Cutera Inc (CUTR) 2013 Q2 法說會逐字稿

Greetings, and welcome to the Cutera, Inc. second-quarter 2013 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 second-quarter 2013 earnings release, which went out today at approximately 4.00 PM Eastern Time. The release is available on the Investor Relations portion of Cutera's website, at cutera.com, and with its Form 8-K filed today with the SEC and available on its website at sec.gov.

Before we begin, 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; the results of cost-improvement initiatives and other financial metrics; expectations for increasing revenue; the development, commercialization, and revenue-growth potential of existing and planned new products.

While we manage to commercialize new products and we attempt to launch products according to our plans, there is risk both from regulatory and technical challenges that our actual launch date could be delayed or the launch of certain products may never occur. Management's plans for the repurchase of Cutera stock; management and our Board of Directors make no assurances to the magnitude of our planned share repurchases, although we have established Board-approved limits and the Company has to comply with regulatory and repurchase volume restrictions.

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 not to 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 today with the Securities and Exchange Commission. I would like to point out that all references to the current quarter relate to our second quarter of 2013 and all changes in financial performance are in comparisons 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, Kevin Connors.

Thank you, John. Good afternoon, everyone, and thanks for listening today to discuss Cutera's results for the second quarter ended June 30, 2013.

Our revenue for the second quarter of 2013 was $19.6 million. We experienced growth in many segments of our global markets, which was offset by declines that I will address next in further detail. Our international revenue increased modestly in the quarter. We are continuing to experience healthy performance in our direct businesses in France, in Australia, as well as our European and Asian distributorship businesses.

The effect of foreign exchange in Japan had an overall negative impact on our direct business performance, however. In the quarter, Japan represented just under 20% of our business volume, down from roughly 25%, largely due to unfavorable foreign exchange impact. Some of our business is priced in local currency, in which case, although the locally denominated business showed growth, we experienced contraction due to weaker yen conversion relative to last year. In the case of our US dollar-denominated business in Japan, the effect was a price increase in local currency, which has a negative impact on business demand. For reference, on June 30, 2012, the yen-to-US-dollar ratio was approximately JPY80 to $1; and on June 30, 2013, it was approximately JPY100 to $1.

In addition, we experienced a 37% decline in our distributed filler and cosmeceuticals products in Japan, some of which was due to unfavorable foreign exchange ratios, but we experienced general softness in sales as well. We have some specific initiatives in place to improve on this revenue category. While we cannot predict future foreign exchange rates in Japan, we have the benefit of expenses in local currency, which provides protection in our operating performance in Japan.

Turning to North America, we expressed a slight decline in our business in the quarter. The two primary areas of weakness were tied to our Canadian business and our podiatry business. We believe we can address improved performance in these two categories, as we believe both continue to represent healthy opportunities. We have recently made certain sales management and structural changes in our North American sale organization.

In addition, we are currently in the midst of a sales force expansion, which also features some sales force specialists focused on increasing our market penetration in the core market with our high-performance vascular workstation, Excel-V. Our success with this product has been exceptional in certain regions, and we see even broader opportunities if we provide additional structural focus. From our product-line perspective, our Excel-V and truSculpt product revenue continue to experience revenue growth, and we continue to get positive feedback on these products from our customers.

Gross margins in the quarter improved from 53% to 57%, compared to the year-ago quarter. We have set a target of ultimately achieving a blended gross margin at a 60% threshold level, pending expansion of our business volume. Some components of our business have gross margins less than this, such as our significant service business and distributed products, so achieving this target requires products with very competitive cost structures for our highly differentiated products in the market that can command a premium.

Additionally, we have managed our expenses while continuing to invest in new products and global sales expansion. We have shown in the past that as revenues increase, we have experienced improvement in gross margins. After adjusting for non-cash items, we generated profit of approximately $500,000, or $0.03 per diluted share, and generated $1.9 million of cash from operations.

Turning to research and development. At the beginning of July, we initiated production shipments of a new applicator for our truSculpt system to treat smaller cosmetic areas of the body. TruSculpt has the commercial advantage of being a platform where we are able to launch new applicators to better treat different parts of the body, as well as the potential to pursue other aesthetic applications. The initial customer response to this new applicator has been very encouraging. We are also pleased to be able to offer this new applicator to our existing truSculpt customers so that they can expand the capabilities of the technology.

