Cutera Inc (CUTR) 2012 Q1 法說會逐字稿

Greetings, and welcome to the Cutera Incorporated, first quarter 2012 earnings conference call. (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 first quarter 2012 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 8K 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 risks associated with such statements. Cutera also cautions you to not place undue reliance on forward-looking statements, which speak only as of the date they were made. Cutera 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 recently filed 10Q filed on May 10, 2012, 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.

Thank you, John. Good afternoon everyone and thanks for joining us today to discuss Cutera's results for the first quarter ended March 31, 2012. On today's call I'll provide an overview of our Company performance, and then Ron Santilli our CFO will provide an overview of our financial results. Finally, I'll provide some closing comments and open the call to your questions. We are pleased with our first quarter revenue growth of 35%, our US revenue increased by 50%, and international revenue improved by 27%, compared to the first quarter 2011. This revenue improvement was a direct result of a following key initiatives. The first contributor to revenue growth in the first quarter was the sales management changes that we successfully implemented a year ago.

Our North American sales management team under the leadership of Michael Pool has been executing effectively and their strategies are generating improved performance. 27% international growth was primarily driven from expansion in Canada, Japan and Australia. The second key contributor are the two most recent new product introductions, GenesisPlus and Excel V. Both of these products are continuing to be well received by the market and are playing a strong role in our revenue growth. The third albeit smaller contributor was the acquisition of IRIDEX's Aesthetic Business Unit, that was closed on February 2, 2012, during the first two months of the first quarter of 2012 we recognized $627,000 of revenue associated with this transaction, which represents a start-up revenue level. We are expecting to see significant growth from this revenue level in the second quarter, when we experience the results of the fully integrated business.

The final contributor to our revenue growth was our legacy Cutera products with the primary contribution coming from our flagship Xeo product. We believe with our strengthened sales management teams and new product offerings position us for continued revenue growth, in the growing market for energy based aesthetic equipment. We concluded the quarter with 32 sales territories in the United States and Canada, and are planning to increase this team to approximately 39 by the end of 2012, or sooner. We believe our recent expansion into the podiatry market will continue to perform well, and as such, we are in the process of dedicating a group of sales specialists in the United States to the podiatry specialty to focus on the sale of our GenesisPlus product for the primary treatment of [Aliko] Mycosis. Once our sales forces expansion is complete, we'll have 29 aesthetic sales representatives, and 10 podiatry sales representatives in North America. We will continue to monitor the size of our sales force, and we'll consider additional expansion as our sales performance support it.

We closed the acquisition of IRIDEX's Aesthetic Business on February 2, 2012, and are pleased with the progress made in integrating this business with Cutera's. As a reminder, we believe the benefits of this acquisition are as follows. One, the VariLite product, a small compact vascular product that compliments our Excel V and other vascular products. Two, a significant existing customer service business, that we are equipped to service and leverage with our existing team. Three, cross-selling opportunities of Cutera products into the IRIDEX install base of core positions. Four, a strong direct organization in France that will contribute to strengthening our European organization. While this acquisition did not contribute significant revenue for our business in the first quarter of 2012, due to the integration of ramp-up of operations, we believe this acquisition will be incrementally profitable to Cutera, in the second quarter of 2012.

Ron will address the financial impact of this transaction later on the call. Turning to research and development, we believe that strategic ongoing investments in research and development are critical to our future success and inline with that principle we will continue to invest in R&D for the next generation of technology. We're excited about the pipeline of new product opportunities and have augmented our team with top talent, that we believe will enable us to continue to develop differentiated, exciting products for years to come. We announced the launch of TrueSculpt at the American Academy of Dermatology meeting in March earlier this year. TrueSculpt is the latest breakthrough technology for noninvasive body contouring and sculpting that targets subcutaneous adipose tissue or fat cells.

TrueSculpt's innovative technology uses RF energy with targeted heating to selectively disrupt fat cells without damaging overlying skin. In one or more pain-free treatments, TrueSculpt provides remodeling to smooth and sculpt body contours. This product received a CE Mark for body sculpting in January of 2012, and has a 510-K clearance for the treatment of cellulite. We expect to commence shipment of this product in the third quarter. Now, I'd 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 first quarter, 2012 conference call. The first quarter 2012 revenue was $15.7 million or 35% higher than the first quarter of 2011. Net loss for the first quarter of 2012 was $5.3 million or $0.38 per diluted share. Included in this loss was approximately $1.1 million or $0.08 per diluted share of the IRIDEX acquisition non-recurring expenses and start-up loss. Kevin already discussed the geographical performance. I will now discuss revenue by product category. Product revenue increased in the first quarter by 58% when compared to the first quarter of 2011.

