Cutera Inc (CUTR) 2010 Q1 法說會逐字稿

Greetings and welcome to Cutera Incorporated 2010 conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is now being recorded. It is now my pleasure to introduce your host, Mr. John Mills, of Integrated Corporate Relations. Thank you Mr. MIlls. You may begin.

Thank you. By now, everyone should have access to the first quarter 2010 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 web site at Cutera.com, and with the Form 8-K filed today with the SEC and available on its web site 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 operation and business, expectations for increasing revenue, generating cash and profitability, the development and commercialization of existing and planned products, and potential revenue growth for 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 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.

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 today on May 3rd, 2010, with the Securities and Exchange Commission. With that, I will turn the call over to the Company's President and Chief Executive Officer, Mr. Kevin Connors.

Thank you, John. Good afternoon, everyone. Thank you for joining us today to discuss Cutera's result for the first quarter ended March 31st, 2010. On today's call I will provide an overview of results and Ron Santilli, our Chief Financial Officer will provide additional retails on the operational and financial results. Finally, I will provide some closing comments and open the call to your questions.

Our revenue for the first quarter of 2010 was $13.7 million or 5% lower than $14.4 million reported in the first quarter of 2009. We are pleased with international growth rate of 14% when compared to the first quarter of 2009. This growth was primarily sourced from our direct markets in Canada and Japan as well as from many countries where we are represented by distributors. Even though several reports indicate that our customers continue to experience strong demand, patient demand from our products, the US market continues to be challenging as many of our perspective customers remain reluctant to purchase capital equipment. However we are encouraged by the modest 5% revenue growth in the US, during the six months ended March 31st, 2010 compared to the preceding six months period ended September 30th, 2009. We are continuing to closely monitor the US performance and remain focused on key initiatives to increase revenue. We will discuss some of these initiatives in my closing remarks.

International business accounted for 67% of our total revenue, in the first quarter of 2010. We are pleased with the results of international infrastructure as producing which is playing a more significant roll in our performance during these challenging time in the US esthetic industry. The international segment of our business was, has weathered the economic storm fairly well because of the many years of continued investments, and their historical and current focus on core positions for a less impacted than the noncourse positions during the economic downturn.

As, we have discussed on previous calls, we are continuing to target the core market segments of dermatologist and plastic surgeons as well as other established medical offices because we believe they offer the best growth opportunities in the current market environment. During the first quarter of 2010, we sourced 25% of our US orders from core positions. The noncore physician achievement was higher than normal due to a large national count order from the noncore business.

Turning to business development matters, during the quarter we made progress in the implementation of our strategic alliances with [Obigy] medical products, and Sam surgical technologies. We trained our applicable sales and service teams enhanced, our marketing plans invested, invest in inventories and established our infrastructure to integrate these exciting new products to the international side of our organization. In February, we commenced shipments of Obigy medical physician dispense cuts with [suetical] products in Japan, and are planning to launch the [Vasure] ultrasound assisted lipo suction device in the second quarter 2010. We believe these alliances will leverage our distribution network, enhance our product offering, and increase revenue in selected international markets. Additionally, we have added a few new sales and marketing functions during the first four months in 2010 to increase our focus on our revenue growth.

Those new positions include one business development to focus on our acquisition and strategic alliance strategy. Two, clinical development to focus on clinical studies on existing products to increase our indication for use. And three, a telesales group to focus on increasing our penetration and strong relationships with our install base. We believe these additional functions will contribute to our revenue growth in the future, and leverage our overall business model.

Turning to Research and Development, we are continuing to development innovated solutions and expand the clinical understanding and applications of the current products. In addition, we are actively pursuing a number of other development programs to look forward to announcing new applications offerings in the upcoming quarters. During, the quarter we added Ken Whittey to head up our clinical research department. Ken comes with extensive experience in engineering and scientific research on a variety of aesthetic laser applications. He has a proven track record and has already begun to make significant contributions to our team. We believe that strategic on going investments in product Research and Development are critical to our future's success. In line with that principal we are continuing to invest in research and development. Now, I would like to turn the call over to Ron, for financial in more details.

