Cutera Inc (CUTR) 2014 Q2 法說會逐字稿

Greetings and welcome to Cutera Incorporated second-quarter 2014 earnings conference call.

(Operator Instructions)

I would now like to turn the conference over to your presenter today, Mr. John Mills of ICR. Thank you, sir. You may begin.

Thanks, Operator. Welcome to Cutera's second-quarter 2014 earnings conference call. On the call today are Cutera's President and Chief Executive Officer, Kevin Connors, and Executive Vice President and Chief Financial Officer, Ron Santilli. After Management's prepared comments there will be a question-and-answer session.

The discussion today will include forward-looking statements reflecting Management's current forecast or expectations of certain aspects of the Company's future business, including any financial guidance provided for modeling purposes. Forward-looking statements are based on current information that is, by its nature, dynamic and subject to rapid, and even abrupt, changes. All forward-looking statements are subject to risk and uncertainties which may cause actual results to differ materially from those projected or implied in our statements. Such risk and uncertainties are discussed in a summary form in today's press release and a detailed discussion of them can be found under the caption risk factors in the Company's filing in the 10-Q filed today with the Securities and Exchange Commission.

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 a unanticipated events. Future results may differ materially from Management's current expectations. With that, I'd like to turn the call over to Kevin. Go ahead, Kevin.

Thank you, John. Good afternoon, everyone, and thanks for joining us today to discuss Cutera's results for the second quarter ended June 30, 2014. Revenue in the second quarter of 2014 was $17.7 million, representing a slight contraction compared to same period last year. The US returned to revenue growth, experiencing a 6% increase from the second quarter 2013. We are pleased to have returned to a growth position in the United States as the significant effort we made to expand our sales force has been able to produce a positive trajectory. However, the growth in the US was offset by a decline in revenue from our international business.

During the quarter, we launched a new product. At quarter end we commenced retro shipments of Excel HR, our duel wavelength premium hair removal system, featuring Alexandrite, Nd:YAG technology. This expands our broad portfolio of products into the core physician market of dermatologists and plastic surgeons provide a premier hair removal solution. In North America, we have 40 sales territories and product specialists to enhance our sales efforts. Our team continues to ramp up our North American commercial activities associated with the significant expansion as we achieved -- we achieved over the past six months. We anticipate continued improvements in our North American revenue in the second half of 2014.

The decline in our international business was primarily due to softness in Japan and other Asia-Pacific distributor countries. We continue to believe that greater focus, coupled with strategic investments in our international business, represent an important component of our global expansion plan. To better capture improved performance in these markets, I'm pleased with the recent addition of Miguel Pardos to lead our international business operations. Miguel is an industry veteran with a proven track record developing and expanding international sales. He has a strong technical and clinical knowledge of esthetic products, and it is well-connected in our industry. I am thrilled Miguel has joined our team and believe that he, along with our other strategic investments in our distribution infrastructure, will be instrumental in increasing our international business going forward.

The near-term focus for Miguel will include defining our international commercial priorities to expand our international business. We see many large markets where we presently do not have a significant presence. We anticipate the expansion initiatives will come in both a broader direct strategy, as well as cultivating more significant distributor relationships. At the end of the second quarter, we commenced shipments of Excel HR, our dual wavelength premium hair removal product which is targeted to core physicians. We're focused our initial commercial launch of this product in the United States, where we performed many physician demonstrations and have received an unusually high close rate.

We are pleased with the early customer response with this innovative technology and are actively expanding our production efforts to meet customer demand. We have successfully established Excel V as the premier vascular solution and we look at Excel HR as an extension of this strategy. These two products have well-differentiated features and benefits that justify a premium to market. As we look forward to our picosecond product, Enlighten, we foresee a similar high-value product profile once we are able to launch. This is the first year since inception of the Company that we will introduce two new, and what we anticipate being, high-impact product platforms in the same year. At this point, we are on track to launch our Enlighten product in the fourth quarter 2014.

