Cutera Inc (CUTR) 2011 Q3 法說會逐字稿

Greetings, and welcome to the Cutera Incorporated third 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, Mr. Mills you may begin.

Thank you. By now everyone should have access to the third quarter 2011 earnings release, which went out today at approximately 4.00 PM Eastern time. The release is available on the investor relations portion of Cutera's website at cutera.com, and with 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, the development and commercialization of existing and planned a new products, and potential revenue growth from strategic alliances and planned new products.

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 risk associated with such statements. Cutera also cautions you to not place undue reliance on forward-looking statements which speak only as of the date they were made. Cutera undertakes no obligation to update publicly any forward-looking statements to reflect new information, events, or circumstances after the date they were made, or to reflect the occurrence of unanticipated events.

For a complete list of risk factors that could cause Cutera's actually result to differ materially from the forward-looking statements, please refer to the section entitled Risk Factors in our most recent 10-Q filed on November 7, 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, and thanks for joining us today to discuss Cutera's results for the third quarter ended September 30, 2011. On today's call, I will provide an overview of our Company's performance, and then Ronald Santilli, our CFO, will provide an overview of financial results. Finally, I will provide some closing comments and open the call to your questions.

We are pleased with our third quarter 2011 revenue growth of 26%, with the US growing at 43% and international growing at 17%, all compared to the third quarter 2010. This revenue improvement was the direct result of the following key initiatives. First, our GenesisPlus for toenail fungus targeted to podiatrists continues to perform well. In addition to toenail fungus, this product is also used for warts and other aesthetic procedures. During the quarter, we achieved record revenue contribution from this product, sourced primarily from the United States. Going forward, we plan to continue to increase our marketing efforts internationally.

Second, our premier vascular system Excel V, which provides practitioners the ability to treat all vascular conditions, both on the face and body, continued to gain traction in the marketplace. We remain in a continued launch and are building an install base of reference sites.

The third key contributor for revenue growth last quarter was the sales management changes we implemented earlier this year. Our recently assembled North American sales management team, under the leadership of Michael Poole, has been executing effectively, and their strategies are paying off, as proven by the 43% revenue growth in the United States, and Canada contributing significantly as well. In addition, with Chris West returning to Japan to focus on the Pacific Rim countries, we are experiencing strong revenue growth from Japan, Australia, and several of our Asian distributors this quarter.

Lastly, during the third quarter we continued to have success in combining Cutera products and upgrades with filler and cosmeceuticals products from Merz and Obagi. Fillers and cosmeceuticals products compliment our laser and light-based products, and revenue from these product categories grew by 19% in the third quarter 2011, compared to the third quarter of 2010. This strong performance was partially offset by a decline in our third quarter 2011 revenue from Europe, due to restructuring of our European sales team. With the improvements being implemented there, we anticipate our European business to return to a growth trajectory in the near future. We believe that our strengthened sales management teams and new product offerings, we are well-positioned for continued top-line growth. We currently have 27 sales territories in the United States and Canada, and are anticipating territory expansion within the next 12 months.

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 are continuing to invest in R&D for the next generation of technology, and have increased our engineering and clinical research expenditures to develop innovative solutions and expand the clinical understanding and applications of our current products. Earlier this year, we created be Cutera Clinic, located in our headquarters in Brisbane, California, and we are pleased with how quickly we were able to perform controlled clinical studies for our new product and existing products.

We are excited about the pipeline of new product opportunities in R&D, and have augmented our team with top talent, and we believe will enable us to develop differentiated, exciting products for the years to come.

Lastly, we are in the process of launching our recently announced myQ Q-switched laser in Japan. By addressing deep dermal pigmentation and melasma, the myQ system complements Cutera's current array of lasers for the anti-aging market. We will initially launch myQ in Japan, where we see a particularly strong demand for this technology and we will evaluate other geographies in the future.

Now I would like to turn the call over to Ron to discuss our financials in more detail. Ron?

Thank you Kevin, and thanks to all of you for joining us today in our third quarter 2011 comments call. The third quarter 2011 revenue was $15.2 million, or 26% higher than the third quarter of 2010. Net loss for the third quarter 2011 was $2.9 million or $0.21 per diluted share. Kevin already discussed the geographic performance.

I will now discuss revenue by product category. Product revenue increased in the third quarter by 56% when compared to the third quarter of 2010. This increase was primarily driven by sales of our GenesisPlus product in the podiatry specialty, followed by sales of Excel V into core specialties. Upgrade revenue declined 51% in the third quarter of 2011, when compared to the third quarter of 2010.

