Cutera Inc (CUTR) 2011 Q2 法說會逐字稿

Greetings and welcome to the Cutera second 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, Mr. John Mills of ICR. Thank you, Mr. Mills, you may begin.

Thank you. By now everyone should have access to the second quarter 2011 earnings release which went out today at approximately 4.00 p.m. Eastern Time. The release is available on the investor relations portion of Cutera's website at www.cutera.com. And with its form 8-K filed today with the SEC and available on its website at www.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, obtaining regulatory clearances, and the impact of natural disasters, including the disastrous earthquake in Japan in March of this year.

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 (inaudible) 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 recent 10-Q filed on August 1, 2011 with the Securities and Exchange Commission.

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. Thanks for joining us today to discuss Cutera's results for the second quarter ended June 30, 2011. On today's call, I will provide an overview of our Company's performance and then Ron Santilli, our CFO, will provide an overview of our financial results. Finally, I will provide some closing comments and open the call to your questions.

We are pleased with 22% revenue growth achieved during the past quarter when compared to the second quarter of 2010. This improvement is a direct result of key initiatives associated with realigning our US sales organization and recent new product introductions.

In April, our GenesisPlus system received an FDA clearance for toenail fungus. As a result, we focused our sales and marketing efforts related to this product on the approximate 15,000 podiatrists in the United States. We received Health Canada clearance for toenail fungus in July of this year, which we expect will contribute to our third quarter performance.

We are encouraged with the early market response of our GenesisPlus product, which can be promoted for toenail fungus, warts and other procedures. With the recently granted FDA clearance, we believe PSS, a distribution partner in the United States, who has a strong channel in the podiatry specialty market, will enable us to expand our presence. We also believe that dermatologists re interested in this product as there is significant patient demand for the treatment of this condition.

We continue to expand clinical research for our Excel-V vascular system, as this is required support for successfully penetrating core physicians. During the second quarter we commenced revenue shipments and are pleased with the response from global key opinion leaders in vascular surgery, as well as our customers, and expect this to be an important part of our future revenue growth. As a reminder, we believe this to be a premier vascular system in this market as it provides practitioners an ability to treat all vascular conditions, both on the face and body. The Excel-V was designed with input from thought leaders in dermatology and plastic surgery.

Shifting to our revenue distribution, we are pleased to experience a balanced geographic mix. In the United States we are pleased with the initiatives that our sales Management are driving as a result of which we experienced 19% growth in the United States in the second quarter of 2011. We believe our strength in the United States has us well positioned for continued top line growth. We currently have 27 sales territory in the United States and Canada.

Our business outside of the United States grew 24% in the second quarter 2011 compared to the same period in 2010 with particularly strong performance from Canada, Australia and our network of distributors in the Asia Pacific and European markets. We are encouraged with an apparent rebound of our Japanese business given the uncertainty associated with the March disaster. During the second quarter, we continued to have success in combining Cutera products and upgrades with filler cosmeceutical products from Merz and Obagi. These filler and cosmeceutical products continue to complement our laser light -based products and have provided us with a growing recurring revenue stream.

Turning to research and development, we believe that strategic ongoing investments in product research and development are critical to our future success. The team led by Chief Technology Officer Linda Benedictus has our R&D team well positioned for future product offerings. In line with that principal, we are continuing to invest in R&D so the next generation of technology and have increased our engineering and clinical research expenditures to develop innovative solutions and expand critical understanding and applications of our current products. Approximately 1 year ago, we discussed our goal of launching 3 new products before the end of 2011. We are pleased with the recent GenesisPlus and Excel-V product launches and our ability to secure a significant number of successful global regulatory clearances.

We view FDA clearance for the GenesisPlus early in the second quarter as a significant milestone, given an unsuccessful outcome would have resulted in a major setback in the domestic market. With this clearance, however, the agency required additional engineering efforts to successfully secure the product clearance from the FDA. In addition, we experienced a longer than anticipated engineering hand off to manufacturing with the Excel-V launch. These 2 factors resulted in resources being diverted from our originally planned third product launch in the second half of 2011. As a result, there could potentially be a delay in that launch.

We will provide an update on our progress during the third quarter conference call. We are pleased with the pipeline of new product opportunities in R&D and have augmented our team with top talent that we believe will provide differentiated exciting product for years to come.

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 second quarter 2011 conference call.

