Cutera Inc (CUTR) 2012 Q2 法說會逐字稿

Greetings and welcome to the Cutera Incorporated second quarter 2012 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 second quarter 2012 earnings release which went out at approximately 4 PM Eastern time today. The release is available on the investor relations portion of Cutera's website at www.cutera.com and with its Form 8 filed today with the SEC and available on its website at www.sec.gov. Before you begin, we would like to remind everyone these prepared remarks include 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 businesses. Expectations for increasing revenue, generating cash, improving gross margins and 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 on the Company's most recent 10-Q filed on August 6, 2012 with the Securities and Exchange Commission. With that, it is my pleasure to turn the call over to the Company's President and Chief Executive Officer, Mr. Kevin Connors.

Thank you, John. Good afternoon everyone thanks for joining us today to discuss Cutera's results for the second quarter ended June 30, 2012. On today's call I will provide an overview of our Company's performance, 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 encouraged with our 32% second quarter 2012 revenue growth, compared to the second quarter 2011, with our US revenue increasing by 38%, and international revenue improving by 28%. US market for aesthetic systems continues to improve. We believe our North American sales organization is well-positioned to continue to generate improved revenue growth for the future. Our international revenue growth was driven primarily from Canada, France, and many countries in our Asia-Pacific region. From a product perspective, a significant amount of our growth this quarter was driven from continued increase in shipments of our ExcelV product. ExcelV is our premier vascular product that continues to gain traction in the marketplace. In addition, demand for our flagship Xeo platform also continues to remain strong and it contributed to the revenue growth this quarter. Our customer service business experienced significant growth this quarter, and Ron will discuss this in more detail shortly.

We have expanded our North American sales team from 26 territories one year ago to 36 territories today. We have nine US territories dedicated to podiatry, the podiatry market, and to focus on the sales of our Genesis Plus. We will continue to monitor the size of this opportunity and we will expand our territory size as our sales performance supports it.

Turning to research and development, revenue shipments of our truSculpt product designed for the fast growing noninvasive body contouring market commences in the third quarter 2012. The truSculpt radio frequency technology is the latest breakthrough in noninvasive body contouring that preferentially heats and destroys subcutaneous adipose tissue or fat cells. Without damaging the overlying skin. In one or more treatments stubborn areas of fat are naturally eliminated to sculpt body contours with no downtime. This product received a CE Mark approval for fat reduction and body sculpting in January 2012, and has a 510K clearance for deep tissue heating and the treatment of cellulite for certain specific indications. We are pleased with the initial market acceptance of this product, and believe it will play an important role in our revenue growth in the future. 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 in our second quarter 2012 conference call. The second quarter 2012 revenue was $19.6 million or 32% higher than the second quarter or 2011. Net loss for the second quarter 2012 was $1.5 million or $0.10 per diluted share. Adjusting our $1.5 million loss for non-cash stock-based compensation of $787,000, and depreciation and amortization of $425,000, our net loss would have been $254,000 or $0.02 per diluted share.

Kevin already provided an overview of our revenue performance. I will now provide some additional details. Product revenue increased in the second quarter by 44%, when compared to the second quarter of 2011. This increase was primarily driven by increased sales of ExcelV into core specialties and our flagship Xeo platform. In addition, cross-selling opportunities in the newly acquired Iridex aesthetic installed base, primarily with our ExcelV and Xeo platform also contributed to our revenue improvement. During the second quarter of 2012 approximately 35% of our North American product orders came from core specialties and 36% from podiatry specialties. Outside the US and Canada, we primarily sell to core physicians.

A significant percentage of our revenue is sourced from existing customers. During the second quarter of 2012, 40% 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 revenues from these annuity revenue categories. Upgrade revenue continues to remain low, because in the last two years we have introduced new platform systems versus a new application that would be an upgrade to a customer's existing product. Service revenue increased to $4.4 million in the second quarter of 2012, compared to $3.6 million in the second quarter of 2011. The primary reason for this growth was approximately $1.1 million of incremental revenue generated from the Iridex aesthetic business acquired in February 2012. We expect future quarterly service revenue to be in the range of $4.3 million to $4.5 million.

