

But if we look at just simply if we look at cost of the goods that you sold, were there any changes in parts or labor?

Not significantly, no.

So we're talking about overhead?

Yes.

Is there anything specifically that when you ramp up, that changes the overhead?

There's absorption issues that you see in both manufacturing and service.

Okay. And then, Kevin, just -- can you help us on the territories? I had 64 at the end of Q3, 56 U.S. territories and 8 for PSS, and now 60. Can you make that an apples and apples comparison for me?

Yes, we ended the year with the 60 number, so we dropped the four territories, but --

But still have eight dedicated to PSS?

In that range, it's six to eight, yes.

Okay. That's it. I'll get back in queue. Thanks.

Thank you. Phil Nalbone with RBC Capital Markets, please go ahead.

Good afternoon, Ron let me take a shot at this, you've given us some tax line guidance for '08. Do you care to give us any other variables on the income statement for '08?

It's difficult without the top line specific guidance which we're not providing it makes it difficult to give the other guidance line so at this we don't have any further guidance.

What is it going to take, Kevin for Cutera to grow its U.S. business at a market rate of growth in '08?

That's the question we're focused on, Phil. As you know historically we've been able to exceed the market growth rate especially in the United States for many years and '07 was an unfortunate departure from that trend. The things that we've done historically that have made that achievable is to launch new applications, and we've been fortunate that we've been successful with those in the past, and continue to expansion of our sales organization and customer support group, and we're sticking with those key initiatives as the guiding principals for 2008.

You gave us a vague time line here, later in the year for a new product. Can you give us some sense for how much later, and is there a major gating factor here, such as a regulatory approval or validating the technology?

We're not going to get into it much. We haven't disclosed what we're working on with our sales organization so for those reasons it's important we keep that confidential. We're hopeful to have revenue during the year from the new product launch.

Okay. Will your ability to basically grow in line with the market depend on that new product launch?

Well, I think that's kind of the backdrop for the industry. We have to constantly launch new products. And so we try to launch a new product every year, so it's kind of in line with that. Historically that's been responsible for a significant part of our revenue during the year. So we're hopeful that we will get measurable contributions from that.

Okay. Kevin, at the AAD meeting we saw a lot of companies offering product for the ablative end of the skin rejuvenating spectrum, can you talk about that opportunity and is Cutera prepared to address that at some point in the not to distant future. Will there be a follow on to Pearl at that sector of the market?

We don't want to tip our hand terms of what we've got going on in the lab and our clinical work. Clearly we are continuing to see the skin rejuvenation market evolve and I think more invasive therapies have become popular, and I think that's one of the things we've learned from the product launches from our competitor at the meeting. So we try to keep our ear very close to the ground in terms of what the market trends are and respond to them accordingly.

Okay. Kevin, can you give us some sense for what your expected level of productivity is per North American sales rep over the coming year, the numbers would suggest about $250,000 worth of revenue per rep in the United States during the most recent quarter. Can you comment on kind of the acceptability of that and where you think we stand with the productivity of that 60-person group?

Well, in past calls we have talked about productivity levels from senior sales people, people that have been with the company for nine months or more and the numbers we've seen historically have been north of a $1.5 million per rep that's in that category. So we don't see anything out there today that that gives us pause to reconsider that so I think a target of $1.5 million and higher is what we're striving to achieve.

Okay. Thank you very much.

Anthony Vendetti with the Maxim Group, please go ahead with your question.

Good afternoon.

Hi, Anthony.

You had mentioned during the call the adoption of the Pearl is improving from-- for the new customers because last quarter you said it sold well into your existing customer base. What did you do differently this quarter to get that interest level up for the new customers, if anything?

Well, we have been focusing on the Pearl rollout since -- actually before the shipment of the product in June, but one of things that we focused on early on was to target the installed base so that we can build a reference base, so we had promotion that we talked about for the third quarter. Or actually for the second quarter was shipments for that beginning in the third quarter. And so getting a larger number of Pearl physicians was one of the key things that we tempted to do and we have been successful with that and it was a fairly fast development program, so a lot of the clinical support elements have been coming and we believe that those tools are now in the hands of our sales force, and we have more satisfied Pearl users out there, and that really helps the selling process, not to mention the clinical research that we have underway as well.

Okay. And I know that you said you're going to have a new product launch later this year. Was there any delay in this product since you didn't have anything really new at AAD, or is this just part of the cycle, and it was just this particular product took longer?

Well, we're constantly working on a number of different programs in the research and development group, and we attempt to get things launched when we're ready to. The derm part of our business is a relatively small part so in that sense the meeting isn't all that important to us in terms of the portion of our business that comes through dermatology. But we weren't prepared to talk about at the meeting and so we look forward to being able to roll it it out later in the year.

Okay. International revenues, Ron, you mentioned up 19% and 22%. Can you go over which one of those was year-over-year and which one was sequential?

The 19% was the quarter to quarter. So Q4 '06 to Q4 '07. The 22% was for full year 2006 to full year 2007.

