Cutera Inc (CUTR) 2015 Q1 法說會逐字稿

Greetings, and welcome to the Cutera Inc. First Quarter 2015 Earnings Conference Call. (Operator Instructions). It is now my pleasure to introduce your host John Mills of ICR. Thank you, Mr. Mills, you may begin.

Thanks, operator. Welcome to the Cutera's first quarter 2015 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 including projected revenue, gross margin, operating expenses, profitability achievement, cash from operations and the impact of foreign currency fluctuations on the Company's international business.

Such risks and uncertainties are discussed in a summary form in today's press release, the following prepared remarks and in the Q&A section that follows. A detailed discussion of risk and uncertainties is stated under the caption Risk Factors in the Company's 10-Q filed today with the Securities and Exchange Commission.

Cutera also cautions you to not place any 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.

I would like to draw your attention to the financial highlights table issued with the Company's earnings release, where the Company has add geographic sourcing of their product revenue from North America versus the rest of the world for. We are referring to it today as ROW in the script as well to provide additional clarity into their business.

With that, I would like to 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 first quarter ended March 31, 2015. Revenue in the first quarter 2015 increased 18% to $19.1 million when compared to the same period last year. Our growth was all organic and was largely fueled by a recently launched enLIGHTen and excel HR products. We are pleased in particular with product revenue growth of 48% in North America and 34% from rest of world despite currency headwinds faced this quarter. We continue to gain momentum in North America with our strengthening sales team lead by Larry Laber, and we believe this will continue achieve year-over-year revenue growth and increase productivity throughout 2015 and beyond. We will be closely monitoring our sales performance and will continue to invest and expand as productivity improves.

Core position in North Americana accounted for approximately 43% for the first quarter orders with the balance of the orders received primarily from family practice physicians. Our 34% rest of world growth demonstrates significant improvement versus last year. Particularly after factoring the negative impact associated with the appreciation of the U.S. dollar. When compared to the first quarter of 2014 the Japanese yen, Euro and Australia dollar declined 16%, 21% and 14% respectably. Our Executive Vice President of International sales Miguel Pardos who came on board last July continues to augment his global team and our business outside of North Americana is gaining momentum under his leadership. In particular our European direct and our global distributer businesses showed strong performance. We are pleased with the early customer response to our enLIGHTen and excel HR products. One of our key objectives during the quarter was to build momentum and a solid reference base with these products through strategic sales to key opinion leaders in multiple countries. In addition to new products excel V and xeo continue to be a significant contributor to our overall Company revenue. Excel V is the new gold standard for vas cue vascular treatments and our multi application xeo product is suited for any aesthetic office looking to offer a wide range of treatment options.

Gross margin in the first quarter is 53% which is below our original expectations. Ron will provide further explanation and detail as part of his comments. We have several initiatives to improve gross margin and we expect it to steadily improve beginning the second quarter throughout the remainder of 2015.

Turning to research and development, we have a very prolific engineering team as is evident by our two new product (Inaudible) launched in 2014. We are actively expanding our pipeline of new products and expect to be able to tell you more about these opportunities as we get closer to introducing them to the market. As has been our tradition we maintain our commit to continued investments in product and clinical research and development which drive exciting new product innovations. The global market for aesthetic laser and energy based products is growing at a steady pace and we believe the overall market is approximately $1.5 billion of products a year. We believe our broad range of products, the expected market penetration of new products as well as our recently hired commercial leadership team to position us to capture greater market share.

I would like to turn the call over to Ron to discuss the financial results. Ron.

Thanks, Kevin and thanks to all of you for joining us today on our first quarter 2015 conference call. First quarter revenue was $19.1 million up 18% when compared to the first quarter of 2014. Our U.S. revenue grew 29% while our International revenue grew 11% despite significant foreign currency headwinds. Our growth was partially offset by declines in our skin care and refill businesses which was largely tied to foreign exchange declines as well as the elimination of the radius product line in 2014.

We estimate the negative revenue impact associated with the appreciation of the U.S. dollar to be in the range of $1 million to $1.5 million for the quarter. Our revenue during the past thee quarters has grown year-over-year by 18%, 15% and 11% in the first quarter of 2015, fourth quarter 2014 and third quarter of 2014 respectively. We expect our revenue growth to continue and to be in the range of 15% to 20% year-over-year in each of the remaining three quarters of 2015.

Gross margin was 53% which is lower than we had originally expected. The key reasons explaining this shortfall are as follows. First, higher than usual distributer volume. Distributer revenue represented approximately 31% of our global product revenue compared to 25% in all of 2014. Distributer business yields a lower gross margin than our direct sales transactions. We expect distributer volume to become a smaller percentage of our total product revenue growing forward due to our expected greater growth rates in our territories where we sell directly to end user customers.

