Cutera Inc (CUTR) 2010 Q3 法說會逐字稿

Greetings and welcome to the Cutera, Inc. third quarter 2010 earnings 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 being recorded.

It now my pleasure to introduce your host, John Mills of Integrated Corporate Relations. Thank you, Mr. Mills, you may begin.

Mr. Mills, you may begin your conference.

Thank you. By now everyone should have access to the third quarter 2010 earnings release, which went out to day at approximately 4 PM Eastern Time. The release is available on the Investor Relations portion of Cutera's website at cutera.com and withits 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 cash, and improving profitability; the development and commercialization of existing and planned new products; essential revenue growth from strategic alliances and planned new products; and obtaining regulatory clearances. 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 undertaking no obligation to update publicly 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 actually results to differ materially from the forward-looking statements, please refer to the section entitled "risks factors" in our most recent 10-Q, filed today, on November 1, 2010, with the Securities & Exchange Commission.

With that I'll turn the call over to the Company's President and Chief Executive Officer, Mr. Kevin Connors.

Thank you, John. Good afternoon, everyone, and thanks for joining us today to discuss Cutera's results for the third quarter ended September 30, 2010. On today's call I'll provide an overview of our results, and Ron Santilli, our CFO, will provide additional details on our operating financial results. Finally, I will provide closing comments and open the call for your questions.

Our revenue for the third quarter 2010 was $12.1 million, or approximately flat compared to $12.2 million reported in the third quarter 2009. Our revenue for the nine-month period in 2010 was also approximately flat when compared to the same period of 2009. We believe this may indicate that a revenue decline has stabilized, and we're hopeful that new products will have a positive impact on our domestic and international results.

In our third quarter our international revenue grew by 7% compared to third quarter of 2009. This growth was primarily sourced from Japan, with strong contributions from Canada, France, and some international distributors. The Japanese markets represents a strategic long-term growth opportunity for us, andwe are pleased that this market is becoming a larger contributor to our overall revenue. During the quarter, our revenue from the Japanese market was strong, with growth source from products and upgrades, a solid recurring revenue from our service and Titan refill business, and strong incremental revenue from the Obagi cosmeceutical and Radiesse filler products.

Our US revenue decreased by 13% in the third quarter of 2010 compared to third quarter 2009, and represents 35% of our total revenue. As we have mentioned on previous calls this year, we are looking to improve sales management focus and coordinate our marketing efforts with the demands of the US market. We're continuing to target the core market segments of dermatologists and plastic surgeons, as well as other established medical offices, because we belief they offer the best growth opportunities in the current market environment. During the third quarter, 2010, approximately 50% of our North American orders came from core physicians, and podiatrists. The podiatry specialty market is a new target market for us, and an opportunity to sell our GenesisPlus and other products.

Titan annuity for the third quarter 2010 was $648,000, a decrease of $640,000 from the same quarter in the prior year. This decrease was primarily due to our voluntary recall of certain Titan XL handpieces. We provided our eligible customers with a fully refilled Titan XL handpiece, which resulted in a lower than normal Titan refill revenue. We anticipate this annuity level to return to previous levels after the impact of the voluntary recall is absorbed. Adjusting for the decrease in revenue associated with Titan recall, our total revenue would have been approximately $12.7 million, an increase of 5% compare to the third quarter of 2009.

[And on to] our new cosmeceutical filler sales, in third quarter 2010 we sold approximately $1.1 million of these products. As a reminder, in Japan we started distributing Obagi physician-dispensed cosmeceutical products in February 2010 and have been distributing BioForm's Radiesse products since late 2008. These augment our current -- our Cutera laser and light-based products, and we are pleased with the initial revenue and profit contributions, as well as the cross-selling opportunities these products provide. Currently the cosmeceutical filler and Cutera laser light base -- install base overlaps approximately 10%. This is providing us with a unique opportunity to cross-sell cosmeceutical fillers with our light-based install base of customers with a great opportunity for us to cross-sell light-based equipment into the cosmeceutical filler install base of customers.

