Cutera Inc (CUTR) 2009 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Cutera, Incorporated fourth quarter 2009 earnings conference call. (Operator Instructions). It is now my pleasure to introduce your host, Mr. John Mills, Senior Managing Director of Integrated Corporate Relations. Thank you, Mr. Mills. You may begin.

Great. Thank you, Scott. By now everyone should have access to the fourth quarter 2009 earnings release which went out today at approximately 4:00 PM Eastern Time. The release is available on the Investor Relations portion of Cutera's website at cutera.com, and with it's Form 8-K filed today with the SEC, and available on the SEC 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 cash and profitability, development in commercialization of existing and planned products, and potential revenue growth from recently announced strategic alliances.

Also, Management may make additional forward-looking statements in response to your questions. These forward-looking statements do not guarantee future performance, and therefore you should not rely on them in making investment decision without considering the risk associated with such statements. Cutera also caution 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. For a complete list of risk factors that could cause Cutera's actual results to differ materially from the forward-looking statements, please refer to the section entitled risk factors in our most recently filed 10-Q filed on November 2, 2009 with the SEC. 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 fourth quarter ended December 31, 2009. On today's call, I'll provide an overview of the our result. Then Ron Santilli, our CFO, will provide additional details on our operating and financial results. Finally, provide some closing comments, and open the call to your questions. Our revenue in the fourth quarter 2009 grew by 27% to $15.4 million compared to the third quarter of 2009. This is our second sequential revenue growth since the market downturn started in 2008, and we have not experienced sequential growth at this level for several years. We achieved growth in a number of our geographic markets. And I'm particularly pleased with the contributions from our teams in Australia and our US improvements.

International business accounted for 66% of our revenue during the fourth quarter. We are pleased with the results our international infrastructure producing which is playing more significant role in our performance during these challenging times in the US for the aesthetic industry. As we have discussed on previous calls in 2009, we are continuing to target the core segments of dermatologists and plastic surgeons, as well as established medical offices, because we believe this represents the best growth opportunity in the current market environment. In addition to improved revenue during the fourth quarter 2009, we are pleased with the following financial achievements. One, 62% gross margin resulting from stable ASPs, higher sales volume, and continued high product reliability. Two, we returned to profitability during the higher revenue and first half restructuring efforts. Three, finally we generated $3.2 million in cash from operations in this quarter, and we achieved positive cash flow for the full year 2009. We are pleased to have generated cash from operations in 2009, in spite of a declining market. This reflects the leverage of our business model as well as results of our restructuring efforts implemented in the first half of 2009.

Turning to business development matters, we have been actively seeking complimentary market leading products to leverage our distribution network, and enhance our product offering in selected international markets. And we recently announced the expansion of our product offering on certain geographies through alliances with Sounds Surgical and Obagi Medical Inc. Both of these companies produce market leading products that are complimentary to our existing products in the aesthetic market. We believe these new, complimentary products will provide value to our customers by incorporating more aesthetic technologies in their practice, which results in incremental practice revenue. Additionally these alliances will provide us with new customer call points for our products. Last, the sound surgical ultrasound assisted liposuction product expands our product offering in the growing body contouring market in certain geographies.

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 the strategic and ongoing investments and product research and development are critical to our future success. In line with that principal we are continuing to invest in R&D. At the end of the November, we announced our plan to postpone the launch of our TruSculpt body contouring product, and we are continuing our clinical research for our technology. During our review of the clinical data, we determined the established clinical protocols did not consistently yield the targeted outcome.

We believe the potential market for noninvasive body contouring is very large, and we are continuing our clinical research to achieve predicted, measurable clinical improvement. We have a strong history of introducing leading products with a high level of clinical efficacy that ensure a customer's success and satisfied patients. We have continued our research effort, and we'll commercialize the technology if and when have met our standards that our customers have come to expect from us. We are actively pursuing a number of other development programs, and we'll provide more information later in the year. Now I'd 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 2009 conference call. Due to significant changes in the recent business environment we are providing more of our financial comparisons to the preceding quarter, instead of the same quarter a year ago. We believe this will assist you with better understanding of the improvements in our business trends. Fourth quarter 2009 revenue grew by 27% to $15.4 million, compared to the third quarter of 2009. This is particularly important for us, as it reflects the second quarter of sequential revenue growth since the market downturn. Net income for the fourth quarter was break-even. This break-even performance included a $351,000 or $292,000 net of tax, or $0.02 per diluted share, nonrecurring R&D materials charge associated with the postponement of the TruSculpt product release.

