Cutera Inc (CUTR) 2014 Q3 法說會逐字稿

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

(Operator Instructions)

A brief question-and-answer session will follow the presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Mr. John Mills of ICR. Thank you. You may begin.

Thanks, Operator. Welcome to Cutera's third-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 risks and uncertainties which may cause actual results to differ materially from those projected or implied in our statements. Such risks 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 unanticipated events. Future results may differ materially from Management's current expectations.

And with that, I will 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 third quarter ended September 30, 2014. Our 11% revenue growth this quarter was driven by both our US and international markets which were up 9% and 13% respectively. We believe this growth is only the beginning of improving results as the investments we have been making and new products the commercial leadership team and North American sales force expansion are beginning to drive our top line.

The revenue growth in United States was driven primarily by the impact of our recent sales force expansion launch of Excel HR, premier hair removal product and Excel V, our gold standard vascular product that continues to gain momentum. Our international growth was derived primarily from our direct operations in Australia, Japan, Canada and our recently expanded European countries. From a product perspective, the primary reasons for our revenue growth are Excel V and the recently released Excel HR product.

We believe these premium products targeted to core physicians will continue to represent an excellent opportunity for us in this market for many years to come. Additionally, we recently received FDA clearance for our enLIGHTen product. This important milestone allowed for us to initiate domestic sales activities and although the commercial efforts at an early stage we have received strong initial customer interest enabling us to enter the fourth quarter with a backlog for this product. We expect to commence commercial shipments of enLIGHTen in the fourth quarter 2014.

One year ago we embarked upon a plan to improve our commercial leadership team in the areas of sales and marketing. John Petersen joined us as Head of Marketing at the end of 2013 and he has revamped our marketing team and advanced our global marketing efforts. Miguel Pardos joined us in July of this year and has leveraged his 20 years of experience in building and leading international sales and marketing organizations in a global medical device [company] to lead our international team. In short order, Miguel has begun to improve our international performance and has started to improve the talent and direction of his team.

Finally, at the end of the quarter we've hired Larry Laber to lead our North American sales team. Larry brings 20 years of sales and sales management experiences, a majority of which has been within the aesthetic medical device industry. Larry has demonstrated an ability to develop cohesive high-performance sales organizations and we look for to working with Larry to improve our performance metrics. I am confident that this commercial leadership team coupled with our expanded portfolio of products is positioned to achieve revenue growth in excess of the market.

Turning to research and development, 2014 will mark the first year since the creation of the Company where we will introduce two new product platforms in the same year. Excel HR, our premium hair removal product was launched at the end of the second quarter and as exceeded our expectations to date with customer interest and product performance. We continue to get traction with this product and now we're rolling it out to international markets.

EnLIGHTen has received an FDA 510(k) indication and has already received strong customer interest. We believe this product's technical specifications and expected product performance will enable our customers to treater a wider variety of patients with fewer treatments. As I mentioned earlier, we entered the fourth quarter with backlog of orders for this product implant to commence shipments during the fourth-quarter 2014. We believe the market for aesthetic light and energy-based systems is healthy and that our broad portfolio of products, recently assembled commercial leadership, expanding global sales team and the expected market penetration, and our new products, strategically positions us to capture larger market share and an expanding market.

Now I'd like to turn the call over to Ron to discuss the financials in more detail.

Thanks Kevin and thanks to all of you for joining us today on our third-quarter 2014 conference call. As Kevin mentioned earlier, we are pleased to have balanced revenue growth in our US and international markets. We're also pleased to see gross margins trending upward and we continue to focus on improving product gross margin through increasing average sales prices as well as aggressively implementing cost reductions. We expect our gross margins to improve further to 60% when quarterly revenue is in the $20 million range.

Operating results, we had a $2.6 million net loss or $0.18 per diluted share. This loss included $1.3 million of non-cash expenses for stock-based compensation, depreciation and intangible amortization. This result reflects ramped up expenses related to investments in our expanded global commercial operations as well as higher than normal R&D spending associated with planned product shipments of enLIGHTen next quarter.

