Cutera Inc (CUTR) 2011 Q4 法說會逐字稿

Greetings, and welcome to the Cutera, Incorporated fourth quarter and fiscal year 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 fourth 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 Cutera's operations and business; expectations for increasing revenue, generating cash, and improving profitability; the development and commercialization of existing and planned new products; potential revenue growth from strategic alliances and planned new products; and financial performance and integration risk associated with the IRIDEX aesthetic business unit acquisition.

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 actual results to differ materially from the forward-looking statements, please refer to the section entitled Risk Factors in the Company's 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 fourth quarter ended December 31, 2011. On today's call, I'll provide an overview of our Company performance and Ron Santilli, our CFO, will provide an overview of the financial results. Finally, I will provide some closing comments and open the call to your question.

We are pleased with our fourth quarter 2011 revenue growth of 22%. Our US revenue increased by 27%, and our international revenue improved by 19% compared to the fourth quarter 2010. This revenue improvement was a direct result of the following key initiatives. The first key contributor to our revenue growth last quarter was the sales management changes that we implemented earlier in 2011. Our recently assembled North American sales management team, under the leadership of Michael Poole, has been executing effectively and their strategies are generating improved performance.

On an annual basis our US revenue increased 21% compared to 2010. Our 19% international growth was primary source from our performance in Australia, Japan, and Canada. Our international revenue growth during the fourth quarter was partially offset by a decline in our revenue from Europe, due to restructuring of our European sales team. With the improvements being implemented there, we anticipate our European business to be back on a growth trajectory in 2012. ¶ The second key contributor was the recent introduction of new products. Our GenesisPlus for toenail fungus (targeted to) podiatrists continues to perform well. In additional, the toenail fungus's product is also used for warts and other rejuvenation procedures. During the quarter, we continue to see significant revenue contribution from this product sourced primarily from a US business. Premier vascular system, Excel V, that provides practitioners with the ability to treat all vascular conditions both on the face and body, continues to gain traction in the marketplace. We remain in early stage launch of this product and are expanding our install base of reference sites.

The final contributor to our revenue growth was a continued growth of our filler and topical products from Merz and Obagi. Revenue from this product category grew $370,000 or 31% in the fourth quarter of 2011 compared to the fourth quarter 2010. The improvement in this product category is also having a favorable impact on our Cutera business as this type of product compliments our laser and light-based products. We believe that with our strength in sales management teams and new product offerings, we are well-positioned for continued revenue growth. We currently have 29 sales territories in the United States and Canada and are planning to increase this team to approximately 34 by the end of 2012. We expand our team further if our sales performance supports it.

We closed the acquisition of IRIDEX's aesthetic business on February 2, and we welcome the IRIDEX employees to the Cutera family. We believe this business combination provides a great opportunity for us and are in the process of fully integrating this business into Cutera. The primary advantages of this acquisition are as follows. One, IRIDEX's VariLite product, a small, compact vascular product, compliments our Excel V and other vascular products. Two, there will be numerous cross-selling opportunities of Cutera products into the IRIDEX install base of approximately 6,000 systems.

Three, we will leverage to combine field service organization in supporting a significant service business. Four, given the IRIDEX install base of customers is concentrated in the core market, this should result in increased penetration of Cutera products into the core market. Five, IRIDEX has a strong (brick) presence in (French), which will contribute to strengthening our European operation and future revenues from this region. Beginning in the second quarter of 2012, when the integration is anticipated to be completed, we will expect this accusation to be incrementally profitable to Cutera on a quarterly basis. Ron will address the financial impact of this transaction later in the call.

Turning to research and development, we believe that strategic ongoing investments in research and development 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. Earlier this year we created the Cutera clinic located in our headquarters in Brisbane, and we believe that the in-house capability-performed clinical studies for our new and existing products will enable us to bring new products and applications to the market faster. We are excited that the pipeline of new product opportunities and have augmented our team with top talent that we believe will enable us to continue to develop, differentiate exciting products for years to come. At the end of the quarter, we launched myQ in Japan for deep dermal pigmentation and melasma, and are pleased with the early market activities. By addressing the deep dermal pigmentation and melasma, the myQ system complements our current array of lasers for the anti-aging market. We plan to evaluate other geographies for this product sometime mid-year.