Product revenue for the fourth quarter 2009 increased 35% when compared to the third quarter of 2009. This growth occurred as a result of higher volume and stable ASPs. Growth in this revenue category is important, given this typically represents purchases by new customers which provides additional long-term growth to our recurring revenue category. Upgrade revenue for the fourth quarter increased 51% when compared to the third quarter of 2009. Our customers continue to express interest in our Pearl and Pearl Fractional products, and as such they represent an increasing percentage of our upgrade revenue. The clinical results are exceeding our expectations and we are, we will continue our focus in building relationships with the markets segment opinion leaders. Service revenue for the fourth quarter of 2009 increased to $3.3 million, compared to $3.2 million for the third quarter of 2009.

This revenue has remained fairly flat over the past few quarters, due primarily to fewer customers purchasing extended service contracts in response to strong product reliability and the current economic environment. Titan annuity revenue for the fourth quarter of 2009 was $1.5 million, compared to $1.3 million for the third quarter of 2009. A significant percentage of our revenue is sourced from existing customers. During the fourth quarter of 2009 45% of our revenue was derived from sales of service, upgrade and Titan annuity revenue. We remain committed to customer satisfaction, and believe we will continue to realize revenue growth from our annuity revenue categories once the economy becomes stable.

I will now address our operating performance. Our gross margin improved to 62% in the fourth quarter of 2009, compared to 60% in the third quarter of 2009. The higher gross margin percentage was due primarily from higher revenue, reduced manufacturing expenses from our first half restructuring efforts, and lower service expenses resulting from continued strong product reliability. Sales and marketing expenses were $6.1 million or 40% of revenue for the fourth quarter of 2009. This expense level represents an increase of approximately $1 million compared to the third quarter of 2009, and was primarily due to increased commission and travel related expenses attributable to the increased revenue. Research and development increased by $200,000 from $1.7 million in the third quarter of 2009, to $1.9 million in the fourth quarter of 2009. This expense increased was due primarily to a $351,000 non-recurring charge associated with the postponement of our TruSculpt product launch.

General and administration expenses were $2.1 million in the fourth quarter, which is flat compared to the third quarter of 2009. Interest and other income net was $174,000 in the fourth quarter of 2009, compared to $288,000 in the third quarter of 2009. The lower income is due to lower yield on our investment portfolio, and higher foreign exchange losses in the fourth quarter of 2009. Our income tax benefit for the fourth quarter was $250,000. This included a benefit of approximately $273,000, resulting from legislature that allowed net operating losses to be carried back up to five years, compared to two years prior to the enactment of the Act. For modeling purposes, we suggest using an income tax rate of approximately 20% in 2010.

Turning to the balance sheet. Our financial position remains strong. As of December 31, 2009, we had $106.9 million in cash, marketable securities and long term investments with no debt. This represents approximately $8.00 per outstanding share. During the fourth quarter our operations generated $3.2 million of cash. For the year we were slightly cash positive, in spite of a declining market. Net account receivable at the end of the fourth quarter of 2009 were $3.3 million, and the DSOs were 20 days. Our DSO continues to remain strong, and we are better than our targeted 35 to 45 days due to a thorough credit approval process and a strong collection efforts. Inventory is decreased by approximately $1.5 million from September 30, 2009 to December 30, 2009. We are pleased with the reductions made in the quarter, and year-to-date and remain diligent in our management of this important asset. Now that I've concluded my overview of Cutera's financial performance, I'll turn the call back to Kevin.

Thanks, Ron. We are pleased to report meaningful sequential growth, and are committed to increasing our market share in today's environment. We will continue to explore strategic opportunities and develop exciting new products going forward. We would like to take this opportunity to thank our shareholders and employees, for their support during 2009, and look forward to the opportunities to strengthen our Company in 2010 and beyond. Now I'd like to open up the call to your questions. Operator?

Thank you. (Operator Instructions). Our first question is coming from the line of Mr. Tom Gunderson with Piper Jaffray. Your line is open. You may proceed.

Hi. Good afternoon.

Hi, Tom.

I have a couple of questions, but let me just start with a clarification. That one time R&D charge for TruSculpt postponement, is that a cash or non-cash>

That would be cash.

Okay. And then maybe since you did so well overseas, and you highlighted the Australia. Kevin, is this a trend we should look at going forward, and were these one-time sales to distributors or do you consider these flow through kind of sales?

Well, with regard to Australia, we are direct there. So we don't have any distributor business to speak about there. It's our feeling that the economy is quite different in different geographies. And we are trying to be opportunistic where we see healthier fundamentals, and clearly Canada, and Australia, and other parts of the world have been pretty strong for us. So I think that the trends have been moving in this direction, where we've had the majority of our business outside the United States now for probably about a year. So it's been continuing to expand.