This increase was primarily driven by increased sales of our existing products including our flagship Xeo product, Excel V into core specialties and GenesisPlus product into the podiatry specialty. Through the first quarter of 2012, approximately 38% of our North American product orders came from core specialties, and 23% came from podiatry specialty. Outside of the US and Canada we primarily sell to core physicians. A significant percentage of our revenue is sourced from existing customers. During the first quarter of 2012, 46% of our revenue was derived from sales of upgrades, service, tighten annuity and filler cosmeceutical products. We remain committed to strong customer satisfaction and believe we will continue to realize revenue from these annuity revenue categories. Upgrade revenue continues to remain flat because in the last three years we have introduced new platform systems, versus a new application that would be an upgrade to a customer's existing product.

Service revenue was $3.9 million in the first quarter of 2012 compared to $3.3 million in the first quarter of 2011. The primary reason for this growth was incremental revenue from the IRIDEX acquisition. We expect future revenue from the IRIDEX service product line to be approximately $1 million per quarter, beginning in the second quarter of 2012. Tighten annuity revenue remained flat at $1.1 million when comparing the first quarters of 2011 and 2012. Fillers and cosmeceuticals revenue was $1.5 million in the first quarter of 2012, an increase of 37% from $1.1 million in the first quarter of 2011. Growth of this revenue category was derived from sales of our Obagi and Merz, distributor products in Japan. Turning to the IRIDEX Aesthetic business acquisition, the transaction closed on February 2, 2012.

We are now integrating IRIDEX products, people and business activities into Cutera as planned. Included in our loss for the first quarter of 2012 was approximately $559,000 of IRIDEX non-recurring expenses. In addition, our results included approximately $500,000 of incremental start-up operating loss for the two months in the quarter. For modeling purposes we do not expect the $1.1 million or $0.08 per diluted share of operating loss to recur. Beginning in the second quarter of 2012 we expect the incremental revenue from this acquisition to be approximately $2 million per quarter, and we expect this acquisition to be incrementally profitable. We are excited about this opportunity and we believe it will increase our revenue, penetration into the core market, and will be accretive to our results. Now I will address our first quarter 2012 operating performance.

Our gross margin was 50% in the first quarter of 2012, compared to 55% in the first quarter of 2011. Adjusting for the IRIDEX related start-up expenses, the Cutera gross margin rate would have been 54% -- approximately 54%. The decline -- the slight decline in our Cutera gross margin was due primarily to an unfavorable product mix shift towards lower-margin products and higher than expected service related 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 margin that IRIDEX products in the second quarter of 2012. We believe in the third quarter we expect to have all manufacturing in our Brisbane facility, and this will enable us to optimize our gross margin on IRIDEX products. We expect gross margin rates, including the IRIDEX business, for the remainder of 2012, to be between 55% and 59% depending upon their revenue level.

Sales and marketing expenses were $7.4 million or 47% of revenue in the first quarter of 2012, compared to $5.9 million or 51% of revenue in the first quarter of 2011. Adjusting our expense base for the IRIDEX transaction, we expect sales and marketing expenses to be in the range of $6.5 million to $8 million per quarter depending on the revenue level. We target sales and marketing expenses to be in the range of 35% to 40% of revenue overall. Research and development expenses were $2.2 million for the first quarter of 2012 and $2.1 million in the first quarter of 2011. 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 expenses were $3.5 million in the first quarter of 2012, compared to $2.3 million in the first quarter of 2011.

Growth of these expenses were due to $559,000 of non-recurring charges associated with the IRIDEX integration costs, higher audit and legal expenses, and higher personnel-related costs. We expect G&A expenses to be in the range of approximately $2.5 million per quarter in 2012. However, note that in addition, 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 $96,000 in the first quarter of 2012 compared to $184,000 in the first quarter of 2011. Foreign exchange gains and losses were the primary reason for this fluctuation. Income tax provision in the first quarter of 2011 was $97,000, due primarily to our international taxes related to our foreign subsidiaries. As a reminder, we continue to maintain 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 effect income tax expense of approximately $75,000 for the future quarters through 2012. Turning to the balance sheet, our financial position remains strong. As of March 31, 2012, we had $81.9 million in cash, marketable securities and long-term investments with no debt. Our cash balance declined by $9.9 million this quarter, which was due to $5.1 million of cash spent to acquire the IRIDEX Aesthetic assets and [$4.9 million] (corrected by company after the call) of cash consumed by operations, due primarily to the income statement loss. Net accounts receivable at the end of the first quarter was of 2012 were $4.5 million and our DSOs were 26 days. Inventories at the end of the first quarter of 2012 were $13.4 million and our inventories returning approximately three times per year which is in line with our previous inventory turns.