Historically, a new product launch has resulted in an increased upgrade revenue, however, our recently launched GenesisPlus and Excel V, our new stand-alone systems, versus a hand piece set is upgradable on our existing platforms. Service revenue remained flat at $3.2 million, compared to the third quarter of 2010. The primary component of service revenue is 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 fewer US customers purchasing extended service contracts, offset by higher revenue from consumable hand piece purchases, and time and material fees charged to customers who are out of warranty.

Titan annuity revenue improved by $384,000, or 59%, to $1 million in the third quarter of 2011, compared to the same quarter in the prior year. This increase was primarily due to our voluntary recall of certain Titan Excel hand pieces. As a reminder, the voluntary recall occurred in the second quarter of 2010 and concluded in the third quarter of 2010. However, as part of the voluntary recall program, we provided our eligible customers with a fully refilled Titan Excel hand piece, which resulted in a lower than normal Titan annuity revenue. Fillers and cosmeceuticals revenue was $1.3 million in the third quarter of 2011, an increase of 19% from $1.1 million in the third quarter of 2010. The growth of this revenue category was derived primarily from sales of our Obagi and Merz distributer products in Japan.

A significant percentage of our revenue sourced from existing customers. During the third quarter of 2011, 41% of our revenue was derived from sales of upgrades, service, Titan annuity, and filler and cosmeceuticals products. We remain committed to strong customer satisfaction, and believe we will continue to realize revenue from these annuity revenue categories.

During the third quarter of 2011, approximately 60% of our North American product orders came from the podiatry specialty. This is a growing market which represents an opportunity to now actively market and sell our GenesisPlus and other products. Outside the US and Canada, we primarily sell the core positions. During the third quarter, 15% of our North America orders were derived from core positions. We are continuing to target the core markets segments, as well as other established medical offices. We believe that recently launched Excel V expands the product offering for this market segment, which offers the greatest long-term growth opportunity.

I will now address our operating performance. Our gross margin was 56% in the third quarter of 2011, compared to 53% in the third quarter of 2010. The increase in gross margin was due to the higher revenue of volume and associated leverage of our it fixed cost and the voluntary recall of Titan Excel hand pieces that adversely affected our gross margin in the third quarter of 2010. The 56% gross margin rate is lower than we targeted, resulting from an unfavorable product mix, as well as an increase in distributor volume related to the lower margin products during the quarter.

Sales and marketing expenses were $6.4 million, or 42% of revenue in the third quarter 2011, compared to $5.8 million, or 48% of revenue in the third quarter 2010. The increase in expenses is primarily due to the higher commission expenses on the higher revenue volume and other US field sales related expenses associated with the higher level of activity. The decreased costs as a percent of revenue was due to the higher volume.

Research and development expenses were $2.4 million for the third quarter of 2011, a 26% increase when compared to $1.9 million for the third quarter 2010. This increase was due primarily to higher personnel expenses, resulting from higher headcount to ramp of the research, development, and clinical support of our new products, and the expenses associated with the Cutera Clinic to perform on-site clinical studies. We remain committed to investing in R&D and launching new products in the future.

General and administrative expenses remain flat at $2.3 million in the third quarter 2011, compared to the third quarter 2010. These expenses declined as a percentage of revenue from 19% in the third quarter of 2010 to 15% in the third quarter 2011, due to the higher revenue volume.

Interest and other income net decreased to $91,000 in the third quarter of 2011, compared to $131,000 in the third quarter 2010, which was due primarily to higher foreign exchange losses, resulting from a revalued US dollar. Income tax provision in the third quarter of 2011 was $326,000, due primarily to a $262,000 nonrecurring charge related to net unrealized gains on marketable and long-term investments that were included in our accumulated other comprehensive loss.

As a reminder, we continue to maintain 100% valuation allowance on our US deferred tax assets and our income tax provisions is primarily related to our non-US operations, as well as small amounts of minimum and capital-based taxes in the US. Therefore, going forward for modeling purposes, we suggest using an effective income tax expense of approximately $50,000 for the future quarters through 2012.

Turning to the balance sheet, our financial position remains strong. As of September 30, 2011 we had approximately $91.4 million in cash, marketable securities, and long-term investments with no debt. This represents over $6.50 per outstanding share. During the third quarter our operations consumed $3.5 million of cash. However, note that our inventories increased by $1.4 million due to the ramp-up of production for our new products, GenesisPlus and Excel V, and our accounts receivable increased by $830,000, due to the increased revenue during the quarter. Due to the leverage in our business model, as our revenue improves, this results in improved profitability and cash flows from operations.