As a reminder, Enlighten is our dual wavelength product featuring both a picosecond and nanosecond technology for the removal of tattoos and benign pigmented lesions. This product will be targeting a variety of common tattoo colors and is expected to require fewer treatments. In addition to tattoo removal, we expect Enlighten to be available to target various pigmented conditions, which is a particularly large market in Asia. Enlighten has received a CE mark and has pending 510(k) submissions with the FDA. We have submitted two 510(k) applications to the FDA and both included data from clinical studies.

As we look to the future, we see significant opportunities in our business. In North America, through the sales force suspension and international with new leadership that we expect will result in expansion and further penetration. Obviously, we're excited with the new introduction of new and exciting products. With that, I'd like to turn the call over to Ron to discuss our financials in more detail.

Thanks, Kevin, and thanks to all of you for joining us today on our second-quarter 2014 conference call. Our revenue was $17.7 million, down 9% when compared to the second quarter of 2013. As Kevin mentioned earlier, we are pleased to have returned to growth in the US as a result of our sales force expansion, but saw a decline in our international business, which occurred primarily from Japan and various Asia-Pacific distributor countries.

Net loss for the quarter was $2.7 million, or $0.19 per diluted share. This loss included $1 million for non-cash stock-based compensation and depreciation, continued investments associated with our North America sales force expansion and other investments in our commercial operations, as well as higher material spending in R&D due to the two products under development.

As Kevin mentioned, we experienced a sharp decline in our Japan business due primarily to a change in leadership. We expect to be back on track with year-over-year growth in our international revenue beginning in the third quarter of 2014 and will be augmented with the leadership of recently appointed EVP of International Sales Miguel Pardos. We also experienced declines with many other Asia-Pacific distributor countries, which we consider aberrant and expect it to be back on track to a growth mode in the third quarter of 2014.

Now I will address our operating performance. Our gross margin was 56%, down from the 57% in the second quarter of 2013. The rate decrease was due primarily to our lower volume. We expect our gross margin rates to vary with revenue and be approximately 60% with quarterly revenue at or above the $20 million range.

Sales and marketing expenses were $7.8 million, or 44% of revenue, compared to $7.2 million, or 37% of revenue, in the second quarter of 2013. The increase in spending is primarily related to higher personnel costs due, in part, to the increased direct sales headcount associated with our North America sales force expansion. We plan to continue with investments in our North America channel and now expect to make investments in our international channels. We expect that our sales and marketing spending will be relatively high as a percentage of revenue in 2014, but expect it to decline in 2015 as we derive revenue growth from these investments.

Research and development expenses increased to $2.6 million in the second quarter of 2014 from $2.2 million in the second quarter of 2013, due primarily to increased spending on materials, which is project timing dependent, related to the Excel HR and Enlighten product launches. We expect quarterly spending to decline gradually in the second half of 2014 as the new products commercialize and transfer to manufacturing. In 2015, we expect R&D spending to be in the range of $2 million to $2.5 million per quarter. General and administrative expenses remain relatively flat compared to a year ago at $2.3 million.

Income tax provision -- our tax provision is primarily attributable to international taxes related to our foreign subsidiaries, and small amounts 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. Our income tax expense in the second quarter was $44,000. 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 second quarter of 2014 were $7.6 million and our DSOs were 39 days. We expect our DSOs to remain in the 30 to 40 day range going forward. Inventory increased by approximately $400,000 to $10 million at June 30, 2014. The increase in inventory was primarily due to the advanced procurement of inventory associated with our new product launches.

Deferred revenue increased by $750,000 during the second quarter of 2014 compared to the second quarter of 2013. We have increased the number of customers who purchased multi-year extended service contracts at the time they purchased new systems. This deferred revenue will be amortized into revenue during the period in which the customer obtains service coverage, which is primarily during years two and three from the date of purchase. Share repurchase -- we continue to have an active 10b5-1 program that is for purchases for up to an additional $10 million. However, no stock was repurchased under this program in the second quarter of 2014.