We plan to enter the body contouring segment of the aesthetic market by launching our TruSculpt product at the American Academy of Dermatology meeting in mid-March. TruSculpt is the latest break through technology for non-invasive body contouring and sculpting that targets subcutaneous adipose tissue to smooth body contours. TruSculpt's innovative technology uses an RF energy source with targeted heating to selectively disrupt fat cells without damaging the surrounding skin. In one or two pain-free treatments, TruSculpt provides remodeling to smooth and sculpt body contours. The unique TruSculpt dual hand piece system allows the operator to selectively tailor the patient's treatment to a wide-range of troublesome areas for optimal results. This product hit the 510(k) clearance and recently received a CE mark, as well. Now I'd like to turn over the call to Ron to discuss our financials in more detail.

Thanks, Kevin, and thanks to all of you for joining us today on our fourth quarter 2011 conference call. Fourth quarter 2011 revenue was $18.5 million or 22% higher than the fourth quarter of 2010. Net loss for the fourth quarter of 2011 was $887,000 or $0.06 per diluted share. We generated $585,000 in operating cash during the fourth quarter. Kevin already addressed - already discussed the geographical performance. I will now discuss revenue by product category.

Product revenue increased in the fourth quarter by 26% when compared to the fourth quarter of 2010. This increase was primarily driven by sales of our GenesisPlus product in the podiatry specialty and sales of Excel V into core specialties. A significant percentage of our revenue is sourced from existing customers. During the fourth quarter of 2011, 39% of our revenue was derived from sales of upgrades, service, Titan annuity, and filler and cosmeceutical products. We remain committed to strong customer satisfaction and believe we will continue to realize revenue from these annuity revenue categories.

Upgrade revenue improved by $272,000 or 31% in the fourth quarter of 2011 when compared to the fourth quarter of 2010. This increase was attributable to physicians upgrading their systems by acquiring additional applications. Service revenue remained flat at $3.3 million compared to the fourth quarter of 2010. The primary component of our service revenue is extended service contract amortization. Worldwide service revenue has remained flat over the past several quarters due primarily to increases in international revenue offset by decreases in the US.

Titan annuity revenue improved by $415,000 or 44% to $1.3 million in the fourth quarter of 2011, compared to the same quarter in the prior year. This increase was due primarily to the recovery of our Titan resale revenue following the voluntary recall of our Titan Excel hand pieces in 2010, when we provided our eligible customers with a fully refilled Titan Excel hand piece, which delayed their purchase of a refill. We have achieved our pre-voluntary recall revenue level and now expect to continue as similar quarterly revenue levels in 2012.

Fillers and cosmeceutical revenue was $1.5 million in the fourth quarter of 2011, an increase of 31% from $1.2 million in the fourth quarter of 2010. Growth of this revenue category was drived primarily of sales of our Obagi and Merz distributed products in Japan. During the fourth quarter of 2011, approximately 46% 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 to core physicians. During the fourth quarter, 31% 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. We believe that recently-launched Excel V and the acquisition of the IRIDEX aesthetic business expands the product offering for this market segment, which offers us the greatest long term growth opportunities.

Turning to the IRIDEX aesthetic business acquisition, the transaction closed on February 2, and we are now integrating IRIDEX products, people, and business activities into Cutera. Some financial information associated with this combination is as follows. One, we expect to incur non-recurring integration expenses in the first quarter of 2012 to be approximately $500,000 to $1 million. IRIDEX has reported annual revenue from their aesthetic business of approximately $11 million. This is comprised of approximately $6 million of product revenue and $5 million of service revenue.

Beginning in the second quarter of 2012, we expect the incremental revenue from this transaction to be at similar levels to IRIDEX's aesthetic business in 2011. We expect gross margins of this business to be similar to that of Cutera. Due to the leverage of our relatively fixed operating costs, we expect that this acquisition will generate incremental cash and profits on a quarterly basis. We are excited about this opportunity and believe it will increase our revenue, penetration in the core market, and will be accretive to our earnings.

