Cutera Inc (CUTR) 2012 Q3 法說會逐字稿

Greetings and welcome to the Cutera, Inc third-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.

By now everyone should have access to the third-quarter 2012 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, we would like to remind everyone that these prepared remarks contain forward-looking statements, including statements concerning financial guidance on future revenue growth, expense levels, gross and net margins and results of cost improvement initiatives. Expectations for increasing revenue, the development, commercialization and revenue growth potential of existing and planned new products, including our recently launched TruSculpt product. 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 5, 2012, with the SEC. I would like to point out that all references to the current quarter relate to our third quarter of 2012 and all changes in financial performance are in comparison to the same quarter in the prior year unless specified otherwise.

With that, I will 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, 2012. On today's call I will provide an overview of our Company performance and then Ron Santilli, our CFO, will provide an overview of our financial results. Finally, I will provide some closing comments and open the call to your questions.

Our total revenue grew 28%, with our domestic revenue increasing by 29%, and international revenue growing to 26%. This is the sixth consecutive quarter of revenue growth in excess of 22% year-over-year. In addition, we are pleased with the sequential gross margin improvement achieved. The improvement reflects the leverage of our model and resulted in positive net income after excluding non-cash items. We believe the aesthetic systems market has continued to strengthen and our global sales team is well-positioned to continue to generate improved revenue growth for the coming quarters.

Starting in mid-August, we commenced shipments of our TruSculpt product. The TruSculpt RF technology preferentially heats and destroys subcutaneous adipose tissue, or fat cells, without damaging overlying skin. In approximately two treatments, stubborn areas of fat are naturally eliminated to sculpt body contours with no downtime. This product received 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. We are encouraged with the initial customer response to this product and believe that the market for noninvasive body contouring is very large and still in its infancy. As such, we expect our TruSculpt product to become a significant contributor to our future revenue growth.

Another significant contributor to revenue growth this quarter was the strong demand for our Excel V product. The continuing positive trend in demand for our Excel V product is encouraging, as it has been well-received by key opinion leaders in dermatology and plastic surgery. Excel V is a high-energy dual wavelength technology which provides physicians the ability to treat a wide range of vascular and pigmented lesions on the body and face. In addition, this premier product is upgradable to include non-ablative applications for wrinkles, uneven texture and diffuse redness. Another contributor to revenue growth this quarter was an increase in our service business which resulted primarily from our acquisition in February 2012. We have expanded our North American sales team from 26 territories one year ago to 35 territories today. Nine of these US territories are now dedicated to the podiatry market and the focus on sales of our GenesisPlus. We will continue to monitor the size and productivity of our sales force and will expand our sales force as performance metrics support it.

Turning to research and development, we are excited to have Michael Karavitis, who joined our management team during the third quarter. He has a wealth of technical knowledge, breadth of relevant experience, and that drive necessary to lead our research and development team. He holds a PhD from the University of California Irvine in chemical and materials physics. He has multiple patents and is the author of several publications in the field ranging from laser science to biotechnology. In addition, he brings to Cutera an in-depth knowledge of the ultrafast laser technology. Prior to joining Cutera, Michael led a team of engineers and scientists at various successful early to mid-stage companies including LenSx, acquired by Alcon, Newport Corporation, and Intralase Corporation, which was acquired by Advanced Medical Optics.

We have many projects in our R&D pipeline and we look forward to expanding our portfolio of innovative product offerings. We commenced shipment of our TruSculpt product and will continue to develop additional clinical applications and look to expand our regulatory indications, as we see TruSculpt as a flexible technology platform. Finally, our Board approved a stock repurchase plan. We plan to repurchase up to $10 million of our common stock through open market purchases pursuant to a 10b5-1 trading plan.

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

Thanks, Kevin, and thanks all of you for joining us today on our third-quarter 2012 conference call. I would like to remind everyone that all references to the current quarter relate to our third quarter of 2012 and all changes in financial performance are in comparison to the same quarter in the prior year unless otherwise specified.

