Cutera Inc (CUTR) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cutera, Inc. third quarter 2008 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS) This conference is being recorded today, Monday, November 3, 2008 . I would now like to turn the conference over to John Mills of Integrated Corporate Relations. Please go ahead,

Good afternoon, everyone. By now, you should have access to the third quarter 2008 earnings release which went out today at approximately 4:00 pm eastern time. The release is available on the Investor Relations portion of the Cutera's website at cutera.com and with the 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 long-term domestic and international growth opportunities and strategies, future spending and execution on various aspects of our operations and business, expectations for increasing revenue, generating additional cash and returning to profitability, and the development and commercialization of existing and planned products.

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 the global economic crisis which may reduce consumer demand for its products, cause potential customers to delay their purchase decisions and make it more difficult for some potential customers to obtain credit financing, Cutera's ability to increase revenue and manage expenses worldwide, the length of the sales cycle process, its ability to successfully develop and acquire new products and market them to both its install base and new customers, unforeseen events and circumstances relating to its operations, government regulatory actions and those other factors described in the section entitled Risk Factors in its most recent 10-Q filed November 3, 2008 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 which speak only as of the date they were made. Cutera undertakes no obligation to update publicly forward-looking statements to reflect new information, events or circumstances after the day they were made or to reflect the occurrence of unanticipated events. And 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 third quarter ended September 30, 2008. On today's call, I'll provide an overview of our results and then Ron Santilli, our CFO will provide additional details on our operating and financial results. Finally, I'll provide some closing comments and open the call to your questions. During the third quarter we continued to be affected by challenging economic conditions but were able to make significant progress towards our goal of bringing our operating expenses in line with current -- with our current revenue trend. However, our third quarter revenue of $19.1 million, which represents a contraction of 32% compared to the same period last year, was greater than expected and offset these operating improvements, resulting in a net loss for the quarter of $0.22 a share. That net loss included $0.19 a share related to an impairment charge for the writedown of our investment and auction rate securities. We are pleased to have generated $2.9 million in operating cash flow during the quarter which reflects the fundamental strength of our business model. US revenue in the third quarter of 2008 was $9.5 million or 46% lower than the amount reported in the third quarter 2007. We are continuing to engage many new prospects, but believe this revenue decline was primarily driven by two factors. First, we're experiencing a protracted sales cycle as a result of the current economic crisis.

We have been successful in expanding our business beyond dematologists and plastic surgeon physician specialties. However, we feel that the current market conditions may be causing some of our non-core physician prospects to defer a purchasing decision at this time, even though most of those physicians are not limited by credit barriers. We further analyzed our North American performance and we believe that a segment of our business, those aesthetic practices that operate outside established medical offices, are being particularly affected by the economic environment. We believe that some of these prospects may be finding it more difficult to attain credit financing, but that most in this specific category are delaying their purchasing decisions. We target significant marketing resources toward that group as well as others. However, as I'll be explaining further in a moment, we've got some exciting initiatives towards targeting our Pearl and just released Pearl Fractional products to the core dermatology and plastic surgeon offices. Second, we believe our revenue for the quarter was also impacted by the relative timing of our product launches. We received FDA clearance for our new Pearl Fractional product recently and started shipping only during the end of the quarter. In contrast, FDA clearance for our Pearl product was received in early 2007, which allowed us to enjoy significantly higher upgrade revenue for the entire third quarter of 2007. International revenue decreased 8% in the third quarter 2008 compared with third quarter of 2007 and accounted for half the quarter's overall revenue.

During this last quarter, we saw strength in many of our direct territories in Europe. Latin America also continues to perform well for us. When measured on a nine-month year-to-date basis, our international revenue increased 18% compared to the same period last year. We have made significant investments in delivering our global infrastructure and even with the current economic uncertainty affecting different world regions, we expect to continue our path of long-term overall international growth. We were taking decisive action in response to these challenging economic times, including efforts to bring our operating expenses in line with our current revenue trend. As indicated in our last call, we implemented some expense reduction measures during the third quarter and reduced our operating expenses by $2.9 million compared to the second quarter 2008. We are pleased with the flexibility in our business model that enabled us to lower expenses quickly and respond to our lower current revenue level. We remain committed to increasing our revenue and profits and generating cash. Turning to research and development, we are continuing to develop innovative solutions and expand the clinical understanding and applications of our current products. We believe that strategic ongoing investments and product research and development are critical to our success, even in these challenging economic times and in line with that principal, we continue to keep our investments high in this area. We are committed to introducing new products and applications to various segments of the aesthetic market and we are looking forward to a planned new product launch in the first half of 2009. We will provide a more detailed update on our engineering efforts during the fourth quarter 2008 conference call.

