Cutera Inc (CUTR) 2011 Q1 法說會逐字稿

Greetings, and welcome to the Cutera Inc. first quarter 2011 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 is now my pleasure to introduce your host, John Mills of ICR.

Thank you. By now everyone should have access to the first quarter 2011 earnings release, which went out today at approximately 4 PM Eastern Time. The release is available on the investor relations portion of Cutera's website 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 cash and improving profitability; development and commercialization of existing and planned new products; potential revenue growth from strategic alliances and planned new products and obtaining regulatory clearances; natural disasters, including the unfortunate situation in Japan. Also, management may make additional forward-looking statements in response to your question.

These forward-looking statements do not guarantee future performance and therefore should not be relied upon -- do not rely on them in making an investment decision without considering the risks associated with such statements. Cutera cautions you to not put place on forward-looking statements, which speak only 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 recent 10-Q filed today on May 2, 2011 with the SEC.

And with that I'll 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 31,2011. On today's call I'll provide an overview of the results, and thenRon 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 questions.

Our first quarter revenue was $11.6 million, and our net loss was $3.9 million, or $0.28 per share. Our revenue in the United States declined by $340,000, or 7%, compared to the first quarter 2010, due primarily to the time needed to ramp up our new North American sales management team and Titan refill -- reduced Titan refill volume due to the voluntary recall in the second quarter of 2011. Our international revenue during the same period declined by $1.8 million, or 19%, due to primarily the recent earthquake disaster in Japan and lower revenue from our European distributor countries. This was partially off set by strength in our Asia-Pacific distributors.

In the first quarter we launched our Excel V vascular laser system at the American Academy of Dermatology meeting. We did not have revenue associated with this product in the first quarter, but during the second quarter we initiated commercial shipments in April. We look forward to a continued ramp up of sales and marketing activities that include shipments of demonstration equipment to our sales organization and continued development of reference sites. We are encouraged by the results from the evaluation systems that have been in the hands of well-respected luminary physicians, and look forward to rolling it out on a larger scale. first in the United States. then internationally.

In the first quarter 2011 we estimated that the unfortunate events in Japan had a negative impact on our revenue by approximately $1 million. The Japanese market has been a strong growth opportunity for us over the past few years and represents approximately 25% of our revenue in 2010. The first quarter shortfall was the result of both of our inability to complete deliveries to certain customers, as well as our inability to solicit new orders in the second half of March. It is our belief, however, that the annuity revenue streams of filler cosmeceuticals, Titan refill and service business in Japan has been impacted to lesser degree during this challenging time. We will continue to closely monitor the market conditions.

We believe the following initiatives will put us in a stronger performance beginning in the second quarter 2011. One, the commercial -- commencement of the commercial shipments of our Excel V laser system. Two, the recent FDA clearance of our GenesisPlus product for toenail fungus. We have been unable to initiate sales and marketing activities in our domestic market for this indication until receiving the clearance in March and April. As a result, we are now able to target approximately 15,000 podiatrists in the United States, and we believe the dermatology specialty will be interested in this product , as many of them will treat -- do treat this condition in their practice. A strategic alliance with PSS will allow us to ramp up and reach this in an expedientmanner.

Three, our confidence in the leadership of our recently hired North American sales management team and the growth strategies they have implemented which we believe will result in stronger performance for the balance of the year. As a reminder, we hired Michael Poole as our VP of Sales and three new regional managers in less than five months, and we're pleased at how quickly they have assimilated into their role.

Five, strengthening our research and development leadership with the addition of Len DeBenedictis as our Chief Technical Officer in the first quarter 2011. During the first quarter, approximately 52% of our North American orders came from core physicians and podiatrists. The podiatry specialty is a new target market for us and represents an opportunity to now actively market and sell our GenesisPlus and other products. We are currently -- continuing to target the core market segments as well as established medical offices, because we believe they offer the best growth opportunities in the current market environment.