Our program to introduce a high-performance laser system that will focus on a large market segment within the aesthetic light-based market is progressing as planned. We recently submitted our 510(k) application to the FDA for this device and look forward to its launch. We will continue to share more details on this new platform in the future.

Lastly, our dual wavelength picosecond laser development program for the removal -- tattoo removal and pigmented lesion market continues to show progress as planned. We have commenced clinical trials for both indications and are now in that process of compiling the information for our 510(k) submissions. In conclusion, we are pleased with the breadth of programs in our R&D team. We feel that we have both launched exciting recent products and have an exciting product pipeline.

Our Board of Directors recently authorized the repurchase of up to $10 million of our stock, which is not subject to a 10b5-1 plan. This is in addition to our currently active $10 million stock repurchase program that is subject to a 10b5-1 plan, under which purchases can occur at pre-determined parameters. 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, on our second-quarter 2013 conference call. Our revenue was $19.6 million, which remained flat when compared to the second quarter of 2012. Net loss was $638,000, or $0.04 per diluted share. Adjusted for non-cash items, including stock-based compensation, amortization and depreciation expenses of $1.1 million, we generated net income of $500,000, or $0.03 per diluted share. Operations provided $1.9 million of cash during the quarter, bringing our cash and investment balance to $89.6 million. Our cash balances have increased by over $8.2 million during the past year.

As Kevin mentioned, the Japanese yen devalued approximately 23% when comparing the average rate for the second quarter of 2013 to the second quarter of 2012. Japan-sourced revenue represented approximately 20% of our total revenue for the second quarter. Please keep in mind that roughly one-third of our Japanese revenue is sourced in US dollars, which minimized the accounting impact of the devaluation to our revenue, but did result in higher prices for our Japanese customers who pay us in US dollars. As such, it is our belief that revenue was adversely impacted, in the aggregate, by approximately $1 million during the quarter. Also note that we have expenses denominated in Japanese yen in cost of goods sold, sales and marketing, and general and administrative expenses, each of which include a favorable impact related to the foreign exchange devaluation.

Products and upgrade revenue increased slightly in the current quarter. This result is primarily due to an increase in our recently launched Excel-V and truSculpt products, which was offset by declines in some of our other legacy products and upgrades. Service revenue increased by $72,000 to $4.5 million. We expect our service revenue to remain in the $4.5 million-per-quarter range for the remainder of 2013.

Titan and truSculpt refill revenue decreased by $110,000, or 9%. This decline was due primarily to general softening that we are addressing and the devaluation of the Japanese yen, partially offset by an increase in truSculpt refills, which commenced in the fourth quarter of 2012. Fillers and cosmeceutical revenue declined $540,000, or 37%, due primarily to the devaluation of the yen and some general softening in the market.

Now, I will address our operating performance. Our gross margin was 57% in the second quarter of 2013, compared to gross margin of 53% in the second quarter of 2012. This improvement was due primarily to product mix shifts toward higher-margin products, such as truSculpt; realization of many cost initiatives driven during the past year; and increased reliability of our products, resulting in lower service expenses. We are pleased with our gross margin performance. For modeling purposes, gross margin percentage will remain in the upper 50% range if revenue is approximately $20 million per quarter, and we expect our gross margin percentage to increase as our revenue increases.

Sales and marketing expenses were $7.2 million, or 37% of revenue, compared to $7.1 million, or 36% of revenue, in the second quarter of 2012. We expect our sales and marketing expenses to increase slightly in the second half in absolute dollars due to the planned expansion of our North American sales force. Research and development expenses increased to $2.2 million in Q2 2013, from $1.9 million in the second quarter of 2012. The growth in the current quarter was due primarily to increased material spending related to new product development activities. We remain to 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 decreased by $500,000 to $2.4 million. As a percent of revenue, G&A expenses declined from 15% in 2012 to 12% and Q2 2013. The large reduction was due primarily to reduced personnel and legal-related costs. We expect general and administrative expenses to be approximately $2.6 million per quarter in the future, which includes the US medical device excise tax.

Interest and other income, net, decreased to $75,000 from $144,000 one year ago. This decrease was due primarily to an increase in net foreign exchange translation losses as a result of the appreciation of the US dollar versus most of the currencies of our foreign subsidiaries. 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. We recorded an income tax expense of $90,000 for the current quarter, compared to an income tax expense of $89,000 in the second quarter of 2012. Going forward, for modeling purposes, we suggest using an effective income tax expense of approximately $100,000 per quarter.