The Sound Surgical distribution opportunity has not yielded the results that we had expected. The VASER product has required more education than we anticipated, and certain regulatory restrictions in Canada that we haven't understand. In Canada the VASER procedure can only be performed in an operating room environment, which is a segment of the market that our sales force typically don't target, makingthis a more difficult sale than originally expected. These factors have complicated the selling process, and therefore we have decided to termination our distribution agreement with Sound Surgical.

Turning to research and development, we believe that strategic ongoing investments in product research and development are critical to our future success. In line with that principle, we're continuing to invest in R&D for the next generation of technology, and have increased our engineering and clinical research headcount to develop innovative solutions and expand the clinical understanding and applications of our current products.

Now I would like to share with you what is in the pipeline of our R&D group. We have -- we discussed on our last call that we plan to launch three new products in following 18 month. During the third quarter we commenced a stage launch of our new product target internationally at toenail fungus removal. And that product is GenesisPlus. We believe this is a fast-growing market, targeting primarily at podiatrists and dermatology specialties. Our new product utilizes our Nd.YAG technology and has a proprietary delivery device with a temperature sensor to improve the practitioner and patient experience with the procedure.

Plus has a general surgery clearance in the United States that allows us to market the product to podiatrists and dermatologists. During the third quarter we the quarter we received a CE mark with an indication for toenail fungus removal. We intend to submit a 510-K to the FDA soon with the intent to obtain a toenail fungus remove indication.

We plan to launch a best in class vascular product, targeted at the core market of dermatologists and plastic surgeons, February 2011 at the American Academy of Dermatology annual meeting, and we are on track with this launch. The design of this system is based on extensive feedback from dermatologists, and we expect this to be the best in class vascular laser solution, with the ability to treat a wide range of vascular treatments than any laser on the market today. Vascular treatments are performedby dermatologists daily, but there has not been significant improvement in the technology for these treatments. As a result, we designed this dedicated system that includes both visible and infrared wavelengths to allow safe and effective treatment of superficial and deep vessels with parallel cooling.

Lastly, we plan to add another new product during the second half of 2011. More details associated with this product launch will be forthcoming in the upcoming months. We remain committed to the core physicians in developing best of class light-based solutions and believe these new product launches will increase our revenue in the future. 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 third quarter 2010 conference call.

Third quarter 2010 revenue decreased by 1% to $12.1 million compared to the third quarter of 2009. Our nine-month ended September 30 also decreased 1% when comparing 2010 to 2009. Net loss for the third quarter was $3.5 million, or $0.25 per diluted share.

Product revenue decreased by 3% in the third quarter of 2010 when compared to the third quarter of 2009. Although our unit volume increased, our ASPs declined, primarily due to customers purchasing fewer applications on our platforms. Upgrade revenue for the third quarter of 2010 increased 5% when compared to the third quarter of 2009. Our customers continue to upgrade their platforms with additional technology and applications. The primary contributors of this sales growth was in our [flash net] and Pearl upgrade application.

Surface revenue for the third quarter of 2010 compared to the third quarter of 2009 was relatively flat at approximately $3.2 million. The primary components of our service revenue are the revenues associated with extended service contract amortization. This revenue has remained flat over the past several quarters due to primarily lower service contract amortization as a result of lower ASPs on our service contracts, offset by higher revenue from consumable handpiece purchases and time and material fees charged to customers who are out of warranty.

Titan annuity revenue was $647,000, down significantly from the same quarter in the prior year. This decrease was primarily due to the voluntary recall of certain Titan XL handpieces announced in May 2010. As part of this voluntary recall, we provide our customers with a fully refilled Titan XL handpiece, which resulted in a lower than normal Titan refill revenue in the second and third quarters of 2010. The increase of this revenue is occurring slower than we had expected. We expect to achieve increased Titan annuityrevenue during the fourth quarter and believe that our revenue should return to the historical run rate of approximately $1.4 million per quarter in the second quarter of 2011.

