Cutera Inc (CUTR) 2014 Q4 法說會逐字稿

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

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. John Mills of ICR. Thank you, Mr. Mills, you may begin.

Thanks, Operator. Welcome to Cutera's fourth-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, including the impact of foreign currency fluctuations on the Company's international business, 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 November 3, 2014, with the Securities and Exchange Commission.

Please note that during today's call, we will discuss non-GAAP financial performance measures that include results on an adjusted basis. We believe these adjusted financial measures can facilitate a more complete analysis and greater transparency into Cutera's ongoing results of operations, particularly when comparing underlying results from period to period. We have included with our earnings release reconciliation from the GAAP results to the non-GAAP measures, and have provided explanations of the adjustments made as appropriate.

Cutera also cautions you to not place under-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.

Thank you, John. Good afternoon, everyone, and thanks for joining us today to discuss Cutera's results for the fourth quarter ended December 31, 2014.

Revenue in the fourth quarter 2014 increased 15% to $25.5 million when compared to the same period last year. This growth was driven by the US market, which was up 33%, and driven by our recently released products, enlighten and excel HR. We're pleased with the US growth rate, and anticipate future growth as a result of recent product launches and new sales management team, led by Larry Laber. We target 40 to 45 sales territories in North America. We will monitor their sales performance, and expand further when productivity levels warrant it. Core positions in North America accounted for approximately 63% of our orders. The balance of the orders was primarily received by family practice physicians.

Our international revenue was flat when compared to the same quarter one year ago. We estimate that our international revenue was adversely impacted by over $500,000, due to the yen and euro valuations, compared to the fourth quarter 2013. Geographically, we experienced some softness in Canada, as well as Japan, due to the discontinuation of the radius business in 2014 and the impact of foreign currency devaluation. In 2015 we expect to expand international sales positions to facilitate expected revenue growth.

In addition to the new products, excel V and xeo continue to be significant contributors to our overall Company revenue. excel V has become the gold standard for vascular treatments. From an operating performance, I feel it's important to make a few comments, and then Ron will get into more detail later.

Gross margin, excluding nonrecurring items, was flat when compared to a year ago. Our margins were negatively impacted by higher than expected manufacturing ramp-up and other interim costs for our recently launched products. We expect cost structure improvement of these products in 2015.

Sales and marketing expenses increased in absolute dollars and as a percent of revenue. In 2014, we made several strategic investments in our global sales and marketing functions, including sales force expansion. In 2015 we expect to achieve higher revenue growth while leveraging our sales and marketing expenses, and we anticipate productivity improvement.

Turning to research and development, our research and development team delivered two new platforms in 2014, which represents a product launch milestone for the company. Excel HR, our premium hair removal product, was launched at the end of the second quarter and has exceeded our expectations to date with customer interest and product performance. We continue to get traction with this product and commenced its introduction in international markets. Enlighten commenced revenue shipments in December 2014. We believe this product's technical specifications and expected product performance will enable our customers to treat a wider variety of patients with fewer treatments and less pain. We're excited about this product and how it can favorably affect our future financial performance.

We maintained our commitment to continued investments in product and clinical innovation that are driving new, exciting product introductions. We believe the market for aesthetic light- and energy-based systems is healthy, and that our broad range of products, recently assembled commercial leadership, and the expected market penetration of our new products, strategically positions us to capture a larger market share in an expanding market.

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

Thanks, Kevin.

Thanks to all of you for joining us today on our fourth-quarter 2014 conference call. Our revenue was $25.5 million, up 15% when compared to the fourth quarter of 2013. Our US revenue grew 33% while our international revenue was flat. In the fourth quarter of 2014, the yen and euro declined 14% and 9%, respectively, versus the US dollar, when compared to the fourth quarter of 2013. The decline sequentially was also of similar magnitude. We estimate that these foreign exchange declines had an adverse impact on our fourth-quarter 2014 revenue of over $500,000.