Net accounts receivable at the end of the third quarter 2011 were $4.1 million and our DSLs were 24 days. Inventories at the end of the third quarter of 2011 were $9.7 million, and the inventories are turning approximately 3 times per year, which is in line with our previous inventory turns.

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

Thank you, Ron. During the fourth quarter of 2011 we remain focused on the following key initiatives. 1, expand our global sales and marketing activities for our GenesisPlus product, into the podiatry specialty and other physician categories. 2, increased revenue from our core market through sales of our existing Excel V product offerings. This will include developing market reference sites with key opinion leaders, and expanding the clinical research of Excel V capabilities.

3, launch our myQ Q-switched laser in Japan. 4, continued improvement of productivity of our North American sales team. 5, restructuring our European sales management team that includes many initiatives that drive revenue growth. 6, continue focus on research and development efforts to enable new product launches in the future, as well as build on the clinical support for existing products. 7, focus on many internal initiatives to drive our gross margins higher and leverage our operating expenses.

With appropriate swift execution of these important initiatives, we remain focused on expanding our global business, which should translate into improved leverage of our operating expenses, resulting in an improved operating performance. Now I would like to open up the call to your questions. Operator?

Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session.

(Operator Instructions)

Anthony Vendetti from Maxim Group.

Thanks. Ron, did you mention what percent of sales was podiatry? I thought I heard the number there.

We said 60% of our North American orders came from the podiatry specialty.

North American.

With outside North America, we sell primarily to core positions.

Right, right. Can you distinguish what you mean by orders? So those were not actual sales for the quarter, correct?

Well, they are the order rate that came in, but not necessarily reflected as revenue. The same figures we've been reporting all along, orders by specialty.

That is a unit analysis, Anthony.

Okay.

Not sales volume.

Yes, that's what I thought. Kevin though, you said in the prepared remarks, the GenesisPlus and the Excel B drove a significant portion of revenue. So if we looked at the orders, would it be reasonable to say that over 50% of sales were from GenesisPlus and Excel V? Would that be a reasonable assumption?

Yes. For competitive reasons, we don't want to give that much of that granularity. I think we have broken out the podiatry unit analysis to give you a sense of how important it is in our domestic business, but beyond that, we don't want to discuss much more.

Okay, and you said you are putting more dollars into R&D and expecting some new technologies to come out of that. Is there a timeline for 2012 in terms of new product introductions, or a number, or anything like that?

Well, I assume there will be a be DAD down In San Diego in the first quarter when we will have something in the boot to show you.

Okay. So there will be 1 new one there. Okay, excellent. Can you talk about a little bit more about the competitive landscape? There are a number of products out there. Titan was 1 of the first one to come out to target noninvasive fat or to target circumferential reduction. There is obviously some other products that have come out, a notable IPO. Can you talk about, just clinically, how you feel the Titan product and technology stacks up against these other technologies?

Well I think in the case of Titan, it's primarily on the face. It Is used on the body as well, but most of our customers do use it on the face. And I think some of the products you are alluding to are used on the abdomen, love handles, and other parts of the body. So they are addressing different parts of the market. But that said, we also have a great interest in continuing to expand our portfolio of products. And we think there are other noninvasive body contouring categories that are of interest to us.

Okay. So you see other, either line extensions or application extensions, of Titan or various other products that could address body contouring, that you may have in development.

Well, I think both categories are exciting. So I think our Titan business, even during the economic pullback, has shown great robustness, barring the 1-time recall that we had. So I think there is a continued demand in the marketplace for it, and where we found the most success is where we really focused on the procedure itself, and our business in Japan is 1 where our sales organization tends to stay very close with their customers and help them with the treatment protocol update, and the Titan revenue there is at hit record levels per capita. So I think there are some lessons there, as we continue to educate our customers about our products, they tend to use them more.

Okay,, and then on the gross margin. Ron, you mentioned there were some unfavorable product mix, and then obviously there is the third-party distributor. Did you say you expect that to improve, and is there a number we should be targeting going forward. Or is that a fluid situation at this point?

Anthony, I don't know for sure the answer, because product mix shifts from quarter to quarter, but this particular 1, there was a bit of a shift in it, and it was an unfavorable product mix shift, and then, of course, there was, within the distributor model, but I suspect that we have many initiatives to drive our gross margins up in the future.

Okay, and just lastly, on the European sales restructuring, is that largely complete, or is that something that should be complete by the end of the year?

