Cutera Inc (CUTR) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Cutera Inc., first quarter 2009 earnings conference call. During today's presentation, all participants will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator instructions). This conference call is being recorded today, Monday, May 4th of 2009. I would now like to turn the conference over to John Mills with ICR. Please go ahead, sir.

By now everyone should have access to the first quarter 2009 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 web site at Cutera.com, and with its Form 8-K filed today 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 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, the development and the commercialization of existing and planned products, and the ability to settle outstanding litigation. 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 obtain credit financing, Cutera's ability to increase revenue and manage expenses worldwide, the link to the sales cycle, its ability to successfully develop and acquire new products, and market them in both its installed base and new customers, unforeseen events and circumstances related to its operations, government regulatory actions, and those other factors described in the section entitled Risk Factors in its most recent 10-Q filed today, May 4th, 2009, 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 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. Go ahead, Kevin.

Thank you John. Good afternoon everyone, and thanks for joining us today to discuss Cutera's results for the first quarter ended March 31st, 2009. On today's call, I will 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 first quarter 2009 was $14.4 million, or 33% lower than the $21.6 million reported in the first quarter of 2008. Historically, our first quarter revenue is lower than any other quarter's revenue during the fiscal year, and the trend was exacerbated by the ongoing global recession. Our industry continues to be negatively impacted by this economic downturn, particularly in the United States, where we believe customer prospects are deferring their purchasing decisions.

We are continuing to take decisive actions in response to the economic environment, with the goal of improving profitability and cash generation. To respond to our lower than expected revenue level, we reduced our Company-wide work force 12% in April. Our head count as of the end of April was 191 people, including 34 sales territories in North America. We expect our second quarter operating expenses to be similar to those in the first quarter 2009, due to the timing of this reduction, and because there are non-recurring charges associated with it.

Starting for the third quarter 2009, the full impact of our cost cutting measures will be realized. I would like to point out that we have not reduced any sales territories since the beginning of the year, and have not materially changed R&D expenditures. We will continue to manage our expenses carefully during these uncertain times and take appropriate decisions in an effort to better align our decisions with current revenue levels. After we experience the full benefit of our cost cutting efforts in the second half of 2009, we believe that our break-even revenue level will be approximately $15 million per quarter.

The current market environment, we believe that the core market of dermatologists, plastic surgeons, and other established medical offices provides us the best opportunities in our industry. Therefore, we are actively focusing our sales, marketing, and new product development efforts on this segment of our market. During the first quarter of 2009, almost 50% of our US orders were sourced from these core physicians. In addition, we plan on increasing sales productivity through reference selling, by asking existing doctors who have been using our products to provide potential customers with feedback of their experience.

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 future success. In line with that principle, we are continuing to invest in research and development.

We are pleased with the planned commercialization of our adjustable depth selectivity, or ADS, technology that was recently previewed at the American Academy of Dermatology Meeting in San Francisco. The latest innovation is a culmination of five years of clinical research and collaboration for non-invasive body contouring. The key features of this technology are the ability to selectively target and heat fat cells and to vary treatment depths within that fat. With these combined effects we expect to result in non-invasive body contouring for a wide range of patients.

Research conducted with in vitro human fat cells at the Cell Culture Facility at the University of California San Francisco measured fat cell survival rates following thermal exposures. In a separate in vivo human study, histological samples following treatment showed controlled cell death and targeted tissue with full protection of nearby tissue. We are encouraged by the positive results of the clinical data, and are looking forward to our planned commercialization of this product.

We believe that our extensive portfolio of existing products and continuing investments in R&D will position us well for strong 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 in our first quarter 2009 conference call. First quarter 2009 revenue was $14.4 million, a 33% decrease, when compared to the first quarter of 2008. Net loss for the fourth quarter of 2008 was $1.8 million, or $0.14 per diluted share.

The first quarter of 2009 included $850,000 for the estimated costs of settling the TCPA, or Telephone Consumer Protection Act, litigation matter, net of administrative costs and amounts expected to be recovered from our insurance carrier. On an after-tax basis, this represented $523,000 or $0.04 per diluted share.

Product revenue in the first quarter of 2009 decreased 48%, when compared to the product revenue in the first quarter of 2008. We believe the global recession continues to affect our industry and customer purchasing decisions, thereby having an adverse effect on sales of new systems.