Our GAAP net loss for the quarter was $1.6 million, or $0.11 per fully diluted share. However, this loss includes $1.4 million of nonrecurring charges associated with $1.1 million in impairment charges related to a previous acquisition. This is an accounting non-cash impairment charge, and we do not expect any further write-offs. And a $346,000 nonrecurring legal spend.

Non-GAAP operating results, after adjusting for nonrecurring items, was a loss of $177,000, or $0.01 per share. This loss included $1.3 million of non-cash expenses for stock-based compensation, depreciation, and intangible amortization. On a pro forma basis, after adjusting for the non-cash charges, we had a $1.2 million profit.

GAAP gross margin was 54%; however, this includes $1.1 million of nonrecurring impairment charges associated with a previous acquisition. After adjusting for the nonrecurring charges, our gross margin was 59%. While this rate was flat compared to a year ago, it is slightly lower than we would expect at current revenue levels. As Kevin mentioned earlier, our margins were negatively impacted by higher than expected manufacturing ramp-up, and other interim costs for our recently launched products. In 2015, we have several initiatives in progress to reduce the cost of these products. For the first half of 2015, we expect gross margin to be in the 55% to 59% range, depending on the revenue volume. Our expectation is that gross margins should be in the 60% range in the second half of 2015, after we have implemented the cost reduction changes.

Now I will address our operating expense performance. Sales and marketing expenses were $9.4 million, or 37% of revenue, compared to $7.8 million, or 35% of revenue in the fourth 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 and commissions from the increased revenue level. We expect our sales and marketing expenses to grow moderately in absolute dollars in 2015, but decline as a percent of revenue as we leverage these dollars with our anticipated revenue growth. Additionally, due to changes orchestrated by our new sales leadership teams, we expect a restructuring charge of proximately $0.5 million in the first quarter of 2015.

Research and development expenses increased to $2.6 million in the fourth quarter of 2014, from $2.4 million in the fourth quarter of 2013, due primarily to higher personnel expenses. In 2015, we plan to continue investing in R&D; and as such, we expect spending to be in the range of $2.3 million to $2.5 million per quarter.

General and administrative expenses were $3.4 million through the fourth quarter of 2014. This includes a nonrecurring legal charge of $346,000. Adjusted for the nonrecurring charge, our G&A expenses were $3.1 million, which is flat when compared to the fourth quarter 2013. In 2015, we expect our G&A expense to be in the $2.7 million to $3 million range, depending on the revenue level.

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. Our income tax expense for the fourth quarter was $41,000. Going forward, for modeling purposes, we suggest using an effective income tax expense of approximately $75,000 per quarter.

Turning to the balance sheet, our net accounts receivable at the end of the fourth quarter of 2014 were $11.1 million. And our DSOs were 40 days, due to an increase in our revenue from customers with credit terms, late in the quarter. We expect our DSOs to remain in the 35 to 40 day range going forward. Inventories declined slightly from $11.1 million at September 30, 2014, to $11 million at December 31, 2014. Our financial position remains strong, as we hold cash and investments of $81.1 million with no debt. This represents approximately $5.60 per outstanding share at December 31, 2014.

Stock repurchase: we continue to have an active 10b5-1 program that is for opportunistic purchases for up to an additional $10 million. However, no stock was repurchased under this program in the fourth quarter of 2014.

In conclusion, our quarterly breakeven point has increased to approximately $25 million in revenue, reflecting our expected gross margin levels and higher sales and marketing investments. 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.

The first quarter is, historically, our weakest quarter of the year. We anticipate this trend will not change in 2015, but do expect that our revenue will grow in excess of the market rate. We also expect a nonrecurring restructuring cost of approximately $500,000 for changes to our sales organization in the first quarter of 2015.

For all of 2015, while there are certain unpredictable factors that may impact our global business, including foreign currency fluctuation, we expect to be profitable and cash accretive as we anticipate gross margin improvement and increased leverage in our operating expenses.

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

Thank you.

(Operator Instructions)

Our first question comes from the line of Tom Gunderson from Piper Jaffray. Please proceed with your question.