Turning to the balance sheet. Net accounts receivable at the end of second quarter of 2013 were $7.5 million and our DSOs were 35 days. We continue to have among the best DSOs in the industry and expect them to remain in the mid-30 range throughout 2013. Inventories at the end of June 30, 2013 declined by $573,000 to $10.5 million, compared to the first quarter of 2013. This reflects turns of approximately 3.2 per year. We believe there continues to be room to reduce our inventory further, where appropriate, increase our turns to 4 per year.

Deferred revenue has increased by $2.6 million over the past year. We have had an increased volume of customers who purchase extended service contracts from us, most of whom did so at the time of purchase of a new system. Relative to last year, this effectively indicates that our order level is improved, but the revenue will be recognized over the term of the contract.

In conclusion, our financial position continues to strengthen as we increased our cash and investments to almost $90 million with no debt. This represents over $6 per outstanding share. Now, I would like to open up the call to your questions. Operator?

Thank you. We will now be conducting a question-and-answer session.

(Operator Instructions)

Morris Ajzenman, Griffin.

Two questions -- first, help us understand -- specifically, I am focusing on the US market, which was down 2% year over year, and you are talking about certain sales and management, structural changes, et cetera -- you touched on podiatry, we can talk on that. First, start with the sales force -- what is it that, for lack of a better word, [revenues] that's lacking that your sales are really lethargic versus what's going on in the industry right now? What specifically needs to be done with the sales force, when you use the word, structural?

Morris, as we alluded on the call, we've got parts of the business that are doing extremely well, but we mentioned Canada and podiatry in North America because relative to a year ago, our Canadian business is off about $1.3 million and podiatry, some of which is [double counting] Canada, but largely it's $1 million from a year ago as well.

In terms of the things that we are focused on -- number one, let's get a renewed focus on, from a distribution perspective, on podiatry. We don't believe that the market in Canada has gone through a material shift and much of the things that we're focused on are bringing a higher level of attention. We talked about specialization in our sales force to make sure that we can sufficiently focus on the broad array of products that we currently have in our portfolio and a heightened focus on training, so it's really blocking and tackling rather than something elusive.

Podiatry, GenesisPlus, what about US -- how is the traction there?

That's largely a US product.

The sales is just refocused elsewhere, away from GenesisPlus, that is impacting recent results in podiatry?

Again, the key concept here is renewed focus on it. We think that the trade meetings that we attend in podiatry, specifically, have had a lot of excitement and buzz. So, we think we need to get our sales force's proper mind share of this market because we are making investments and we are seeing continued signs that this market is real.

Okay. One follow-up, and I will get back in queue. How many quarters -- is it quarters or quarter before you think the sales force and -- putting aside what's going on with the yen-dollar devaluation, as from the perspective of the yen -- is it a quarter, is it a couple quarters before you get back on track, where you think the top line should be?

Yes, to keep things in perspective, we had seven quarters of growth in excess of 20% up until the end of -- up until Q1. We uncovered some things earlier in the year, and we think we have jumped on the appropriate course to get those things back on track. We feel good about what our sales management team is focused on. And, I think from a product perspective, we think we are also very strong there. We don't give guidance on our revenue, but we don't think that there is something here that we can't manage our way through.

Thank you.

Tom Gunderson, Piper Jaffray.

Let me start with a little confusion on the answers to the last questioner. Kevin, I thought podiatry in the US had a separate sales force, and I thought you just said that there was a lack of focus. If I understand this right, they have one product to sell -- how do you lose focus on that?

Right, but the challenge that we found with that is that -- you are correct, they largely have one product, we have distributed something in addition to that. But, the territories we found to be very difficult to manage. We had around nine reps for the US, so the efficiency of that focus team brought some challenges that we did not anticipate. We are continuing to expand, and we will fold the podiatry product in with the whole portfolio, such that all of our feet on the street will be able to capture the podiatry market.

Now, with the specialized team, we did have individuals that did extremely well with that, but we found that the feedback that we have is that there is a lot of travel time associated with a specialized force like that. We are looking to do some other things where we continue to manage -- create some structural focus, such that we can continue to get proper mind share, but we felt that nine people traveling across the country had them spending more time traveling rather than getting in front of customers.