Second quarter 2011 revenue was $14.9 million or 22% higher than the second quarter of 2010. Net loss for the second quarter of 2011 was $2.5 million or $0.18 per diluted share. Kevin already discussed the geographical performance.

I will now discuss revenue by product category. Product revenue increased in the second quarter by 43% when compared to the second quarter of 2010. This increase was primarily driven by sales of our GenesisPlus product into the podiatry specialty, as well as other physician specialties. In addition, this product can be used for treating warts and other procedures.

Upgrade revenue declined 36% in the second quarter of 2011 when compared to the second quarter of 2010. Historically, a new product launch has resulted in an increase in upgrade revenue, however, our recent product launches of GenesisPlus and Excel-V are new platforms, versus a hand piece that is upgradable on one of our existing platforms.

Service revenue for the second quarter of 2011 compared to the second quarter of 2010 increased by approximately $200,000, from $3.4 million to $3.6 million. The primary component of service revenue is the extended service contract amortization. Service revenue has remained flat over the past several quarters due primarily to lower service contract amortization as a result of lower ASPs, offset by higher revenue from consumable hand piece purchases and time of material fees charged to customers who were out of warranty.

Titan annuity revenue in the second quarter of 2011 was in line with our expectations at $1.2 million, an increase of $300,000 from the same quarter in the prior year. This increase was primarily due to our voluntary recall of certain Titan XL hand pieces. The voluntary recall occurred in the second quarter of 2010 and concluded in the third quarter of 2010. We provided our eligible customers with a fully refilled Titan XL hand piece, which resulted in a lower than normal Titan annuity revenue. We have been slowly increasing our revenue from this category as many customers are now requiring the recall replacement hand piece to be refilled. We expect this revenue category to slow its growth rate as we are close to achieving the quarterly run rate prior to the voluntary recall.

Fillers and cosmeceuticals revenues was $1.1 million in the second quarter of 2011, which increased by 31% from the $806,000 in the second quarter of 2010. The growth of this revenue category was derived primarily from sales of our distributed Obagi products in Japan. A significant percentage of our revenue is sourced from existing customers. During the second quarter of 2011, 45% of our revenue was derived from sales of upgrades, service, Titan annuity, filler and cosmeceutical products. We remain committed to strong customer satisfaction and believe we will continue to realize revenue from these annuity revenue categories.

During the second quarter of 2011, approximately 58% of our North American orders came from the podiatry speciality, which represents an expansion target market for us. And also represents an opportunity to now actively market and sell our GenesisPlus and other products. As Kevin mentioned earlier, we are actively engaged with PSS to sufficiently capture this opportunity in the US. 15% of our North American orders were derived from core physicians. We are continuing to target the core market segments as well as other established medical offices.

Towards this goal, we believe the recently launched Excel-V product expands the product offering for this market segment. We believe that the core market segment offers us the greatest long-term growth opportunity.

I will now address our operating performance. Our gross margin was 57% in the second quarter of 2011 compared to 56% in the second quarter of 2010. The increase in gross margin was due primarily to improved leverage associated from our fixed costs on the overall -- on the higher overall revenue volume. The 57% gross margin rate is lower than we had previously expected at this revenue level due to higher service related expenses and higher manufacturing expenses related to the ramp up of production of our recently launched products.

At current revenue levels we believe our gross margin will be approximately 57% and with revenue levels higher than the $15 million, we expect that our margin will improve due to the leverage in our model. We believe that the manufacturing expenses will trend down and we are actively managing our service and warranty expenses in order to improve margin levels moving forward. Sales and marketing expenses were $6.3 million or 43% of revenue in the second quarter of 2011 compared to $6.5 million or 53% of revenue in the second quarter of 2010. The decline of expenses is primarily the result of lower promotional related expenses, partially offset by higher commissions in line with the higher revenue.

Research and Development expenses were $2.3 million in the second quarter of 2011 or a 56% increase when compared to the $1.5 million for the second quarter of 2010. This increase was due primarily to a higher materials spending and personnel expenses associated with our stepped-up engineering and clinical development efforts. We remain committed to investing in R&D and expect many new product launches in the future.

General administrative expenses declined by 6% to $2.6 million in the second quarter of 2011 compared to $2.7 million in the same period of 2010. This slight decline was due to lower personnel related expenses. On a seasonal basis, our second quarter G&A expenses are typically higher than the other quarters due to the annual grant of stock to our outside Board members. We expect general administrative expenses to decline by approximately $0.25 million from the second quarter of 2011 to approximately $2.3 million in the third and fourth quarters of 2011.