Now I'd like to address our operating expense performance. Sales and marketing expenses were 42% of revenue compared to 39% of revenue in the third quarter 2013. The increase in spending was primarily related to higher personnel costs due in part to the increase in direct sales headcount associated with our global sales force expansion. We plan to continue with investments in our global distribution channels and expect our sales and marketing expense as a percent of revenue to decline in 2015 as we derive revenue growth and productivity improvements from these investments.

Research and development expenses increased to $2.6 million in the third quarter of 2014 due primarily to increased personnel expenses. Over the past year our R&D spending has been higher than normal due to project timing matters related to the development of Excel HR and the enLIGHTen product. As such, we expect quarterly spending to decline gradually in the next -- as new products commercialize and transfer to manufacturing. In 2015, we expect R&D spending to be in the range of $2.3 million to $2.5 million per quarter.

General and administrative expenses increased this quarter by $700,000 due primarily to a higher personnel cost including non-cash stock-based compensation expenses. We expect our G&A expense to be in the $2.5 million to $3 million range going forward. Turning to the balance sheet, net accounts receivable at the end of third quarter 2014 were $8.7 million and our DSOs were 43 days. We expect our DSOs to remain in that 30- to 40-day range going forward.

During the quarter our inventories increased by $1.1 million to $11.1 million. The increase in inventory was primarily due to the procurement of inventories associated with the ramp-up of production for our recently launched Excel HR and planned product shipments of our enLIGHTen product in the fourth quarter. Our financial position remains strong as we hold cash and investments of $80.7 million with no debt. This represents almost $6 per outstanding share as of September 30, 2014. Stock repurchase, we continue to have an active 10b5-1 program that is opportunistic for purchases of up to an additional $10 million. However, no stock repurchase was done under this program in the third quarter.

In conclusion historically the fourth quarter is the highest revenue quarter of the year. We expect this year to be no different particularly in light of our new product launches, enLIGHTen backlog, sales force expansion and improved commercial leadership. We are expecting to be profitable on a GAAP basis and cash accretive in the fourth quarter as well. Our quarterly breakeven point is in the $21 million to $23 million revenue range. Revenue achieved in excess of this range, begins to reflect financial leverage in our business model which is our target as demonstrated by our commercial investments and broad portfolio of products.

Looking to 2015 we expect to grow at a rate above the market growth rate as a result of our commercial and product investments. Additionally, we expect to be profitable and cash flow positive in 2015. Now I'd like to open up the call to your questions.

Operator?

(Operator Instructions)

Tom Gunderson, Piper Jaffray.

Good afternoon, everybody.

So Ron, maybe just clarification on the last statement there when you said profitable in 2015. I want to make sure I understand that. Profitable GAAP? Profits each quarter by the end of the year? For the whole year? How should we categorize that?

Hi, Tom. The comment was targeted for the full year 2015 that we would be profitable. I'm sure there are some quarters where we see fluctuations in seasonality and might not be profitable on a GAAP basis, on a quarterly basis, but for the entire year we expect to be so and to generate cash.

Got it, thanks.

Then, Kevin, speaking of seasonality that's one -- this Q3 is one of the strongest product revenue, and upgrade revenues that you had in a Q3 of late, in a while. And I'm just wondering if you could tie that into two things that you said in the prepared remarks. One is, that HR surpassed your expectations. I'm wondering what in particular the market is appreciating about the HR device?

And the second is, maybe just an update on the sales force expansion? Is it settled in? Are the territories calm now and ready to go out there and sell the products? Thanks.

Sure, Tom. Thanks.

We were pleased with the year-over-year comparisons with revenue in Q3. And in the prepared remarks we also commented that initial customer interest in the enLIGHTen product which got an FDA clearance set mid-quarter and this is with virtually no sales marketing focus we were pleased to see the demand for that, that we couldn't ship them in the quarter. So, had we been in a position to ship that product, it would have been even a stronger performance relative to last year.

HR is a premium product and we've elected to develop a portfolio of products that we sell for premium in the marketplace, so the high end to derms and plastics. Hair removal, isn't a new application in our space, however, it continues to be one of the largest aesthetic light-based markets that we address. And having a new story with a product that can do things at performance levels that we think are quite exciting is a great development for us.