Titan annuity remained flat at $1.2 million when compared to the second quarter of 2012 to 2011. Fillers and cosmeceutical revenue increased by 38% to $1.5 million in the second quarter of 2012 compared to $1.1 million in the second quarter of 2011. Growth of this revenue category was derived from sales of our Obagi and Merz distributor products in Japan. We remain excited about this opportunity and believe it will continue to increase our revenue penetration into the core market and will be accretive to our results. The integration of the Iridex aesthetic business acquisition has gone according to plan. In particular, we are pleased with the cross-selling and service opportunities we have into this installed base. Additionally, our team in France continues to perform well and is expected to play a large role in our European operations.

Now, I will address our second quarter 2012 operating performance. Our gross margin was 53% in the second quarter of 2012, compared to 57% in the second quarter of 2011. The decline in our gross margin was due primarily to a product mix shift towards lower margin products. Further, we experienced an increase in distributor revenue as a percentage of our total revenue, which contributed to the margin decline. With the commencement of shipments of our truSculpt system we expect this will have a favorable gross margin impact, as our truSculpt revenue ramps up. And due to several other gross margin improvement initiatives underway, we believe that consolidated gross margin will be higher than 53% going forward.

Sales and marketing expenses were $7.1 million, or 36% of revenue in the second quarter of 2012 compared to $6.3 million, or 43% of revenue in the second quarter of 2011. Higher spending from a year ago was primarily related to the expansion of our US sales force. Even though our spending increased, our percentage of revenue dramatically improved as a result of the high revenue. We target sales and marketing expense to be in the range of 35% to 40% of revenue. Research and development expenses were $1.9 million for the second quarter of 2012 and $2.3 million in the second quarter of 2011. We remain committed to investing in R&D and launching new products in the future, and expect quarterly spending to be in the range of $2 million to $2.5 million per quarter.

General and administrative expenses were $2.9 million the second quarter of 2012, compared to $2.6 million in the second quarter of 2011. The increase of these expenses were due primarily to higher legal expenses of a nonrecurring nature. As a result, as such, we expect G&A expenses be in the range of approximately $2.6 million per quarter in 2012. Interest and other income net was $144,000 in the second quarter of 2012, compared to $199,000 in the second quarter of 2011. This decline was primarily attributable to a decline in investment yields and foreign-exchange gains and losses. The income tax provision in the second quarter of 2012 was $89,000. Our tax provision is primarily attributable to international taxes related to our foreign subsidiaries and small amounts of minimum capital base taxes in the US. As a reminder, we continue to maintain 100% valuation allowance for our US deferred tax assets. Going forward, for modeling purposes, we suggest using an effective income tax expense of approximately $75,000 per quarter for the remainder of 2012.

Turning to the balance sheet, our financial position remains strong. As of June 30, 2012 we had $81.4 million of cash, marketable securities, and long-term investments with no debt, which represents approximately $5.76 per outstanding share. Accounts receivables at the end of the second quarter of 2012 were $6.2 million and our DSOs were 29 days. Inventories at June 30 were $12.7 million, which represents a $712,000 reduction from the $13.4 million at March 31, 2012. Our inventories are turning approximately 3 times per year. Now that I've concluded my overview of Cutera's financial performance, I will turn the call back over to Kevin.

Thank you, Ron. As we enter the third quarter of 2012, we remain focused on the following key initiatives. One, launch of our truSculpt product into the fast-growing body contouring segment of the market. Two, continued growth from recently launched products, A, ExcelV into the core market, B, Genesis Plus in the podiatry market and other physician categories. Three, improving gross margins through anticipated cost reductions, increasing average selling prices, and the launch of truSculpt. Four, productivity improvements of our recently expanded North American sales team. Five, continued investment in our research and development activities to enable new product launches in the future. Six, achieving positive operating cash flow during the second half of this year.

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

Thank you.

(Operator Instructions)

Dalton Chandler, Needham & Company.

Good afternoon. I just wanted to start by asking a little bit about the sales force, thanks for the update on the expansion, but could you just remind us what your goals are for the end of the year and for the longer term there?

Yes, Dalton, we are essentially where we planned to be at this point. And as we mentioned in the script, that as we get more experience in the marketplace with some of these new product launches, we will monitor that very closely and make decisions about expanding even further if the data supports it.

That is right, Dalton. Our current position, we have 36 territories out there in the US and Canada, which 9 of them are dedicated to the podiatry specialty.