Thanks, Kevin and thanks all of you for joining us today on our first quarter 2010 conference call. First quarter 2010 revenue declined by 5% to $13.7 million, compared to the first quarter of 2009. Net loss for the fourth quarter was $2 million or $0.15 per diluted share. Product revenue decreased by 3% in the first quarter of 2010 when compared to the first quarter of 2009. We experienced a higher than normal level of distributed business during the quarter and had a large national account. Both had a significant impact on our revenue during in the quarter. Upgrade revenue for the first quarter of 2010 decreased 31% when compared to the first quarter of 2009. Though the unit volume of upgrades sold in the first quarter of 2010 was at a similar level to the first quarter of 2009, they were at lower ASPs, due primarily to fewer purchases of our higher priced profractional upgrade.

Service revenue for the first quarter of 2010 compared to first quarter of 2009 was relatively flat at approximately $3.3 million. This revenue has remained flat over the past several quarters due primarily to fewer customers purchasing extended service contracts in response to the current economic environment and our strong product reliability. Tighten annuity revenue for the first quarter of 2010 compared to the first quarter of 2009 was relatively flat at approximately $1.3 million. This revenue has remained flat over the past several quarters. We believe this is primarily due to customers using fewer shots per procedure which is allowing them to perform more procedures per hand piece before requiring a replacement.

Starting from the first quarter of 2010, we are reporting a new revenue category called fillers and cosmeceuticals. This category primarily includes revenue from the distribution of Obigy's cosmeceutical products and bio forms radius filler in Japan. We expect this revenue of category to grow and further development the infrastructure marketing and selling efforts for these products.

A significant percentage of our revenue sourced from existing customers. During the first quarter of 2010, almost half of our revenue was derived from sales of service, upgrades, tightened resells, filler and cosmeceutical products. We remain committed to strong customer satisfaction. And we will continue to realize revenue growth from our annuity revenue category once the economy becomes more stable.

I will now address our operating performance. The gross margin was 58% in the first quarter of 2010 compared to 59% in the first quarter of 2009. We realized gross margin improvements from our 2009 restructuring efforts, that were partially offset by an unusually higher level of distributer business which yields lower gross margins than our direct business. In addition, we had a nonrecurring charge recorded in the first quarter of 2010 for the voluntary replacement of certain components in our (inaudible) hand pieces. Backing out the nonrecurring tight neck (inaudible) hand piece charge, our gross margin would have been approximately 60%.

Sales and marketing expenses were $6.4 million or 46% of revenue for the first quarter of 2010, compared to $7 million or 49% of revenue, for the first quarter of 2009. This expense level represents a decrease of approximately $642,000, compared to the first quarter of 2009, and was due primarily to our 2009 restructuring efforts.

On the sequential basis, our sales and marketing expenses increased $261,000 from the fourth quarter of 2009 due primarily to seasonal expenses associated with our largest trade show of the year and our annual sales meeting. As Kevin mentioned in his opening remarks we have added a few new sales and marketing functions in 2010 to focus on increasing our revenue and leveraging our overall business model. For modeling purposes if you assume similar revenues that in Q1 2010, we would expect sales and marketing expenses to be approximately $6 million. For any increase or decrease in revenue, you would need to adjust the sales and marketing expense accordingly.

Research and Development expenses decreased by approximately $300,000 from $1.7 million in the first quarter of 2009 to $1.4 million in the first quarter of 2010. This expense reduction was due primarily to a high level of material spending for our True Scope product during the first quarter of 2009 that was not replicated in the first quarter of 2010.

General administrative expenses declined by approximately $300,000 to $2.5 million for the first quarter of 2009 to $2.2 million in the first quarter of 2010. This decrease was primarily attributable to our restructuring efforts implemented in 2009.

Interest and other income net was $166,000 for the first quarter of 2010, compared to $599,000 in the first quarter in 2009. The lower income is due primarily to the extremely low yields on our investment portfolio and some foreign exchange losses. The low yeld on our investment portfolio reflect our focus on capital preservation during the recent uncertain financial markets. We generally have invested in lower risk government agency and municipal bonds.

In the first quarter of 2010 even though we had a loss before taxes, we recorded a tax expense of $47,000. This compares to the income tax benefit for the first quarter of 2009 of $1.2 million. Even though we had our loss before taxes in first quarter of 2010, we were not able to tax effect our loss because we had a valuation allowance against our US deferred tax assets. For modeling purposes, we suggest using an effective income tax expense of $75,000 per quarter until we have fully utilized our US valuation allowance.