We have made some strides in that direction, and the basic premise here is that we see a large opportunity in Europe that we have under-penetrated. So we are looking to make some substantial strides to change that. We think our products bode very well there, particular product like Excel V or this wavelength is very well embraced in Europe, and we want to get our fair share, So it is important that we have the right sales infrastructure on the ground there in Europe and we think it is going to have a material positive impact as we look at next year in particular.

Okay. And then lastly on Asia and the Pac Rim. Other companies have indicated a little bit of softness there. It seemed like your numbers there were okay to positive. Anything that you think you are different before the launch of the myQ Q-switched laser?

Well, we are delighted with their business in that region. Our business in Japan continues to be robust, and as we have talked about on this calls, our ability to offer our customers not just energy sources, capital equipment products. But injectables and topicals, we really think that has made a nice difference, and then we are very pleased with our distributor business in the region, as well as their business in Australia. So I think the new products are only going to augment our performance if we are able to execute properly.

Okay great. Thanks guys.

(Operator Instructions)

Morris Ajzenman from Griffith Securities.

Hi guys. Just a little further clarity. In the press release, you talk about looking to the fourth quarter, you just give comment, we expect will result in an improved margins and cash flow in the fourth quarter 2011 compared to 2010. Are we referring to gross margin's, operating margins? What are we referencing when we say improve the margins in the fourth quarter year-over-year?

Yes, I think, Morris in general, all margins. We are always expecting to increase, and we have many initiatives internally to improve our gross margins. We want to improve our profitability, and we want to get back to a cash generation perspective.

Okay. So last year in the fourth quarter, if I'm correct, gross margins were 59%. Based on what you just said there, we should expect to see an increase from the fourth quarter gross margin of last year, Is that fair?

It is certainly possible.

Okay, and any comment on revenues? I know, Kevin, you have said you want to increase revenues. It does not matter if you look at sequential year-over-year, coincidentally they were both $15.2 million, last year and most recent quarter. Can we expect, again assuming no major catastrophe happens worldwide, that revenues should grow?

Well, we don't get that forward-looking guidance, but the fact that we are looking to expand our sales force should give you some indication of how we're looking at the future.

Fair enough. Thank you.

Larry Hamovich from HMPC.

Good afternoon gentlemen. Ken, I have a question, and then I also have a comment. My question is, when I look at the aesthetics base today, some of the most rapid growth is coming in areas where the companies have developed consumer-attractive products that are going straight to the consumer channel and actually bypassing the physician completely. I'm thinking of things like [trea]. I am wondering in the long-term strategic plan that you are working on all the time I'm sure, Kevin, where does this fit in Cutera's future?

Well, in the case of the company you mentioned, they are a privately-held company, and as such we don't get access to their financial performance, but it is my understanding that it has been quite a cash-rich investment reaching out to the consumer with products that are developed for the consumer and have the right distribution strategy in place, So that is really not in our sweet spot. Not to say that we don't keep our finger on the pulse of what is happening in that space. We do, but right now we are standing on the sidelines until we see a real opportunity emerge. So far, there have been companies that have been in there and generate some revenue, but it's not clear that this is profitable endeavor, and we would rather direct our efforts towards the professional market, and our strategy has been to focus on the core physicians, launch of Excel V. We are getting a very warm reception from dermatologists and plastic surgeons. So that is a kind of a different strategy from some of our competitors.

Great, and then perhaps a request, or a comment. Conference calls are meant to be for all of us, and they should not become 1 way interviews by analysts, and I would request that both of you think in the future of letting the people ask 1, 2 or 3 questions and not 10 questions, and we have limited time, and I don't think it is fair to allow someone to dominate with question after question after question, and ultimately, Kevin, it is your responsibility as a CEO and Ron as the CFO to police that. So I would like to make that request.

I hear you Larry. We try to make this the most efficient use of everybody's time, and Ron and I are accessible to all of our investors. So it is important that we be accessible, and I spend time on the road to meet investors face-to-face. So investor relations are an important part of our business.

No, I understand that but when someone comes on a conference call and asks 10 questions and monopolize is the time, that is my complaint.

All right. Understood.

Thank you very much.

Gentlemen, there are no further questions left in the queue. I would like to hand the call back over to management for closing comments.

Thank you for participating on our call today. We look forward to seeing you at the Piper Jaffray Healthcare Conference in New York on November 29, and the Canaccord Genuity Conference in San Francisco on December 6. We will update you on our business progress on the fourth quarter conference call in February 2012.

Good afternoon, and thanks for your continued interest in Cutera.

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