In conclusion, our financial position remains strong as we hold cash and investments of $81.6 million with no debt. This represents approximately $6 per outstanding share at June 30, 2014. We expect year-over-year revenue growth commencing in the third quarter of 2014 and to improve our profitability due to the leverage in our business model. Now, I'd like to open up the call for your questions. Operator?

(Operator Instructions)

Tom Gunderson, Piper Jaffray.

First question would be, is the mix of products and upgrades that you reported in the US for Q2 2014 similar to the mix in Q2 2013?

Tom, the mix is similar in terms of products and upgrades. In terms of the products, our Excel V products is clearly one that's leading the growth.

And it was leading the growth a year ago, as well?

A year ago it would've been still growing -- it was growing a year ago and it's growing even more now from a year ago, if that makes sense.

Yes, it's accelerated. The other would be if the mix is similar, how are you seeing the beginnings of the new larger sales force impacting the various products? Are there some that are easier to sell than others?

As we said in the script, the Excel HR, our new premium hair removal platform, began commercial activities in the quarter really largely at the end of the quarter, so that was -- we didn't have a full quarter of exposure with that product, and our ability to demonstrate the product was also limited by production. So it's really early, early experience with that, but that was also a component of our growth in North America. In the US last quarter, we didn't ship that product -- well, we actually shipped one to Australia.

That's true.

But we're seeing the new sales force embrace that new product, as well as Excel V and other products that tend to be legacy products with us.

I realized that HR wasn't contributing that much. I just wondered by smaller territories and new faces whether there were some products that the new territories were doing better at and others that might kick in later in the year.

The way we look at the expansion, Tom, is that it is typically six months from the time we begin that process, and as you know, we started that during the first quarter, so we're really starting -- we really anticipate seeing more visible signs of that get traction in the second half.

And then last question, I'll get back in queue. On Enlighten and shipments, I think last quarter I think you said second half, in this quarter you're saying fourth quarter. I understand the semantics are not -- are similar, but in Wall Street speak we think second half is midnight on July 1 and Q4 is more into October. Was there any change in your view, any change in the timeline for shipping Enlighten?

We're not seeing any material change in that, and when we talked about timing on that, as you get closer to it, it becomes more obvious where that is likely to land, whether it's in the third quarter, the fourth quarter. Obviously we're still awaiting the FDA to get back to us on our two submissions, but we're pleased to get the Excel HR successfully launched in the third quarter, and it's important because it allows us to -- in the second quarter, it allows us to focus our engineering efforts on completing Enlighten.

Got it. Thanks.

Anthony Vendetti, Maxim Group.

I just wanted to ask a question a little bit more on Enlighten. Enlighten received CE mark approval in the first quarter, right, towards the end of first quarter?

It was either the first or the end of the fourth. I can get back to you just to clarify that.

So, when you say it's going to commence shipments in the fourth quarter, are you talking about US shipments or are you talking about all shipments, even though you already have CE mark approval?

We often are able to get our international clearances before we can get FDA clearance, and so we prefer to launch close to home, if we can, and in the case of that product, we prefer to start our shipments here in the States. But for whatever reason we are not anticipating any reason to change our thinking on this, but if there is some sort of a delay in the domestic clearance, we have the option and plan to ship to Europe with the clearance that we have.

So basically by this statement you will be shipping Enlighten in the fourth quarter, whether that be in the US or in Europe, but you'll commence shipments by then. My only question is if the answer to that is yes, even with the preference of shipping in the US first, and now with Miguel on board, is there any reason not to plan to at least slowly roll out Enlighten at some point in the third quarter internationally?

There are some international meetings that I think -- we think would be appropriate for us to focus on Enlighten outside of the United States and Europe specifically. And as I said, we hold that strategy to go to Europe before we start shipping in the United States if we don't get the FDA indication in the near term.

Okay. And then, Ron mentioned the decline in other Asia-Pac countries was an anomaly. Can you talk about what happened in those particular countries? Was it distributor relationships that ran awry? What happened in those countries and is it all pretty much fixed? And then Japan continues to be soft. Is that -- you think that's at a trough now? Just an understanding of where things are there?