Inventory increased $2.7 million when comparing March 31, 2012, to December 31, 2011. $1.6 million of increases due to the IRIDEX asset purchase, the other $1.1 million was related to inventory buildup, primarily for our increased Excel V volume and the plant launch of TrueSculpt. We don't expect any more inventory growth this year. Now that I've concluded my overview of Cutera's financial performance, I'll turn the call back to Kevin.

Thanks Ron. As we enter the second quarter, we remain focussed on the following key initiatives. One, continuing growth from recently launched products, GenesisPlus and the podiatry specialty and other categories, and Excel V into the core market. Two, integration of IRIDEX's Aesthetic products and the service business which we believe will result in revenue growth and incremental profits. Three, launch of our TrueSculpt product, with revenue shipments commencing in the third quarter of this year. Four, expansion and continued productivity improvements of our North American sales team driven by the formation of a direct sales team targeted at the podiatry market.

Five, continued focus on our research and development efforts to enable new product launches in the future, as well as build on the clinical support of our existing products. With appropriate swift execution to these important initiatives, we remain focussed on expanding our global business and leveraging our operating expenses, which should result in improved operating performance. We believe that our worldwide distribution network, strong cash position, no debt and expanding portfolio products, offer continued long term opportunities for Cutera. Now I'd like to open the call for your questions. Operator?

(Operator Instructions) Tom Gunderson with Piper Jaffray.

Yes, for Tom. Can you tell us if there is any noticeable seasonality in podiatrist sales and if we should expect any in the future?

We, as you know, we got our FT clearance for this indication in April so we're still fairly early in the cycle with this application. But with that said, we still see a tremendous opportunity in podiatry. We're doing some things with our sales organization to now create podiatry specialists within the sales team, and with the TrueSculpt coming and Excel V being launched, we really believe we have a full portfolio of products, and it is important for us to have specialists that can give us the focus that we need in some of these exciting categories.

Okay. Great. Thank you. And just one more question. As far as the launch of TrueSculpt ex-US, particularly Asia, do we have any timelines for that?

Well, we will have a global launch but we'll primarily be focusing on domestic of North American market early on, but we are taking orders for it globally today.

Thank you.

Morris Ajzenman, with Griffin Securities.

Hi, top line improving, which we all want to see. We've talked about it in the past, but gross margins, understand you need to get to certain inflection point probably in the upper teens, or whatever, until you start approaching break-even, depending on the mix. We understand also IRIDEX low gross margins, and maybe you can give us a ballpark of what the gross margins are there. Do you expect to see gross margins improving throughout the year where at some point we could be at a -- at least on a pro forma basis, at a break-even, and possibly earning money?

Yes, Morris, this is Ron. With regard to gross margins, you're right. Our gross margin for the quarter was only 50%. But it was around 54% if you were to pull out the IRIDEX aspect of that, and that was actually negative for the quarter because we were in a start-up phase. So that clearly is not a reflection of the ongoing rate. And our expectation for the remainder of 2012 is that the gross margins on a consolidated level with the IRIDEX numbers will be in the range of 55% to 59%. So we certainly expect -- this 50% is not an ongoing rate that we would expect.

I understand that. You said that during the presentation. I guess what I'm getting at, if you get into the upper 50% range, and again I would like to just get the handle on what gross margins are in IRIDEX, but in the upper 50% range would we be earning money on a pro forma basis?

Certainly we believe that in those upper 50% gross margin range, depending upon the revenue level, we can get to above break-even where we are earning an EPS-positive basis.

Morris, to add more color to that, we have a phased integration with IRIDEX. What we'll have full vertical integration of all manufacturing processes. We anticipate somewhere by mid-year that we have a manufacturing agreement with IRIDEX for some part of the manufacturing. We think we'll have improved product margins once we bring that in-house. And, Ron, I could try to lay out for modeling purposes, you know, some target gross margin levels, as well as what we anticipate expenses looking like going forward, so you should have enough there to figure out where the break-even point is.

Thank you.

Anthony Vendetti with Maxim Group.