Got it. Thanks. And then, Kevin, core business versus primary care physicians, how did that match up in the quarter?

Ron has got that.

We were approximately 46% for the quarter. Our orders were associated with core physicians, which would leave 54% with the non-core.

Got it. Is that a US number that you gave?

Yes, that is.

Okay. And then could you talk a little bit about 2010 relative to Obagi and Sounds Surgical, is that going to affect margins, and if so, how?

Well, we don't have any guidance to give in terms of what we expect from these new partners. But we're pleased to have two strong brands in our bag now. And as we mentioned in the script, it's not worldwide distribution for both of these. In the case of Obagi, it's just Japan. But we started with distributing an thorough line in Japan a couple years ago, and that's worked out very well. And our customers like having one company that they can talk to about a broad range of aesthetic practices.

Got it and then last question. Ron, I think, on the Titan hand pieces, I continue to be amazed that those go up in a tough market, and reflective of people who have lasers are using them, and are using them more. The -- was there any price changes during the year, or should we look at those hand pieces as being total unit increases?

During the year there were no price increases on Titan refills. So it would reflect nothing but usage.

Got it. Okay. Thank you very much.

Thank you our next question is coming from the line of Anup Mehta with Canaccord Adams. Your line is open. You may proceed with your question.

Thank you. First question, going back to the international performance, is there -- has there been any change? You said you were being opportunistic. Does that mean you've you added any sales reps in certain areas in Canada or Australia, or any change besides the business is stronger there?

I think it's pretty much the latter. We haven't made any significant changes to sales headcount.

Okay. Is there any, can you talk about the difference in terms of, I'm assuming a lot is credit approvals, a lot different in Australia or Canada, relative to how it is in the state?

I would say the states is the most challenging market as it relates to that. We are not having resistance abroad that we are seeing here.

Okay. How about moving off to new products. Can you give any guidance in terms of when you think you might have something you'd like to bring to the market in the US? Are you thinking about launching anything at AAD in March?

We don't have any plans, as we mentioned in the script. We hope to be able to update later in the year regarding what we have in the pipeline.

Okay, and then any comments about the outlook for the US business going into 2010? Have you found January and February to be an improving climate, or more customers seeking out new products and looking for the upgrade? Or how have things changed relative to November and December?

Well, you can't read the tea leaves too much on that. January is typically a pretty quiet month for the industry. We can just point to the last two quarters. We've been able to see nice sequential growth, and we are hoping that that will continue.

Okay. Great. Thank you.

Thank you. Our next question is coming from the line of Dalton Chandler with Needham & Company. Your line is open. You may proceed with your question.

Good afternoon.

Hi, Dalton.

Maybe if I can just push a little bit more on the question. I understand you don't want to get a specific time line, but if you're not showing anything new at AAD, should we expect something new at some point this year?

We just can't comment on when we plan to have our next product launched. And as we get closer to it, we would be discussing it on this call.

Okay. With regard to the TruSculpt, I believe it is already cleared for cellulite. Can you talk about what the clinical goal is, that you are trying to achieve that you haven't gotten to yet?

Right. We have had the cellulite clearance for quite some time. What we are trying to accomplish is to have a more meaningful impact on treating relatively small volumes of fat and getting a repeatable result. So we are just, we are seeing some improvement in some patients. But we are just not able, at this point, come up with a treatment protocol that gives us predictable outcomes.

Okay. And when do you expect to start selling the Sound Surgical and Obagi products?

We signed those contracts, and we are planning to start with Obagi this quarter, and Sound as well.

Okay. And then just lastly I think the mix of core and non-core physicians shifted pretty favorably toward the core physicians versus last quarter. Is that a result of your sales force retraining program?

We were pleased to see it bounce back. It can move around a little bit, particularly in Canada. Every now and then we get some nonphysician business that makes that look less desirable, but we are hoping that going forward that we can exceed 50% of our business going into the core physician category.

Okay. Where do you stand with the retraining process?

Well, we're done with it. We just had our global sales meeting in the first month of the quarter. And we are just shining a bright light on it, and making it clear that we think it's really important that our sales team be properly trained when they are going up in front of a demo plastic that is a sophisticated buying physician. And we want to make sure that our team has all the tools that they need to be successful.

Okay. Thanks a lot, guys.

Thank you. (Operator Instructions). Our next question is coming from the line of Mr. Anthony Vendetti with Maxim Group. Your line is open. You may proceed with your question.