The second item is foreign currency weaknesses. The three major foreign currencies that are sales are denominated in are the Japanese yen, the Euro and the Australia dollar. This basket of currencies decline against the U.S. dollar on average by 17% when compared to the same quarter one year ago which had a negative impact on our ASPs and gross margin.

The third item is the key opinion leader transactions to build are reference sites. This quarter we achieved lower average selling prices for our new products as we seated key markets with discounted KOL units in order to build a solid reference base for the future. We believe we have seated key markets adequately and therefore expect to see improved selling prices going forward.

And finally as mentioned on last quarter's call our new product manufacturing cost during early builds have been higher than anticipate. We expect our cost base to materially decrease throughout the remainder of the year as we complete the implementation of the initiatives to drive down cost. As such we expect the second, third and fourth quarter 2015 gross margin to be in the range of 55%, 57% and 59% respectably.

I will now address our operating results. Sales and marketing expenses were $8.2 million or 43%of revenue in the first quarter 2015 compared to $7.3 million or 45% of revenue in the first quarter 2014. The increase in spending is primarily related to a $0.5 million nonrecurring sales restructuring charge in connection with our North Americana sales team. The remainder of the increases expense is primarily due to sales force expansion and commission on higher revenue. 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 our sales force with our anticipated revenue growth.

Research and development expenses decreased to $2.4 million in the first quarter of 2015 from $2.6 million in the first quarter of 2014. The decrease in spending is primarily associated with decrease material expense associated with the launch of excel HR and enLIGHTen. We expect quarterly R&D spending to be in the $2.5 million range for the remainder of 2015.

General and administrate expenses were $3 million for the first quarter of 2015. This represents a $400,000 increase from $2.6 million in the first quarter of 2014. The increase is primarily associated with increase personnel and stock-based compensation expenses. For the remainder of 2015 we expect our quarterly G&A expense to be approximately $3 million.

Income tax provision our tax provision is primarily attributable to International taxes related to our foreign subsidiaries and a small amount of minimum and capital base taxes in the U.S. As a reminder we continue to maintain a 100% valuation allowance for our U.S. deferred tax assets. Our income tax expense if the first quarter was $50,000. Going forward for modeling purposes we suggest using an effective income tax expense of approximately $75,000 per quarter.

Our net loss for the quarter was $3.6 million or $0.25 per diluted share. This loss includes a $0.5 million nonrecurring charge associated with North Americana sales team restructuring and $1.3 million of noncash expenses for stock-based compensation, depreciation and intangible amortization.

Now turning to the balance sheet. Cash from operations consumed $6 million during the quarter. This unusually high cash consumption included $3.8 million of working capital reductions associated primarily with the substantial pay down of the year end accrued liabilities for personnel expenses, commissions, royalties as well as cash consumed for the increase in inventories. We expect our working capital adjustments to be minimal in future quarters and as such expect to generate cash from operations in the remaining three quarters of the year.

Net account receivable at the end of the first quarter of 2015 were $10.4 million and our DSOs were 49 days due to higher back ended revenue from customers with payment terms. We expect our forward DSO to be in the typical 35 to 40 day range. Inventory increased slightly from $11 million at December 31, 2014, to $11.9 million at March 31, 2015. The increase was due to an intentional build up of inventories of our recently launched products as well as finished goods to help facility continued revenue growth while maintaining efficiency within the factory.

Our financial position remains strong as we hold cash and investments of $76.1 million with no debt. This represents over $5 of cash per outstanding share as of March 31, 2015. Our stock repurchase. We continued to have an active 10b5-1 share repurchase program, under which we have repurchased 386,000 shares for $5.2 million in the first quarter of 2015. We have $34.8 million remaining in our $40 million program approved by our Board of Directors as of March 31, 2015. We will continue to be opportunistic in repurchasing our shares in the future.

In conclusion, our current quarterly GAAP break even point is approximately $25 million in revenue reflecting adjusted 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 expected goal given our significant commercial investments and broad portfolio of products. We expect small GAAP losses in the second and third quarter but expect to be profitable by the fourth quarter. Our expectation is that we will generate cash from operations in each of the next three quarters which will include minimal changes to our working capital. For 2015 while there are certain unpredictable factors that may effect or impact our global business including unfavorable currency movement we expect that in each quarter we will continue to realize improvements in our financial performance.

With that, I would like now to open up the call to your questions.

Thank you. (Operator Instructions). And today's first question comes from Tom Gunderson of Piper Jaffray.

Hi, good afternoon, guys.

Hi, Tom.

So one is I just missed it in the note. I got R&D, G&A and income tax guidance, what was the sales and marketing guidance?

In the sales and marketing what we had said is that the absolute dollars are expected to increase but the percent of revenue is expected to decline as we expect revenue growth.