Turning to our cosmeceutical and filler products, in the first quarter 2011 we had revenue of $1.1 million from these products. As a reminder, in Japan we started distributing Obagi physician-dispensed products in February 2010, and we have been distributing BioForm's Radiesse products since late 2008. These products augment our Cutera laser- and light-based products. We are pleased with the recurring revenue model and profit contributions, as well as the significant cross-selling opportunities that these products provide. Currently, cosmeceutical and fillers and Cutera laser- and light-based install base overlaps by approximately 10%. In the first quarter 2011, we expanded the product line by adding ElastiLash and ClenziDerm, and we are continuing to evaluate other lines from Obagi.

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

Now I'd like to share with you the current status of our recently introduced products and future development efforts. One, in April 2011 our GenesisPlus product received FDA approval for toenail fungus treatment. We will -- this will enable us to enhance our sales and marketing efforts to approximately 15,000 podiatrists and many dermatologists in the United States to capture a larger percentage of the toenail fungus treatment market.

Two, we launched our Excel V vascular laser in February at the American Academy of dermatology meeting, and commenced shipments in April. During the second quarter of 2011 we expect to ramp up our sales and marketing activities associated with this product launch and record revenue from this product.

Three, lastly, we plan to add another product launch during the second half of 2011. More details associated with this product launch will be forthcoming in the upcoming months.

Now I'd like to turn the call over to Ron to discuss our financials in more

Thanks, Kevin, and thanksto all of you for joining us today on our first quarter 2011 conference call.

First quarter revenue was $11.6 million, or 15% lower than the first quarter of 2010. Net loss for the first quarter was $3.9 million, or $0.28 per diluted share.

Our product revenue declined in the first quarter by 28% when compared to the first quarter of 2010. This decline was due in part to the recent earthquake disaster in Japan, as well as lower revenue from our European distributor countries. We believe that our product revenue will increase sequentially beginning in the second quarter of 2011 due to commencement of Excel V shipment -- system shipments and the sales and marketing activities surrounding the GenesisPlus FDA approval that Kevin discussed in the call.

Upgrade revenue declined by 32% to $821,000 in the first quarter of 2011 compared to the same period in 2010. Historically a new product launch has resulted in an increase in upgrade revenue. However, in 2010, we launched GenesisPlus, and standalone system that is not up gradable to our existing products.

Service revenue for the first quarter of 2011 was -- compared to the first quarter of 2010 was flat at $3.3 million. The primary component of service revenue is extended service contract amortization. This revenue has remained flat over the past several quarters due primarily to lower service contract amortization as a result of lower ASPs on our service contracts, offset by higher revenue and consumable handpiece purchases and time and material fees charged to customers who are out of warranty.

Titan annuity revenue in the first quarter of 2011 was in line with our expectations at $1.1 million, adecrease of $265,000 from the same period in the prior year. This decrease was primarily due to our voluntary recall 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 were pleased with the sequential increase of approximately $122,000 of annuity revenue from the fourth quarter 2010, which we believe will continue to increase until we return to our normalized quarterly revenue of $1.3 million to $1.4 million in the second half of 2011.

Fillers and cosmeceutical revenue was $1.1 million in the first quarter of 2011, which was up significantly from the first quarter of 2010. And as a reminder, we started selling Obagi products in Japan in February 2010 and are pleased with this increase in revenue source and the cross-selling opportunities this relationship provides. As Kevin mentioned earlier, in the first quarter of 2011 we introduced two new Obagi products that we believe will be well received by our customers and will contribute to our future revenue growth of this product category.

A significant percentage of our revenue is sourced from existing customers. During the first quarter 2011, 54% of our revenue was derived from sales of upgrades service, Titan refills and filler 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 55% in the first quarter of 2011, compared to 58% in the first quarter of 2010. The 55% margin is lower due primarily to reduced leverage of our relatively fixed manufacturing cost as a result of lower overall revenue volume, lower Titan refill revenue during the quarter -- that traditionally has a higher gross margin than our consolidated gross margin. -- andsome setup costs associated with the launch of our Excel V product, such as tooling and other fixed costs. We believe our gross margin will improve to approximately 60%, with quarterly revenues in the $14 million to $15 million range. Below these revenue levels our margin will be lower, and conversely above these revenues they will be higher.