Fillers and cosmeceutical revenue was $1.1 million for the third quarter of 2010, which was up significantly from the third quarter of 2009. The primary reason for this growth was Obagi Japan cosmeceutical sales of approximately $700,000 in the third quarter of 2010. We started selling Obagi products in Japan in February of 2010 and are pleased with this increase in revenue source from the cross-selling opportunities this relationship provides. Fillers and cosmeceutical revenue for the third quarter had a nonrecurring element, therefore for modeling purposes we suggest using $800,000 of revenue per quarter in the future.

A significant percentage of our revenue sourced from existing customers. During the third quarter 2010, 52% of our revenue was derived from sales of service, upgrades, Titan refill, filler and cosmeceutical products. We remain committed to strong customer satisfaction and believe we will continue to realize revenue from these annuity revenue categories.

I will now address our operating performance. Our gross margin was 53% in the third quarter of 2010, compared to 60% in the third quarter of 2009. Our margins were unfavorably impacted primarily by the following factors. First the write down of our VASER inventory of $171,000 due to our intent to discontinue the distribution of this product. Without this nonrecurring write-down our margins would have been 55%. A 50% decline in our Titan handpiece refill revenue, combined with the expenses associated with refurbishing our global installed based of Titan XL handpieces resulted in an unfavorable impact to our gross margin this quarter as well. And lastly, we experienced a decline in ASPs for products and upgrades, primarily as a result of customers purchasing fewer applications on our platforms.

We typically target 60% gross margin at quarterly revenue levels in the $14 million range. Below the $14 million revenue level we expect the gross margin level to be below 60% due to absorption issues. Alternatively, we expect the gross margin rate to increase above 60% when quarterly revenue rises above $14 million.

Sales and marketing expenses were $5.8 million or 48% of revenue for the third quarter of 2010, compared to $5.1 million or 42% of revenue for the third quarter of 2009. This spending increase is primarily related to higher international spending associated with the higher international revenue, including the expenses associated with increase in our Obagi cosmeceutical business in Japan and three new functions added in the first quarter of 2010; business development, clinical development, and a telemarketing group to our install base. We expect to improve the leverage of these expenses in ratio to revenue as we increase our revenue.

Research and development expenses were $1.9 million or 15% of revenue for the third quarter of 2010, compared to $1.7 million or 14% of revenue for the third quarter 2009. As Kevin mentioned earlier, we plan to increase our investments in R&D and expect multiple product launches in the next 15 months. As a result we expect R&D expenses to increase; however, if our revenue improves, we expect that R&D expenses as a percentage of revenue should decrease from the 15% rate for the third quarter of 2010.

General and administrative expenses were $2.4 million or were 19% of revenue from the third quarter of 2010,compared to $2.1 million or 17% of revenue for the third quarter of 2009. The expenses were higher in the third quarter of 2010 due primarily to higher personnel and travel expenses and higher professional service fees for accounting and tax services.

Interest and other income net was $132,000 for the third quarter of 2010, compared to $288,000 in third quarter of 2009. The lower income is due primarily to extremely low yields on our investment portfolio and some foreign exchange losses. But the low yields on our investment portfolio reflect our focus on capital preservation during the recent uncertain financial markets.

In the third quarter, 2010, we had minimal net income tax expense as a result of [a tax returned] to provision adjustments in this quarter. This compared to an income tax charge of $12.1 million in the third quarter of 2009. The high tax expense of 2009 related to the creation of a valuation allowance against our deferred tax assets. For modeling purposes, we suggest using an effective income tax expense of approximately $50,000 per quarter.

Turning to the balance sheet, our financial position remains strong. As of September 30, 2010, we had $97.5 million in cash, marketable securities, and long-term investments, with no debt. This represents over $7 per outstanding share. During the third quarter, our operations consumed $1 million of cash.