Turning to the balance sheet, our financial position remains strong. As of March 31st, 2010, we had $103.4 million in cash, marketable securities and long term investments with no debt. This represents almost $8 per outstanding share. During the first quarter our operations consumed $2.7 million of cash. Of this amount approximately $800,000 related to investments in inventories for our fillers and cosmeceuticals business.

Also historically, we consumed cash in our seasonally slower first quarter each year. As a reminder, we consumed $3 million of cash in the first quarter of 2009, yet still generated a modest amount for the full year of 2009. Net accounts receivable at the end of the fourth quarter 2009 were $3.5 million and the DSOs were 23 days. Our DSO's continue to remain strong even during these challenging economic times. Inventories increased by approximately by $500,000, which is comprised of the $800,000 related to investments in inventories for our fillers and cosmeceuticals business offset by a $300,000 reduction in Cutera product inventory from December 31st, 2009 to March 31st, 2010. We are pleased with this management of this important asset. Now, that I concluded my review of Cutera's financial performance. I will turn the call back to Kevin.

Thanks, Ron. During the next few quarter, we remain focused on the following key initiatives. One, improving sales productivity through increased reference selling and targeted marketing initiatives to core positions in established medical offices. Two continuing our efforts on multiple R&D with an expectation to introduce new applications in the future. Three, evaluating other complimentary strategic alliances to further enhance our product offering and leverage our distribution channels. While the nearer term prospects for our industry are difficult to predict due to economic uncertainty for the industry, we believe that our worldwide distribution network, strong balance sheet with over $103 million in cash and investments with no debt, broad portfolio products and various research and development products underway offer continuing long term growth opportunities for our Company. Now, I would like to open our call for your questions.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions). Our first question is from Anook Mehta with Canaccord Adams. Please go ahead.

Can you break out the revenues by distributor versus direct internationally?

We don't typically break it down by the individual distributor, but we did have a much higher percentage of distributor business than we have had historically.

Was that of the specific geography?

It actually was in multiple areas anywhere from the Middle East, Korea, Brazil, a couple come to mind, but many of our distributor countries contributed well.

How much was it different to previous quarters? Was it staggeringly different? Were you perhaps going (inaudible) in certain of those geographies?

Maybe think of that as 2X kind of double the distributor level of business.

Okay. And then can you, can you give us an update on the sales head count? Has there been any change or maybe give a little more detail regarding the roles that you have brought in in the first quarter?

Really no significant changes in head count. We are still targeting around the 30 territories in North America, and it is about 25 internationally. No changes.

Can you talk a little more about the folks that you brought in during the first quarter?

Ken Whittey, we mentioned in the script. And Ken has been in the industry for quite some time and has done some different things from the research side to even broader roles in the sales and marketing. One of the things we talked about with True Scope is the need to have more senior capabilities on the clinical research front. So, we are pleased to have Ken join the team. And then, some of the other thing that is we think are important or continue to maintain close contact with our customers. So we talked about the tele sales function and the script as well.

How many tele sales folks did you bring in?

We have a team of three. And there purely servicing existing accounts, correct? That's right, that's right. And then the, we think that continuing to work with clinically research part is going to be important going forward, as well as new business development. So, we have a dedicated resource to that.

Okay. A few more questions. One, you mentioned a recall of the techno hand piece. Can you give us a little more detail on what happened there. And is that something, is it a going concern or can we take that off the table going forward?

This is a voluntary situation where we have elected to go in and for reliability purposes, it is, there's many issues why we are doing this. One of them being reliability. But as such, we are going to go in and replace these components. We have taken the charge in the current quarter, and it will probably be completed within the next two to three months.

How much again did say that was? You said it would have been, GM would have been 60%.

Right. The charge for the quarter was $425,000.

Okay. Last one and I will jump back in the queue, your G&A expenses in the quarter picked up sequentially. Are we more normalized rate? You were declining each quarter or almost each quarter of last year, and picked up in the first quarter of 2010. Is that going to be a steady rate going forward?

Yes, nothing significant but we do have seasonal expenses with G&A associated with our annual audit, that occur in Q1.

Okay. That makes up most of the difference?

That's probably a big piece of it, yes.

Okay.