In terms of the sales force, we've talked about in the first half that we're making major investments in our North American expansion, which was largely wrapped up at the very end of Q1, beginning of Q2. That typically takes six months to see the benefits of that. So we saw some of that in the quarter. And obviously, we're really pleased that we've been able to broaden our bench with the announcement of Miguel that we made in July. And then in the release, we talked about Larry joining us for North America at the very end of Q3.

So we are pleased with what we are seeing but there's still lots of work in front of us and we're really pleased to have these two lead the charge globally.

Okay. Thanks, that's it for me guys.

Anthony Vendetti, Maxim Group.

Thanks, guys.

Just in terms of enLIGHTen and the rollout, I know it's this quarter in terms of the shipments, can you talk a little bit about if you've already started the shipments because we obviously a little more than a month into the fourth quarter, and if not, when do expect to start those shipments? And then just any update on the FDA approval process for tattoos, the clearance there.

Sure. We indicated that we expect commercial shipments to commence in the active quarter and we're sticking with that. Don't want to get into high-level granularity of how many systems are expected to ship or anything like that. But we're pleased that in the third quarter we were able to get the FDA indication for our first submission treatment of the benign pigmented lesions and we've been working closely with the agency on the second submission for tattoos and the discussions have been constructive.

From our perspective there are no more active items that we're addressing so we don't anticipate any surprises but we'll certainly share the news once we have it.

Okay. You said in terms of revenue growth this quarter once again driven by primarily by Excel V. You also mentioned Excel HR, your new hair removal product. Any granularity there in terms of percent of revenues, is that driving those two products driving over half your revenues?

Yes, we've talked about the contributions of Excel V in the past and it's still relatively early days with Excel HR for us so we anticipate that ramp and demand to continue with that product. But we're pleased also with the Excel V as we believe it's earned a reputation for being the new gold standard in vascular light treatments, and then, of course, Anthony, that's just the product side.

On the distribution side we're pleased to see year-over-year international performance increase by 13% and, again, from a foreign exchange perspective, we still at headwind so we're really happy to see what Miguel is doing early on with us. Then in the US, 9% growth and again that's not reflecting any of the performance that we've seen with the enLIGHTen product with the new FDA clearance.

Anthony, as an additional color on that is, Excel HR and V, in terms of dollars, are justifying the growth. But XEO is still a big product contributor to our line. So that's not gone out of the portfolio by any chance.

Okay, I figure that's still your flagship product. Any color on truSculpt? I saw Titan refills were up this quarter. Any color on those products?

There's nothing material that's changed in that business. We still think that's a great category and we think there are opportunities for us to align our strategies around to capture a larger part of that market.

Okay, and then lastly, Ron, you said a goal of 30 to 40 days of DSOs. Traditionally you guys have been one of the leaders and having low DSOs. This quarter was just slightly above that, 43. Any explanation there?

This is -- Q3 is seasonally a quarter where it's even more back ended than most quarters. With the summer months a little bit quiet in July and August and September's big. But this quarter was even bigger than big. And as a result, when everything -- when a lot is back ended it just shows a bigger DSO than maybe what it really is because the DSOs a snapshot of time.

So we feel really good about our 30 to 40 days but for the [bigger] quarter I think we were more like 43 days, something like that.

Okay, perfect, thanks, guys.

Thanks, Anthony.

(Operator Instructions)

Jack Wallace, Sidoti and Company.

Thanks for taking my questions, guys.

Just with the domestic sales team, looks like we've got a new head of that division there and were there any sales hires underneath Larry in the quarter?

Again, we wanted to point out that he came at the very end here so didn't have a whole lot to do with our North American performance during the quarter, but we're really delighted to have him on board. So nothing to talk about terms of his impact.

Right. How about underneath him? I believe it was with 46 reps across almost that many territories, were there anymore additions in the quarter or has it been pretty flat since the tail-end of the first or really, second quarter?

We haven't initiated an additional expansion. We're constantly evaluating that but we also recognize that going from 25 territories to 40 in the first half is something we [need] to stay very close to. So we think that, so long as the market continues to expand, that expansion is going to be a part of our plan for the future. And we're really happy to have Larry be part of the story.

