Cutera Inc (CUTR) 2015 Q3 法說會逐字稿

Greetings, and welcome to the Cutera third 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, Mr. John Mills of ICR. Thank you, Mr. Mills, you may now begin.

Thanks, operator. Welcome to Cutera's third 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 discussion today will include forward looking statements reflect 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 segments 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 the risks and uncertainties is stated under the caption Risk Factors in the Company's 10-Q filed today with the SEC.

Cutera also cost you to not place undue reliance on forward-looking statements which speak only of the date they were made. Cutera undertakes a 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'll 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, 2015. We are pleased with the trend in momentum for our financial performance improvement as demonstrated by the growth in revenue, improving gross margin, operating cash flow, and profitability metrics. The investment in our commercial team, recent product releases and a broadening portfolio of asthetic solutions have been the key components that have driven our business. Despite continued foreign exchange headwinds, our revenue in the third quarter 2015 increased 23% to $23.1 million when compared to the same period last year. In line with our goal to capture greater market share and expanding market, we have experienced double-digit revenue growth during the past five consecutive quarters. It is important to note that our growth has been organic and fueled primarily by the recently launched products, strong contributions from legacy platforms and enhanced commercial focus.

Our North American team, led by [later] labor, delivered a particularly impressive 80% product revenue growth this quarter. Over the past year, Larry has assembled an effective team in North America. As his team continues to develop and gain momentum in the marketplace, we believe salesforce productivity will continue to improve in the fourth quarter and position us favorably for 2016. In addition, we will continue to expand our sales organization to allow us to better showcase our products in the market. In terms of the customer profile of the quarter, core physicians in North America accounted for approximately 55% of our orders. Our sales team in rest of the world resume led by Miguel Pardos increased product revenue by 3% on a constant currency basis year-over-year.

Despite currency challenges, our Australian direct operation and our global distributor sales channels performed exceptionally well. From a product mix perspective, revenue growth was driven from our recent product launches, elighten and excel HR. In addition, the continued growth in market penetration, our gold standard, excel V vascular system. And our flagship multi-application, multitechnology xeo platform, also remained material contributions to our revenue. enlighten's rapid rise as a top revenue contributor within one year of its commercial release is especially noteworthy. This product is well-suited for tattoo removal and treatment of benign pigmented lesions and has been well received by our customers. We're excited about the platform's capabilities and plan to induce technologies' extensions to the platform in 2016 that will showcase the versatility of enlighten.

Turning to research and development, we will expand our portfolio products and expect to be able to share more in the coming -- about coming introductions in the near term. As has been our tradition, we remain committed to continued investments in product and clinical research and development which are hinged on technical innovation that provide clinical breakthroughs for our customers. The global market for aesthetic razor and energy based systems is experiencing healthy expansion which we estimate to be approximately $2 billion per year in equipment revenue. We have made significant progress thus far in 2015 and are well positioned to leverage our initiatives for next year.

I'd now like to turn the call over to Ron to discuss our financial results.

Thanks, Kevin and thanks to all of you for joining us today on our third quarter 2015 conference call. Third quarter revenue is $23.1 million, up 23% when compared to the third quarter of 2014. Our year-over-year revenue growth rate during the past five quarters was 11%, 15%, 18%, 27%, and 23% respectively. Given the higher baseline performance as evidenced by our recent results, we expect our fourth quarter 2015 revenue to be approximately $29 million and the full-year 2016 growth rate to be in the range of 10% to 15% year over year.

Gross margin was 58%, which is higher than the 57% guidance we previously provided as well as the 57% margin in Q2 of 2015. We have several key initiatives targeted at increasing our gross margin, and we are tracking ahead of schedule. Our margin improvements were due primarily to an increased level of direct revenue and our new product manufacturing cost projections at a faster rate than previously expected. We expect fourth quarter gross margin to be in the 60% range, and we believe we will achieve an annual gross margin of 60% in 2016, starting lower in the first quarter and sequentially increasing throughout the year to more than 60% in the fourth quarter of 2015.

I'd now like to address our operating results. Sales and marketing expenses declined as a percent of revenue during the quarter as we were able to leverage expenses across a higher sales volume. Expenses were $8.8 million, or 38% of revenue in the third quarter of 2015 compared to $7.8 million, or 42% of revenue in the third quarter of 2014. The increase in absolute spending is primarily related to commissions on higher revenue and associated marketing activities. We expect our sales and marketing expenses to grow moderately in absolute dollars in the fourth quarter 2015 and full year of 2016 but continue to decline as a percent of revenue as we leverage our expenses with our anticipated revenue growth. Research and development expenses were $2.7 million in third quarter of 2015, similar to $2.6 million in third quarter 2014. We remain committed to continued investments in product and clinical research and development that drive new product innovation. As we enter expense intensive phases in the new product development cycle, we project quarterly spending will increase slightly. Overall, we expect spending to be in the $2.5 million to $3 million per quarter in the future.