Just to backup little bit with international, it certainly has pulled back in the second quarter, but in first quarter that business grew 7%, so were not at really a point where going to call that there's a trend in the market or products in the market. There are a number of relatively small things that added up, and so that there was a timing issue, Anthony. Our filler injectable product line, that was off about $200,000 in the negative, and we've got some really strong distributors, and sometimes the business can get a little bumpy, so our Asia-Pacific distributor, relative to last year, was off about $800,000, in that range. We're not dissatisfied with the commitment we have from our key distributors in the region, but we do think that from time to time it does get lumpy.

Okay. In the US, you said direct 40 sales territories. Is that your full complement for the rest of this year, or as you get ready for a fourth quarter launch of Enlighten, you may look to add some more territories?

Well, we certainly are staying very close to the aggressive expansion that we began at the beginning of the year, and again, the numbers were somewhere around 25-ish, 28 going to 40 and then specialists on top of that. It's a pretty bold effort on our behalf and we want to make sure we stay very close to those new people, particularly to ensure that they are getting the traction. We do think that the market would justify continued expansion in terms of our head count on the sales side, but we have to weigh that with how much can we digest one at a time.

Okay. And just remind me, how many specialists do you have now?

Seven.

Seven. Okay. Ron, the devaluation of the yen, how much of that contributed to the weakness in Japan?

It was insignificant for the quarter when compared year over year, Anthony.

Okay, great.

(Operator Instructions)

Jack Wallace, Sidoti & Company.

Just wanted to follow up a little bit on the international sales front. Kevin, on the one hand you're saying there's some smaller things, a little bit of bumpiness, possibly just some lumpiness in the quarter. Then on other hand you've got a new international sales manager. You're going to be looking to expand your distributor base and possibly also moving to a direct model to augment that. It seems like there's maybe a little bit more going on just there being some basic lumpiness or timing issues. Am I reading too much into that?

Our direct business in Japan also, but as we said in the script, that was soft so that, largely, coupled with the things we talked about in our Asia Pacific distributors really made up the bulk of it. Our European business was on target. Our business in Australia was also on target, so it's not -- we are not dismissing a 19% contraction relative to a year ago, but in terms of the appropriate steps, we think that continuing to shine a bright light on the region is prudent and we're excited to have new leadership that's been very focused in that part of the world in particular.

And how much of the revamp push here internationally, particularly in Asian markets, is going to have to do with the new products you are bringing, particularly the Enlighten?

That part of the world is a very strong market for product like Enlighten, so we've got some regulatory strategies for that region that will allow us to get into that market as quickly as we can, so we see it as a big deal for us. There is a tremendous interest in the treatment of benign pigmented lesions in that part of the globe, whereas here in the States, I think that a lot of focus on the tattoo removal aspect of the product. We're excited to aggressively go after our regulatory submissions as soon as we can get them in.

Is there a relative timeline of those submissions to the US before or after, around the same time?

We've got, for certain countries, we're actively working on those submissions as we speak.

Okay, thanks. And then, Ron, to your relative margin guidance based off the level of revenue, I believe it was $20 million again for a 60% gross margin. Did I hear that currently?

That's correct. In that range.

In that range. Just looking back a couple of quarters, you did 58.6% in the fourth quarter last year on $22 million-plus in revenue, so that's --at $20 million going forward, you're really looking for a much better contribution from your products here, which I believe have been loosely guided to be higher-margin products. Am I reading that correctly?

You are seeing it right. If you look a year ago, too, where we did $19.5 million in revenue, we did 57% gross margin. We are looking to move that forward and the new products do play a key role in that, as well as some other initiatives that we have in play. We certainly see that there's a goal associated with it, but we think it's within reach.

Okay. And then lastly, with any potential direct model or suspended direct model, excuse me, in Asia, are we going to see, I assume, a smaller growth strategy than what you saw here in North America in the first two quarters? I guess what is the additional headcount going to look like?

Were working with Miguel now right now. As we said in the script, it's a question of prioritizing about where we want to focus our resources abroad. But, as we discussed earlier, there are many high-growth markets where we don't have a significant footprint, and we want to be as opportunistic and aligned with our product portfolio where we see the greatest opportunities to grow our business outside the United States, and we're working actively with Miguel on that as we speak.