Net accounts receivables at the end of the third quarter 2010 were $3 million, and our DSOs were 23 days. Inventory as of the end of the third quarter remained relatively flat when compared to second quarter. We continue to aggressively manage this asset and are turning our inventory in the range of three or four times per year.

Now that I concluded my overview, I'll turn the call back to Kevin.

Thanks, Ron. Through the next few quarters we remain focused on the following initiatives. One; improving sales productivity through improved sales training, focusing our sales and marketing efforts on physicians in the core market, and continuing to cultivate relationships with key opinion leaders.

Two; continuing our efforts on multiple R&D projects, including the following; the continued launch of our GenesisPlus product, the new vascular best in class laser targeted at the core market to be launched at the AAD in February 2011. Further more, we plan to begin clinical evaluation of this new vascular product in the current quarter.

Four; a third new product launch scheduled for the second half of 2011. We also plan to evaluate other complementary strategic alliances to further enhance our product offering and leverage our distribution channels. With appropriate swift execution of these important initiatives, we are targeting to achieve our goal of increased revenue compared to the third quarter of 2010. In addition, we expect to improve the leverage of our operating expenses as the revenue increases.

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

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. (Operator instructions). Our first question is coming from any line of Anthony Vendetti with Maxim Group. Your line is now open. You may proceed with your question.

Thanks. So I just wanted to verify. So had the volunteer recall of the Titan refill XLs not occurred, your total revenues for the quarter would have been $12.7 million. Isthat correct?

That's correct. About another $600,000 or $700,000 of revenue.

And the reason for the voluntary recall, specifically?

Yes, we touched on it on last quarter's call, Anthony. There was an variable probability of an unintended treatment outcome, but we took a very conservative position and decided to replace all of the affected Titan XL handpieces with a certain design.

So it -- a more controlled design to prevent the treatment protocol happening outside of that protocol. Is that what you are trying to say?

Yes. As I mentioned, it is a very, very low probability of that happening, but we wanted to be sure to take a very conservative position with it.

And is that recall now complete, and have they all been replaced at this point in time?

At the end of September, it was largely completed. It's hard to get to 100%, but we're in that 90% range.

Okay. And then in terms of the credit markets, what are you seeing out there? Is it still relatively tight? And are you seeing any of the leasing companies or maybe the banks coming back?

We're still continuing to see tight credit markets out there. The credit-worthy customers continue to find money some way, whether it's through a leasing company, leasing source or individual bank loans. But the higher-risk customers are still struggling to get money to open a business or open satellite offices. So we're still seeing that to be fairly tough out there.

Okay. And then obviously the derma fills and cosmeceutical sales this quarter was very strong. What are your expectations going forward for that?

Well, we're pleased with the growth we're seeing there, and I think we're also very pleased with the synergies that we're experiencing with those products. As we mentioned in the call, cross-selling in both directions between the fillers and the cosmeceuticals and the capital equipment part of the business, so it's opening up lots of nice elements to us.

Okay. And just in terms of -- because we have listened to a couple of the conference calls so far this quarter. Are you seeing demo requests or lead generation from your sales force increasing? Stay the same? What are you hearing out there?

Well, obviously when we're launching new products, that gives our sales force a reason to call on doctors, so one of the key things that we're focused on is the three new product launches in that 18 month period of time. And now it's 15 months, because we already have the first one out. So strong commitment to R&D, and I think that's opening up doors and getting appointments and allows our sales force to bring new exciting things in to their office.

Okay. And then just two final ones. Pricing, is that -- is there any pricing pressure, any discounts you were offering? And just to break down the stock comp among the different line items?

So -- go ahead, Ron.

Sure. From a stock comp perspective for the quarter, Anthony, we had $1.1 million, of which about $200,000 was in cost of sales, $300,000 in sales and marketing, $200,000 in R&D, and about $$400,000 in G&A.