You mentioned that one of the strengths was some of the international operations, including Canada, Japan, Australia. Can you talk about Europe, because most of the companies that have reported so far have said that Europe's been weak, particularly Greece and Spain. What are you seeing in Europe? And then I just have a few follow-ups.

Well, not just recent times, but for the last -- last year we've had our challenges in Europe. We believe that, you know, one of the things with the IRIDEX opportunity was the direct operation that they have in France, they have a very strong aesthetic business as well as a service business, and so we're excited to invest in that. But, yes, we have had our challenges there. Greece was never a major market for us and we've also struggled with Spain, as well. So we're doing what we can to maintain our expenses and control them and during a difficult time, but we are excited to have a real nice franchise in France, as well as had a very nice install base in the UK.

Your international headquarters for selling I guess and distribution in Europe, is that still in Zurich?

No, we are, as part of the integration of IRIDEX, we are shifting that to France. That will be our hub, and then, of course, our office in Tokyo is our hub for our Pacific Rim business.

Okay. And then in terms of the IRIDEX start-up costs for this quarter, should we -- should we in our model look at that as falling all in G&A, or did, Ron, did that fall through some of the other expense lines?

It actually fell into a variety of lines. $559,000 of it did fall into G&A, which is truly non-recurring. Then there is a variety of other expenses and revenue which had a net loss of approximately $500,000 for the quarter, that was just efficiencies as a result of just getting the -- getting integrated post-closing on February 2.

Did you want to break that out, and what lines that was in, or do you have that handy?

We aren't breaking out that level of detail. We are talking about it being in the $1.1 million combined level and $559,000 falling into G&A. But the others are in a variety of areas that we aren't getting into that level of detail with.

Okay. Okay. I guess, Kevin, you talked about sales. You're at 32 sales territories right now. You said 39 by the end of the year, including 10 in podiatry. Is that correct? And how many of the 32 right now are podiatry?

Well, first of all, on the last quarter call we said our target was expanding the number your talking about, by the end of the year or sooner.

Okay.

So we're, as I alluded to in an earlier question, we are building a podiatry specialty sales force within the North American team, and a number of them on board now. I don't have this week's figure, but it's probably at least five or six.

Okay. Okay. Great. Thanks, guys.

(Operator Instructions) Larry Haimovitch with HMTC.

Good afternoon, gentlemen, congrats on a good quarter. Forgive me, I'm not on a very clear line, and Ron I missed a couple of metrics I wanted. I didn't catch what the contribution of IRIDEX was in the quarter, or maybe asked a different way, what was the apples to apples growth in Q1 over last year just with the base Cutera business?

In terms of -- well, let me answer the question more easily on the IRIDEX side.

Okay.

What it contributed for the quarter was $559,000 of non-recurring expenses.

Yes.

Down to our G&A line. And then there was another $500,000, approximately, of other net contribution, that is revenue less cost and other expenses associated from in the quarter that basically occurred from February 2, the date of close through March 31.

So Ron, if I take away the IRIDEX transaction completely, what would your sales have been? I'm trying to get an apples to apples understanding, what the organic growth or organic sales was for the first quarter, over last year's first quarter?

Got it. I understand the question now. IRIDEX contributed $640,000 of revenue for the quarter. So it was just 640--.

Okay.

So that would have made the Cutera revenue $15.1 million.

Which is still a very healthy increase, still into the very 20s probably, I haven't done the math but it looks like it's still a very, very healthy increase.

Correct.

The second question is, and again, I know you said it, forgive me for going over this, again. I thought you said that you expected the IRIDEX quarterly revenue, now that you have it for a full quarter beginning obviously in Q2, to be running at about a $2 million quarterly rate? Did I catch that right?

That's correct.

Okay. And that's a little less than -- that's a nice number, obviously, considering you paid a very modest price for it. I'm just curious, because I thought when you acquired the business, it was running at -- I thought I remembered roughly $11 million in sales. At least that is what I seem to remember from the press release. Did I -- did something different or is it just that you've pruned the product line a little bit?

You got that right. It's more of a pruning of the product line. They were running higher and clearly our goal is to do higher than $2 million per quarter, but the $2 million is primarily driven, for us, is that service business, the VariLite product line, which we've taken on and a lot of cross-selling opportunities that we have now acquired.

Right.

But remember they were also selling things like [Delira], oral products, the older laser scope products which we no longer are--.

Okay.

We will continue to service those centers but we are not offering those product sales.

Okay. So, Ron, if I understood you correctly, what you just said, effectively we've trimmed the product line to only sell what we only want to sell, we're letting go of some things, and the true expected annual rate of sales is $8 a year, $2 million a quarter?