Sales and marketing expenses were $5.9 million, or 51% of revenue in the first quarter of 2011, compared to $6.4 million and 46% of revenue in the first quarter of 2010. The lower expense level was due primarily to lower promotional and marketing related expenses. Sales and marketing expenses as a percentage of revenue were at 51%, due primarily to the lower revenue. We expect to improve the leverage of our sales and marketing organization with anticipated increase in revenue beginning in the second quarter of 2011. We have 27 sales territories in north America and are encouraged by the recent sales management changes and growth strategies implemented that Kevin touched upon earlier, and believe they will result in increased growth in North America, starting from the second quarter of 2011.

Research and development expenses were $2.1 million for the first quarter of 2011, compared to $1.5 million for the first quarter of 2010. This increase was due primarily to material spending and personnel expenses associated with our new product development efforts. As Kevin mentioned earlier, we plan to increase our investments in R&D and expect another product launch in the second half of 2011.

General and administrative expenses were relatively flat at $2.3 million first quarter 2011, compared to $2.2 million for the first quarter of 2010. We don't anticipate much quarterly variations in this spending going forward, except that our second quarter expenses are typically higher than the first quarter due to our stock compensation expenses related to the issuance of annual stock grants to our outside Board members.

Interest and other income net was $184,000 for the first quarter of 2011, compared to $166,000 in the first quarter of 2010. Income tax expense was $32,000, which was primarily related to our foreign businesses. As a reminder, we have a 100% valuation allowance for our US taxes and have only a small amount of minimum and capital based taxes in the US. For modelling purposes, we suggest using an effective income tax expenses of approximately $50,000 per quarter for the remainder of 2011.

Moving to stock-based compensation expenses, for modeling purposes, beginning in the first quarter of 2011, we have included pre-tax stock-based compensation expenses by function as a standard analysis in the earnings release table. So please refer to that if you have questions.

Turning to the balance sheet, our financial position remains strong. As of March 31, 2011, we had approximately $96 million in cash, marketable securities and long-term investments with no debt. This represents approximately $7 per outstanding share. During the quarter, our operations consumed approximately $1.5 million of cash. Due to the leverage in our business model, as revenue improves, this should result in improved profitability and cash from operations. Net accounts receivable at the end of the first quarter of 2011 were $3.3 million, and our GSOs were 26 days.

Inventories at the end of the first quarter of 2011 increased by approximately $820,000 when compared to the fourth quarter of 2010. The increase is due primarily to our buildup of Excel V inventory associated with that product launch. We continue to aggressively manage this asset and are turning our inventory in the range of three to four times per year.

Now that I concludes my overview of Cutera's financial performance, I'll turn the call back to Kevin.

Thanks, Ron. With appropriate [Swiss] execution of the key initiatives, we believe we will achieve our goal of increased revenue and approved leverage of our operating expenses in the second quarter, resulting in improved performance.

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

(Operator Instructions). Our first question is from Phil Nalbone with Wedbush Securities. Please go ahead.

Hello. So, Kevin, you haven't given financial guidance in a very long time, so in some fairness to the Company, street expectations for the quarter were indeed a made-up set of assumptions. But the industry is growing again, and after Cutera's big improvement in the December quarter, I think it was pretty reasonable for us to expect some growth for Cutera on a year over year basis in the March quarter. You missed by a wide margin. Walk us through exactly where weaknesses were in the quarter. What went wrong in North America? Exactly what went wrong in Japan, considering that, I believe, you get the vast majority of your revenues from within the city limits of Tokyo, which was largely unaffected by the natural disasters. And then talk about why there was no contribution from new products. Or perhaps there was some, but it would appear that there was very little in the March quarter. And then I'll have a follow-on.

Okay. Let me see if I can hit on all these. First of all, the last one, the new products, we did launch GenesisPlus in the third quarter, but we have been clear that the FDA clearance was uncertain to us, so we're happy to finally get that in the current quarter. So that prevented us from marketing that product for that indication in the US market, which is typically the biggest opportunity for new product launches.

Japan, we indicated the shortfall was for two reasons. One is that we had product that we couldn't deliver. As it turned out, the earthquake tsunami left certain facilities damaged, and we couldn't get the sold equipment delivered to the site. That's improved since, but had an impact. And then, as you know, this is a nonlinear business, with the last couple weeks typically being the most significant period of contribution of new orders, and we weren't able to do that. So we look at that as somewhere around $1 million of impact for there.

