Cutera Inc (CUTR) 2015 Q2 法說會逐字稿

Greetings, and welcome to the Cutera second quarter 2015 earnings conference call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, John Mills of ICR. Thank you. Mr. Mills, you may begin.

Thank you Operator. Welcome to Cutera's 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 prepared comments there will be a question and answer session. The preparation will include forward-looking statements reflecting management's current forecasts 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 fluctuation on the Company's international business. Such risks and uncertainties are discussed in a summary forum in today's press release.

A detailed discussion of the risks 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 undue reliance on any forward-looking statements, which speak only as of the date that 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 current or unanticipated events. Future results may differ materially from management's current expectations. With that, I will turn the call over to Kevin Connors.

Thank you John. Good afternoon everyone. And thanks for joining us today to discuss Cutera's results for the second quarter ended June 30, 2015. Revenue in the second quarter of 2015 increased 27% to $22.6 million when compared to the same period last year. We are encouraged with the continued momentum and favorable trend of our revenue growth. We have experienced double digit accelerated revenue growth in the past four consecutive quarters. Our growth has all been organic, and fueled primarily by our recently launched Enlighten and Excel HR products, as well as continued strong contributions from our legacy Excel V and Xeo platforms. Our North American sales team led by Larry Laber, delivered particularly impressive 57% product revenue growth this quarter, over the past six months Larry has aggressively recruited and assembled a strong team of sales professionals. As his North American team develops further and gains momentum in the marketplace, we believe we will continue to achieve year-over-year revenue growth, and increased productivity throughout the second half of 2015.

Core physicians in North America accounted for approximately 53% of our second quarter orders, with the balance of the orders received primarily from family practice physicians. Our sales team and the rest the world led by Miguel Pardos delivered a strong 36% product revenue growth, despite currency headwinds of the strong US dollar. Miguel joined us last year, and also continues to build his global team that is gaining momentum under his leadership. In particular, our Australian direct operation and distributor sales channels have demonstrated significant improvement under Miguel's leadership.

We continue to closely monitor our sales organization performance, and we will invest and expand further as productivity improves. From a product line perspective, this quarter's revenue growth was sourced primarily from our new Enlighten and Excel HR products, and the continued growth and market penetration of our gold standard Excel V vascular system. Our flagship multi-application multi-technology Xeo product also showed growth, and remains a strong product platform that is suited for any aesthetic office, seeking to offer a wide range of treatment categories. Gross margin in the second quarter was 57%, up 53% in the first quarter of 2015. The margin improvement this quarter exceeded our earlier guidance, and were a result of favorable product mix, faster than expected realization of manufacturing cost reductions, and Ron will add further color in a moment.

Turning to Research & Development, we have a high performing engineering team as is evident with our two new product platforms in 2014. During the second quarter, our R&D team completed the first Enlighten product extension, that provides even more customized benign pigmented lesion treatments by extending the treatment parameters. The expanded function has been received favorably by our Asian customers, and gives them a significant performance edge to enlighten, and creates better versatility over other Picosecond systems. We are always looking to expand our pipeline with new products, and expect to be able to tell you more about these in the coming quarters. We maintain our commitment to continued investments in product and clinical research and development, which drive exciting new product innovations. The global market for aesthetic light and energy based products is growing at steady pace, and now in our opinion is in excess of $1.5 billion a year. We believe our broad range of products, the expected market share expansion of our new products, as well as our strength in commercial leadership team, to position us to continue to capture a greater market share based on an organic growth strategy. I would like to turn the call over to Ron, to discuss the financials in more detail. Ron.

Thanks Kevin. Thanks to all of you for joining us today on our second quarter 2015 conference call. Second quarter revenue $22.6 million, up 27% when compared to the second quarter of 2014. Our US revenue which includes service and hand piece refill revenue grew 36%, while our international revenue grew 20% despite significant foreign currency headwinds. Our year-over-year revenue growth has been accelerating during the past four quarters, and was up 11%, 15%, 18%, and now 27% in the past four quarters respectively. We expect our year-over-year quarterly revenue growth to be in the range of 15% to 20% in the second half of 2015.

As Kevin mentioned earlier, this quarter our international revenue was adversely affected by the declines in the major foreign currencies that we transact in. When compared to the send quarter of 2014 the Japanese yen, the Euro, and the Australian dollar, each declined in the 20% range. As a result, we had to make a foreign exchange related negative impact on our revenue was in the range of $1 million to $2 million. Gross margin was 57%, which is higher than second quarter guidance of 55%, and higher than the 56% realized one year ago. As Kevin mentioned earlier, we have several key initiatives targeted at increasing our gross margin, and we are tracking ahead of schedule. During the quarter our product improved due to a favorable product mix, and new product manufacturing cost reductions, at a faster rate than previously expected. We expect third quarter gross margin to remain in the 57% range, and to see it increasing to approximately 59% in the fourth quarter of 2015, given the fourth quarter is seasonally our strongest revenue quarter of the year.