Upgrade revenue for first quarter of 2009 decreased 21% when compared to upgrade revenue in the first quarter of 2008. We are continuing to see a lot of interest in our Pearl and Pearl Fractional upgrades. The clinical results of our Pearl Fractional products are exceeding our expectations, and we will continue our focus on selling to the core specialties and building relationships with that market segment's opinion leaders.

Service revenue for the first quarter of 2009 increased by 20%, to $3.3 million, compared to the first quarter of 2008. Our first quarter 2009 service revenue growth was attributable to increased service contract amortization, resulting from an increased installed base of customers. Although our service revenue growth varies from quarter to quarter, over the long term, this revenue category has shown consistent growth.

Titan refill revenue for the first quarter of 2009 increased 2% to $1.4 million, compared to the similar revenue in the first quarter of 2008. This growth rate in Titan refills indicates that Titan procedures remain in demand, even during these tough economic conditions.

We are continuing to experience growth in our business from existing customers. During first quarter of 2009, 44% of our revenue was derived from sales of service, upgrades and Titan refills. We remain committed to strong customer satisfaction, and believe we will continue to realize revenue growth from our annuity revenue categories, once the economy becomes more stable.

I will now address our operating performance. Our gross margin in the first quarter of 2009 was 59%. This rate is slightly lower than the 62% rate in the first quarter of 2008, due primarily to our lower revenue volume.

We are continuing to experience pricing compression, which was largely offset by reduced expenses, resulting from improved product reliability. 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 decreased by $3.3 million or 32% in the first quarter of 2009, and were $7 million compared to $10.3 million in the first quarter of 2008. As a percentage of revenue, the expenses were up 49% in the first quarter of 2009, and 48% in the first quarter of 2008. A decrease in expenses in the first quarter of 2009, in absolute dollars, was due primarily to our downsized sales and marketing organizations in North America.

Research and development expenses remained relatively flat, at $1.7 million in the first quarter of 2009. This spending level is in line with our continuing commitment to develop and commercialize innovative products and applications.

General and administrative expenses declined by over $400,000 from $2.9 million in the first quarter of 2008 to $2.5 million in the first quarter of 2009. The decrease in expenses was primarily attributable to lower labor and legal expenses.

We have an agreement in principle to a tentative settlement of our Telephone Consumer Protection Act or TCPA Class Action Lawsuit. This class action lawsuit was filed against the Company in January of 2008, and alleged that the Company violated the TCPA by sending unsolicited advertisements by facsimile, without the prior expressed invitation or permission of the recipients. Included in our loss for the first quarter of 2009 was $850,000 for the estimated net costs of the tentative global settlement of this litigation. On an after-tax basis, this represented $523,000 of our net loss for the quarter, or $0.04 per diluted share.

Interest and other income net was $599,000 in the first quarter of 2009, compared to $901,000 in the first quarter of 2008. The lower income is due primarily to the lower interest yields on our cash and marketable investments.

Our effective income tax rate for the first quarter of 2009 was 40%. For modeling purposes, we suggest using the effective income tax rate of approximately 40% for the remainder of the quarters in 2009.

Turning to the balance sheet, our financial position remains strong. As of March 31st, 2009, we had $103.4 million in cash, marketable securities, and long-term investments, with no debt. This represents approximately $7.80 per outstanding share. Note that our outstanding share count increased by approximately 480,000 shares in the first quarter of 2009, as a result of management exercising options and holding their shares.

Operations consumed $3 million of cash during the first quarter of 2009. I would like to point out that we were near cash neutral in the quarter, after adjusting our net loss of $1.8 million for the after-tax costs of $523,000 for the litigation settlement, and adding back the $1 million of non-cash stock-based compensation charges.

In the first quarter, we invested approximately $2.7 million in working capital. Of this amount, $1.1 million was due to an increase in our tax receivable balance, resulting from our loss, $1.1 million resulted from a decrease in our deferred revenue associated with service contracts, and $500,000 of other increases in working capital.

Our auction rate security investments held stable during the quarter. We recorded a balance sheet write-down of $164,000, due primarily to lower interest yields on the auction rate securities. Our remaining portfolio of auction rate securities was valued at $9.5 million as of March 31, 2009.

Net accounts receivable at the end of the first quarter 2009, were $5.3 million, and the DSOs were 33 days. Our DSOs continue to remain strong, and we're better than our targeted 35 to 45 days, due to a thorough credit approval process and strong collection efforts.