Interest and other income net increased to $199,000 in the second quarter of 2011 compared to $141,000 in the second quarter of 2010, which was due primarily to improved yields on our portfolio investments. In the second quarter of 2011 we had tax benefit of $208,000 due primarily to a non-recurring adjustment of approximately $246,000 resulting from carry back of our 2010 tax return loss to obtain a refund of alternative minimum taxes paid in 2008. As a reminder, we have a 100% valuation allowance for our US deferred tax assets and have only a small amount of minimum and capital based taxes in the US. Therefore, for modeling purposes, we suggest using an effective income tax expense of approximately $50,000 per quarter for the remainder of 2011.

Turning to the balance sheet, our financial position remains strong. As of June 30, 2011 we had approximately $95 million in cash, marketable securities and long-term investments with no debt. This represents approximately $6.85 per outstanding share.

During the second quarter, our operations consumed approximately $767,000 of cash. However, note that our inventories increased by $1 million due to the ramp up of production for our new products, GenesisPlus and Excel-V. Had our inventory levels not increases, we would have generated cash from operations this quarter. Due to the leverage in our business model, as our revenue improves, this should result in improved profitability and cash from operations.

Net accounts receivables at the end of the second quarter of 2011 were $3.3 million and our DSO's were 20 days. Inventories increased by approximately $1 million at the end of the second quarter of 2011 when compared to March 2011. This increase was in line with our expectations and was due primarily to our buildup of the GenesisPlus and Excel-V product launches. We continue to aggressively manage this asset and are turning our inventory in the range of 3 to 4 times per year.

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

Thanks, Ron. For the balance of 2011, we remain focused on the following key initiatives. One, expand our global sales and marketing activities for our GenesisPlus product and for the podiatry specialty and other physician categories.

Two, increase revenue from our core market through sales of existing and new Excel-V product offerings. This will include developing market reference sites with key opinion leaders and expanding the clinical research of Excel-V capabilities.

Three, continued improvement in productivity for our North American sales team. We have confidence in this team and their strategies and are encouraged with their performance to date.

Four, continued focus on our research and development efforts to enable many new product launches in the future. With appropriate swift execution of this key initiatives, we remain focused on expanding our global business, which should translate to improved leverage of our operating expenses resulting in improved operating performance and cash from operations.

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

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. ( Operator Instructions ).

Tom Gunderson, Piper Jaffray. Please go ahead.

Hi, Ron, just a start, I need you to repeat a couple of quick numbers. The percent that came from podiatry, and the percent that came from core physicians.

Sorry it wasn't clear. 58% of our North American orders came from the podiatry specialty and about 15% came from the core of plastic surgeons and dermatologists.

And that is the same terminology, 15% of orders in North America?

Yes, that's correct.

Okay. And therefore 27% came from primary care physicians, is that the way we look at that?

No, because that would also include some non- MDs, some OB/GYN, but primary care physicians are in there about 6% but then there's a smattering in other specialties. It gets allocated around.

I got it. And then, Kevin, you got FDA approval for the toenail fungus. You talked about GenesisPlus in the prepared remarks. When you get on label like that, and your sales force can actually sell the product for which it was intended to the customer, do you foresee marketing costs going up temporarily, do you do any co-marketing with your customers? Give us a sense of how the change in label helps sell the product.

Well, the obvious advantage is that our sales force can openly promote the product for the indication. We had other indications that were cleared. But this is the one that we are looking forward to getting and we even had a potential plan to begin clinical studies to support the submission, but we were pleased that we are able to work with the agency to get the current device with some modifications made.

We are learning a lot about this market, Tom. We are doing market research, and listening to key opinion leaders in this field. And what you've suggested has been discussed, but in the short-term, I would not anticipate any significant increases in marketing spending. We think we've got sufficient resources to pursue this opportunity and it's important that we get our mind around how big this is.

Okay. And then again in the prepared remarks, it seemed a little bit more emphasis on your commentary on GenesisPlus and less on Excel V. Should we interpret that to mean that some of the upside that we saw in the quarter, more of it was GenesisPlus and Excel V maybe has a longer sales cycle than we were assuming?