Ron, on the guidance for 2015, on sales and marketing, you said you expect it to grow moderately. In Q4 2014, sales and marketing took a big jump up. Should we expect it to grow from that? Or was there some end of year bonuses, or other types of expenses that went into Q4 that we wouldn't see going forward?

Yes. With regard to that statement, I was referring mostly to 2014 as compared to 2015. So we do expect sales and marketing to increase slightly in absolute dollars, for spending, year over year.

From the quarter, Q4 tends to be the highest quarter of the year for us in spending there, because of the revenue and higher commission rates, so I would expect, with the seasonally lower Q1, for those expenses to decline in absolute dollars.

Got it, thanks. And then one other on the income statement, and then a broader, qualitative one for Kevin. The other one on the income statement is gross margin, can you give us a little bit more color on what's going on with the cost of goods? I think you started shipping enLIGHTen December 19. So I'm guessing that wasn't the big hit on change in the cost of goods, and it might've been more on the excel HR. But I'll let you kind of give us the granularity around that as to what's going on with your cost of goods.

Hey, Tom, it's Kevin. I'll address your question. It's -- the fourth quarter was a unique one for us, in that we, for the first time, had two brand new product launches happen simultaneously. And a demand for both was quite high, so the revenue contribution from those two products was material.

And as we discussed in the script, as we launch new products, and this is the unique time because we had two new products, there are manufacturing and other interim things that we tend to get better at. And so we expect gross margin to migrate down as we have seen historically.

The second factor that is also very important as it relates to the excel HR is, the royalty for that has now expired. So for a dedicated hair removal product like that, that 7.5% of revenue was paid for royalties. So all those factors, we think, will assist in making that gross margin go. And the trend line that starts with a six moving forward.

Thanks for that. And then on -- is that true that the patent expired, the royalty bearing patent expired across the board on hair?

That's correct. Our royalties will cease as of the end of January.

Thanks. And then the qualitative one I was going to ask Kevin is, magnified about what you just said, I think I heard you say that, despite a mid-December shipping date for the first enLIGHTens, that it was material to revenue. Can you give us a sense of -- I know it's only early February, but give us a sense of the kind of demand you're seeing, the kind of customers that are buying, maybe early reads on the sales cycle of how long it takes between, here's your first trial and somebody writing a check?

Yes. Tom, once we got our first FDA clearance and we were able to take orders for the product in the third quarter, we mentioned on the third quarter call that we had built a backlog, and, again, it was enough to call it out.

In the history of our product launches, we've never had that kind of reception. Meaning that people are ordering the product without having an ability to demonstrate the product. And we had a limited number of machines at the various trade shows.

And so I think there's an appetite, and it's both for the treatment of benign pigmented lesions, as well as tattoo removal. And we see that opportunity balance differently, depending on what part of the globe, but we're quite pleased with the customer reception thus far.

Thanks. That's it for me, thanks.

Our next question comes from the line of Zack Ajzenman from Griffin Securities. Please proceed with your question.

First question, on enLIGHTen, was there any backlog that carried into the current quarter?

Yes. We indicated that we had accumulated backlogs. We didn't break out the absolute dollar representation of the backlog, but -- and we continued to get orders in the fourth quarter, as well.

And on enLIGHTen, and we can also maybe loop in excel HR for this question, what did the revenue profiles look, geographically, for each product, US versus oUS?

Well, so far the revenue has been US for enLIGHTen so far. We tend to get experience with early shipments domestically, and then start focusing on the international shipments. It does have regulatory approvals CE marked. And we are actively tracking down additional international clearances.

And then the excel HR, we are shipping that globally. And have had strong interests both here in North America as well as overseas.

Okay. And on HR, I know Q4 is seasonally the strongest quarter for the business. But given where we are in the HR's lifecycle, do you expect sales to grow sequentially into the first quarter?

As Ron indicated, seasonally Q1's our lightest, and Q4's our strongest, so there's usually a drop off, so in terms of sequential growth, we're not committing to that at this point. But we are pleased with the reception for both of these new products that came to market in the second half.