Our revenue grew by 28% to $19.4 million. Net loss was $892,000 or $0.06 per diluted share. Adjusting for the non-cash stock-based compensation depreciation and amortization expenses of $1.2 million, we had net income of $335,000, or $0.02 per diluted share. Product revenue increased by 34% and was primarily driven by increased sales of our TruSculpt product, Excel V core specialties and cross-selling opportunities into the Iridex Aesthetic Business install base. Approximately 34% of our North American product orders came from core specialties and 26% came from the podiatry specialty. Outside the US and Canada, we sell primarily to core physicians. Service revenue increased by $1.1 million to $4.3 million. The primary reason for this growth was generated-- was revenue generated from the Iridex Aesthetic Business acquired in February of this year. We expect future quarterly service revenue to be in the range of $4.3 month of $4.5 million.

Fillers and cosmeceutical revenue was derived from sales of Obagi and Merz distributor projects in Japan. Revenue for this product category increased by 4% to $1.4 million and was primarily driven by an increase in the number of customers purchasing such products from us, as well as the expansion of the product lines being distributed. We remain excited about these product offerings, which allows us not only to generate incremental revenue but also helps us to penetrate our laser business into an expanded customer base. From a geographical perspective our US revenue growth was due primarily to the recent expansion of our sales force and the introduction of the TruSculpt product. Our international revenue growth this quarter was sourced primarily from France, Japan, and many of the distributor countries in our Asia Pacific region.

Now I would like to address our third-quarter 2012 operating performance. Our gross margin was 55%, which is 190 basis points increase over the previous quarter. This improvement was due primarily to the mid quarter launch of our TruSculpt product and other cost improvement initiatives. We remain focused on improving our gross margins and have several initiatives that are currently in progress. Sales and marketing expenses were $7 million or 36% of revenue, compared to $6.4 million or 42% of revenue in the third quarter of 2011. This increase in spending was attributable to higher personnel costs associated with the expansion of our US sales force and higher commissions due to the increased revenue.

Our expense ratio improved due to the leverage in our model. We target sales and marketing expenses to be in the range of 35% to 40% of revenue. Research and development expenses declined by $135,000 to $2.2 million due to reduced prototype material expenses resulting from the timing of product development activities. 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 increased by $165,000 to $2.5 million. As a percent of revenue, G&A expenses declined from 15% in Q3 2011 to 13% in the third quarter 2012, as a result of the increase in revenue. We expect G&A expenses to be approximately $2.6 million per quarter in the future for modeling purposes.

Interest and other income net increased to $152,000 from $91,000 in the third quarter of 2011. This increase was primarily attributable to a shift in foreign-exchange gains and losses from a loss in the third quarter of 2011 to a gain in the third quarter of 2012. Income tax provision. Our tax provision is primarily attributable to international taxes related to our foreign subsidiaries and small amounts of minimum and capital-based taxes in the US. As a reminder, we continue to maintain a 100% valuation allowance for our US deferred tax assets. In the third quarter of 2012, we recorded a tax benefit of $64,000. This resulted primarily from foreign taxes offset by $102,000 tax benefit net gains on our investment portfolio recorded in other comprehensive loss. Going forward, for modeling purposes, we suggest using an effective income tax expense of approximately $75,000 per quarter.

Turning to the balance sheet, net accounts receivable at the end of the third quarter 2012 were $7.9 million, and our DSOs were 37 days. We have not changed our credit practices and policies and expect our DSOs to return to our recent historic levels. Inventories at September 30, 2012, were $12.5 million which represented a $245,000 reduction from $12.7 million at June 30, 2012. Our inventories are turning approximately three times per year. Our financial position remains strong.

We ended this quarter with $81.2 million in cash, marketable securities and long-term investments with no debt. This represents over $5.80 per outstanding share. Our cash used in operations for the quarter was $267,000. Included in this use was a $1.6 million increase in our accounts receivable balance. Excluding this, our operations would have generated in excess of $1 million of cash.

Now that I've concluded my review of Cutera's financial performance, I will turn the call back to Kevin.