Well, we tried to focus the script in line with the business performance. Obviously, with the breakout of this application being about half of the business in North America, we thought it made sense to spend more time on it. We are still extremely excited about Excel-V and we have top-notch doctors around the globe that are buying this product and we are working on validating the technology as we move forward by commissioning clinical research. So, there's a tremendous amount going on right now, we plan to continue to expand that. This is a well differentiated product in vascular surgery and we're really excited about it.

And then last question, Ron, what percent of revenues were from Japan?

I don't have the total percent of revenue, but I can give you an estimate here. It will put me somewhere in the 15% range.

Great. Thanks a lot, guys.

Thanks, Tom.

Dalton Chandler, Needham & Company. Please go ahead.

Good afternoon. Could you provide us with the percentage of revenue that came from new products that you were not selling in the year ago quarter?

We did not disclose that this past quarter. Clearly the Excel-V and the GenesisPlus are the newest products in the last year, but we did not disclose percentages on those revenue numbers.

Okay. Could you maybe talk about it qualitatively?

Well, we talked about in terms of the specialty in North America being 58% coming from podiatrists. That certainly lends itself to a pretty good revenue piece from the GenesisPlus product. The Excel-V fits right in the core physicians and our existing products also were sold to core physicians. We did not break out those -- the revenue on those 2 separate products.

Okay. And, how do you actually work with PSS in the podiatry market? Are they just providing your reps with leads, or are they actually closing business on their own?

Dalton, we are new in this application, so we are learning quite a bit as we understand it better. But PSS does call on podiatrists today and we think that having the ability to talk about a new technology at that call point makes tremendous sense for us. We really are partnering with them to explore that further. But, it is a whole spectrum of experiences with PSS. We have certain situation where the PSS actually closes business or has the business pretty far along when our rep is introduced to it, and it is also the model that you alluded to where they're generating leads or turning leads over to our direct sales force to hopefully close that business.

Okay. All right, thanks, guys.

Thank you.

Anthony Vendetti, Maxim Group. Please go ahead.

Thanks. I missed the OUS growth. US was 19%, up year-over-year, what was OUS again?

Outside the US was 24%, Anthony.

24%, thanks, Ron. On the TRUSCULPT, I know that's something that you guys have sort of put on the back burner. But, do you have any updates there? Or just a refresher on what your new product pipeline looks like, and timing?

Well, we are not commenting on the pipelines until we're ready to launch. We didn't discontinue the TRUSCULPT, Anthony, if you recall, we talked about having some near-term products and so we had our engineering resources directed at some opportunities including GenesisPlus and Excel-V that we could deliver to the market in a pretty well defined period of time. But we continue to have excitement about TRUSCULPT. We have added some resources to R&D and things like TRUSCULPT are areas that we want to revisit.

Okay. But in terms of just -- I know you cannot talk about the types of new products in the pipeline, but timeframe for launching new products, can you update us on that?

Well we just launched 2 and we commented on the call that some of the efforts associated with the FDA clearance required engineering resources to be reallocated. If you look at the R&D expense line, we are clearly stepping on the accelerator in terms of getting new products to the market as quickly as possible and we expect that.

Okay, and then the last 2 quick questions. Any large customer purchases this quarter that helped you out?

No. There isn't anything in particular that stands out from a national account perspective.

Okay. Great. Lastly, what particular geographic area outside the US is showing the best growth right now?

Well, you know that always changes from quarter to quarter, but we've had some good uptake in Canada and Australia. Our Japan business has always been good. Clearly the disaster in March kind of has affected our performance, but it has really rebounded fairly quickly here in Q2. So we are continuing to see them sporadically in various countries around the world.

Great. Thanks, guys.

Thanks.

Thank you. Morris Ajzenman, Griffin Securities, Inc. Please go ahead.

Hello, Kevin, hello, Ron. So, in this quarter, $14.9 million revenues equates to 56.5% gross margins, you had a GAAP loss of $0.18, if my calculations are correct, a pro forma non-GAAP loss of $0.08 a share. What do we need on the top line and what sort of gross margins do we need to get to a -- let's look at it both on the GAAP breakeven, and the non-GAAP breakeven? Can you kind of help us along that path now?

Sure, Morris. I think, first of all, let's keep the numbers to GAAP, it's just easier to stay that way. First of all, we are not happy with the gross margins. The 57% for the quarter on $15 million is not our target. We really expect to be at 60% of that level. North of $15 million, we'd like to be north of 60% of gross margins. So, those are areas that we are aggressively working now to improve.