Okay. And other than the new products that help drive some of the upside here to revenues, were there any other surprises that contributed to the upside? Or on the flip side, any surprises that may have impeded even stronger upside?

That's why we highlighted in the script that everything didn't go perfectly. We had some softness in our business in Japan, as well as Canada. So that's got our attention. We've got some specific initiatives in place to improve upon that.

And there's clearly a lot of focus on the new products, but we're also very enthusiastic and encouraged by the sales leadership that we have, with both Larry Laber and Miguel Pardos joining us and they're, in turn, building out their team with some really talented people, as well. So we really attribute it to both products and people.

Okay. And then lastly, and correct me if I'm wrong, I believe on the Q3 earnings call, you guys had mentioned that you believe you can run a quarterly run rate of about $21 million to $23 million, for breakeven.

It seems now, we're going to need about a quarterly run rate of $25 million. I know we've spoken about the cost of goods. We've touched on sales and marketing. Is that mostly the two areas that have caused you guys to maybe take another look at a higher quarterly run rate for breakeven?

Yes. It's a good question. You're right. We have changed -- that breakeven point did change during that period of time. However, our gross margins are slightly lower than originally anticipated because of these new product launches, which we expect to get under control here in 2015.

There's still leverage in the sales and marketing, and from an R&D side, we had some average spending in 2014 as a result of launching two new products in the same year. So we expect to see some decline in that spending, as well. And then I think there's room on the G&A side for us to see some leverage in 2015.

So I think, although the quarter showed kind of a breakeven point of $25 million, we want to ultimately target that breakeven to be lower than $25 million going forward.

Okay great. Thanks a lot.

Our next question comes from the line of Anthony Vendetti from Maxim Group. Please proceed with your question.

Just a little bit of a follow-up on enLIGHTen. I know you had a backlog and started working through it in the fourth quarter. Are you through the backlog at this point? Or are you still working through the backlog?

We still -- again, we don't get into backlog in normal reporting, but you're correct that we did have a backlog entering the quarter, fourth quarter, and we have a backlog of enLIGHTen entering the quarter as well.

Entering the first quarter?

Correct.

Okay. So you had it entering the first quarter. But are you willing to say whether or not you've work through it as of February 5, or not yet?

Still not through it.

Okay. And then in terms of international, I know you said in general, international was flat, and there was an FX I guess a $500,000 FX hit due to the strong dollar. Which particular countries, if you had to say, which were the two weakest countries on a year-over-year basis, obviously some of them were probably down year-over-year. Which countries would that be?

The two strong currencies that affect us the most are the Japanese yen and the euro. Those are the two currencies that have the biggest impact to our international business.

And Anthony, we've called out both Japan and Canada, but in the case of Japan, there's an injectable product line that we no longer distribute. So when you do that apples to apples, you have to back that out.

And we do think that our equipment business was lighter than we would like, but we see that coming back. And that same bumpiness we saw Canada, we don't see anything that gives us pause that the long-term prospects are in any way unhealthy.

So Canada, if I recall, used to be a strong contributor. The last couple quarters, I think it has been bumpy. Do you think that that, at this point, has been fixed, whatever the issue was there? And you are confident moving into -- well, we're already almost halfway through the first quarter, but are you confident that that stat is back on track, or it's hard to say at this point?

Well, I have confidence that Larry is the right person to be focusing on getting things like Canada, where we want it to be. We don't think there's anything in the Canadian market that concerns us, and Larry's leadership team underneath him, we're very confident that they are going to get the performance level where we think we need to be.

As Ron mentioned in his comments, this is the year where we're looking for real expansion of sales force productivity. And we're working very closely with the sales team to achieve that.

Just in terms of that, I'm sure there are quotas. Did the quotas range depending on either the territory, or the experience, or both? And are you at liberty to share those?

We won't disclose the actual quota, but largely it's relatively a common compensation plan. There are some nuances depending on experience, as you mentioned. But we have raised the quotas up materially, this year relative to last year. And this is really under Larry's suggestion.