Thanks, Ron. In concluding we're encouraged with the 28% revenue growth, and I believe our industry is growing. Opportunities exist for us to further improve our results. With the recent launch of TruSculpt for body contouring market and our premier Excel V platform, we are poised to continue our growth. We improved our gross margin as well as our operating margins and achieved a positive net income with the exclusion of non-cash items. Further, we are near breakeven in cash flow.

These operating metrics reflect the strength and leverage of our business model as our revenue continues to grow in the fourth quarter, which is typically seasonally our strongest quarter of the year. We expect to be able to generate positive net income and cash flow in the quarter. I would like to thank our employees and our partners around the world for their commitment and dedication. We're diligent in our efforts to improve shareholder value and our focused to improve our position in the marketplace and enhance shareholder value.

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

(Operator instructions)

Tom Gunderson with Piper Jaffray.

Ron, I will start with you, just a couple of quick ones. Should -- is -- for the medical device tax next year, should we assume about 40% of your revenues are sub -- going to be subject to that?

No, it would be slightly less than that because it would be only the product revenue in the US. So the service associated revenue and accessories would not be associated to that. So it is about 2.3% of our US product revenue and I am estimating about 1% of overall revenue or between $750,000 and $1 million a year.

And then, AR is up, therefore days outstanding are up, you said the days outstanding would go down again. Can you tell us a little bit -- is there a slow payer, a slow country? What happened with the $1.6 million or was it just the 90 day cutoff and they have paid already?

It was really mostly a cutoff issue, Tom, because since September 30, we have had an unusually high amount of cash collections and are -- we have increased our cash balances accordingly. So we expect the AR to return to the historical DSO level in the future.

Kevin, you talked about doing demos with the new truSculpt and obviously the press release said some of the revenue growth came from sales of truSculpt. I know it has only been a couple of months but can you give us a sense of how it is going out there? Are a lot of docs trying these? And what kind of early conversion rate are you getting from trying to buying?

Well, we had a material amount of revenue come from truSculpt. As we pointed out in the script, we did not get active in the market until mid-September. The demo activity -- or mid-August, excuse me -- the demo activity with this product is extremely strong. Our sales team is having great success getting access to core physicians primarily. The patient experience that -- the feedback we're getting on that is very positive. But again, it is fairly early in terms of our commercial experience with it. So we are happy to have some material level of sales with a really relatively short exposure in the marketplace.

Last question for this round at least for me, is organic growth, you mentioned the service growth from IRIDEX and then last quarter we went through this hazy mix of what is really an IRIDEX sale and what is a historical Cutera sale if the customer was originally IRIDEX. With all of that in mind, what kind of percentage growth would you range us for as far as organic growth in the quarter?

Well to your point, Tom, about the hazy description of quantifying product sales with IRIDEX is difficult for us because that install base is candidates for our products and we are seeing success with that. The one clearly defined part is the service revenue. And that is, as Ron mentioned, about $1 million a quarter. Aside from that, we really are benefiting from having a direct contact with that large install base throughout the globe.

Morris Ajzenman, Griffin Securities.

Thanks. This is Zack Ajzenman in for Morris. Our first question really pertains to gross margins. We modeled it be a little higher for the third quarter. Can you speak of if the launch of truSculpt had any effects on gross margins in the third quarter? And then maybe just broadly speak about why margins were where they were this quarter? And maybe a little color going forward into the fourth quarter?

Yes, sequentially our gross margins have gone up from Q2 at 53% to 55% in the third quarter. So we did see a fairly substantial increase there in gross margin percentage and that was largely driven by the truSculpt launch. Keep in mind that is on similar revenue dollars because we did about $19.6 million in Q2 and $19.4 million in Q3. So we're continuing to see many initiatives that are driving our gross margin higher and we're anticipating that to go up even further as our revenue increases.

Just expanding a little further on Tom's question before, can you talk about adoption of truSculpt by region within the United States? And then maybe going a little further, company-wide trends for revenue within the US?