Got it, thanks. And, Kevin, I'm curious, I think when we started out there was a little bit of a backlog which you would expect on enLIGHTen and a cool new product like that. Maybe you said this in the opening remarks but I had to come in late, is there a backlog now or in Q1, and are you shipping to orders turnaround time relatively quickly in May?

We're pleased with what we've seen from our operations team. They have really adapted to the ramp up in a way that we think allows us to take care of all our customer needs. So there are times when customers have to have delivery in a time sensitive manner. We have been able to successfully satisfy those needs. And we think going forward I think it becomes even more straight forward for us to accommodate whatever demand we have for the product.

Got it, thanks. I found your KOL comments interesting and I understand that. But maybe you can correct me on this, but the list price on enLIGHTen is significantly higher than any of your other lasers, so my assumption is that doctors looking to buy that might shop around a little bit longer or a little bit more than they do on some of your other products. And I am just wondering if you could -- a, is that true in your view, and, b, could you remind us of what you feel are the key points in the competitive differentiation of enLIGHTen over the some of the other products that have come out?

Sure, Tom. In terms of the sales cycle with enLIGHTen we indicated a couple earlier calls that it was the first product in the Company's history where without showing the product we are able to take orders for it. So I think there is a lot of excitement around this general technology space. This happens to be one of the applications that we address that our customers are able to see clinical endpoints fairly well-defined ways. There are other technologies such as laser hair removal where there is no obvious clinical change from before the treatment and after the treatment. So that tends to help the sales cycle. And sure this is materially more expensive than our product portfolio, but I think these other factors where they are able to see the technology gives clinical endpoints that are fairly easy to appreciate. And relative to the competitive landscape we have had several situations where they have evaluated us up against a competitor, but we think we are fairing pretty well with that so far.

Want to put a number on that? Are you getting 75%, 80% 90% of those?

We always hear about the ones we win, Tom.

You get 100% of the ones you got, good job.

That's right.

Okay, thanks. That's it for me, Kevin.

All right. Thank you.

Thank you. And the next question comes from Zack Ajzenman of Griffin Securities.

Thanks, good afternoon. First question just looking at gross margins here and thinking about the year going forward and the guidance you gave, Ron. Correct me if I'm wrong, but the guidance kind of implies that on a year-over-year basis gross margins will likely be about flat; is that right?

Right. There is not a tremendous growth year-over-year as we're in the process of improving the cost basis of our new products. And, of course, we're assuming the foreign currencies are kind of remaining constant.

Okay. So given some of these one off kind of issues where KOL transactions that were kind of moving past and moving past some of the manufacturing inefficiencies that come with the ramping of the products, can you better maybe help me understand why we wouldn't see better leverage to the gross margin line moving in to later this year?

That's certainly very possible. We have given the guidance we gave today, but the possibility of being able to do better is out there.

And I think one other point that Ron covered in the script, we had a significant distributer mix this quarter which was outside of our original plan. And the interest for this product outside of the United States is exceptionally high as well in the quarter. So both of those factors that coupled with the key opinion leader program that we had as well those were all headwinds on the margin issue.

Got you. One quick question on Canada, I know it has been underwhelming over the past year or so. How did it perform this quarter?

We don't disclose any specifics on a country by country basis.

Okay. That's fine. So more of a strategic type question moving over to the sales force. There were major investments in 2014 in response to inadequate sales coverage and also in anticipation of some of these new exciting products. In the U.S. in particular can you share some more insight on where the sales force productivity is today versus maybe this point last year and where realistically we think we can get to over the next couple of years?

Again just for background we target 40 territories in the sales management support above and beyond that. And I think with the sales leadership we have they're targeting significant improvement in sales force productivity. But there is a ramp up here for new hires that are on board the organization so that takes six to nine months to get that up to full contribution level. And ultimately we think the targeting something north of $1.2 million of sales territory with a rep that has tenure in that six to nine month range is where we plan to drive the business.

Okay, great. And then last question just on maybe anecdotally on TruSculpt. Any color on the thought process on some of the prospects for possibly expanding the current label that TruSculpt has here in the U.S. and if there are any ongoing studies or anything anecdotally would be great.

It is something we're actively working at this point and again I think it is important to recognize it is a global opportunity with TruSculpt and we have broader clearances for the product outside in most of the major markets, so we're clearly working initiatives outside of the U.S. to capture a larger portion of that market opportunity. But there are certain limitations for our indications for use that we need to be sensitive to and expansion of the indication is an active discussion that we're currently pursuing here.

Great, thanks a lot.

Thank you. (Operator Instructions). And the next question -- (Operator Instructions). All right. As there are no more questions at it the present 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'll be attending many investor conferences and marketing events in the second quarter, and look forward to updating you on our business progress in the second quarter 2015 conference call in August. Good afternoon, and thank you for your continued interest.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.