Our new Pearl Fractional product is designed to improve pronounced wrinkles by targeting the deep dermal layer and enables us to compete in the expanding fractional ablative market. Clinical results for this application are continuing to exceed our expectations. We do not begin shipping Pearl Fractional until the end of the third quarter, and it was not a meaningful contributor to revenue in that period. However, we are optimistic about the long-term contributions that will make to our future revenue as we educate the market on its features and benefits. We believe that both Pearl Fractional and our Pearl product launched last year are ideally suited for the dermatology and plastic surgeon offices. We have sharpened our sales and marketing focus on this market segment and expect many new opportunities with these products in the coming quarters. Now I would like to turn the call over to Ron to discuss our financials in more detail. Ron?

Thanks, Kevin, and thanks to all of you for joining us today on our third quarter 2008 conference call. Third quarter 2008 revenue was $19.1 million, a 32% decrease when compared to the third quarter of 2007. Net loss for the third quarter was $2.8 million, or $0.22 per diluted share. Included in these results is a $2.4 million, or $0.19 per diluted share impairment charge related to the writedown our investment in auction rate securities. Excluding the impairment charge net of tax, our loss was $0.03 per share. Product revenue for the third quarter of 2008 decreased by 34% when compared to the third quarter of 2007. These results were primarily driven by an uncertain worldwide economy. Upgrade revenue for the third quarter of 2008 decreased 61% when compared to the third quarter of 2007. This decrease was primarily attributable to a large number of Pearl upgrade sales in the third quarter 2007. We commenced shipments of that product earlier that year.

In contrast, we just started shipping our new Pearl Fractional product at the end of the third quarter 2008 and have many initiatives in place to increase our upgrade revenue in the fourth quarter. We are pleased with the clinical results of Pearl Fractional and will be focusing our efforts with the core specialties and penetrating sales and building relationships with opinion leaders. Service revenue for the third quarter of 2008 increased 25% to $2.9 million when compared to the third quarter of 2007. Although we are pleased with our third quarter growth rate, our sequential service revenue growth rates are declining as a result of fewer customers electing to purchase service contracts. We believe this reduced customer demand for service contracts is due to the challenging economic environment combined with a strong reliability of our products. Customers appear to be more willing now to accept the financial risk and pay on on a timely material basis rather than purchase a term service contract. Titan refill revenue for the third quarter of 2008 increased by 14% to $1.3 million compared to the third quarter of 2007. Titan remains a popular application that is sold by a majority of our Xeo systems. We are continuing to experience growth in our business from existing customers. During the third quarter of 2008, 32% of our revenue was derived from sales of service upgrades and Titan refills. We are committed to strong customer satisfaction and believe we will continue to realize greater growth in our annuity revenue categories once the economy becomes more stable.

I will now address our operating performance. Our gross margin in the third quarter 2008 was 59% compared to gross margin of 66% in the third quarter of 2007. The decrease in gross margin was primarily attributable to higher service and Titan refill revenue as a percentage of total revenue, which has lower gross margin than other revenue categories, increased level of international distributed business, which has slightly lower gross margins than our direct business and lower than expected overall revenue, which reduced the leverage of our manufacturing and service department expenses and was dilutive to our gross margin percentage in the short-term. Sales and marketing expenses for the third quarter of 2008 were $8.1 million or 42% of revenue compared to $10.6 million or 38% of revenue for the third quarter of 2007. The decrease in expenses in the third quarter of 2008 in absolute dollars was due primarily to our reduced marketing and sales costs in North America. As a reminder, we lowered our sales territories in North America to 46 in July. The increase in sales and marketing expenses as a percentage of revenue was due primarily to lower than expected US revenue. Research and development expenses were $1.8 million in each of the third quarters of 2007 and 2008. Although the total spending is flat as a percentage of revenue, it had increased from 6% in the third quarter of 2007 to 10% in the third quarter of 2008 due to our declining revenue. We intend to increase our dollar investment in this area and our continuing committment to develop and commercialize innovative products and applications.

General and administrative expenses declined from $3.1 million in the third quarter of 2007 to $2.6 million in the third quarter of 2008. Although the total spending declined, as a percentage of revenue, it increased from 11% to 14% due to our lower levels of revenue. Our effective income tax rate for the third quarter of 2008 was 3%. This rate has decreased from previously mentioned rates due primarily to our lower than expected profit levels and our tax exempt interest income becoming a larger percentage of the projected pretax income for fiscal 2008. For Q4 2008 modeling purposes, we suggest using an effective tax rate of approximately 10%. For modeling purposes in 2009, we recommend using a 25% effective tax rate.