North America, we talked about Michael Poole joining us at the very end of Q4. We think his impact has been felt. We hired him to build a strong team, and as we mentioned in the script, Michael has brought new leadership in the next level below him. So we're pleased to be able to get seasoned industry people to join us, and they in turn also brought some new sales reps to the Company in the first quarter. And there is a time delay from those changes to be reflected in the top line. So we're looking forward to the balance of the year to see that growth trajectory continue. We think the trends look positive in North America, and I think the activity is markedly different, but we didn't see it impact the top line in Q1.

But we think steps were taken are the right steps, and we think that with the new indication for the toenail fungus, coupled with Excel V being launched at the American Academy of Derm meeting in mid quarter. We didn't ship product in the first quarter, but we have initiated commercial shipment of that in the first month of this quarter.

So, did I hit on all the bullet points you touched on there?

I think you did. Look, going forward, we're gonna need to build models. We're going to need some sense for how you're managing the business for growth. Can you give us some sense for when your internal models suggest a resumption of year over year growth in the business? Does that happen this quarter or two quarters out or three quarters out? And, Ron, if you could remind us, at what level of quarterly revenues do you get back to break even and generating cash?

Well, let me touch on the first one, Phil. First of all, we're not going to get into the details of it, but from an order perspective, we trended nicely in North America Q1 relative to the previous year. And we think that with the key product launch information we just discussed, coupled with our sales team being invigorated, we think that the current quarter we are expecting improvement [and] seeing growth. So this is nothing that we're pushing for the second half. We think that the decisions we've made were the right ones, and we think we're going to see the impact in the near term.

All right. So we expect to grow not only year over year, but sequentially looking at Q2. In terms of your other question, Phil, we expect to be cash accretive in the $14 million range -- quarterly revenue of $14 million, and break even GAAP in the $15 million per quarter region.

All right. Thank you very much.

Thank you. The next question is from Tom Gunderson with Piper Jaffray. Please go ahead.

Good afternoon, guys. The up sequentially. I just want to make sure that we're getting this right. The increase from the product approvals, the settling down of the sales force, et cetera, will be more than enough to make up for any slowness in Q2 in Japan?

Well, let's dig into Japan a little bit. As you know, Thom, last year we talked about how our performance in Japan had just been setting record levels. So we think that we've got a strong team and got a nice -- very nice business model with diversified revenue sources. It's unfortunate to experience what that group has had to manage through, butthe good news in Japan, if there is good news, is that capital equipment is a significant part of our revenue, but we also get a significant part of our revenue from more recurring sources. So topicals, injectables, our Titan refill business as well as our service business represents a significant portion of our business. And we don't think that is as exposed to the uncertainty in the region.

We don't expect our capital equipment business to go to zero, but it's hard for us to understand how we should look at that as we look into the future. The team itself is still very active in the market place, and it's a very resilient team, and we think that we'll manage through this as best we can.

Okay. And then, if I shift to North America and the new VP of Sales and three new regional managers, and I think I heard you said in the answer to a previous question that there was some new people put into territories. First, can you give us a sense of what the turnover was at the territory level? And second, are you on May 2 at full force, up and running, everything clicking as far as the sales management and territory management?

Sure, Tom. We were delighted to have Michael join -- or come back to Cutera in December. And we have him here to build that team. So it wasn't just Michael we were looking to hire. We were looking for Michael to build a world-class team to take us to where we need to be in this industry. And they, in turn, have brought some top talent with them. So I'm not aware of any gaps in terms of -- maybe a territory or two, but not a material amount that's open. So, we're very pleased with the caliber of the sales reps that we've been able to recruit.

It's not -- Yes, sorry to interrupt, but it'snot just open territories that I'm looking at. Because we could have said that three months ago or six months ago. What I'm looking at is that -- whatever that subjective part of it is that caused the downturn in Q1. That's behind us, and in Q2 you're ready to go. People have got quotas, and they're out there working at full force. Is that a fair statement?

I feel as if the team is solidified, and we're expecting nice performance in the second quarter.

Okay.

It's not in flux.

All right. That's it for me. Thanks, guys.

Thanks, Tom.

Thank you. The next question is from Dalton Chandler with Needham & Company. Please go ahead with your question.