Got it. And then, I can't remember if it was one year ago, or two years ago, where we were talking about how things had switched for your sales force at some of the meetings -- industry meetings, et cetera. The competitive sales force was coming to you and saying -- hey, you guys have the hot products, and we would be interested in switching ships, here. Is that still out there? Do you think you can get some of those high-performance aesthetic laser-like sales guys from some of your competitors?

Then, second part of that question is -- you mentioned feet on the street now and combining the two forces. If we go from feet on the street at the beginning of the year to the end of the year, what do you think it's going to be?

First of all, in terms of getting high performers, you're absolutely right, and that is an active initiative with our sales force expansion. We have been able to successfully land some people that, at one point, were top performers here that were recruited by competition, and we are delighted to have them come back into the fold. So, that is part of the plan. We are targeting about 40 people --

About 40 people, from 35 at the beginning of the year.

Right, and mind you, Tom, that we are collapsing that nine podiatry sales force into that as well. We are scheduled to get that, and that is underway, as we said in the script. We have more expansion plans beyond that, but we're taking this as a first step.

And, to speak a little bit about the specialization, we have an Excel-V sales specialist because this is a product that really shines when it is in a doctor's office for evaluation. The conversion rate with this product is the highest of our products. It is a premium product with well-differentiated technology, and it really has done well in certain parts of the world. It has exceeded our expectations, and our focus, now, is how can we replicate that on a much broader scale, here, in North America, with very sophisticated salespeople that can manage their colleagues within their region. We will assign one specialist for each region and have them work side by side with the direct rep in a given territory. So far, the reception of that has been very good.

Got it. Two quick number ones, probably for Ron -- Excel-V and truSculpt were 48% of revenues in Q1. What was that number in Q2?

I think that was the product revenue in Q1.

Product revenue, so what was that number in Q2?

It is in the same range, around 44% I think, but it is in that same range.

And then, you gave us -- can you give us the split of orders between core and podiatry and other?

Right, I realize that we didn't have those in the prepared remarks. The core group was about 43% -- this, again, is North America orders, podiatry was about 19%, and then the non-core group about 38%.

Got it. That's it for me, guys, thanks.

Anthony Vendetti, Maxim Group.

To talk a little bit more about the product, you mentioned that you have done some clinical trials for the new picosecond laser, and you are getting ready to submit a 510(k) for that. What do you think the timeframe is for that submission? And, based on the fact that there is already a competitor of there with a product, what is your best guess to -- with some type of range of when you think you might receive approval? And then, also on the new high-performance laser, which you already submitted FDA approval for, is that something you are still expecting by year end?

Sure, Anthony. First of all, we wanted to update investors and anyone else on the call that is interested in being updated on the various engineering programs. Last quarter, we indicated that we had a meeting with the FDA to lay out, what seemed to be, an agreeable strategy. The FDA is always subject to change their views on things, but we were encouraged by that meeting, and they laid out the basic framework for what they are looking for, for the two indications that we are looking to get the agency to approve -- one is for tattoo removal and the other is for pigmented lesions. And, both of those have clinical trials to support the 510(k), so that was the direction we got from the agency last quarter.

On timing, we will comment more as we get closer, but generally, we want to start speaking about product launch information once we have the submission in. The FDA has given us some guidance that they do not want us to seem as if we are promoting it before we having our 510(k) in process, so I cannot speak to the timing of it. The second question Anthony was?

In terms of the laser system that you have already -- the new high-performance laser system, is that still on track for the end of this year? And then, I wanted an update on ProWave LX -- how that roll out is going?

Good. We are pleased to get the submission in, in the past -- recently. We think that the program is coming together nicely, and we think that the time frame that we have talked about is still what we are targeting.

Okay, and then --?

ProWave LX, we started shipment of that. So far, the feedback we are getting from physicians, on their clinical experience, has been very positive. We are really raising the peak-power capabilities with that launch and that allows our customers to treat some of the more challenging patients with fine hair and lighter hair, and with this technology, they are able to do that.

Can they buy that as a separate hand piece as well as a standalone system?

That's correct. We were able to provide that as an upgrade, or they can buy a system that incorporates that technology, as well as our Nd-YAG, for the treatment of hair removal.

Okay. And then, on Canada, Kevin, are you convinced that this is transitory? I know the first quarter was a little bit of a surprise because Canada has been a strong market for you guys for a while. Are you confident that whatever steps you have taken is going to turn things around quickly, here in the third quarter, or is this going to take a little bit of time to turn around?