Inventories decreased slightly from the December 31, 2008 balance, to $9.8 million as of March 31, 2009. While we are comfortable with the quality of our inventories we have implemented initiatives to reduce our inventory levels more aggressively, and expect it to decrease during the remainder of 2009. This should result in a favorable impact to our cash from operations in the coming quarters.

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

Thanks, Ron. Our focus during the next few quarters will include one, the continuation of our marketing and clinical work on our Pearl and Pearl Fractional products, with a heightened focused on dermatology and plastic surgeon offices. Two, we are focusing our efforts on a timely and efficient launch of our planned body contouring product.

Three, we also plan on increasing sales productivity through such measures as increased reference selling, and targeted marketing initiatives to core physicians and established medical offices. Four, we will be continuing our efforts throughout 2009 to manage expenses in line with our revenue levels, maintain profitability, and improve cash generation. While the near term prospects for the industry are difficult to predict due to economic uncertainty, we believe our extensive worldwide distribution network, strong balance sheet with over $103 million in cash and investments, no debt, broad portfolio of products, various research and development projects underway, are for continuing long-term growth opportunities for our Company. Now, I would like to open the call for your questions. Operator?

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator instructions). Our first question comes from the line of Dalton Chandler with Needham & Company. Please go ahead.

Good afternoon. Let me just start with a couple of clarifications. I missed part of what you said about the sales territories. Is it still at 35?

No, it's at 34 in North America.

Okay. Thanks. And then the $850,000 for litigation, was that a cash expense in the quarter?

It was not. It would be a cash expense in Q2. It was an accrual in Q1.

Okay. Great. Thanks. And then more broadly, I guess, some of your competitors have made sort of mixed commentary on the overall market. Some have said it hasn't really changed much; others have said they have recently seen things pick up and they have become somewhat more optimistic. Can you talk about what you are seeing?

The most recent snapshot we have is the first quarter, and I think throughout the industry, the order trend tends to be back-end loaded. So it's too early for us to speculate on the tea leaves at this point.

Okay. And you mentioned you are pleased with the Pearl Fractional upgrade levels. If I look at your product upgrade number overall, it was down a little bit sequentially. It was down a little bit year-over-year. So are people not buying other upgrades or what is the underlying driver of that number?

Just for clarification, Dalton, we were referring to the clinical efficacy side, not on the upgrades. As you probably have seen in the revenue break out, our upgrade business does move around quite a bit, so it wasn't a strong quarter for us, but that can change from quarter to quarter.

Okay. And then, just a final question on the launch of the new ADS product, you do already have, it sounds like a fair amount of clinical data and it's pretty positive, so what is it, what else are you working on that you need to see before you are ready to actually launch?

Well, this particular application is one where it takes quite a bit of time to monitor whether there's been a change or not. So the time constants associated with this clinical research and development is on the longer side.

What we are dealing with Titan, actually, it took quite sometime for us to follow patients and measure the difference. It's just the nature of the beast. It is just going to take us a long time to get the kinds of long-term follow up that we are looking for in the clinical research.

Okay, but you are still on track for launch in the second half of the year?

That's our plan.

Okay. Thanks a lot, guys.

Thanks, Dalton.

Thank you. Our next question comes from the line of Thom Gunderson with Piper Jaffray. Please go ahead.

Hi, guys. It's actually Amy in for Tom.

Hi, Amy.

You mentioned the revenues this quarter coming roughly half from the core markets. Ron, do you have handy the mix between the general practitioners and the ob-gyn, et cetera?

Yes. Approximately 14% came from the general practitioner. Actually then about 33% from other MDs, and so it's not helping you a lot, but all the other MDs and 5% from non-MDs.

Okay. And nothing has changed as far as your relationships with the general side, correct?

Could you be more specific with that, Amy?

Just as far as your marketing efforts, your partnership there.

You're referring to PSS?

Yes.

Nothing has changed with that, no.

Okay. And then you also mentioned, just as far as the pricing pressures, can you give us any more color there, and maybe relative change sequentially?

You know, it's not significant, but we are continuing to see every deal is more competitive, and price becomes one of the points, but I wouldn't say it's been of significant change from the last few quarters.

And the other thing to consider is that we're at record levels in terms of our international component. So our distributor business goes at transfer pricing, so that will have a negative impact on average selling prices as well.