Got it. Lastly, on the revenue number that you said for the gross margins, I know someone else had asked this question, but is there anything that you're seeing now that -- we're halfway through, almost halfway through the first quarter, that leads you to believe that growth is still slowing in the U.S., or do you feel like it has troughed or stabilized here? Any sense for where things are at this point?

We're not prepared to talk about the first quarter at this point, but we're keeping very close with what we're learning in the marketplace, and as you know, Anthony, the sales cycle is very short in this business, 90 days is what we think in most cases even shorter than that, so we're trying to take as many cues as we can from what's happening in the marketplace. We'll manage the business accordingly, but with that said, we still think we've got a market that's growing in North America and we have made investments in '07 that should put us in very good position to capture that opportunity.

Okay. Just last question on Titan. Any -- any color on Titan for the fourth quarter?

Well, we're pleased with the 20-- was it 24% growth? Yes, 24% quarter to quarter.

Yes. And we're--

That's just on the refill business.

Just on the refill business. An it continues to be an extremely popular application on the Xeo platform.

Okay. Great, thanks, guys.

Thank you. Our next question is coming from the line of Dalton Chandler with Needham & Company. Please go ahead with your question, Mr. Chandler.

Good afternoon. Just a quick follow-up on the gross margin question. You mentioned you had ramped up overhead in anticipation of higher revenues. When the revenues did not come in, did you dial that overhead back so we could expect a return to the historical revenue gross margin relationship or did you leave that in place?

We've ramped up our overhead in plans for having increased revenue. And that plan would continue into '08 as well.

Okay. So the -- okay. And then just also a quick follow-up on the new product. Kevin, you had mentioned that you hope to have revenue from it this year. I don't know if you're just being cautious, but reading between the lines that suggests like a late third quarter launch. Any further color on that?

As I said earlier, Dalton, we haven't disclosed this to our sales force, and so we're keeping it confidential, as we have with every product launch. We tend to couldn't pretty quiet until we're ready to announce it.

We've still got two months before ASL MS, anything we should be looking for there?

Yes.

I'm sorry?

Oh, I'm sorry, Dalton. We're not prepared to commit to that at this point.

Thanks a lot, guys.

Take care.

Ladies and gentlemen, if there are any additional questions at this time, please press the star followed by the 1 now. Again, if you're on speaker equipment note that you need to lift the handset prior to making that selection. Start one if you have a question at this time. Our next question is coming from Jose Haresco from Merriman Curhan Ford.

Good afternoon, gentlemen. Could you give us insight into how the leasing companies, which still disproportionately fund a lot of these leases, how they've reacted to the dire economic environment and news flow in terms of how they're qualifying the doctors, and then the kind of hoops that they make the doctors jump through in terms of getting approved for a lease. Do you sense any major changes? Not just from your own capital leasing companies, but from others that you watch on the periphery.

Jose, I think the largest change I've seen recently is the credit approval process for the non-physician. I think that's gotten much more difficult. The doctor situation, assuming they've been in practice for awhile, and have the credentials, typically still seems to be a fairly easy credit approval process, if you've got some blemishes on your credit record that's a different story but the doctor situation doesn't appear to be as bad. It's the non-physicians that are getting tougher and tougher. Are you there, Jose? Did we his lose him?

Just one moment, please. I'm sorry, Jose, your line is reopened.

Okay, thanks. Can you hear me, guys?

Yes.

When you say non-physician are you referring specifically to the Medispa segment?

Yes, I should probably say Medispa as opposed to non-physician.

Okay. When you guys look into -- now, when you look at the overseas markets, do physicians over there face similar types of hurdles when they sell into that market, or do your distributors face similar types of hurdles in getting I guess lease lines approved to buy your types of equipment? How should we think about the global market when it comes to risk and credit and that type of thing?

Well, I think that they are going to have a similar risk profile, because they've got to come up with the money to acquire the piece of capital equipment and they have to have the return on investment. Although we haven't seen a significant change there as we have in the U.S. market, primarily for these Medispa type of environments, it might of already been a more sophisticated approach for the international markets because we haven't seen much change there.

Last question, do you guys have a sense for the penetration rate at this point at the end of '07 into the both the core and the non-core markets?

Jose, if we look at the global opportunity for our business, it represents about 500,000 physicians, and obviously we're talking about much larger physician groups than the derm and plastic, Ob-Gyn and family practice make up the lunge of our business. Outside of the core specialties, I think it is safe to say that we are in low single-digit penetration of that market.

Okay, great, thanks.

And that concludes our question-and-answer session, Mr. Connors, please continue with any closing comments.

Thank you for participating in our call today. We will be presenting at the Roth conference next week. Look forward to meeting with you at various investor events during the next quarter. Look forward to updating you at our progress on our first quarter conference call in May. Good afternoon, and thanks for your interest in Cutera.

Thank you, ladies and gentlemen this concludes the Cutera, Inc., fourth quarter 2007 conference call. If you'd like to listen to a replay of today's conference in its entirety, you can do by dialing 1-800-406-7325 or 303-590-3030, and in put the access code 3829016. Those numbers again, 800-406-7325, or 303-590-3030, again the access code 3829016. Thank you for your participation. At this time you may disconnect. Have a very pleasant rest of your day.