Cutera Inc (CUTR) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Cutera Incorporated fourth 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). And as a reminder, this conference is being recorded today, Monday, February 9th, 2009.

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

Good afternoon.

By now, everyone should have access to the fourth quarter 2008 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 www.cutera.com, and with its Form 8-K filed today with the SEC and available on its website at www.sec.gov.

Before we begin, Cutera would like to remind everyone that these prepared remarks contain forward-looking statements, including statements concerning domestic and international growth opportunities and strategies, future spending, expense management, and execution on various aspects of our operations and business; expectations for increasing revenue, generating additional cash and maintaining 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; our ability to successfully develop and acquire new products, and market them to both the install base and new customers; unforeseen events and circumstances related to operations; Government regulatory actions; and those other factors described in the section entitled "Risk Factors" in its most recent 10-Q filed November 3rd, 2008, with the SEC.

These forward-looking statements do not guarantee future performance, and therefore you should not rely on them in making an development 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'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 fourth quarter and year ended December 31st, 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 will provide some closing comments and open the call to your questions.

Our revenue for the fourth quarter of 2008 was $17.9 million, or 32% lower than the $26.5 million recorded in the fourth quarter of 2007. Revenue for the full year of 2008 was $83.4 million, or 18% lower than our 2007 revenue of $101.7 million. 2008 was a challenging year for our industry, as the global recession continued to affect customer purchasing decisions. Even though our revenue volume was impacted by this economic downturn, the actions we took to manage our expenses and bring them in line with current revenue trends enabled us to generate cash and profits for the full year, after excluding the noncash impairment charges net of tax associated with our investments in auction rate securities.

Gross margin for the fourth quarter was 61%, up from 59% in the third quarter 2008. This improvement was primarily attributed to improvements in product reliability. It was also attributed to cost-cutting measures that we recently implemented, partially offset by some pricing compression. We generated $4 million of operating cash during 2008, and ended the year with $106.8 million in cash, marketable securities and long-term investments, and no debt.

In 2009, we plan to continue taking appropriate actions to manage our business during these challenging economic times. In January, in an effort to improve profitability and cash generation, we reduced our workforce by approximately 10% Company-wide. The flexibility of our business model allows us to quickly respond to changes in our business. We will continue to manage our expenses during these uncertain economic times to keep them in line with revenue levels. US revenue in the fourth quarter 2008 was $7.4 million, or 52% lower than the amount reported in the fourth quarter 2007, and decreased 35% in 2008 compared to 2007. We believe the revenue decline was primarily driven by a continuing recession that is significantly extending our sales cycle.

Cutera's broad product offering allows us to compete in many of the industry's market segments. However, we feel that the continuing recession may be causing our customer prospects to delay their purchasing decisions. We also believe that those prospects that do not have established medical practices are finding it more difficult to obtain credit financing.

In response to current market condition, we have been increasing our focus on the core market of dermatologists and plastic surgeons, and other established medical offices through marketing efforts and product introductions. We are continuing to implement exciting initiatives that target our Pearl and recently-released Pearl Fractional products specifically to the core market.

International revenue decreased 5% in the fourth quarter 2008 eight compared to the fourth quarter 2007, but increased 11% in 2008 compared to 2007. International revenue accounted for 59% of our fourth quarter 2008 revenue, and 50% of 2008 total revenue. During the year we saw strength in many of our overseas markets, with particular strength in Australia and Japan. We believe that our established international infrastructure has positioned us well for international growth in 2009 and beyond.

Turning to research and development, we are continuing to develop innovative solutions and expand the clinical understanding of our -- and applications of our current products. We believe that strategic ongoing investments in product research and development are critical to our future success. In line with that principle, we are continuing to invest in R&D at rates in the range of 8% to 10% of revenue. We are committed to introducing new products and applications to the various segments of the aesthetic market, and we're looking forward to our planned introduction of a non-invasive body contouring product. During the past five years, we've been conducting research in this area, including research commissioned with the University of California. We believe we have developed a technology with a unique approach that is tailored specifically to this exciting application.