I will now address our operating expense results. Sales and marketing expenses were $9.1 million, or 40% of revenue in the second quarter of 2015, compared to $7.8 million, or 44% of revenue in the second quarter of 2014. The increase in absolute spending is primarily related to sales force expansion, commissions and higher revenue, and associated marketing activities. We expect our sales and marketing expenses to grow moderately in absolute dollars in the second hall of 2015, but continue to decline as percent of revenue, as we leverage our sales force with our anticipated reductions growth. Research and development expenses were $2.7 million in the second quarter of 2015, up from $2.6 million in the second quarter of 2014. We remain committed to continued investments in product and clinical research and development that are driving our new product innovations.

As we enter expense intensive phases in new product development cycle, we project quarterly spending will be in the range of $2.5 million to $3 million per quarter for the remainder of 2015. General and administrative expenses were $3 million for the second quarter of 2015. Our G&A spending has been in the $3 million range during the past four quarters. We expect to continue in that range in the third quarter, and slightly higher in the fourth quarter of this year, reflecting higher seasonal expenses. Our net loss for the quarter was $1.9 million, or $0.13 per fully diluted share. This includes $1.3 million of non-cash expenses related to stock-based compensation, depreciation, and intangible amortization. We expect our third quarter financial performance to be similar to that of the second quarter, and expect to be profitable on a GAAP basis in the fourth quarter of this year.

Turning to the balance sheet and cash flow. Net Accounts Receivable at the end of the second quarter of 2015 were $8.9 million, and our DSOs were 36 days. We expect our DSO to remain in the 35 to 40 day range. Inventories increased from $11.9 million at March 31, 2015 to $13.5 million at June 30, 2015. The increase was due to an intentional buildup of inventories associated with our recently launched products, to help facilitate continued revenue growth while maintaining efficiencies within the factory. Cash from operations generated $1.4 million during the quarter, due primarily to working capital changes. We expect to be cash neutral in the third quarter, and generate cash in the fourth quarter. Our cash position remains strong, as June 30, 2015 as we held cash and investments of $66.3 million, with no debt, which represented approximately $4.70 per outstanding share.

We continue to remain active with our share repurchase program, under which we repurchased 386,000 shares for $5.2 million in the first quarter of 2015, and repurchased almost 900,000 shares for $12.5 million in the second quarter of 2015. In total we have repurchased almost 1.3 million shares for $17.7 million in the first half of the year. We remain active in repurchasing our shares, and have over $22 million remaining in our board-approved $40 million share buyback program.

In conclusion, we are pleased with our revenue growth, gross margin improvements, generation of cash from operations, and finally that we are near our financial breakeven point. We expect our third quarter financial performance to be similar to our second quarter performance, and expect to be profitable in the fourth quarter of this year. We will continue investing in our R&D and our commercial operations, and expect to continue leveraging this spending as a percentage of revenue. Our current quarterly GAAP breakeven point is approximately $25 million in revenue. For the second half of 2015, while there are certain unpredictable factors that may impact our global business, including unfavorable currency movement, we expect that each quarter we will continue to realize improvements in our financial performance. I would like to now open up the call to questions. Operator.

Thank you. We will begin the question and answer session. (Operator Instructions). One moment while we poll for questions. Our first question comes from the line of Thomas Gunderson from Piper Jaffray. Please proceed with your question.

Hi, good afternoon. This is Kyle on for Thom. You talked about building reference sites through KOL transactions, and doing this by discounting those units in order to build a solid base. Are you where you wanted to be in this respect? And two, have ASPs bounced back a bit, or are you still discounting quite a bit?

The ASPs did bounce back a bit as we expected, because we were ceding with these luminary transactions early on with these product launches we have had, and we are satisfied that we have got the adequate coverage throughout the country and the world, in various locations to continue ceding growth in these product lines.

Okay. Okay. And it sounds like you still have quite a bit remaining in the stock repurchase program. Can we assume continued purchases each quarter? And did you give your estimates for fiscal year 2015 average share count?

We did not give an average share count. First of all, we do remain active. We have a 10-b-51 in place for our share repurchase. I believe that we purchased about $17 million as of the end of June. And we are continuing to be active in the market.

Okay. Looking at the US sales force, you still had around 40 territories, and how much do you anticipate that growing over the remainder of the year and next year?

We are pleased with the expansion that we saw in North American headcount. The expansion in terms of new folks that we brought on board, and we are really happy with all of the hiring that had happened, that we were able to get them trained and supported by our sales leadership, and we think that continued hiring is our plan going forward.

Okay. All right. And then lastly, it looks like I think you guys said the FX impact to sales was about $1 million to $2 million in the quarter. You have given a range of 15% to 20% as reported growth for roughly the next couple of quarters. Do you have internal estimates for what that range would be in constant currency terms?