Now we will address our fourth quarter 2011 operating performance. Our gross margin was 60% in the fourth quarter of 2011, compared to 59% in the fourth quarter of 2010. The increase in gross margin was due to the higher revenue volume and associated leverage of fixed costs. We have entered into a manufacturing supply agreement with IRIDEX to transition the production to our facility in Brisbane. This agreement includes a transfer price that will adversely affect our gross margins on IRIDEX products through the second quarter of 2012.

Beginning in the third quarter, when we expect to have all manufacturing in - at our Brisbane facility, we will optimize our gross margin on the IRIDEX products. We expect gross margin rates in 2012 with the IRIDEX business to vary between 56% and 61% depending on the revenue volume. Sales and marketing expenses were $6.8 million or 30% - 37% of revenue in the fourth quarter of 2011, compared to $6.1 million or 40% of revenue in the fourth quarter of 2010. Adjusting our expense base for the IRIDEX transaction, we expect our sales and marketing expenses to range from $6.5 million to $8 million per quarter depending upon the revenue level.

After the first quarter of 2012, which is seasonally lower and higher expense quarter, we target sales and marketing expenses to be less than 40% of revenue. Research and development expenses were $2.3 million for the fourth quarter of 2011 compared to $2.2 million for the fourth quarter of 2010. As we remain committed to investing in R&D and launching new products in the future, we expect quarterly spending to be at similar absolute dollar levels in 2012.

General and administrative expense were $2.9 million in the fourth quarter of 2011, compared to $2.2 million in the fourth quarter of 2010. Growth of these expenses was due to higher personnel-related costs and higher professional fees for audit, tax, and legal associated in part to the IRIDEX asset purchase, most of which is non-recurring in nature. We expect general and administrative expenses to be approximately $2.4 million per quarter in 2012. However, note that in addition to the first quarter of 2012, we expect to incur approximately $500,000 to $1 million of non-recurring charges associated with the IRIDEX acquisition, and in the second quarter of 2012 there will be a $360,000 charge associated with stock compensation expenses for our independent board members.

Interest and other income net was $140,000 in the fourth quarter of 2011 compared to $144,000 in the fourth quarter of 2010. We don't expect any major fluctuations of this income source in 2012. Income tax provision in the fourth quarter of 2011 was $93,000, due primarily to international taxes related to our foreign subsidiaries. As a reminder, we continue to maintain a 100% valuation allowance for our US deferred tax assets and our income tax provision 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 $75,000 for the future quarters in 2012.

Turning to the balance sheet. Our financial position remains strong. As of December 31, 2011, we had $91.7 million in cash, marketable securities, and long-term investments with no debt. This represents over $6.50 per outstanding share. During the fourth quarter, our operations generated $585,000 of cash. The first quarter of 2012 will likely consume some cash, due in part to the seasonal - seasonally low revenue level, the higher sales and marketing expenses, and the non-recurring IRIDEX expenses.

We plan to generate cash from operations for the remaining three quarters of 2012. Net accounts receivable at the end of the fourth quarter of 2012 were $5.2 million and our DSOs were 26 days. Inventories at the end of the fourth quarter of 2011 were $10.7 million and our inventories are turning approximately three times per year, which is in line with our previous inventory turns. Compared to December 31, 2010, we have invested $4.3 million in our inventories. This increase was due primarily to the ramp-up of production for the new products introduced in 2011.

As we look into 2012, we expect inventories to grow in the first quarter of 2012, by approximately $2 million to support the IRIDEX aesthetic business. Thereafter, we believe our inventory is right-sized for our planned revenue growth in 2012. Now that I've concluded my overview of Cutera's financial performance, I'll turn the call back to Kevin.