But there's no, there's no adjustment in head count that we should know about. No. No change.

Okay. I will jump back in queue. Thanks.

Thanks.

Thank you. The next question is from the line of Phil Noble with Wedbush. Please go ahead.

Thank you. Ron, the first question relates to that gross margin, 60% adjusted for the tightened charge. What should we be thinking in term of a gross margin level going forward?

I think that as, at the current level of revenue volumes, so 13.7% for the quarter, our gross margins would have been more in the 60% to 61% range had we not had the charge and that's the right way too look at it.

Okay. Fine o fine. I wanted to be clear on the remark that you or Kevin made regarding ASPs in Q1. They were somewhat lower than the norm. Is that a function of Cutera's own mix or industry-wide pricing issues?

Regarding in the upgrade section it is lower because of product mix, we sold fewer profractual upgrades and instead sold other upgrades that go for lower prices. And then, in the products section, slightly lower ASP's due to product mix where we sold more Solera in the quarter as opposed to the Zeal products or sold a higher mix toward still significantly greater Zeal but we sold more Solera than usual.

As well as the distribution mix being unusually high. That has lower transfer pricing.

Okay. Thank you for clarifying. And then Kevin, you stated in the script that you're expecting to announce new application offerings in coming quarters. Does that include True Scope? Can you give any color around new product expectations over say the balance of the calendar year?

True Scope as we talked about in previous calls is an active research program for us. And obviously by staffing, the research function is one of the things we are focused. Can't give anymore visibility in terms of when and if it will be launched. But we are working on other things as well that we look forward to sharing in future quarters.

And those things you look forward to sharing, should we think about those as 2010 product opportunities or further out?

Further out,.

Okay. Thank you very much.

Thank you. Our next question is from Anthony Vendetti with Maxim Group. Please go ahead.

Thanks. First, Ron, if you can just give us the comp break out across the expense lines?

Sure. It was a total of $828,000 of which $148,000 was in cost of sales, $231,000 in sales and marketing, $96,000 in R&D and $354,000 in G&A.

Okay. Great. And did you say that tight resells were flat due to some of your customers just using less pulses per procedure? Is that what you said?

Yes, we believe from recent discussions with our customers, we are learning that they are using fewer shots for their procedures which of course in that, since they each hand piece has a limited shot gives the hand piece a longer life. We believe that's part of why they're using longer use than originally expected.

Is that because they're paying per shot and they're trying to conserve that. And the second question is how did you come about this? Is it just a couple customers doing this or do you think this is pretty widespread? If so, are they still able to get the efficacy with fewer shots?

We think that the protocols that are establish require significant number of pulses. So there is a trade off, we believe in terms of efficacy if they're not delivering it according to the published protocols. But I don't think that the trend is a material change from what we know. It is somewhat in the noise level. I wouldn't try to read the tea leaves too closely on what's happening with the tightened annuity business.

Okay. So it is not the norm, but you have encountered instances or have heard of cases where this has occurred.

That's right.

Okay. And international revenues, Kevin you mentioned Canada, Japan as being particularly strong this quarter. Any other areas because I know Australia has been typically a strong for you as well. Any other areas did you want to highlight?

Yes, I think that business in Brazil is very good for us. The Middle East business and South Korea, we've also seen a nice performance there. So, it's spread out from a geographic perspective.

And then any other investments that you are making to expedite the launch of Sound Surgical or Obigy's Products? Or are these new job functions mostly focused on internal development?

In the case of Obigy, they are some Obigy specialist in Japan that we were able to hire two people for that. So in the direct sales role, and we think that they will ducktale with our existing capital equipment sales force nicely. And there is some additional administrative support required for that. But it is also pretty modest.

Okay. And these were all, these relations with Obigy and Sound Surgical are for just international here in the US. The have exclusive in the US. Is that correct?

That's right. Both of those organizations have a direct sales team here in the US. So in the case of Sound, we distributed (inaudible) in Canada and then in many territories in Europe.

Okay. Great. And thanks.

Thank you. Our next question is from Dalton Chandler with Needham and Company. Please ahead.

Good afternoon.

Hi, Dalton.

Hi. I wanted to ask about the, the one large national order that you mentioned. Is that a spa order?

It is a mid spa type environment. But, it is somewhat of a unique customers.