I think, to your point, Anthony, we have had a very strong business in Canada for years, and we really believe we have got a great team up there that has been consistently performing at some of the highest levels in our organization over the years, and that same team is in place. I think with some of the things that have happened in the podiatry discussion impacted Canada as well. We believe that, again, really sending a message of focus and providing a higher level of support for the team on the ground.

We have beefed up our sales training resources significantly, and we certainly have not lost confidence in our team in Canada. We have seen that elsewhere, where -- there's certain parts of the United States, our performance has been extremely strong. So, where we are not strong, we are shining a bright light on the specifics of what we can do to change that. We are working very closely with that team, and we believe the initiatives in place are going to return our performance to typical levels.

Okay. Great. Thanks, guys.

(Operator Instructions)

Brian Freckmann, LS Capital.

A lot of the questions have been answered, but I am looking at things -- is it fair to say that your, as best as I can tell, your Excel-V and truSculpt business has grown about 30% sequentially over the last two quarters -- is that about a good way of thinking about it?

We really don't get into that level of granularity within our products, but I think we can say we are continuing to see growth on those products, year over year, as well as sequential.

So, here is a general question, and then I will jump to the buyback. It seems as if you guys are launching new products and you are growing -- at least, when you take Excel-V and truSculpt as a percent of sales and line those up, you're growing at about 30% the last two, quarter over quarter, sequentially, and unfortunately, have been stumbling with core products, and then, let's say, optically, $1 million of FX.

I think the question prior was -- how comfortable are you that your legacy business has trimmed the decline. Because obviously, you are losing the benefit of 30% sequential growth in new products because your core legacy products seem to be struggling a little bit. And obviously, I think people see the value in the new products, but that is getting lost in the wash because you are showing, optically, flat growth. When, in fact, I think what people are looking for is pretty good growth, you are just giving it up in other places. How do you stem the legacy business?

Brian, unfortunately, there is not a one-sentence explanation to the question, but we have tried to tease it out in a number of ways. Previously in the call, we mentioned the $1.3 million shortfall relative to one year ago from Canada. On the call, we indicated that we anticipate Japan was about $1 million; about $1 million from the podiatry; and even our topical business -- which is, to some degree, part of the Japan number, but not completely -- that was off about $0.5 million. And then, we also indicated, in Ron's section, that deferred revenue increased, relative to one year ago, by $2.6 million.

There are just a lot of moving parts here, but one way of thinking about it is that our order performance actually grew very nicely. Obviously the FX really hurt us in Japan, there's nothing we can do about that. Ron explained that our operating expenses are a bit of a hedge in terms of our operating performance in Japan. We are working diligently to address the areas that we think are key opportunities for us, that's namely, the Canadian opportunity and podiatry.

Okay, I appreciate that. That leads me to my next question in relation to the buyback. It sounds like you have built a deferred revenue, so theoretically, revenue should be growing from there. Your gross margins should increase as revenue grows. It sounds like you are trying to stem the sales slowdown by bringing in new sales people and restructuring that. From the standpoint of looking forward, obviously, you are fairly confident in the direction it is going, and you're generating about a 13% free cash flow yield.

When I look at the $10 million authorized for the buyback, you already have, of course, a $10 million 10b5-1. Can you tell me how willing you are to buy the stock at the current prices? I assume the $10 million is for current prices, in some general sense -- is that a fair assessment?

General comments, Brian, while we would like to see the top line perform at higher levels than what we are reporting today, we are encouraged that, year over year, our gross margin has improved 418 basis points. You can see the cash generation, even with [$19.6 million] in revenue, we were able to generate nice cash in the quarter. We think we have got some challenges/opportunities from an execution perspective, but we think we have got the right products, and we think we have got the right people. And as such, the Board considered this issue, and certainly, we have gotten strong opinions from some of our holders, and we take that very seriously. So, that was the catalyst for the Board deciding this made sense for our shareholders to do this.

We wanted to make it clear, in our communication of the newly approved plan, that we can purchase that in the open market during the open window. So, we have one month a quarter that we have an open window. That is why we wanted to retain our 10b5-1 plan because we want to be opportunistic if the stock were to perform at certain levels that we would be able to acquire it that way, too. So, we intend to buy stock, is the short answer.

Okay, and the window opens, I assume, a couple days after this conference call --?

That's correct. Is it two days, three days -- what's the --? I think Thursday, but --

48 hours is the (multiple speakers) --

48 hours, okay. So, you could be in the market buying $10 million worth of stock, come Thursday?