How about there being a specialty sales group like there is for the Excel V? I believe there is the start of one for the truSculpt, any traction there with that group? And any thoughts on specialty groups for any other products?

Sure. As we continue to expand our portfolio, managing focus within the sales organization is one of the key things that we're talking about and whether that's in the form of sales specialist or some other form, it's an active discussion and clearly with the new leadership here in North America that's something for Larry to weigh in on and take the appropriate steps.

Okay, great and then lastly is there a timeline or maybe additional steps that need to be taken to get additional approvals in Asian markets for the enLIGHTen product?

Absolutely. And over the years, the issue of global regulatory clearance has become more and more burdensome. But we're actively working in South Korea, got a pecking order of countries, including Canada, and we're pleased to have the CE Mark and now with our first FDA indication and a second one hopefully coming anytime soon.

Okay, great so I guess the potential for sales into the Asian markets be sometime the second half of last year that being conservative?

I think we've gotten orders from outside the US already. So we plan to meet those where we can and can support them at the level that we think our customers expect from us. But I think we will start to see some shipments outside of the United States in the first half of 2015.

Okay, great. That'll be all for me.

Great.

Dan Mendoza, Prospect Capital Advisors.

I've got a few. Can you, Ron, can you provide the international growth in a constant currency basis, in other words with the FX headwind?

You mean using a Japanese Yen or a Euro or something?

Yes, if foreign exchange rates had stayed the same, how much faster would international have grown?

Yes, the dollar did revalue during the quarter so I haven't per se, looked at that, but clearly there would have been additional growth associated to that, that we have not factored back. Because we use the Japanese Yen in our Japanese sales and of course Euro covers much of Europe. So I could throw out a number but I'd rather go back and look.

That's fine. We'll cover it off-line.

It's a good question because I think it is probably a material impact on the apples to apples comparison versus a year ago.

Right, agreed.

Then just a question in terms of manufacturing capacity in ramp for both HR and enLIGHTen. Are you in a position now where you're able to meet the existing demand for the hair removal product? That's the first part of the question, second is, how long will it take to ramp up manufacturing so that you're able to meet demand for enLIGHTen?

In terms of Excel HR we're pleased with what our operations group has been able to demonstrate, they've just been very close to launching that product and I think we're pretty much up to speed now that we can satisfy the demand we have for Excel HR. We've talked about in previous calls that there's usually a ramp up during the first quarter or so of any new product launch and Excel HR is no exception to that.

And in terms of enLIGHTen, that's the same thing. We are -- we have our manufacturing team working very closely with the development group here and we stay very close to make sure that we're doing that in the most efficient way. Dan, you've been to our facility, we've got plenty of room to expand our manufacturing resources if need be, but right now we're operating with a single shift, so there's a lot of flexibility that we have in order to meet what other demand there could be for not just these two products but all of our portfolio.

Right, I'm trying to get a sense for whether you're at a point where you think the backlog will come down in the fourth quarter with the first full quarter of shipments or whether there's a more than one quarter curve for ramping up manufacturing?

Certainly we think that high demand would be a nice problem for us to try to figure out from a manufacturing perspective. And we're certainly keeping our options open in terms of having that flexibility with the operations team to address that. But for us to essentially -- we are not going to divulge the exact amount of backlog that we have for that product but I think we were pleased that we have a lot of people that believe that we're coming up with a really interesting technology and they're willing to put orders in before really having an active demo program with our sales team, so we're encouraged.

Okay and maybe along that note, can you help us understand how the product is differentiated from both the incumbent product in the market and one of your other competitor' has recently had an FDA approval as well?

Right, so there's one company that's active in this market, they've been out there for quite some time, probably 1.5 years or so. And they're saying positive things about how they see the market and it's been responsible for a lot of the growth they're seeing in their business, so we're happy to be in a market that seems to have some nice dynamics and we're addressing some significant unmet needs in North America.

It's largely a tattoo removal opportunity, but as we look at our business in Asia, pigmented lesions and things of that nature are of more interest. So we're addressing several different markets in several different geographies. The approach that we've taken is to offer multiple wavelengths, multiple colors of light to be able to give our customers more flexibility, so that they can come up with the optimal treatment for a given patient. Whether it be a tattoo removal patient or pigmented lesions and then just the overall execution of our technology we think is something we're very proud of.