Okay. So, I assume this is really an usually large order since you specifically singled it out. And it's probably not a recurring type number. Is that fair to say.

It's possible. They might have expressed interested in other similar size orders. But we were able to get this one buttoned down in the quarter. And it was a Solera platform. So that's one of the things we wanted to draw some attention to, that it's not the typical (inaudible) that we sell the most for our customers.

Okay. And then, I think you said that you expect to launch Sound Surgical this quarter? Is that right?

That's right.

Okay. So would you expect to have revenue this quarter or do you think that's going to take some time to ramp up?

Well, we expect to see it start to ramp up this quarter. So we don't expect a huge in rush of orders but we think it will gradually build into a nice business for us.

On these products where you are acting as a distributor, how did the margins compare to your own business?

Yes, they will be certainly lower than the 60% that we are accustom to on a consolidated basis. But somewhere in the 50% level is where I would see it falling.

Okay. Thanks a lot.

Thank you. And our next question comes from the line of Anook Mehta. Please go ahead.

Hello?

Sorry about that. That margin you just mentioned, is that 50% for both Obigy and for Vasure?

Yes. When we are a distributor type, when we are operating as a distributor, yes, so in both cases it would be approximately 50%.

And then, touching going back to the Research and Development efforts, are there any changes that are going on with within the Company that would accelerate time lines so that once you have an idea in the shop you can get it to market a little faster? Is that part of the effort, that is currently underway?

Absolutely. We are constantly trying to figure out ways that we can, shorten the development period and in some cases we have added additional talent in order to expedite that. So it has certainly has got our attention.

Is Ken going to be working on that as well.

Absolutely. He's pulled into new product development, and so it is a nice combination to have the clinical understanding coupled with the strong technical background in the core technologies. I think it will be nice combination for us.

And is Ken also working on development efforts, or is that separate?

That's separate. And that is really a full time job. So we really don't expect him to get involved with all of the things we are trying to accomplish.

Do you care to comment on quarterly question about cash use, and any, any maybe developments on that front?

Well, can't say that anything has changed on that front. We are spending a lot of time looking at opportunities out there and some small companies are out there in the marketplace. We are constantly looking at anything that would be exciting out there that would be potential acquisition target or potential distribution agreement. So, it's a nice environment to look over a lot of opportunities.

The last questions, just on the US sales going back to the tele sales idea. You don't really have a lot of disposal necessarily except for the tightened and refill. Are they going to be more focused on selling upgrades, or what service are they really providing to existing accounts?

In Ron's comments, he mentioned half of the business coming from existing customers. So, we see tremendous value in keeping close to our customers. And our sales force is obviously calling on our existing customers but often times they are looking at new accounts. So we don't, always get the well worth of customer support that we would like, and what this in house team, we think will help us to provide that.

That would include things like service contracts as well as the tightened refills and following up with upgrade opportunities as well.

Okay. Alright. Great. Thank you for taking the question, guys.

Sure.

Thank you. We have one final question from Larry Hemovitch with HNTC. Please combo ahead.

Good afternoon, Kevin. Hi, Ron. Hey, Larry. I just wanted to get a sense, it appears that relative to the other companies that have reported so far, that perhaps your US sales weren't as strong as theirs. I don't know if that impression is correct. just want to get I sense if you feel like you have had some market share loss. And if so, then maybe discuss some of the programs. You have talked about some but maybe a sense about the US market.

Sure. Like, I think we were pleased with how we wrapped up 2009. And in the fourth quarter we saw a 27% sequentially growth. And we had modest sequentially growth in the fourth quarter. So, I think in that where we have been, we think we made some progress on that front. And then when we compare the six month comparisons, those also look positive to us. So, we were certainly evaluating ourselves relative to how we are performing on a share basis. And there are a number of initiatives we focus on to improve our market share, but the Company history is one where we at one point had 80% of our business outside of dermatology and plastic surgery, and that strategy was a winning one when the macro environment was different. But as we have seen a different industry backdrop, we have been focusing on our efforts to get more in front of the derms and plastics. And so we have lots of initiatives to that end. It has our attention, Larry. And we want to be a winner on a market share perspective.

Great. Thank you, Kevin.

Thanks. Thank you very much. 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 the second quarter conference call in August. Good afternoon and thank you for the continuing interest in Cutera.

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