Good afternoon. I just wanted to make sure I heard this right. Did you say the impact of Japan in this quarter was $1 million in revenue?

That's our estimate, yes.

Okay. So you're including laser sales in there as well as the fillers and topicals?

That's predominantly -- in fact, I'd say it's exclusively laser and upgrades. We didn't have disruption from the other source of revenue. As we indicated, Dalton, Japan represented 25% of our revenue last year, so it's a material part of our business.

There was a piece of our revenue, Dalton, that was sitting in customs, and customs had literally shut down, so it couldn't clear. That was a piece, and thenKevin indicated earlier the solicitation of other orders at end of the quarter that typically occur. And that's the $1 million.

Okay. And then just to clarify again on the new products, the Excel V is shipping in a commercial quantities now? The GenesisPlus is approved, but you've not started to ship in commercial quantities?

We are. We were limited from marketing that indication until we got the clearance in Q2. So we were not able to market that treatment in Q1, and it wasn't reflected in our numbers like we'd like it to be.

Okay.

The indication and Excel V both started in April. That's when we were ready to roll.

Okay. All right. Thanks, guys. That's all I have.

Thanks, Dalton.

Thanks, Dalton.

The next question is from Morris Ajzenman with Griffin Securities. Please go ahead with your question.

Good afternoon.

Hi, Morris.

You gave us a specific number, $1 million impact revenue Japan. Then you spoke about earlier lower European sales in this quarter. Would you care to venture what sort of dollar impact that was when you say lower? And then looking out, is there any reason to believe that's going to pick up in the second quarter? Any visibility you have there?

Sure, Morris. We have a direct presence, as well as a distributor management strategy in Europe. And our direct operation did is relatively well, but ourdistributor business was off by somewhere around $1 million. So we don't see that as a market condition issue, and we have sales management that's been modified to rectify that, and we anticipate us getting that situation improved in the near term.

So near term meaning into second quarter, maybe into third quarter?

Well, all we said was we're disappointed with the first quarter performance, and that's being addressed. So we like to see that going into the first -- the second quarter and throughout the balance of the year.

Okay. And on the -- again, congratulations on the toenail fungus machine --

Thank you.

Getting FDA approval. You have a pretty large population base there. Wouldn't take much -- even if 1% share, it would be very meaningful. Machine retails for $[70,000], is that right?

That's right. That's the list.

That's the list, yes. What sort of share gains -- what sort of size market do you see for this? What are you getting initial orders of, without being too specific? Should we be excited about this for next year, or will this take longer before you -- it wouldn't take too many units to have a meaningful impact on the top line. How does this play out? How do you see this impacting?

Yes, itis a significant market opportunity, and the number of -- the patient population demographics are very favorable to support a sizable capital equipment business. With that said, this is our first product offering that targets podiatrists. We're also targeting dermatologists. And our global sales experience with that has been pretty exciting. We're finding it looks different around the world, but we're finding lots of interest in this application, and we can't really forecast what that could be in the near term, but patients are very satisfied with these treatments, and physicians are finding tremendous demand, and it's a lucrative private-pay procedure for them to add to their practice.

So there's nowhere you can help us getting some feel for what this means over the next few quarters? Will it be anything meaningful, or will it be very modest for the next quarter or two? Specifically from this new introduction?

Well, we had somewhere around 25% of our revenue come from this application in North America. So -- and that's without the clearance. So it's early in the rollout, and we're the first major company that has a global rollout of this application, we'recontinuing to stay very close to it.

Thank you.

(Operator Instructions). The next question is from Anthony Vendetti with Maxim. Please go ahead with your question.

Thank you. So, 25% is -- Kevin, you said 25% of -- is that total revenues or laser revenues?

List by units.

By units.

Total revenue dollars. Approximately 25% in Japan.

Oh, okay. I thought we were talking about toenail fungus, but go ahead.

I'm sorry. Maybe I misunderstood. What's the question, Anthony?

It was about the GenesisPlus. But they're both 25%.

They're both 25%, yes. 25%, in the case of GenesisPlus, is the percentage of unit sales.

Units,okay. And remind us -- so since it wasn't yet FDA cleared for toenail fungus, what were most of the physicians buying it, for or were they just using it off label?