Turning to the balance sheet, our financial position remains strong. As of September 30, 2008, we had $109.4 million in cash, marketable securities and long-term investments with no debt. This represents over $8.50 per outstanding share. We are pleased with the $2.9 million of cash generated by operations during this challenging quarter and believe we can continue to generate operating cash flow, even during these uncertain economic times. During the quarter, we recorded a non-cash impairment charge of $2.4 million or $0.19 per diluted share for the writedown of our investment and auction rate securities. Because this is an unrealized loss, there was no net tax impact for this impairment charge. As a reminder, we have $13.4 million par value invested in various auction rate securities. These securities are guaranteed a maturity by either federal or municipal governments. The securities are scheduled to mature 20 to 35 years from now. Liquidity for these securities was previously provided by an auction process, which typically occurred every 30 days. However, due to the US financial crisis, these auctions have been failing since February of 2008, thus eliminating the short-term opportunity for liquidity. Though we took this non-cash impairment charge in the third quarter, we have not sold any of these securities. If this market reestablishes itself, we will be able to recover some or all of this charge. However, if the valuation of these securities further deteriorates, we will be required to record additional impairment charges in future quarters.

Net accounts receivable at the end of the third quarter of 2008 was $6.5 million and the DSOs were 31 days. Our DSOs continue to remain strong and were better than our targeted 35 to 45 days due to a thorough credit approval process and strong collection efforts. We have not changed our credit standards during these tougher economic times and are pleased that our results remain among the best in the industry. Inventories increased slightly from $8.6 million at June 30, 2008 to $8.8 million at September 30, 2008. This inventory level calculates to over four turns per year. Now that I've concluded my overview of Cutera's financial performance, I'll turn the call back to Kevin.

Thanks, Ron. In the coming quarters, we'll be focusing our efforts on one, continuing the development of the Pearl Fractional story with a heightened focus on dermatology and plastic surgeon offices. We are pleased with the clinical results of this product and are excited about the opportunities it will present with this segment of the market. Two, we'll also continue to closely monitor the evolving demands of our customers and consumers while aligning our sales and marketing and R&D sources quickly to address any market changes. Three, as we showed last quarter, continue our efforts to decisively manage expenses since they remain within targeted levels to help achieve and maintain long-term profitability and four, we recognize that we have experienced a shift in our business. Customers that once generate the a significant part of our business appear to be more impacted by our challenging economic environment. We have identified the need to focus our sales and marketing efforts to better capture a healthier segment of the market. We believe we have the right products to date to perform at a higher level in the future as we're not satisfied with the current performance level. While the nearer term prospects for our industry are difficult to predict due to the economic uncertainty, we believe that our diverse global infrastructure, solid cash position, strong portfolio of products designed for various market segments and various development projects underway offer continuing long-term opportunities for our company. Now, we would like to open up the call for your questions. Operator?

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Tom Gunderson with Piper Jaffray. Please go ahead.

Hi, good afternoon.

Hi, Tom.

The -- it's a tough economy out there. Everybody knows, and you've talked about it. Where -- in what category are ASPs under the most pressure? How did they do during the quarter?

ASPs had slight pressure on them, but nothing significant, Tom. The only caveat to that is that we did have a pretty significant part of our business through distributors, and so that transfer pricing is at a lower price, so we think that's probably the lion's share of the reason for that.

But do the distributors put the screws to you as well in these tough times?

No, we're not experiencing any of that, Tom.

Okay, and then I'm assuming, but tell me I'm wrong or right, I'm assuming that upgrades from physicians from offices that already have your products and are already generating income from those, that upgrades might be a little bit more immune to the tough economy. Has that been your experience?

Well, I think the biggest cause for upgrade business to pop one way or the other is the timing of new product launch. So clearly, we are focused on telling the Pearl Fractional story to our existing customers and so going forward, we expect to see more significant contributions from that and as we launch new products, that tends to have a very positive impact on upgrade business.

But from those existing customers where you're selling Pearl Fractional, are you getting the same level of pushback that you get from new customers as far as being able to take on additional debt at this time?

I don't think it's so much a credit issue, Tom. It -- we do expect to have a stronger upgrade business going forward now that we have more -- we've been able to accumulate more experience with Pearl Fractional.

Okay, and then last question, I think it was last week, you traded for a few moments below cash level. One of the worries that Wall Street has out there is that you might make an acquisition that would be good for long-term business strategy, but maybe not so good for near-term revenue or earnings growth. Can you tell us a little bit about what you're thinking about acquisitions right now?

Well, we have an open mind to look at new opportunities, but we don't have anything in the pipeline that we're looking to acquire.

Okay, thanks.

Thank you. And our next question comes from the line of Dalton Chandler with Needham & Company. Please go ahead.

Good afternoon.

Good afternoon.

The $2.9 million in cost reductions you mentioned, I assume you didn't get the full benefit of that in the third quarter, but you will in the fourth quarter. Could you comment on that?

Hey, Dalton, this is Ron. Yes, we did get most of it in the third quarter. The adjustments were made very early in July, so most of the adjustments, from what we had said at the beginning of last quarter, have taken effect.