But again we are pleased to be in a market where our competitor is already doing a nice job and there's a third company that just got an FDA clearance announced recently but we're not aware that they're shipping product at this point.

Okay.

And I guess lastly some more of a comment then a question, but I really wanted to encourage you publicly to add some new blood to the Board and freshen up the Board. I think I'm probably not alone in my view that maybe the current Board has been -- I guess its just gotten really frustrating with the long-standing refusal to buy back any meaningful amount of stock.

Probably not alone in the view that the current Board has been sub-optimal in terms of helping you guys in the management team with strategic guidance and I just think it's time for a change and time for some new -- a new face or two. And would hope to see that there's a sense of urgency around that because I think it's a pretty important juncture for the company.

You have new products, new sales leadership and a bigger sales force and want to see you guys get some help in terms of executing and hopefully generating much better financial performance in coming quarters, and, at the end of the day, I hope you're successful with that. And if you are, you should be buying as much stock as you can in front of it, and if things don't go well, you should also be buying as much stock in front of it, because the stock's too cheap here and if it comes to pass that you need to look at alternatives having $6 a share of cash on your balance sheet you're not going to get a multiple on your cash.

Right, Dan we've had that discussion for quite some time and I think you know I relay opinions and comments and observations that our holders have about the Company to the Board. So I think that (multiple speakers) transparent so you know that. But I understand the importance of having a strong Board and having different perspectives of how we look at opportunities so it's an active discussion, Dan.

Great. I appreciate that and you have been transparent and you've always said you've relayed the comments and I guess I'm just making them publicly now because, while you're relaying my comments and others' comments that I think have a similar view, that the Board doesn't seem to be acting upon them. So hopefully if the message doesn't get through we can -- some other people will be voicing a similar opinion and we'll see some changes. Sure. Again -- I'm not asking you to indict your Board on the call though so no need --

It's alright, I know that Dan. But listen, we hope to see you down here at Cutera in the coming weeks as we usually have an opportunity to get into things in a higher level of detail. The comments are appreciated.

Very good, thanks and congrats on some signs of success and particularly in the international front.

Thanks, Dan.

Thanks, Dan.

Zack Ajzenman, Griffin Securities.

Thanks, good afternoon. Now that the orders are in on enLIGHTen, can you remind us the pricing details around the product? Or the [ASP]s?

The end-user list price is $249, that's what we're charging for that.

Okay, great.

And on HR, any particular pockets of strength regionally within the US this past quarter?

It moves around from quarter to quarter. I don't think there's anything that's noteworthy in terms of trends of that product. As we alluded to on the call, certain sales reps that tend to really get behind certain products so it really comes down to the rep more than the geography did with the product mix.

Okay.

And also on HR, I may have missed this earlier in the call, now rolling out to European countries, does that imply there were, in the third quarter, no revenues from HR European sales?

As we've indicated, our commercial shipment plan has been the fourth quarter so we have not shipped anything anywhere.

Okay.

And lastly, there was an APAC distributor last quarter that you guys disclosed was down almost $1 million year over year. What was the performance for that particular distributor this quarter?

That was down $1 million? I'm sorry?

In a second-quarter call I think he's referring to. We'll have to get back to you on that. But overall we're pleased with our business in Asia. We had a strong comeback in Japan and to Dan Mendoza's comment, the Yen has continued to be challenging for us but it might be our distributor in South Korea that you're referring to but I'm not quite clear.

I think you might have been -- it was Japan, our direct area was down. That might be what you're referring to because we didn't have a distributor that was down that much. But we can go back and talk offline more detail, Zack, to make sure we get it right.

Okay, sure no problem. Thank you.

Thank you.

There are no further questions at this time. I'd like to turn it back to Kevin Connors for closing comments.

Thank you for participating on our call today. We will be attending the Canaccord and Piper Investor Conferences and other marketing events in the fourth quarter. We plan to update you on our business product on a fourth-quarter 2014 conference call in February. Good afternoon and thanks for your considered interest in Cutera.

Thank you.