Okay. In the past few quarters, you have talked about the GenesisPlus as one of your growth drivers. You did not really mention it this time, could you talk about what is going on with that product?

It is continuing to sell very well for us. Of course, the year-over-year numbers are getting harder and harder to beat, because the FDA approval occurred a year ago at this point. But it continues to be a strong contributor to our revenue base.

Okay. Finally, it looks like you are very close to breakeven, if you get the margin expansion you think you're going to get from the Genesis, I'm sorry, from the truSculpt launch, is this about the breakeven number now where you came in this quarter?

Right. Dalton, we are positioned to be at about the lowest breakeven point in the industry. And our target is to get the gross margins back up into the upper 50% range, given the many pricing and cost initiatives we are implementing in the launch of truSculpt. If we get there, and you can see at the $20 million mark, we are essentially at breakeven on a GAAP basis, and of course, that would generate about $1.1 million in cash given the stock-based compensation expenses and intangibles.

Okay. That is all for now. Thank you very much.

Morris Ajzenman, Griffin Securities.

Hi guys, can you give us a little more color, better idea what the revenue run rate was on an organic basis year-over-year, adjusting for Iridex?

There are parts of that business that make it difficult to isolate. The service business is one that we can get clear visibility on the Iridex contribution and that was in excess of $1 million. Is that right, Ron?

Yes, about $1.1 million came from the service Iridex business. Most of the other portion of the Iridex business is cross-selling, and is difficult to measure, but is included in our US revenue growth.

It's fair to say that the overall revenue was up, if we somewhat could get a better feel for it, in the mid-teen area, is that fair as a guesstimate? Is that conservative? Is that aggressive?

Again, it is not clear measurement, but we think that organically, it would be somewhere in the 20% range, but again, take that with an asterisk.

Thank you. Last question here, can you kind of walk through again, you touched on it, but just a little better feel for gross margins? Again, this quarter, I think about 53%, you talked about a product shift mix to lower margin product distribution, can you give a better feel for that? Just because I think the key issue here going forward, and that you will understand, if you can draw gross margins say in the upper 50% level, would have a company that's operated much more profitably, clearly profitable versus nonprofitable recently, though unprofitability is currently improving. Can you kind of give us a road map, just give us a better explanation of how, again, this quarter, and how that transitions over the next few quarters?

Again, in the script, we talked about 20% of our revenue approximately went through distributors and, of course, the service business is now a larger part of our business, somewhere annualized $17 million, $18 million a year with the Iridex acquisition. And product mix, that moves around from quarter to quarter. But, as we are seeing the top line expand, we are seeing margins improve with that typically. And we think with truSculpt being an exciting new category that has really nice margins, we think all of those should result in improved gross margin.

So, let me ask, just restate it another way, the target of upper 50% range, can we see that by the end of this year? Is that a more realistic target sometime into 2013?

It certainly is our plan, and it's largely dependent upon the truSculpt launch, because that obviously will have an impact, but then as Kevin says, the other product mix shifts from quarter to quarter, and those are harder to detect and to manage.

But other categories, we have a number of initiatives on the service side, the Iridex business we acquired, I think they had that business, or the fee structure in that lower than we think is justified in the market, so we have made some price increases with that. Also, price increases with some of our other products. And then, as Ron alluded to, we have a number of active programs to get our cost structure and our products at a lower level.

Thank you.

Misha Dinerman, Piper Jaffray.

Hi there. Good afternoon. Just wondering, on the truSculpt if you guys have any more information as far as the timing of the launch, and just an update of how it might have done at the annual meeting of the Academy of Dermatology.

We are excited to be where we are with truSculpt. The Q2 numbers don't have any truSculpt revenue in it, and we anticipate commercial shipments in the current active quarter, and we've already started demonstration activities with the product, and so far we are very pleased with both physician response to it, and the success we're having by getting this equipment in front of new prospects.

Okay, great. And then can you also remind us how many sales reps you have divided between the podiatry and the non-podiatry territories?

Right now we have 36 territories in the US and Canada, of which 9 are dedicated to the podiatry specialty.

But on a rep basis, is there any info?

On a rep basis, I'm sorry.

Yes, how many people are detailing to each of those territories?