Okay. And then lastly, just as far as the general, just a broader perspective, we're seeing some improvement from consumer sentiment and whatnot, just curious what your thoughts are. Is it patients, volumes, patient traffic, that is making the doctors hesitate? What is it that's going to get the laser market growing again, to get it to turn?

Well, we think that the consumer interest is still strong, and there are surveys that plastic surgeons have done, where they are reporting pretty bullish forecasts for laser and light-based procedures in the plastic surgeons' office. I think we've seen some changes in the overall market, some of the med spas from years ago that were doing very well are experiencing a more difficult environment.

It's our belief that existing physician offices, where they are currently doing aesthetic procedures, that continues to be a very attractive market, and that's why we on the call had mentioned that we are spending a lot more time focused on that healthier segment of the market. But in general sense, any time there's an existing practice, if they're able to layer the aesthetic procedures on top of their existing patient base, it's an attractive opportunity.

Okay. Thank you.

Thank you. (Operator instructions). Our next question comes from the line of Anthony Vendetti with Maxim Group. Please go ahead.

Thanks. Good afternoon.

Hi, Anthony.

The sales, I don't know if you broke this out. I may have missed, North America, international?

We did break it out. It's on the release as well.

And I'll just pull it up myself.

And did you say what the growth was sequentially or year-over-year? I don't have the old numbers in front of me.

I'm sorry. I will just pull it up right now.

While we are doing that, Kevin, you had mentioned that March is generally better than January and February because it's the end of the month, and that generally is the case in every quarter. Some competitors have said that there's not been much change in April, and others have said that April is off to a better start than the start of, let's say, the first quarter. Have you seen any evidence that maybe April looks a little bit better and gives you a little bit more hope for the second quarter, or what's your read right now on what you have seen so far since we're finished with April?

I need a better crystal ball, because it's hard for us to glean anything meaningful for the first month of any quarter really.

As I mentioned earlier, as you know, the business is back-end loaded in terms of the order volume. But often times, there's a lot of speculation that it's tied to what's going on in some of the broader markets. I would rather not comment on that as it relates to the aesthetic space.

Sure. Sure. And in terms of the credit markets, since a lot of these deals are financed, have any of the leasing companies come back into the market that had left the market, or are the terms still rather onerous in terms of being able to get the credit?

I would still characterize it as fairly tight out there. I don't think banks or lending sources are coming into the market very fast.

Okay.

But obviously the strong credit customers still are able to get the credit. We are finding a way to get deals done, but it certainly takes a lot longer and more disclosures on their part.

Okay. On the product side, you were talking about this new body contouring product and some positive test results for some of these, for the destruction of some of the fat cells. Can you talk about the methodology that you are using?

I mean, there's a number of companies out there, obviously, yours one of them, that are looking at different ways, whether it's heat, whether it's cold, specifically what you are seeing that leads you to have the confidence in this product, and whether you think there's an extension possible to the body contouring product as you further develop this technology.

Well, as you saw at the Laser and Medicine Meeting in D.C., we had the technology preview there, and we went through the specifics of our energy source and why we have developed it to provide adjustable depth capabilities. So it's a thermal process, where we're actually selectively heating fat cells and leaving the dermal tissue unharmed. And by thermally denaturing the fat cells, we are able to demonstrate successful targeting of fat cells, successful selective targeting.

So I think it's a huge category, any time we can avoid breaking the skin and having a therapeutic result like this, I think it represents a very exciting opportunity for a product.

And are you continuing to elect to stay away from anything that's invasive, even if it's minimally invasive, and stick to the non-invasive?

Well, with Pearl and Pearl Fractional, those are two of our most invasive products in our portfolio, with that said, the recovery time is relatively short, and complication rates have been very modest for us. So we have shown a willingness to get more invasive, relative to the other products that we have done prior to that.

Okay. And like I said, the last thing is Ron, do you have those numbers handy?

Yes. So we said our revenue was $14.4 million for the quarter, compared to Q1 '08, where it was $21.6 million or a 33% decline. The US during the same period declined 49%, and international declined 12%.

Okay. That's year-over-year? Okay, great.

Yes, that's correct.

Alright, thank you.

Thank you. There are no further questions. Mr. Connors. I will turn the call over to you for closing comments.

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

Thank you. Ladies and gentlemen, that will conclude today's teleconference. We do thank you again for your participation, and at this time, you may disconnect. Have a nice day.