All right.

With regard to pricing, we're continuing to see our customers purchase fewer applications on our devices in order to have a lower outflow of cash. We end up getting more upgrade business, it seems like, down the road, but they are just buying fewer upfront. So that has some impact on our ASPs, but other than that, we're seeing it hold fairly constant.

So they are buying fewer upfront modules or handpieces, but pricing is relatively flat? Then what was the inventory write-down of $177,000? Was that the calls? And would the margin have been higher if it wasn't for that?

Yes. The write-down was on the VASER inventory, since we decided no longer to continue in that business. Itwas $171,000, and had we not had that write-off, our gross margin would have been 55%.

Okay. Great. Thank you.

Thank you. (Operator instructions). Our next question is coming from the line of Mr. Morris Ajzenman with Griffin Securities. Your line is now open. You may proceed with your question.

Hi, guys.

Hi, Morris.

Just a quick follow-up with that gross margin change year-over-year, that decline. You highlighted the write-down of the inventory, where gross margins would have been 55% instead of 53%. What was the Titan recall? The lower revenue amount? What -- I guess we can back into it. It was $600,000. We can just back in to the inventory -- the gross margin impact?

Yes, clearly that has a fairly large impact as well on a couple of fronts. One, that's higher margin business than -- it is one of our top lines, and we have seen significant revenue that we'll ultimately get back over time. The second part is the factory is set for that level of business, and we're going to continue that level of factory size, because that business will be coming back within the next few quarters. So it does have a fairly charge impact on gross margin.

Could you quantify -- I mean, you quantified the inventory reduction caused you 200 basis point reduction in gross margins in year over year. Could you quantify what the impact was to gross margins for the Titan this quarter?

It would probably be in the 200 to 300 basis point range.

Thank you. Another quick item here. You touched on SG&A in your discussion. It was 19% versus 17% last year as percent of revenues. Not SG&A. G&A, I'm sorry.

G&A, yes.

How should we model that going forward? Is that going to be an ongoing higher percent revenues? Assuming revenues -- if we made the assumptions revenues didn't change much, would stay at this level?

Yes, for G&A, I would think of it more in absolute dollars. If you look at the range between $2.1 million and $2.4 million, we're fairly constant, so as our revenue changes moderately, I don't see much movement in G&A. Obviously a significant change in revenue would have some impact there, but in the meantime for modeling purposes, somewhere between $2.1 millionto $2.4 millionper quarter is probably the appropriate range.

And last question. Cash burn for the quarter of $1 million, down from the cash burn of previous quarters -- or at least the past quarter. Looks like the major components of that was improvement of accounts receivable and then the accrued liabilities. Should we assume that's one quarter of happening, and we can't -- we should not expect to see that to repeat itself thenext few quarters if [all] things are unchanged?

Probably. I would tend to agree with you on that that our balance sheet is fairly well managed, and I'm not sure we're going to see a whole lot of shifts in other working capital accounts. But certainly our goal is to remain at least cash neutral here in the short term.

I said last question, but one more. You had revenues in Titan of about $650,000 approximately.

Yes.

And you are looking at, I think you said, $1.4 million per quarter by the second quarter of 2011. Is that correct?

That's correct, with a ramp-up between now and then.

Right. Would the ramp-up be then $200,000, $300,000 per quarter to get to that two quarters out?

We have never experienced this before, since this was the first recall that we had to do, and we provided our customers with a free refilled replacement as a result of the inconvenience. So I don't have any real history on -- to look back towards, but my guess is -- I would go to what you just said, that I would just kind of linearly work my way up to $1.4 million in Q2 of 2011

Thank you.

Thanks, Morris.

Thank you. Ladies and gentlemen, at this time there are no more questions in the queue. I would like to turn the call back to management for any further comments.

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 fourth quarter conference call in February. Good afternoon, and thanks for your continued 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, and have a wonderful afternoon.