Thanks. You had a nice improvement in gross margin this quarter, and I was wondering what you attribute that to. Obviously there's been some firming in pricing, but an actual improvement, what do you attribute that to this particular quarter?

Well,the volume certainly helps. That is a primary indicator, as well as our first half restructuring efforts are starting to come into play here in Q4. So those are the two primary ones that allowed for the good gross margins.

Okay. Specifically what kind of restructuring are you --

In the first half when we had our down sizing, we had change in staff. Those levels. Over the course of the first half, we had much higher manufacturing expenses even leading into Q3. But by Q4, we had attained the levels that we were looking for.

Okay, Ron. What about the sales force, the number of territories or what was the count at the end of this quarter?

It's remained about the same. In North America, we've got about 30 territories.

Okay. If you can just give us the stock-based comp break down?

Sure. I think for the quarter, for the quarter it was about $840,000. And if you want to get the cost of goods sold portion, about $149,000 was the cost of goods sold.

Are you going to break it out between R&D and sales and marketing.

Sure. R&D is 227. I'm sorry. 227 is for sales and marketing. R&D is 109,000 and 355 for G&A.

Okay. And particularly, obviously, Australia has been strong in your direct there. Any other segments particularly strong internationally? How is Japan doing? Any comments on that?

We saw growth from a large number of countries. So we are pleased, that it's not one geography having a strong quarter. It was really spread around nicely.

Okay. And Kevin, maybe you can just talk a little bit the US market. Is it your sense that, even though credit remains tight, that, A, pricing is firming up or B, we are seeing a bottoming in terms of demand?

Well as Tom Gunderson commented earlier, the only indicator we have in our business is tied directly to the procedure is the Titan annuity side of our business. So I think the procedure side , as far as we can tell, seems to be in decent shape. And I think in terms of the macro issues, it could well be that we have just gotten better at dealing in the current climate, wanting business

So based on that, it sounds like with Titan procedure volume moving up a little bit, is it -- I don't want to get too optimistic here, too ahead -- but at least based on this quarter it looked like procedure volume picked up a little bit. And we don't know if it's a trend, because it's one quarter. But you have had sequential improvements on a quarterly basis. Do you, how do you want to characterize that?

Well, we are happy with the 27% sequential growth. It's been a long time since we've been able to speak of a number in that range. And in a normal market, the fourth quarter is the strongest one. But the industry has gone through a pretty challenging couple of years. And so have we returned to a more normal business cycle is the open question. But we are pleased to be able to have two quarters of sequential growth.

And lastly, just on the competitive front. Would you attribute some of the strength that you are seeing and maybe some your public companies are seeing, due to some weakness in the private sector, as the financial constraints have hurt some of the other companies maybe?

Well, it's much better to weather the storm with a strong balance sheet. So we have certain competitors that don't have that luxury, and I'm sure it must put a strain on the business.

Okay. And on the territories, you had 30. Is that what you are planning on sticking at for the rest of this year? Or are you going to look to selectively add if the market picks up?

We think we have got bandwidth with the 30. We think there are opportunities to have to increase sales volume, and that is one thing we are monitoring very closely. We think we need to improve upon that. We still have plenty of spring in that sales force to rebound as the market cooperates, but in the near term we don't have any plans to add territories.

Okay. Great. Thanks guys.

Thank you. Our final question comes from the line of Anup Mehta with Canaccord Adams. Your line is open. You may proceed with your question.

Hello?

Can you hear me now? I want to harp on the opportunistic comment about the international market. If there was a change in the sales force, was there any kind of shift in terms of moving sales reps from one region to another, geographic region? Has everyone stayed in place?

I'm not quite sure if --

You referenced travel expenses and commissions. I'm just asking like was there a shift in sales reps to more opportunistic markets? Did you move folks from Japan to Australia for whatever, just to have more feet on the street?

No. We haven't done anything material like that. We've promoted some people, but we haven't made any strategic moves to relocate sales people.

The higher commission and travel expense, the commission of course is a link to the higher revenue. Travel is just additional promotional efforts and activities going on in the quarter. Those are what drove those up.

Okay, so that 30%, almost 40% growth in the international on the sequential basis, that is all just organic?

Yes.

Yes.

And the Titan refills, was that more so in the utilization of that higher in the US or outside of the US? Can you talk about that?

It's a mix. Relative to the install base, our -- the Titan annuity business is probably strongest in Japan, and but we are seeing it from across the board.

Okay. Great. Thank you so much guys.

Thank you. This does conclude our question-and-answer session. I would like to turn the floor back to Mr. Kevin Connors for closing remarks.

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

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you very much for your participation.