We're a little confused here. We have nine dedicated podiatry reps.

Okay, all right. And then just one last question for me. Wondering what your thoughts are related to share repurchases given that the share price has been trading so near cash lately.

There is a strong argument that at this price, that is justified, and we have many investors that have expressed that view. And every time we have opinions from shareholders, we take it up to the Board level just to make sure that these views are vetted and that we're responsive to those kinds of questions. But with that said, there's also a lot of consolidation and acquisition going on in this space right now. And so, the other side of that is that some companies are opting to keep dry powder in order to have the ability to execute a transaction.

Okay, all right. Thank you.

Anthony Vendetti, Maxim Group.

Thanks, just a couple of questions on truSculpt, so commercial launch, this quarter, did you say you already started shipping, or you will be shipping?

We plan to have revenue shipments in the third quarter.

Can you talk about how you are pricing that and if there is a consumable with it?

The list price is what, $85,000.

$88,000.

$88,000. And there is a consumable. So similar to the Titan annuity revenue we are excited to have that model and we think the benefits for both the physician and the patient with this technology really support the direction that we are pursuing with it. And we see future new applications, of course we'll have to get expanded FDA clearances, but we think the platform really lends itself to many new treatment categories in aesthetics.

And did the technology or energy sources, is RF, what kind of RF is it?

Well, we have got a lot of flexibility where we are able to actually vary the frequency of the radio frequency source while maintaining constant power output. And we have the ability to drive more than one active electrode and so again, the hopes for future expansion of both application and speed and improving the patient experience in any way we can, we see lots of future products coming from this platform.

Okay. And then on Iridex, I know you said there was some good cross-selling this particular quarter, is that predominately the VariLite, and then if you could talk about the impact it had in terms of revenues on margins this quarter versus last quarter?

They've got a substantial installed base, we believe it is somewhere around 6,000 devices. And what we are finding is that many of those customers are looking to get into newer technology, like the Excel V, so we have had a number of Gemini customers that have reached out to us. And what we are able to do, is to recondition the Gemini product, and sell an Excel V, and then have a second market at a different price point. So, there are lots of unique opportunities for us. And of course the service business is something that continues to expand and it has become a large portion of our revenue today.

So, just as a follow up on the example, on Gemini, for example, you may take a Gemini back in a trade, charge an upgrade to Excel V, possibly repackage Gemini, and sell that in another country, is that about right?

That is right.

Okay. In this quarter, did you have any outstanding legal costs or settlements?

Yes, we did, Anthony. We had a nonrecurring charge for this quarter that will not be continuing in the future related to a settlement.

That was somewhere in excess of $300,000.

Do you want to disclose what company you settled with or what it was regarding?

It is not material. It is one of these unusual lawsuits that unfortunately we see too many of.

All right. Okay, sounds good. Thanks guys.

(Operator Instructions)

Larry Haimovitch, HMTC Group.

Good afternoon gentlemen, congrats on a very nice quarter.

Thank you.

Several of my questions have been asked already, but a couple that I wanted to raise. You talked about distributors and distributor inventories, one of the things we have seen in a couple of companies this quarter that have already reported is, they've reported problems with distributor inventories for various reasons. Problems as in reduced distributor inventory levels. Can you discuss whether you think your distributor inventory levels are higher than normal, lower than normal, or just right where you feel they should be?

Our philosophy has always been to keep our distributors at inventory levels that are really driven by the current business. We don't think it is a good practice to ask distributors to take large orders at the end of the quarter, only to go dry for a quarter or two. And I think that is reflected in our accounts receivable level. We really want to keep the inventory fresh, and so we have no -- we don't have tremendous visibility in how many machines they have in their warehouse. But we try to stay very close to the way that they're transacting their business and provide the product when the customer needs it.

Our distributors primarily stock for service parts, and maybe have some demo equipment that they purchase they use for demo purposes, but sale transactions are pretty much passed right through to the end user.

So they don't, the distributor inventory levels don't move very much except if sales grow, then maybe they move commensurate with sales growth?

That is correct and very minor.

Ron, for you, looks like the Medical Device Tax, which we all just so much love, is going to be a reality beginning January 1. Have you given a lot of thought to how this is going to impact Cutera, what the impact would be? And for Kevin, one CEO talked about raising prices to offset the Medical Device Tax, wondering how you guys are looking at this.