Okay, and then just a follow-up on who is still buying. Do you find that practices with established aesthetics practices are continuing to expand the practice and buy new equipment, or have they pulled back as well?

Well, in the script, we talked about the customers that seem to be doing relatively well in this current environment, the greatest success stories seem to be with aesthetic practices. They are continuing to buy equipment, and they have successful practices where they have been able to successfully market these procedures and as new applications are launched, they tend to continue to be interested to add those things to their practice. So long-winded answer, but yes, we are seeing that.

Okay, good. And the Titan refills were up year-over-year, but they were down a bit sequentially. Do you think that's due to a decline in procedures, or is that just a timing issue with the --

I think probably the -- probably the right apples-to-apples comparison is Q3, because typically in the summertime, a lot of these procedures pull back a bit. But it's been pretty steady growth for many quarters. In fact in last quarter, I think we grew 26%, so it does get a little lumpy and there's some seasonality to that.

Okay, and then just last question, you mentioned first half '09 new product launch. Is that -- would that be a product that's still pending approval, or do you need approval, or is it something that maybe you can launch without approval?

Yes, we're not going to comment on that, Dalton. I don't want to tip our hands to the competition in terms of what we're working on, but we feel that we will have a regulatory strategy in place to have something in place in the first half.

Okay. Thanks a lot.

Thank you. (OPERATOR INSTRUCTIONS) The next question comes from the line of Anthony Vendetti with Maxim Group. Please go ahead.

Thanks. The percent financing for your products, we've heard that that number for some companies has gone down due to the availability of credit or lack thereof. Can you talk about what percent in the third quarter of your sales were financed?

Well, most of our sales are financed one way or the other, meaning through a third quarter leasing source or they have their own local bank, where they obtain a loan and get their funding that way. Most of who we sell to are physicians who are still very credit worthy. We're finding more of the issues as being primarily here in the US where they are deferring the decision to purchase and aren't as much related to lack of credit.

So would you say, Ron, when you say most of the sales have some sort of financing, whether it's third party or through a local bank, is most, 60%, 70%, or are you talking 80%, 90%?

Yes, it's probably up there into the 80% range. They are typically not writing a check $100,000, $150,000 check. They are getting financing somewhere to finance their capital purchase.

Right, right. And you guys don't do any of -- you don't self finance any of these at this point, do you?

That's correct, we do not. We work with third party finance leasing companies.

The tax rate that you said for fourth quarter, you expected to be -- what was that?

About 10%.

Just 10%. And then for '09, you said to use 25% or 35%?

25% would probably be good.

25%, and that's because of the increase in international revenues?

Part of it's the international. Part of it is also related to tax exempt interest income, which is becoming a bigger piece of our profit, which of course is expect from income tax.

Okay, and any FX losses this quarter?

Nothing appreciable. I think there was maybe 50 to 70,000 in there, but nothing large.

And on the Pearl Fractional, that product, the list price for that and the gross margin on that, is that higher than your current gross margin, your average gross margin for the products that you have now?

Pearl and Pearl Fractional are slightly more expensive products since they are laser based, so they are a little bit lower, but not significantly. Obviously, our gross margins have declined and I think a lot of that is related to the service in Titan refill business, which has become a bigger piece of the revenue and that's at lower margins.

Okay, and the list on the Pearl Fractional, do you have that, the actual list price?

Well, it's on -- typically on Xeos.

And that's just over $100,000.

Yes.

For a single application version of that on Xeo.

Okay, and Kevin, as a follow-up, regarding the new product, is this a new product platform or is this an upgrade to something that you currently have, and is that supposed to be out by (inaudible) in 2009?

We're not going to comment exactly when we'll have it released, but our plan is to have it first half of the year, and we want to be able to talk about it more at our next conference call.

Okay. Anything else in the pipeline that might be different than, not necessarily a new platform for you, but maybe something that the industry hasn't yet thought of that you have in the pipeline for '09 or '10?

Well, we're working on some exciting things beyond what we're talking about in the first half, and I think these are all aesthetic applications, but they are not all laser light based. So we think there's some pretty exciting things.

And lastly on the international, you said Latin America was strong. Any other international companies that -- international countries that were strong that helped this quarter?

We were pleased with our direct business in Europe as well.

Direct in Europe, okay, great.

Japan's moving along as well.

Okay.

Thank you. And at this time, I'm showing no further questions in the queue. I would like to turn the call back over to Mr. Mills.

Actually it's Kevin Connors. Thanks for participating in our call today. We look forward to seeing you at various investor events during the quarter, including the Piper Jaffray Health Care Conference and updating you on our fourth quarter conference call in February. Good afternoon, and thanks for continued interest in Cutera.

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation, and you may now disconnect.