Thanks, Ron. As we begin 2012, we remain focused on the following key initiatives. One, continuing growth from our recently-launched products, with GenesisPlus in the podiatry market and Excel V in our core market. Two, integration of IRIDEX's aesthetic products and services - service business, which we will believe, will result in incremental revenue and improved Company performance. Three, introduction of our TruSculpt body contouring product at the AAD in March with planned shipments commencing in the second quarter.

Four, expansion and continued performance improvements of our North American sales team. Five, continued focus on research and development efforts to enable new product launches in the future, as well as build on the clinical support of our existing products. Six, there are many internal initiatives to improve our gross margin, to improve our operating performance. Seven, generate positive cash flow from operations starting in the second quarter of 2012 and beyond. With appropriate swift execution of these important initiatives, we remain focus on expanding our global business and leveraging our operating expenses, which should result in improved operating performance and cash from operations. We believe that our worldwide distribution network, strong cash position, no debt, and expanding portfolio of products offer continued long term opportunities for Cutera. Now I'd like to open up 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 comes from the line of Thom Gunderson from Piper Jaffray. Please proceed with your question.

Hello. Good afternoon.

Hello, Tom.

Hello, Tom.

So I'll focus on TruSculpt, I guess. Kevin, you may have said this but I missed it. Could you give us the timing of the launch? Is that a worldwide launch or a US launch? The price point, and the difference from your previous technology that you stopped a couple of years ago on non-invasive?

Well the product will be shown at the American Academy of Dermatology meeting in San Diego later this quarter and that meeting typically has about a third of the attendees coming from outside of the United States. So it is the largest single dermatology meeting that we attend. And as we have indicated in the script, we have an FDA indication that is cleared as well as a recent CE clearance that allows us to go to European Union, as well as other countries. So, yes, it is a global launch. But as is typical, we tend to get traction here in North America first, and we typically see the international revenues slightly lag. That's been the pattern from new product launches historically. But when we have planned shipments, revenue shipments, for the second quarter of the year.

Got it. And the price point and the difference from previous?

The difference from previous is really the electro-design. The core technology in the console hasn't changed materially, but what we had to do is to understand how to get a more uniform energy distribution and we have been successful in accomplishing that. So it's really leveraging the long research that we've done on the console that allows us to make these modifications to the design and by improving the profile, we're able to minimize discomfort, which was one of the issues that we were challenged with the first time. And in terms of price point, we haven't rolled that out yet, but it's going to be somewhere in the $100,000 range, somewhere in that range.

Great. That's it for me on this round. Thanks.

Our next question comes from the line of Dalton Chandler from Needham & Company. Please proceed with your question.

Good afternoon.

Hello, Dalton.

Hello. Are there any disposables associated with TruSculpt?

There is a planned annuity revenue stream with the product launch.

Okay. And then on IRIDEX did you bring over any of their sales reps?

Yes, the organization was relatively small and we hired three direct reps, and as well as the majority of their service organization.

Okay. And could you just remind us the price points on their products?

They're anywhere from about $50,000 to $100,000.

Okay. All right. Thanks very much.

Sure.

Our next question comes from the line of Anthony Vendetti from Maxim Group. Please proceed with your question.

Thanks. Just had a follow-up on the IRIDEX products. They have gone through a couple owners -- well, at least Laserscope has -- and you bought the combined IRIDEX Laserscope aesthetic business. Can you talk about which of those combined products you think has the most promise in terms of 2012, and are these slightly lower margin than the products you currently have?

As Ron indicated in the script, we've got a long-term -- meaning in the next six months -- we have plans to get our gross margins even higher. We have the interim supply agreement that won't have the margins that we anticipate in the long term. And in the case of our overall strategy to be dominant in the vascular category, this product is one that we competed against quite regularly. So I think their visible vascular product has done pretty well in the marketplace, and so we'll have a corner on green technology for vascular, which is something that we are very excited about.

However, they've got a number of other products. One that's really quite slick is the tabletop solid-state system that is extremely reliable and offers two wavelengths and a very novel delivery system that has been very well-received. So we see that as a really exciting product that allows to have depot repair and the ability to ship this light-weight compact device overnight to customers that have any service issues. So we rolled that out at our sales meeting in the beginning of this quarter, and the team is very excited to have that in our bag, and we are also as excited that we now have a corner on green in this industry.