We are expanding our clinical research programs and plan to exhibit our technology next month at the upcoming annual meeting of the American Academy of Dermatology in San Francisco. We are planning to commence commercial shipments in the second half of the year. This body contouring application will be the latest addition to one of the most comprehensive product offerings in our industry.

Our portfolio is comprised of a broad range of solutions that offer our customers all of the popular aesthetic applications for improving a person's appearance, from removing unwanted hair to treating vascular lesions in rejuvenated skin. Our products in the latter category include laser and other light-based symptoms for treating discromia, texture and lines; our popular infrared Titan for wrinkles; and most recently our Pearl Pearl Fractional YSGG lasers for minimally-invasive skin rejuvenation. We believe that this extensive portfolio and our continued investments in R&D will position us well for future growth once the market becomes more stable.

Now, I would like to turn the call over to Ron to discuss our financials in more detail.

Thanks, Kevin, and thanks to all of you for joining us today on our fourth quarter and full-year 2008 conference call.

Fourth quarter 2008 revenue was $17.9 million, a 32% decrease when compared to the fourth quarter of 2007. Net loss for the fourth quarter of 2008 was $235,000 or $0.02 per diluted share. Included in these results is a $1.2 million or $0.09 per diluted share noncash impairment charge net of tax related to the writedown of our investment in auction rate securities. Excluding that impairment charge, and after adjusting for the impact of dilutive options, we achieved a fourth quarter profit of $0.07 per share.

Revenue for 2008 was $83.4 million, an 18% decrease when compared to 2007 revenue. Net loss for 2008 was $2.9 million, or $0.22 per share. Included in these results is a $3.6 million or $0.28 per diluted share noncash impairment charge net of tax related to the writedown of our investment in auction rate securities. Excluding the impairment charge, and after adjusting for the impact of dilutive options, we achieved a 2008 profit of $0.05 per diluted share.

Product revenue for the fourth quarter of 2008 decreased 40% when compared to the fourth quarter of 2007. We believe these results were primarily driven by customer prospects deferring their purchase decisions during these uncertain economic times. Upgrade revenue for the fourth quarter of 2008 decreased 42% when compared to the fourth quarter of 2007. Upgrade sales of our new Pearl Fractional product were lower than expected, which we believe is primarily attributable to the global recession. The clinical results of our Pearl Fractional product are continuing to exceed our expectations, and we will continue our focus on selling to the core specialties, and building relationships with the market segment's opinion leaders.

Service revenue for the fourth quarter of 2008 increased 8% or $3 million compared to the fourth quarter of 2007. Although we are pleased with our fourth quarter growth rate, our sequential service revenue growth rates are declining as a result of fewer customers electing to purchase post-warranty service contracts. We believe this reduced customer demand for service contracts is due to a challenging economic environment, and the strong reliability of our products. Customers are apparently more willing to accept the financial risk of paying on a time-and-materials basis, rather than purchase a term service contract.

Titan retail revenue for the fourth quarter 2008 increased 13% to $1.4 million compared to the fourth quarter of 2007. This growth rate in Titan refills indicates that procedure volume is strong, even during these tougher economic conditions. We are continuing to experience growth in our business from existing customers. During the fourth quarter of 2008, 36% 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 category once the economy becomes more stable.

I will now address our operating performance. Our gross margin in the fourth quarter 2008 was 61%. This rate is lower than the 63% rate in the fourth quarter of 2007, but is an improvement from the 59% rate in the third quarter of 2008. We are pleased with our sequential growth in gross margin percentage rates, which is primarily attributable to increased product reliability and expense management, partially offset by pricing compression in the market. The improvements in product reliability have positively impacted all of our products, and are the result of continuing efforts on quality and customer care.

Sales and marketing expenses for the fourth quarter of 2008 were $6.6 million or 37% of revenue, compared to $9.4 million or 36% of revenue for the fourth quarter of 2007. The decrease in expenses in the fourth quarter of 2008 in absolute dollars was due primarily to our down-sized sales and marketing organizations in North America. In addition, our effective commission rate for that quarter was below the rate used for the fourth quarter of 2007, due to lower than expected revenue. This resulted in a significant one-time reduction in commission expense in the fourth quarter of 2008. For modeling purposes, if we were to assume the same revenue level in the first quarter of 2009 as we had in the fourth quarter of 2008, we estimate sales and marketing expenses in the first quarter would be approximately $1 million higher. This increase would be primarily due to the reduced commission expense in the fourth quarter that will not recur in the first quarter, and expenses associated with our participation in the upcoming American Academy of Dermatology's annual meeting.