Well, on the price side, it sounds nice. I think we might have a hard time dealing with that, so we are going to do everything we can, Larry, to mitigate it, but it is material. And as you know, it is not dependent on whether the company is profitable or not.

Right.

This is a majority our US business.

That's correct.

Which is about 40% of our total revenue, we need to dig into it some more. And if it's just related to the product sales, and not the service sale, the service revenue, we are going to look to a high level of detail and make sure that we are not leaving money on the table.

At this point, it sounds like, unless I should let Ron probably pipe in, it doesn't sound like you have an estimate at this point that what it might cost you?

We have not put any guidance out there in any way about what that would be, no. Not yet.

Okay. One last question, I'll jump back in queue. On the share buyback, I wasn't -- I can't remember, do you actually have a share buyback in place now, Kevin?

We do not, Larry, not at this time.

Okay, wouldn't it make sense to just have the Board put something a place, obviously it does not obligate you to buy anything, but in the event the market gets really worse than it has been, it gives you the opportunity at least to step in if you choose to, and perhaps pick up some stock at a price you deem to be very attractive.

As I said early in the call, this is an active discussion with my Board and philosophically, we've done it before, as you know, Larry. And if we were to approve a plan, it would be with the intent of actually buying a stock that we talk about, it would not be for external optics. I do see that the argument that the stock is so inexpensive at this level, relative to what we have in the bank, that it is getting louder, I am hearing this more and more.

Okay. I second that motion. Thank you very much, guys.

Thank you.

David Levy, Senvest.

Hi guys, great quarter.

Thank you.

Just had a couple of questions for you. On the service side you broke out $1.1 million coming from Iridex. So if I back that out, it looks like your service revenues would be down year-on-year, can you explain why that might be the case in the context of the core business growing?

It would have declined a couple hundred thousand dollars, and it does fluctuate, that service revenue if you watched it over the past couple of years on a quarterly basis, fluctuates between $3.2 million and maybe $3.6 million per quarter, so I don't know if I consider that to be material, just a fluctuation that's occurred.

Okay. On Titan, it seems to be the opposite, it seems to be very steady and you get about $1.1 million, $1.2 million every quarter, how should we think about that going forward? Is that going to get tired at some point, or do you think that that's sustainable in the coming quarters and even years?

The trends are very predictable, and we have got some plans to augment that. We are committed to significant investments in R&D and the Titan business has been one that we really like. So I don't see that going away. In fact, with the introduction of another recurring revenue stream, it allows us to start to evaluate whether we want to make more investments from a distribution perspective, meaning a sales specialist that actually are focused on procedure volume, whereby we are participating in that. So I think with these two products in our bag, that it makes that argument even more justified in my mind.

Right.

In that case, there is possible -- there is an argument that we could actually leverage that Titan business if we were able to build that into our sales team.

Right. And then just last one for me, can you give us a little bit of a report card from around the world where you saw pockets of weakness and where you saw pockets of particular strength? Everyone's obviously concerned about Europe. You seem to be executing well in France with Iridex. Just any color you can provide, country by country or region by region would be helpful.

Sure, with the Iridex acquisition, we really looked at France as one of the key assets and they have got a really nice installed base, and a great team on the ground. And we are happy to have that group contributing. And in fact, we have made some additional investments in our sales team on the ground in France with the hopes of growing that business even more. But with the challenging environment, we did cut some of our other expenses in Europe over the past year, and so we have done some expense reductions there that we think were the right things to do. And we were happy to see that the addition of the business in France was able to make revenue net flat relative to past periods.

Or actually, even slightly up.

Slightly up. Canada, we are seeing great strength in Canada, record performance levels there. Asia seems pretty stable, with Japan consistently being about a quarter of our business, anywhere from 20% to 25%. And then Australia and New Zealand, more strength there. The recent quarters, Latin America has been a little soft, but we have had a pretty good track record down there over the years.

Okay. Thanks a lot.

There are no further questions in the queue at this time. I would like to turn the floor back over to Mr. Connors for closing comments.

Thank you for participating on our call today. We will be attending a number of investor events in the coming months and we will update you on our business progress on the third-quarter conference call in November 2012. Good afternoon, and thank you for your continued interest in Cutera.

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