General administrative expenses remain flat at $2.9 million in third quarter 2015 and 2014. Our general administrative spending has been in the $3 million range during the past several quarters. We expect expenses to continue in that range and we will realize leverage as a percent of revenue as we anticipate continued revenue growth. Our net loss for the quarter was $957,000, or $0.07 per diluted share. This includes $1.3 million of non-cash expenses related to stock based compensation, depreciation and intangible amortization. Please note after adding back the non-cash expenses, we were profitable and cash flow positive for the quarter. We expect to achieve GAAP profitability in the fourth quarter and expect to continue our profitability trend for the full year of 2016.

Turning to the balance sheet and cash flow, net accounts receivable at the end of the third quarter of 2015 were $9 million and our DSOs were 36 days. We expect our DSO to remain in the 35- to 40 day range. Inventories were $13.5 million at June 30, 2015 and September 30, 2015. This represents annual inventory terms of approximately 3 [points]. Our objective in 2015 will be to increase our inventory terms closer to the 4 point level.

Cash from operations consumed $614,000 during the quarter, due primarily to a $960,000 net working capital increase during the quarter due primarily to a normal paydown of operating liabilities and a reduction of our deferred revenue balance that resulted from fewer multiyear warranties being sold at the time of sale. We expect to be cash accretive in future quarters as we continue to leverage our revenue growth, and we don't expect any significant changes in our working capital assets other than the normal quarter-to-quarter fluctuations.

Our cash position remains strong and as of September 30, 2015 we hold cash and investments of $47.7 million with no debt which represented approximately $3.60 per outstanding share. We concluded our $40 million stock repurchase last month. We commenced this program in February of this year and concluded just a few weeks ago in October. During this time period, we repurchased and retired 2.8 million shares of our stock. Our Board will continue to evaluate the best use of our strong balance sheet to enhance shareholder value.

In conclusion, we are pleased with the achievement of our recent revenue growth, gross margin improvement, leveraging of our operating expenses, our cash position, and are particularly excited that we are approaching profitability. For the fourth quarter of 2015 and beyond, while there are certain unpredictable factors that may impact our global business, including unpayable currency movement, we believe we will continue to realize improvements in our financial performance. We expect our fourth quarter revenue to be approximately $29 million, leverage our operating expenses and to achieve GAAP profitability, which will also generate cash from operations. For the full year of 2016, we expect revenue to grow in the range of 10% to 15% on a year-over-year basis and to be GAAP profitable and cash accretive.

I would now like to open the call to your questions. Operator?

Thank you. We would now be conducting a question-and-answer session.

(Operator Instructions)

Tom Gunderson, Piper Jaffray.

Hi. Good afternoon. Just a little bit of clarification. Ron, as you are continuing to give us good guidance going forward, when you say, and this gets down maybe a little bit semantics, but when you say approximately $29 million in revenues for Q4, is that a range of $28 million to $30 million or $28.9 million to $29.1 million? When you say approximately, what kind of boundaries are you putting around that?

It is a good question. We're just looking at that $29 million range, and so the boundaries are not large, but we don't have any specific guidelines within that. I think the range that you're thinking about is relatively consistent.

$28 million or $30 million?

Yes.

All right, and then on the enlighten, it sounds like it had another good quarter and another good quarter coming. What percentage of revenues for enlighten were coming from OUS? Any outside of North America?

Yes. Absolutely. We are seeing continued strengthening in the Asia in particular. We're looking to get more traction in Europe and that region, but clearly, it's getting a lot of interest around the globe.

Good. Thanks.

And then, Kevin, one of the things that Cutera's has done well over time is keep their loyal customer base, and you go back and expand the products that they have. I'm curious, has enlighten brought new customers in? Have you been able to go into traditional dermatology or plastic surgery offices as far as the core physicians go and maybe steal those guys away from competition?

It's really a combination of the two. You've followed the Company since we went public, so you know that some time ago, 80% of our business was outside of dermatologists and plastic surgery, and now we have been able to change that. So, half our business or so on an average basis is coming from derms and plastics, so we have really been able to pivot the Company in terms of our focus to core physicians. These are doctors that tend to appreciate disruptive technology and willing to pay what we think a fair price is for it. And the combination of products like Excel V and now with enlighten have allowed us to both go back to our existing customers, but also make introductions to new ones.