Well, there's an awareness for lasers for this application, so we'vehad a lot of physicians -- or podiatrists and physicians that have contacted us. We're out in the market. We got the CE mark. We've had that for sometime. As a result, we have an international part of our website where we have been able to provide information of this technology. And now the US clearance, we're really excited to be able to have targeted marketing campaigns to exploit this.

Okay. And I think I heard the number 53% when you were talking about core, including podiatrists. Is that right for sales for this quarter?

Yes. We had 35% in a core, and the podiatrywas actually 17%.

Okay, 17%, I'm sorry.

It was 26% last year, so it'sgonna move around.

Okay. So core was 35%, plus the podiatrists, you're at 52%, 53%.

Yes, 52%. Yes. Exactly in that range.

Okay. And in terms of shifting to the second half product launch, is that more of July/August thing, or is it more likely back half of the year for the new product launch?

Well, we -- as we said in the -- mentioned in both the press release and the script, we are really delighted to have Len DeBenedictis join the Company in January. And he has been surveying all of the R&D programs that are currently active. He's finding lots of exciting things. And with the Excel V now being a launch product that's shipping, and getting the FDA clearance for the GenesisPlus, those are both significant things from the R&D perspective, but we have a commitment to plan to launch another product before the end of the year. And beyond that, we're looking at 2012 engineering pipeline, and we're excited about what we've got for next year as well.

Okay, great. And then just, I know you probably can't for competitive reasons provide too much information, but maybe you could talk about whether or not it's a product that addresses something that your current products address? If it addresses something competitors don't currently address or don't currently address well?If it has a disposable component? Anything like that you can help us with?

We're gonna stay silent to that, Anthony, for competitive reasons.

Okay.

But I think the -- hopefully, the take away message here is we've even stepped up our R&D commitment, and we think we've got some real exciting future products that we'll be commercializing.

And Len I know from his days at Reliant. So on Japan then. So, it was approximately, as you said, instead of $1 million impact, mostly from laser and upgrade sales. And that was really toward, since the tsunami happened, beginning of March. It was basically for the second half of March. Last three weeks or so in March. Is it your view that things are relatively back to business in Japan, or is it too tough to say what the potential impact would be for the second quarter of this year?

I think in terms of how our operation is functioning, it's largely back to normal. There are some interruptions that have happened in terms of power and some things about transportation that have been impacted, but they seem to be getting better with each passing day. We're being cautious in terms of how we're painting the future of the capital equipment business, just because it's a fluid situation, and we're still getting lots of traction in terms of the sales and marketing activities. Hasn't shut down. But how that translates into our revenue is something we want to get more experience with before we comment on it.

Yes. It's hard to gauge the demand. Even if operations are largely back at this point, it's too early.

Yes, it's too early.

Just lastly on the margins, Ron, you commented I guess on what you need to do to get back to the core, what your gross margins used to be in terms of revenues. So, the lower margin in this quarter is mostly or completely attributable to the lower revenues? I guess the tack-on question to that is, ASP still stable for the business? And then if you could just comment on the credit markets?

Sure. We're not -- the ASPs, our competitive side hasn't changed significantly. The lower margin is primarily driven [through] the higher, relatively fixed costs associated to the operation. So the $11.6 million is what drove that gross margin down. To a lesser degree, because we have lesser Titan refill business, and that's high margin business. But that's on it's -- coming back from the voluntary recall last year. And then we did have some setup costs associated with the Excel V product launch, tooling and other fixed costs that were expensed during the quarter that impacted the margin. So as we mentioned, kind of in the $14 million to $15 million range, we expect to be able to get back to a 60% gross margin.

With regard to the credit markets, I mean, they're still very tight out there. But the customers that we're targeting, the physicians with the established offices, typically are able to find financing, whether it's through leasing companies or bank loans. We aren't having significant problems, as is evident through our DSO, in terms of collecting for the people that are really credit worthy andlooking to buy the products.

Okay, great. Thanks, guys.

Thanks.

There are no further questions in the queue. I'd like to turn the call back over to Kevin Connors for closing remarks.

Thank you, all, for joining us today to learn more Cutera, and welook forward to updating you in the future.

This concludes the teleconference. You may disconnect your lines. Thank you for your participation.