Okay. And the TruSculpt, which you're launching officially, I guess, at AAD, was that the planned product that you were scheduling to launch or do you have another product that could be unveiled at AAD?

Well, we're excited to be able to, again, talk about Excel V, this is our second year at the AAD to talk about it. We have got a much broader story to tell now. So it is that, it's the IRIDEX product, and it's TruSculpt. And in terms of what we're working on R&D, there are multiple programs that are active, so as we, as we've mentioned on this call, we're not working on just one technology. We have got multiple things going on. And it is important that we have a full portfolio of exciting technologies to pick from as we roll out new products.

Okay. So lastly on TruSculpt -- there's a -- body contouring is obviously one of the faster-growing markets out there. There is a number of companies out there that have products using different energy sources. In terms of efficacy versus pain, where would you put TruSculpt. How does TruSculpt look in terms of the competitive landscape in your view?

Well, we haven't done any side-by-side comparisons with some of the other newer technologies on the market right now. But with that said, the patient experience is something that's been very important to us, as we have worked on the technology, and we made great strides in addressing that, and the feedback we're getting from patients that have had this treatment is that discomfort is not going to be a limitation in terms of market acceptance. And in terms of efficacy, we've got all of that information coming in with each passing day. I think it's important to recognize that this category is not one that has results that will have large volumetric reduction of tissue. I mean, this is relatively modest. So with that caveat, we see a very large market opportunity for something that can be done with a comfortable experience, as well as measurable results after the treatment.

Okay. And, Ron, just a quick question, I just wanted to make sure I got this right. Did you say 43% of revenue from this quarter were from GenesisPlus?

No, I didn't disclose any specifics from GenesisPlus.

Okay.

Could that have been the from the existing customer business? Yes.

Maybe.

No, 46% of our North American orders -- I'm sorry -- came from podiatry, but that is North American orders.

North American orders. Okay. Did you want to give the revenue number, or--?

No, we don't disclose any specifics with revenue.

Oh. Okay. 46% of orders. Okay.

In North America.

Yes. Okay. Great. Thank you.

(Operator Instructions)

Our next question comes from the line of Morris Ajzenman from Griffin Securities, please proceed with your question.

Hello, guys.

Hello, Morris.

Just a little clarity on the IRIDEX. I think you said $11 million annual run rate, which brings it to about -- let's call it $3 million approximately, [$2 million to $3 million] per quarter, if that is right, looking at 2012. In the first quarter, should we just assume two-thirds of that number? Is there any seasonality to those numbers?

Morris, I would probably assume a little bit less only because we're in a start-up mode with this and our focus is on customer service and getting those customers over and addressed properly. But by the time you get to the second quarter, I think that run rate is certainly what we're targeting.

Okay. Thanks. Changing the subject, in this quarter gross margins were, what, 59.5%, yet your revenues were about $18.5 million. Kind of listening to you guys in the past, though you never give guidance, I would have thought as you approached the range that you actually displayed, your gross margins would have exceeded 60%. Any comment on that?

Well, I think gross margin always includes so many variables -- the distributor business, the product mix, and of course volume. And during this particular quarter, everything kind of hit in a kind of a normal mode, and I think the 60% was probably right for the product mix, but clearly at times it could be higher than 60% at $18.5 million, or it could be lower depending upon what that product mix is.

Okay. Okay. And, lastly, it looks like if you look at the non-cash compensation, on a pro-forma basis, you were about a break-even for the quarter. Is that about right?

Well for the quarter, it was about $800,000 and that's right, and you look at the loss and it would be very near break-even if you took out the non-based cash comp. That's correct.

Thank you, guys.

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

Thank you for participating in our call today. We look forward to seeing you at the Roth Capital conference in Laguna Niguel, California and the Maxim Growth Conference in New York, both of which will take place in March. We'll update you on our Business progress on the first quarter call, which is in May 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.