It's fair to say the expectations have gone up on a territory basis.

Sure. Obviously you have some exciting new products. I missed the number though, Kevin, you gave at the beginning of the call. You expect to expand the number of sales territories to how many?

We target 40 to 45 this year.

Okay.

In North America.

And then you mentioned the R&D team and they're working on new things. Without saying exactly what products you're working on, and obviously you've had some very exciting new releases, but for 2015, is there a plan to launch a new platform in 2015, or has that not been yet decided?

Obviously, we mentioned that our commitment to R&D investments is not going to be sacrificed as we enter 2015. And that enLIGHTen has a new platform. We see a number of product line extensions that we think are going to be pretty exciting in the marketplace.

And there are other product ideas that we're working towards. And we'll have more to talk about on that front in the coming quarters, but quite frankly, it's been quite a run to the finish with enLIGHTen in the fourth quarter. And the previous quarter excel HR, so we're very excited from a product perspective.

Okay, great. Thanks.

Our next question comes from the line of Jack Wallace from Sidoti. Please proceed with your question.

What revenue level, or what signs of the sales force, would you need to see in order to go ahead and add to the headcount there?

Well, we recognize that there are competitors that have larger sales organizations than we have. And clearly we want to be able to build a team that can compete effectively with those players, too. So we will continue to add to the sales force.

But we want to stay very close to the sales team and allow Larry and his new management team to get their arms around the situation and then, as we see improvements in sales force productivity, which we anticipate, we will continue to augment the size of that team.

And what's the headcount at today on the sales team?

It's 40. As I said, the 40 to 45 is the target and at any given time, there are openings. So it's a fluid situation, but I think that's typical.

Okay. And then just, qualitatively, can you talk about some of things that Larry and, to a certain extent, Miguel have done? The changes that they have made, whether it's some personnel or just culturally, that gives you your confidence that, things are changing internally and not just from a headcount and a name standpoint.

Good question. I think that in the case of Miguel, he's assembled a leadership team underneath them. I was just with him in Europe and he had his European team go over the 2015 plan. And I just think that his approach is shining a much brighter light on the situation and highlighting the areas that need more attention, and need additional resources.

So there have been -- the team has grown in headcount. And I just think the sense of urgency that both Miguel and Larry have, in terms of getting the sales organization up to our target levels, is certainly there. So that does represent just a higher level of expectations through our global commercial team.

And then do you expect to be breakeven for 2015, on a GAAP basis?

We expect to be profitable in 2015, on an EPS basis, and cash accretive.

And then, can you touch a little bit on the royalty amount that you had mentioned -- your earlier caller? Roughly, how much was that? And how much of an impact can we expect that to be on a apples to apples going forward?

It had about a 1% to 1.2% effect on overall revenue, on gross margin.

On gross margin, okay, thank you. And then last what was the legal matter that results in the $340,000 charge?

It was a non-recurring employment related matter.

Okay thanks. That'll be it for me.

Our next question comes from the line of Dan Mendoza from Prospect Capital. Please proceed with your question.

Most of them have been asked and answered already, but just one point of clarification on the $25 million breakeven. That's effectively a GAAP number, correct?

That's correct.

You guys, the last couple quarters that your non-cash stock comp has been running about $1 million a quarter, which is pretty close to $0.07. Do you expect that to be about the right level as we move into 2015?

I think that is the right level, Dan. About $1 million a quarter.

Okay. So it's $25 million in breakeven for you guys on a GAAP basis, on a cash EPS basis, that $25 million should be a little bit less than $0.07 just for making that one adjustment?

That is correct.

That's helpful. Thanks very much. I will be in touch.

Great. Thanks, Dan.

That's all the time we have for questions. I would like to turn the call back over to Kevin Connors, for closing comments.

Thank you for participating on our call today. We will be attending many investor conferences and marketing events in the first quarter, and will update you on our business progress in the first quarter 2015 conference call May, 2015. Good afternoon and thanks for your continued interest in Cutera.

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