Yes, and be mindful that there are volume requirements and that kind of thing, so we have to be compliant with the regulations. We were able to get this cleared based on an intent buy back stock.

Great. I think you should buy $10 million, and potentially, buy $10 million more, but that's for another conference call. Thank you.

Jack Wallace, Sidoti & Company.

Couple of questions here -- one, on previous calls, you have gone ahead and commented on your -- excuse me, your results versus those of the market that you've seen, obviously looking back at the quarter that just passed. Could you go ahead and comment on that, and your thoughts on how you can improve that forward? Which will tie into my second question, in regards to collapsing the podiatry sales force in with the existing sales force as well?

Sure. All right, Jack, we tried to provide what we think are macro comments on what's happening within the industry. At this point, it is very difficult for us to weigh in right now because there is some significant moving parts. We have the integration of Palomar and Cynosure that just happened, and they have reported recently, but it was only for a partial quarter, so it is hard to see what the combined entity's trajectory is. Then, we had [Deltic] report, so we still -- and they showed very nice growth in their procedure growth, in particular.

But, there are a number of other companies that we're waiting to report, so we did not feel like we had enough information to really give a good assessment of what is happening with the industry expansion rate. I would estimate, and again, this is barring having that other information I alluded to, but I would estimate that it is growing double digits. And clearly, that is the bar that we are setting in terms of how we want to perform.

Thank you. Then, going to my second question, with the collapse of the podiatry sales force in with the rest of the sales force. It seems as though, particularly, in the comments that you've made in previous calls, truSculpt, and possibly, the Excel-V product are higher-margin products, and depending on how the sales force is incentivized, it looks like the podiatry sales force may be incentivized to focus on the newer products, which may, of course, be what you're looking to accomplish there. But, what will that say about the, I guess, the stemming of these slowed growth to decline with the podiatry segment sales?

Originally, we had the podiatry product, GenesisPlus, in the bag with our general sales force before we went to specialization, so this is not an area that we have not had experience with it. As I alluded to earlier, we believe the activity at our trade meetings and other podiatry events has been very positive. So, it doesn't seem that there is any indication to suggest that the podiatry opportunity has contracted.

Our view is that having 40 individuals having this product in their bag will improve the efficiency of -- because we are not dealing with people flying large geographies in their territory in order to get this product distributed. We are staying very close to that, and I think the whole notion of specialization is something that once we get our experience with Excel-V, we will look to replicate that with other products as well.

Great. Thank you. One last question, just as it regards to the lower service gross margin. I think you may have alluded to it earlier in the call, but my call patched out. I was wondering if you could talk about the lower gross margin in that segment?

Our service business, typically, has gross margins sub-50%. We are doing things the way we like to, and I think we are seeing nice evidence that our service expenses are moving in the right direction, and that is one of the contributors to our overall gross margin going right. But even in that level, the period expenses associated with that business are very little. So on a contribution basis, profit contribution basis is comparable to our product sales.

I think there are a number of companies in the space that have a very difficult time maintaining a profitable service business. And, I think that has been an area that we have been able to maintain very positive relationships with our customers, and also, provide them with service by, either an extended service contract, or time and material. It's about a $19-million-a-year business for us.

That's correct.

Okay. Thank you. That will be all for me.

Morris Ajzenman, Griffin.

If you care to, we're one month passed into this third quarter, July, any commentary you want to give on any of the specific divisions or parts that had difficulties, if there's any change in traction? And, if you want to comment on Japan and the yen?

In terms of the yen, I think you can see that that's stabilized. The yen hasn't strengthened, but it is no longer, at this moment in time, it is no longer collapsing like we experienced in the first half of the year. Your prediction is as good as mine, in terms of what that is likely to look like going forward. All I will say is that we feel good about the team that are working the various initiatives that are in front of us. We are shining a very bright light on the areas that we think are truly areas of improved performance.

But again, I look at the entire organization, and we have got some great shining stars here, and we think we have got exciting products that are well received in the marketplace. So, I think that focusing on execution is critical, and supporting these initiatives with the appropriate management and training resources that we have provided are going to ensure that we ultimately see the results. Anything else, Morris?

No. Thank you.

That is all the time we have allotted for questions. Mr. Connors, I would like to turn the floor back over to you for closing remarks.

Thank you for participating in our call today. I 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 call in November 2013. 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. Thank you for your participation.