That is our commitment at this time, you're exactly right. The business itself was running at a higher revenue level which doesn't mean that isn't an opportunity for us.

Sure. Sure. And then maybe this is for Kevin rather than you, Ron. Kevin, you thought there were some opportunities in sort of cross-selling and the fact that you would be getting into a bunch of IRIDEX accounts that perhaps Cutera sales reps were not having as easy a time with. Have you seen any evidence that, that synergy of cross-selling, et cetera, is working for you in the sales force?

The early signs are positive, Larry. They've got extremely large install base, and we've got the service connection with them, and we've already had a large number of IRIDEX customers approach us about trading in their equipment, or getting into the Cutera Excel V, and other products. And that also extends to key opinion leaders in the core. Many of them are now asking to explore getting into the Excel V technology. So that was part of the strategy.

We still see opportunities, such as, you know, trading and having a used equipment business in the market, it gives us a different price point. And the economics are favorable for us to explore that kind of thing. So, you know, the real answer is that this is a new business. We are hopeful that the synergies exceed what Ron has communicated. But in terms of setting expectations with investors who want to be -- just a little cautious with that.

So you're basically being conservative and cautious and not wanting to -- not wanting to stick your neck out too far, so to speak?

No, and I also think another factor is that if you look at the way we manage our business from an accounts receivable perspective, we're the most conservative -- I should say, we're on the conservative end of the spectrum in our industry, and there is from company to company different views on how to look at revenue recognition. And so there is probably one way of looking at that is that there is a bit of a time shift for us to apply our principles to the way we transact our business.

I do have one more question. I don't know if there is a queue and I don't want to hog the line. I'll be happy to jump back in queue if there is, if you think it is okay to ask another question right now, I will.

Please.

You've seen Lyposonix start off to a very nice start with their fat reduction product. You're entering the market now. I know you probably don't want to give specific guidance but it looks like this is a market that's got plenty of room to penetrate and grow. Any thoughts about, you know, their success and how big the market is, and is the market, you know, bigger and maybe faster-growing than many of us thought?

Well, it's an exciting market. I think the growth is pretty explosive from what we're seeing from our publicly traded companies that are in that space. And we're certainly excited to get our technology in the marketplace. So, all indications that I am seeing and probably what you're looking at, Larry, it has us very encouraged about the demand for non-invasive therapy like this.

Yes. It looks like the market has got a lot of strength and this would be a very, very good opportunity for you.

Well, the interest in the marketplace has been extremely high, so we're excited.

And I'm sorry I missed it, I know you talked about TrueSculpt, are you actually shipping product now, or will you ship this quarter, Kevin?

There is an outside chance that it's at the very end of the quarter but in the script we indicated that it would be next quarter and last quarter call we said that we anticipated the revenue contribution largely being in the second half, so that's kind of how we're --.

Okay. Great. Thanks, guys.

Morris Ajzenman with Griffin Securities.

Hi, just another kind of follow-up, little different than the previous question on gross margins. Again, revenues clearly you're really getting traction there and you even stated even excluding IRIDEX you were at about $15 million revenue run rate or thereabouts versus $11.6 million a year ago.

Yes.

Again, though, exclusive of IRIDEX charges, you had a loss of $0.30 on a GAAP basis. That was up $0.02 from a loss of $0.28 a year ago. Revenues are up materially. Should I construe that as just investment in getting up and ramping on new product introductions? You touched on mix of business, but ex-IRIDEX, revenue is up a lot but GAAP earnings at a loss actually increase some? What is the best sort of summary of that?

Yes, I think you're right. There's a couple of different things there. The first one is the business is ramping up, and so we are -- Q1 is seasonally is the one of the lower quarters of the year, and so our -- a lot of our operating expenses are ramped up for that higher level. So you're seeing that in your Q1 of 2012. In addition on the gross margin, we did have some unfavorable mix-shifts for the quarter, for on the Cutera line excluding IRIDEX, which may or may not continue, and will drive gross margins higher. So those two different factors could have a very different impact on the net income on a similar revenue basis. But going forward, clearly we expect some revenue growth as we've been experiencing significant revenue growth in the past four quarters, and I think the industry itself looks like it's growing fairly significantly now. So we're ramped up for that.

Thank you.

Thank you. Mr. Connors, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

Thank you for participating in our call today. We will be attending a number of investor events in the coming months. We'll update you on our business progress on our second quarter conference call in August 2012. Good afternoon, and thanks for your continued interest in Cutera.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.