Another line for the quarter was R&D, and of course, we are continuing to invest heavily in new products. But we've probably spent a lot of money, particularly in material spending, that we suspect can actually decline in some small ways in the future. So we are working our spending down to be efficient there. It depends on where you are at in the lifecycle of the product. But for a lot of our projects have come to where a lot of that material spending has already occurred.

The last thing in this current quarter that occurred is in G&A. There's about a $300,000 non-recurring charge, or annual charge, that is made for stock that goes to outside Board members that won't occur in Q3 or 4 or even Q1 of 2012. Those are areas that we need to more aggressively work and bring our breakeven point down, because if we try to work the breakeven point with the results from this quarter, it's in that $17 million to $18 million per quarter range and that's too high. So that is -- we are not pleased with that profit level at that revenue level either.

So then, should we -- I'm not sure where that leads us to a year or so down the road when your price deductions come behind you. Those always are new initiatives. Should the revenue be $16 million to breakeven? Should it be $15 million? I'm not sure what we should be looking at as time progresses.

Yes, I don't have a specific number for you. Clearly, we are targeting lower -- low numbers to get to our breakeven point. But, right now we are trying to drive that top line and drive gross margins. Once we get those, I think the rest we can bring into line, but we've got to keep that revenue up.

I understand. And one last question, please. Upgrade revenues, down 36% and then you highlight specifically, you had new launches, there were new platform launches. Now that that is happening, how long will that take before we start seeing an uptick in orders, and upgrades specifically?

At this point, until we have any new product launch which is an upgrade to an existing platform, I'm not sure we see any significant uptick in that upgrade category. So, for GenesisPlus and Excel-V, those are platform purchases. As a result, they don't -- they are not, those never hit the upgrade category, you don't add them onto the Xeo, Solera, or CoolGlide lines. Until such time that we come out with new products, which may or may not affect existing products, at this time, you would not see a huge change in our upgrade revenue.

The only thing I would like to add to that, Ron, is that we do -- we don't have excellent visibility in terms of utilization of our equipment in terms of procedure volume. But we have some indirect ways of monitoring that. We are getting some anecdotal evidence that utilization of our products has picked up, meaning that more patients are having these procedures done. The only direct metric we have in a business is the Titan annuity business and that has recovered nicely. So, there may be some benefit of higher patient demand for these procedures that could drive the interest in upgrades.

Thank you for the insight.

( Operator Instructions )

Larry Haimovitch, HMTC. Please go ahead.

Good afternoon, gentlemen. Kevin, Len DeBenedictis joined Cutera fairly recently. He has a great repetition I've heard from people in the industry, a very good product developer. What kind of run rate does someone like that need before they can start making a contribution to developing new and improved products?

Larry, we are delighted to have Len join the team. He came on board at the beginning of the year and we've actually found talent beyond Len at R&D of late, and we're really delighted to have some top industry technology people join the company. The group we have is quite broad in terms of its technical range and I think Len is leading that charge and I think the kinds of things that he is working on are things that can really transform business from a technology perspective. So, he is very busy here and he has a team working very hard to get the next generation products in the market.

Do you feel an impact over several months or is it more longer -- is it longer than that, Kevin?

Well, the impact was felt pretty soon after he had joined. I think it is having an impact now. But, product development does take some time and we are here to support Len and his team to expand our product portfolio, but that is the one thing that does not show up on the balance sheet, is the talent that we have in the organization. We are quite excited.

Okay, I noticed you burned a little bit of cash in the quarter, wasn't very much, but burned a little bit it looked like. Do you have any discomfort with that or is that just part of building the business?

We like to generate cash, Larry, so yes, it does cause discomfort. On the other hand, we have a Board that is supportive of us earning a leadership position in the market. Sometimes, unfortunately, you have to dip into cash consumption, but it is -- from the early days of starting this company, we have been focused on generating cash from operations and that is ultimately what we are here to do. Typically new products that can transform your business are the best way to control that.

Larry, we did consume about $0.75 million for the quarter in cash from operations. but, if you notice, about $1 million of it was for inventory increase associated to the GenesisPlus and Excel-V products. We had to invest in some inventory there.

Thanks, Ron.

Thank you.

There no further questions at this time. I would like to turn the call back over to Mr. Kevin Connors.

Thank you for participating on our call today. We look forward to seeing you at the Wedbush Healthcare Conference on August 16 and to updating you on our third quarter conference call in November of 2011. Good afternoon, and thanks for your continued interest in Cutera.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Have a wonderful day.