Okay. Thank you.

Dan Mendoza, Prospect Capital Advisors.

Can you give a timeframe for when there will be enough Excel HR demo units to go around?

We had just a handful last quarter and manufacturing is taking over production of that now. Production lines, I haven't --

We are ramping up, but it's probably going to take the better part of this quarter to really get the demo needs that we want fulfilled here in the states, and then we'll, in Q4, be able to start getting international sales.

Okay. That is helpful. And then just to follow up on the questions about the relatively pathway for Enlighten in Asia. Again, a timeframe for when that product might be commercially available in some markets in Asia?

We certainly anticipate shipping in some markets in the first half of next year. Obviously, Europe, we can explore doing at in the second half of this year. Is a regulatory timelines are becoming more and more challenging with higher levels of regulatory rigor that we are experiencing abroad. However, we see markets like South Korea as being a huge one for this, and Japan as well, so we're actively coordinating our regulatory activities to reflect that.

Okay. That's helpful. And last question, Ron, on deferred revenue, I'm sorry, I'm hopping around multiple calls, on the transcript it looks like you said deferred revenue was up $700,000 year over year, but at least the way that I quickly glanced at the press release. I think -- is that quarter to quarter and it's up $3.3 million year over year or do I have that reversed?

No, you have it right. It's quarter to quarter. If I said that wrong, I apologise. I meant from March 31 to June 30 it was up $750,000.

And is $3.3 million about the right number for year over year?

Yes. I was saying it was around $3 million but could very well be in the $3.3 million range.

Okay, great. Thanks.

Zack Ajzenman, Griffin Securities.

First question, more of a clarification, Kevin. In your prepared remarks, I think you mentioned that you anticipate that there is a continued improvement in North America in the second half of 2014, so is it fair to model, then, that sales continue to get stronger than the 6% we saw in the second quarter moving into the 3Q and 4Q?

In past quarters we've talked about -- we really emphasized the second half for North American sales force contributions to take hold. Even though we anticipate that is typically six months for a new sales rep to hit their stride, were pleased to see early signs that there's evidence that we're seeing that in the second quarter.

And on the United States, can you comment generally on what you see in the core physician landscape and diet environment in the market and what sort of growth rate you see the market growing at now?

Ron has the numbers in terms of the split between core and non-core in the US.

Yes. The core was about 73% in North America in the quarter, with the balance coming up primarily from family practice people, as well as maybe as a little bit of podiatry. That 73% is very strong growth in the core markets, which is one of our key initiatives.

We haven't had that level of core business probably in excess of eight years or so.

Again, on the US come I'm just trying to get a better handle on gross margin. If US sales were stronger this quarter relative to the international business, can you provide a little more color on why we did not see contributions, or more contributions, to the gross profit line when US sales typically carry higher margin?

I understand what you are saying. The distributer mix wasn't significantly different. It did go down a little bit from the upper 20%s to 25%.

Remember, you're not getting much impact from on the new products. There was a little bit of HR that shifted the very end of the quarter, but it's a second half that the new products will have a larger impact. Again, you look a year ago on slightly higher revenue we had only 1 percentage point higher in gross margin. So it seems like it's tracking, except for the new products, which will primarily be second-half.

And I think this is touch on earlier in the call, but Excel HR, there has been -- has there been clinical data submitted to countries outside of the US at this point?

We have CE mark for the product and we are going the customary sequence of expanding revelatory clearances where we have a larger presence abroad.

Last question. Any color or comments around progress made with the recently installed sales specialists for the truSculpt product?

Nothing material on truSculpt, but the specialists are playing an important role in terms of getting our new people, in particular, up to speed quicker so our specialists are more experienced in this business and are able to provide value on a number of levels on the commercial side.

Thanks a lot.

At this time I would like to turn the call back over to Management 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 third quarter 2014 conference call in November. Good afternoon and thanks for your continued interest in Cutera.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a great day.