I do not have the constant currency. For the quarter at least our international business had grown $2 million, or 20% when compared to the quarter a year ago. On a constant currency basis that would have been about $1 million dollars higher, or 31%. All I'm assuming in a go forward basis is that exchange rates remain flat to today's rate, but I'm not assuming any other change.

Great. Thanks. That is it for me.

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

Sure. Thanks very much. Just following on the FX, and then I have a couple of questions on some of the products. So the even though there was a $1 million to $2 million impact, Ron, from the strong dollar, can you talk about the actual dollar amount that was related just to pure FX currency translation impact?

Well, if you wanted to take the currency in the second quarter of 2015, and using Q2 of 2014 rates, that is roughly $1 million right there.

Right there is a million, okay. And estimating something in addition to that was due to maybe lost sales because of the strong dollar, correct?

That is correct. And what that means is roughly half of our international business is conducted in US dollars. i.e., with distributor transactions, and that means there is a weakening purchase power on their side.

Sure. That is fine. And then just on Enlighten, clearly there are two, strong competitors out there that sell Picosecond laser technology, and some have given color on either the number of sales, or the dollar amount of sales. Can you give us any more color on how well Enlighten is doing, either in terms of the number, and then what is the ASP at? I know you said it has bounced back a little bit here. What should we look at as a reasonable ASP in general?

Well, we will address the numbers and then let Kevin talk further about Enlighten itself. in terms the ASPs we did see a nice bounce back as we had anticipated because of the initial ceding that had taken place in the first half of the year. A lot of it being in the second quarter, and we are continuing to drive our selling prices, and so value, as Kevin will talk further we have enhanced the product with our low energy green option, that we also believe adds value to the rod. In addition to that there is a product mix where we are selling more direct, and that also brings a higher blended average. So from that perspective, we have got the bounce back we were expecting in selling prices

Anthony, we were particularly pleased with the expansion in North America, so I think that the team did a nice job of really focusing on Enlighten. And we think that the product has some pretty compelling features and benefits, that we are hearing very exciting things from our customers. And as we talked about in the past, we think this is a platform that will have lots of product line extension opportunities, and we are delighted that the engineering team is able to respond with the low energy green, which is important to our business that is interested in providing a solution for benign pigmented lesions. We are able to get to the proper operating parameters to successfully treat those patients.

Do you need a third wavelength for that, Kevin, or is two wavelengths enough?

We continue to expand future directions with wavelength as something that is important to us, but we are hearing very positive hinges with the current wavelength that we have to treat this, and this is one area in Asia that is particularly exciting.

And just a couple more things on products, and then I will jump back in the queue. Excel HR obviously your new hair removal product. Hair removal has been around for a while. Can you talk about, since this helped contribute to growth, what about that product is contributing to the growth vis-a-vis the competition, that has had hair removal products out there for a long time?

I think one of the things that we are pleased to see was our legacy products, as well as our new products are continuing to expand. We think that is a good reflection of the way that the sales team is presenting these products, while not turning their attention away from the legacy products. Hair removal has been around for a very long time, but it is still one of larger treatment categories in the space, and having a flagship platform now with Excel HR, we think keeps the portfolio very fresh.

And one last question on R&D this terms of how we should lack at the next 12 to 18 months, is there an expectation of a new product or two that we should see sometime in 2016, maybe in conjunction with AAD or [Aslands]?

As we get closer to that, Anthony, we will share what are our thoughts are. We are pleased to be able to get the product line extension with Enlighten in the past quarter.

Okay, great. Thanks, guys.

Thank you, Anthony.

(Operator Instructions). Our next question comes from the line of Zack Ajzenman, Griffin Security. Please proceed with your question.

Thanks, good afternoon. First question, last quarter Q1 there was an unusually high distributor mix of business that pressured gross margins. Did this proportion return to a more normalized level this past quarter?

I would say not that it has contracted in the distributor business, in fact, we still feel good about the distributor volume, but our direct business has actually increased which the causes the distributor business to be a little bit more diluted.

Got you. And could you maybe elaborate a bit more on truSculpt's prospects or trends over in Europe, where it has some broader indications now that Celtique has about a year or so now, clearly making some meaningful investments overseas?

Specifically we don't have anything that is unique overseas with that product. We have broader indications for use in Europe for example with that product, and we are working with our both direct operations, as well as our distributor partners, to capture a larger part of that market.

Okay, great. Thanks, guys.

I would like to hand the call back over to Kevin Connors for closing comments.

Thank you for participating in our call today. We will be attending many investor conferences and marketing events in the third quarter. We look forward to updating you on our business progress in the third quarter 2015 conference call in November. Good afternoon, and thank you 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 that this time, and have a wonderful day.