Research and development expenses increased from $1.7 million in the fourth quarter of 2007 to $1.9 million in the fourth quarter of 2008. We intend to increase our dollar investment in this area, in line with our continuing commitment to develop and commercialize innovative products and applications. We expect to spend in the range of 8% to 10% of revenue on R&D in the near future.

General and administrative expenses were $2.7 million in each of the fourth quarters of 2007 and 2008. Although total spending was flat as a percentage of revenue, it increased from 10% to 15%, due to lower levels of revenue in the fourth quarter of 2008. Interest and other income net was $555,000 in the fourth quarter of 2008. Included in this number was $686,000 of interest income reduced by $153,000 in foreign exchange losses. The foreign exchange losses resulted primarily from translation losses, due to the strengthened US dollar and the impact on revaluing our international assets.

Our effective income tax rate for 2008 was only 22%, well below our previous expectations, due primarily to lower than anticipated profits. For the fourth quarter of 2008, our effective tax rate was 76% of pre-tax loss. The fourth quarter tax rate and benefit are unusually high, due to the following. One, the benefit recorded to the fourth quarter of 2008 resulting from actual pre-tax loss, in contrast to the previously expected profit levels. Two, tax exempt interest income becoming a larger percentage of the pre-tax loss. And three, the benefit associated with the extension of the R&D tax credit that was approved by Congress in October of 2008 and was recorded in our fourth quarter of 2008. For 2009 modeling purposes, we suggest using an effective income tax rate of approximately 30%.

Turning to the balance sheet, our financial position remains strong. As of December 31, 2008, we had $106.8 million in cash, marketable securities and long-term investments, with no debt. This represents approximately $8.34 per outstanding share. We consumed $1.9 million of cash during the fourth quarter of 2008, but are pleased with having generated $4 million during 2008. For 2008, we recorded noncash impairment charges of $3.6 million net of tax, or $0.28 per diluted share, associated with our investment in auction rate securities. $2.4 million of that amount was recorded in the third quarter of 2008. The remaining $1.2 million charge was taken in the fourth quarter of 2008. These are noncash unrealized losses that have no tax consequences on our income statement.

As a reminder, as of December 31, 2008, we had $13.4 million par value invested in various auction rate securities, investing primarily in student loans that were valued at $9.8 million as of December 31, 2008. The majority of these securities are guaranteed at maturity by the federal government. These 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 temporarily eliminating the short-term opportunity for liquidity.

Though we took this noncash impairment charge in the third and fourth quarters of 2008, we have not filled any of these impaired securities. Subsequent to December 31, 2008, we were able to liquidate $250,000 of our auction rate security investments at par value. If this market re-establishes itself, we will be able to recover some or all of the charge. However, if the valuation of these securities further deteriorates, we may record additional impairment charges in future quarters.

Net accounts receivable at the end of the fourth quarter of 2008 was $5.8 million, and the DSOs were 30 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 with our results. Inventories increased slightly from $8.8 million at September 30th, 2008, to $9.9 million at December 31, 2008. This increase was primarily due to a higher level of finished goods, resulting from lower than expected revenue in the fourth quarter of 2008. We expect our inventory level to decrease in 2009.

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

Thanks, Ron.

In 2009, we will be focusing our efforts on one, continuing our marketing and clinical work on our Pearl and Pearl Fractional products, with a heightened focus on dermatology and plastic surgeon offices. Our clinical results for these products are continuing to exceed our expectations, and we remain excited about the opportunities the applications present to practitioners and their patients. Two, we will be focusing in 2009 -- we will also be focusing in 2009 on a timely and efficient launch of our planned non-invasive body contouring product. Three, we are focused on increasing sales productivity through such measures as increased reference selling and targeting -- targeted marketing initiatives to core physicians and established medical offices. Four, we will also be continuing our efforts in 2009 to managing expenses in line with our revenue levels, maintaining profitability, and improved cash generation.