Got it. Thanks. That's it for me.,

Thanks, Tom.

Anthony Vendetti, Maxim Group.

Thanks.

Kevin, I was wondering if you could talk a little bit about the sales force. I know Larry and Miguel have done a good job, but are you looking to add more sales people as you ramp up into 2016, and are you looking to go direct in any more countries at this point?

Yes, we do continue to add. As you know, there are companies in our space that have a larger footprint from a sales headcount perspective, and we think we've got a strong portfolio of products today and more coming. In line with that, we think it's important to have our story be told on a grander scale, so we look to continue to grow our North American business, and we think that by year end we should be somewhere around 50-ish sales reps. And we will continue that, because, as we talked about on the call, we think the overall market is healthy and we want to capture shares, so that usually implies more new products and a greater focus on the commercial side of the business.

The same is true for our rest of world strategy. Miguel's done a very nice job. The nine months of product sales expansion, Ron, you have that number, don't you? In rest of world?

Actually, the growth in the rest of the world, if you look at the nine month situation, actually grew 20%, even and US dollars, despite the approximate 20% decline in the local currencies. So, we've done very well there.

Yes. We just went direct in the UK and Ireland, and we're direct in Spain, and Miguel's spent a lot of time building a strategy that gets us continued greater representation outside of North America.

Okay, and just one follow up in the products area. I know enlighten is selling well. Any other planned wavelengths or upgrades to enlighten? And then, just in general sense, I know you're working on some new products, any type of planned launch in 2016 that we should be looking towards at this point?

Well, we talked about the extension of enlighten's capability for the Asian market, and we think that puts us in a very unique perspective relative to our two major competitors. But, we're very excited about other programs we're actively pursuing to introduce new applications and broader clinical capabilities that we think are going to make a difference in our business going forward. We're always looking at new platforms as well, so it's a very busy time with the development team here.

Okay. Great. Thanks.

Thanks, Anthony.

Zack Ajzenman, Griffin Securities.

Hey, thanks.

I don't want to overlook some of the success in traction here in the US, but turning to international, Q1 and Q2 product sales were up 34% in 36% respectively, and this quarter is down 5%, or up 3% in constant currency. What are some specific reasons for the sharp pullback here in Q3?

Other than the commentary which we've already touched on here, we really don't have much more to add. We think that there will be some bumpiness in the revenue, but we think Miguel's initiatives have shown a nice traction since he joined us last July. And we don't see anything from a trend perspective the has us concerned about our ability to win in a tougher backdrop with the foreign exchange headwinds.

Just to add to that, we are happy with what's going on in our international operations. And again, you are looking at a three-month period as opposed to the nine-month period. And realize there will be fluctuations from quarter to quarter. But we feel good about what's happening.

Okay. Any insights on if we think about regions abroad, Europe versus Asia? Any color there?

In terms of what?

In terms of overall trends and macros and fundamentals in some specific regions internationally? Is Europe performing better than Asia, or any color along those lines?

Each country has its own unique circumstances, and managing a broad range of geographies has its own challenges. But fundamentally, I think our perspective is that we are not concerned about a quarterly move one way or the other if we make the long-term prospects are healthy, and we do.

Okay, and then one more also directed towards the international business. For enLighten, the 532 wavelengths extension to more effectively treat pigmented lesions, started shipping I believe the end of Q2. How should we think about the ramp timeline in Asia, which represents about one-third of the business? Or in other words, when will that maybe be able to offset some of the recent pressure in that region?

Recent pressure in the region? I still don't follow the question. But we think that the pigmented legion market in Asia is bigger than tattoos -- tattoo removal market. And we've done some things to build a group of key opinion leaders that are getting clinical experience with this extension and we're quite pleased with the positive feedback that we're getting. From the clinical side, we're able to minimize any unwanted complication in the treatment of this condition. And as we look at that market, it has a huge installed base of earlier technology that we think we can displace and we have got strategy in place to accomplish that.

Okay. Great. Thanks.

Thank you. With that, I would like to turn the conference back over to Management for any additional comments.

Thank you for participating in our call today. We will be attending many investor conferences and marketing events in the fourth quarter. We look forward to updating you on our business process in the fourth quarter 2015 conference call in February 2016. Good afternoon, and thank you for your continued interest in Cutera.

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