As we indicated, we only had six weeks -- six weeks of the quarter to have any commercial experience. And typical of this market is the time from exposure -- demonstration to a sales completed can be 90 days so I think there is a -- we do not know enough at this point to answer that question. And certainly by the end of this quarter, we will have much more commercial experience under our belt and we will be able to comment on it.

And for the third quarter truSculpt was only commercially sold in the US. We are just rolling that out internationally now.

And generally from a Company standpoint, can you speak of sales by region within the United States?

Not really, no.

Anthony Vendetti, The Maxim Group.

I was wondering if you could talk a little bit more about truSculpt. I know you said you are pleased with the results from the third quarter. Can you quantify number of systems sold or approximate percent of revenue? I know you don't normally break that out but just maybe the systems sold or how many docs are already signed up to use it? Any type of information on truSculpt would be very helpful. And then if you could talk a little bit about your onychomycosis products.

What specifically about GenesisPlus?

Just how that is trending.

We broke that out in Ron's presentations. Ron, do you have that number again?

On the order rate we did talk about 26% of our North American orders were derived from podiatry, the podiatry marketplace.

So any information on truSculpt, order rate and stuff like that?

We don't break out product revenue granularity. But as I alluded to earlier, the fact that we are six weeks from the time that our sales people had this product to demonstrate, we were pleased to see how quickly the sales converted and the demo activity is -- we haven't had a product like this that has given us access to physicians that are interested in evaluating it for many years so that has other benefits. Once we are able to talk about truSculpt, we can also talk about the other products that are in our bag. Because getting access to these physicians is one of the most challenging parts of the sales process. So we are pleased to have the performance we got from that and we think that as we enter this quarter, we are optimistic that those demos are going -- the material number of those demos are going to convert into orders for us.

Anthony, to further expand on the truSculpt, qualitatively we are very pleased with that launch. But we just prefer not to get into specific numbers because we have such a wide array of products that if we begin to comment on units and revenue volume for each one of those, then it becomes a little bit unwieldy at times.

I understand. Can you talk about how the sales process is? There is demo units and then there is the costs with that and then the consumable piece. How that works?

Right, yes there is -- it affects our balance sheet to get this much demo equipment out in the field. However, it seems to be an effective way of getting the prospects to evaluate the technology. We have an annuity-based per use model, and it translates into approximately $200 per procedure. And we would expect for that portion -- for that category revenue to really start to impact us as we get our install base to grow. So next year by the end of the year I think that would be a material source of high gross margin recurring revenue.

Ron, just lastly on the breakout of the revenues between product upgrade, service and Titan refills?

I believe it is in our press release but I can go ahead and give that to you now. The $19.4 million of revenue broken down by the product category. Is that what you are referring to?

Yes, by actual dollars as opposed to just percentage. Do you have that?

It was $12 million for upgrades -- I'm sorry $12 million for products, $0.5 million for upgrades. Service was for $4.3 million. Titan handpiece refills was $1.2 million and the dermal fillers and cosmeceutical business was $1.4 million.

(Operator instructions)

Larry Haimovitch, HMTC.

Good afternoon, gentlemen, and congrats on the progress. Kevin, I am very pleased to see you've initiated a buyback. You and I have discussed that for some time and it is great to see. What were the deciding factors or what were the issues that the Board -- could you share at all with us the discussions at the Board level and how after seemingly a long time you're getting back into the market to buy your stock?

Well, I won't going to get into the content of the Board discussions but other than to say that every time we have had feedback from an investor on this topic, I raise it to the Board. So it has been an ongoing discussion. I think from my perspective, we're at cash flow neutral and the stock is where it is, and it seems to me that it is prudent for shareholders at this point to pursue this. But as I said, it has been an ongoing discussion and will continue to be an ongoing discussion as we get other feedback from existing investors.

And the $10 million is not limited by any time duration, I'm assuming, based on what I saw on the press release?