While the near-term prospects for our industry are difficult to predict due to the economic uncertainty, we believe that our worldwide distribution network, solid cash position, significant customer base, diverse portfolio of products, and various research and development projects underway will offer continuing long-term growth opportunities for our Company.

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

Thank you, sir. (Operator Instructions). And our first question comes Tom Gunderson with Piper Jaffray. Go ahead, please.

Hi, good afternoon.

Hi, Tom.

I guess I would like to start with the head count reduction that you did in January. The last 10-K you had 273 people, and it was roughly half in sales and marketing, and half in everything else. Was there a proportional cut across-the-board?

When you compare it to the 10-K, you mean for the period ended 12/31/2007, correct?

Correct.

So there were quite a few changes throughout the year. Our head count in early January, after we had made this cut, is down to around 220.

Okay.

And a lot of it is in sales and marketing, but it did go into other function within our Company as well.

And you will be taking a charge then in Q1 for that, Ron?

There will be some charge, that's correct, for some of the actions that we're taking in January, but some of those were also taken throughout 2008.

Okay. And then along those same lines, the lower head count, presumably more productivity, watching your expenses on any of the lines, is your -- are you prepared to say that your goal is to be cash flow positive in 2009, or that you will be cash flow positive in 2009? How should we look at that?

Our goal is to be cash positive in 2009, yes.

Okay. And then, Kevin, do you have any sense that you can give us on the international side of things? It did well, relatively less poorly in Q4, but starting to maybe catch up with the US. Is the international market so underpenetrated that we're not going to see the impact of an economic downturn? Or is the rest of the world catching up to the dismal US?

Well, we're keeping our ear very close to the ground, Tom. We are seeing pockets of actually pretty good performance abroad. Our business in Japan and Australia, some of our distributors have really done pretty well. So we can't predict what the future looks like in the international business, but we're being opportunistic where we see pockets of strong performance.

Okay. And last question, I will get back in cue queue, is you mentioned some pricing pressure in your prepared remarks. Is that across the US, or is it pockets of various territories or regions?

It is not a drastic shift we're seeing there, Tom, but you know, as we mentioned, we see some signs of compression in pricing, and it tends to be in pockets.

Okay. Thanks.

Thank you. And our next question come Dalton Chandler with Needham & Company. Go ahead, please.

Good afternoon.

Hi, Dalton.

Hi. I wondered if you could share any additional details about the body shaping product with us? You mentioned it is a unique technology. Do you think maybe you could describe that? And also if there is a disposable associated with it?

Dalton, as we mentioned earlier, we've been working on it for quite a long time, and what we like about it is that we don't have to break the skin, so it is a non-invasive solution, and we're able to rely on the unique properties of fat and dermal tissue that allow us to use an electrical energy source that selectively targets the fat cells. So it is a thermal approach, but we're able to successfully cool the tissue. We don't want to target and heat the fat cells.

Okay. And is there a disposable associated with it?

Yes.

Okay. And do you have approval for the product yet?

We have FDA approval for the product. And we will look to provide broader indications for use, so we will continue to work with the FDA to expand our indications for use.

Okay. What is the label that have you right now? Is it cellulite or is it actual --

It is a cellulite indication.

Okay. Do you think you would be able to get an indication for, you know, say circumferential reduction at some point?

We are looking at that.

Okay. All right. Thanks a lot.

Sure, Dalton.

Thank you. And our next question comes from Chris Sassouni with Eagle Asset Management. Go ahead, please.

Good afternoon. Hi. I was wondering, you guys did a great job in controlling expenses, given the reduction in revenues. What I can't figure out is why the cash flow from operations was negative, given that you're adding back all of the noncash charges, and it looks to me like either because of the build in inventories or one of the other working capital accounts, and perhaps also this change in deferred tax asset liability? Could you just talk us through it, because the presumption is that on a normalized basis as we go forward, you're going to be just -- theoretically would be producing cash. I mean there shouldn't have been something so different about this quarter that as we march through the first, second, and third and fourth quarter, other than some launch expenses and/or conference expenses, that we shouldn't have positive cash flow from operations.

Certainly it is our goal to be cash positive from operations, and in this last particular quarter we did have a rise in inventory. So that worked against us, and we also had a tax payment that we needed to make. Those two things was a majority piece of the $1.9 million that absorbed cash during the quarter.

Okay. All right. And then just back to the body contouring, I take it that the FDA is okay with something like cellulite because the amount of fat lysis or lipolysis that you would be doing wouldn't be in such a volume that they would be concerned about the things that they are concerned about with companies like Liposonics or UltraShape?

Yes, Chris, we're not looking to provide a solution for significant volumetric change in the fat content, so it is a sculpting application, so it is not a non-invasive liposuction procedure that can remove liters of fat. We're looking at the more confined regions that we're looking to target with a non-invasive solution.

Okay. And then if you just compare this to some of the other -- the VeloShape or some of the other technologies that are out there, what do you like about this particular technology versus the others that have been currently indicated for cellulite?

Well, I think some of those non-invasive solutions on the market haven't been able to deliver the kinds of clinical outcomes that we're looking to achieve with our technology. So it's -- again, we're relying on the thermal properties of fat, and how it is different than the dermis and underlying muscle, as well as the electrical properties that allow us to have a truly selective application.

Okay. But in the clinical -- in the limited clinicals that you've operated on, from everything that you can tell, both in your pre-clinical work and your clinical work, it does lyse? This is just not heating fat away, perhaps some other technologies where there is evidence of lipolysis?

Yes, we have been able to observe thermal necrosis of the -- in the fat region.

Okay. And it is pretty selective, specifically for fat?

That's correct.

Perfect. Okay. Thank you.

Okay. Thank you. And our next question comes from Mike [Neary] with Neary Asset Management. Go ahead, please.

Hi, yes, do you believe your business has a positive value? I mean, you know, the market value of your Company right now is $77 million. You have $107 million in cash; so the market thinks your business is worth negative $30 million. And you and the Board, who know the business better than anybody, are not buying back stock at these prices. Can you just talk about that a little bit?

Well, we're actively having those discussions with the Board. So we have historically purchased shares, I think we bought shares about a year-and-a-half ago, so it is an active discussion with the Board. The entire sector has been battered in terms of the valuation of the space. We generated cash from operations during the year, and our commitment is to continue to focus on managing the business such that we are generating cash. You know, we're as disappointed with the value that the stock is, but we think we need to keep focused on the fundamentals, and ultimately that will work its way through.

I agree. It seems -- you know, you can't control what the stock price does, but I mean you know, you could still have a very strong balance sheet, even if you bought back 20 or 30% of your shares, and you would dramatically increase the long-term value of the business per share, if your business had long-term value.

That's right. As I mentioned, we're having these discussions with the Board, and the Board has shown a willingness to support purchasing stock in the past, and I think this will be something we will continue to discuss.

Okay. Thank you.

Thank you. And our next question comes from Hesham Shaaban with Maxim Group. Go ahead, please.

Good afternoon. I just had one quick question. Do you have the breakout for stock-based comp by line item?

Let's see. I do approximately. For the quarter, stock-based compensation expense was approximately $1.2 million. Are you looking for more detail than that?

Yes. I'm looking by expense line, like how much was attributed to sales and marketing, research and development and such?

I think in the cost of sales component, it was approximately $199,000. Sales and marketing was about $365,000. R&D was about $185,000, and G&A was about $487,000.

Perfect. Thank you.

Thank you. And ladies and gentlemen, that does conclude our question-and-answer session for this conference. I would now like to turn the conference back over to Kevin Connors for any closing statements.

Thank you for participating on our call today. We look forward to seeing you at various investor events during the quarter, and updating you on our first quarter conference call in May. Good afternoon, and thanks for your continuing interest in Cutera.

Ladies and gentlemen, this concludes the Cutera Incorporated fourth quarter 2008 earnings conference call. You may access the replay system for this conference by dialing (800) 406-7325 or (303) 590-3030, and entering the access code of 3966078. Thank you for your participation, and you may now disconnect.