This is -- structurally we did it like this last time. We have a 10b5-1 and so we want to have -- be sensitive to the optics of how we acquire stock is something that we pay a lot of attention to and we want to make sure we are doing that all right. But we will have it in place and as the window opens this week, we will get it going.

And, Kevin, last question on the buyback, did you or the Board give any consideration to doing a tender offer because given the relatively light trading volume of Cutera, although it certainly has gotten better, it would seem that you're going to be restricted to a modest amount of buyback in any given period. Did the Board think about, well, let's go out and do a $2 million tender to sort of kick this thing off? Or was that not part of the discussions?

Well, as I said, we did it like this last time and it worked out well for us. So I think we are pleased with the ability to offer this.

Okay, one last question and I will jump back in queue. I think you started demo-ing truSculpt as I recall at the end of August, somewhere around there?

Mid-August, in that time frame.

I'm sure you noticed that Solta had perhaps a bit of a disappointment in Liposonix sales in their Q3. Do you think you guys had any impact on their business in Q3?

It is hard to tell. But oftentimes, physicians will defer on making a purchasing decision until they see what is about to be launched. We certainly have encountered that with our products. So it is quite possible.

Jack Ripstein with PCAP.

I just want to make sure I'm looking at the number right but it looks like you guys probably had close to $1 million from truSculpt. I know it was a short timeframe but if you kind of count physicians offering the product and assume some pricing and kind of the upside you guys had to this quarter, so if you could talk about that a little bit. And then second, I heard some pretty specific guidance with respect to your OpEx. And then I thought I heard you say that you were going to be net income positive for Q4 and that would imply, if I'm doing the model correctly, that you would have another sort of north of 25% growth number revenue year-over-year in Q4, is that correct? First of all, that we heard net income positive and cash flow positive for Q4?

It certainly is our target to be cash flow positive and net income positive for the quarter. We have just finished six successful quarters of 22%-plus year-over-year revenue growth. And we are still seeing the market strong. So without giving any specific guidance for the fourth quarter, we certainly feel good going into it and we're coming off of six strong quarters and this past quarter we were near cash flow breakeven and even EPS was just the $0.06 loss, less than $1 million. So we feel very good going into the fourth quarter with our truSculpt launch as well.

And then, Jack, on the issue of the truSculpt volume, as we said earlier, we historically have not gotten into that level of detail. But we did comment that it was a material amount of our growth came from truSculpt and, again, I reiterate that that's only a half quarter of commercial exposure in the market and we see this is as a big market. And we think the feedback that we're getting from our customers is that patients are very positive on the procedure. Discomfort is not an issue. And we will see that a full quarter of commercial focus this quarter and as we said in the script, this is typically one of our -- it is our strongest quarter from a historic perspective.

You mean the upcoming quarter? Q4?

Q4.

Just in terms of the way sales -- you have obviously a month now into the next quarter, what is the typical -- not typical, I guess it's new, that's not fair. But what would a cadence be of closing truSculpt deals? Would it be back-end weighted, linear across the months? What are you starting to see?

Well I think the industry in general if you exclude recurring revenue sources but focus on the capital equipment sales, it has historically been very much the hockey stick that you hear about. We expect that to be the case here too. We expect December to be a strong -- the strongest month for us. And in terms of what that means for truSculpt specifically, we look to see the benefit of all the demo activity that we started in the third quarter and we continue that going into this quarter.

Anthony Vendetti, Maxim Group.

I just had a question (technical difficulty) acquisition of PSS Worldwide. Do you expect that to have any impact at all or do you think it will be business as usual?

We have reached out to them and I think that the dust still has not settled there. So we would look forward to making the introductions with the appropriate people from McKesson and -- but I can -- it has been a good relationship and we will continue to do everything we can on our front to extract more from that relationship.

Approximately what percentage of your sales originate from them?

It has changed over the years. Right now we are probably 10% of our domestic, something like that.

There are no further questions at this time. I would like to turn the floor over to Kevin Connors for any closing comments.

Thank you for participating in 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 in the fourth quarter conference call in February 2013. Good afternoon and thank you for your continued interest in Cutera.

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