Cutera Inc (CUTR) 2015 Q4 法說會逐字稿

Greetings and welcome to the Cutera Inc fourth-quarter 2015 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. Thank you, you may begin.

Thanks, Operator.

Welcome to Cutera's fourth-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 brief comments, there will be a question-and-answer session.

Please note that during today's call we will discuss non-GAAP income statement measures for net income and net income per diluted share, which exclude non-cash expenses for stock-based compensation, depreciation and amortization of intangibles. Management believes that these adjusted financial results are more reflective of the cash basis results of operations, as well as comparable to similar measures used by other companies. We have included with our earnings release, reconciliation from the GAAP results to the non-GAAP measures.

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.

Forward-looking statements include among others, statements regarding plans to introduce new products, expand our sales force, ability to increase revenue, reduce expenses, improve financial results, make productivity improvements, grow our market share, realize benefits from additional investment and prove or maintain profitability, penetrate the market, generate cash from operations and plans for stock repurchases. All forward-looking statements are subject to risks and uncertainties including those risk factors described in the section entitled risk factors in our form 10-Q as filed with the SEC on November 2, 2015.

Cutera also cautions you to not place undue reliance on forward-looking statements, which speak only as of the date they were are made. Cutera takes no obligation to update publicly any forward-looking statements to reflect new information, events or circumstances after the date they were are made or to reflect the occurrence of unanticipated events. Future results may differ materially from management's current expectations.

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 2015. We are pleased to conclude 2015 with our sixth consecutive quarter of double-digit revenue growth. And the fourth quarter revenue was essentially on par with our highest revenue quarter in our history.

A return to profitability, demonstrate our ability to expand revenue, while realizing operating leverages as our gross margins improved to 60% without operating margins improved as well. This performance resulted in generating nearly $4 million in cash and GAAP EPS of $0.15 a share and non-GAAP EPS of $0.25 a share.

Our organic revenue growth was broad-based throughout our product portfolio and we achieved meaningful productivity improvements in many of our global markets. The ongoing results of our two-year projects to revitalize our commercial team have been generating increased momentum throughout 2015 and we are encouraged about our opportunities for continued growth in 2016.

Our North American sales team, led by Larry Laber, delivered another impressive performance by growing product revenue 30%, while compared the fourth quarter 2014 and 49%, when compared to FY14. Larry has successfully recruited and assembled a first-class team of sales professionals and in year-over-year growth and productivity improvements reflect the skill of his team. During the fourth-quarter 2015, core physicians in North America accounted for approximately 56% of our orders, with the balance of the orders received primarily from family practice physicians.

Our sales team in the rest of world region, led by Miguel Pardos, increased product revenue by $1.1 million or 14%. We estimate our international revenue in the fourth-quarter 2015 was negatively impacted in the range of $1 million to $1.5 million, due to the appreciation of the US dollar relative to other currencies. Despite currency challenges, it's worth noting that our Australian direct operation and our new European direct teams and our global distributor sales channel have demonstrated significant improvement under Miguel's leadership.

We will closely monitor our sales team performance and will continue to expand our global sales team. We expect to continue to improve sales force productivity in the year ahead.

From a product perspective, we experienced strong growth from our legacy portfolio, as well as our recently launched products. In particular enLighten, our flagship picosecond and nanosecond tattoo removal and benign pigmented lesion treatment laser, continue to demonstrate global appeal and has become a major revenue contributor for the Company. While we've been granted a number of important regulatory clearances to date, we anticipate a number of additional regulatory clearances from geographies around the globe to allow us to market enLighten in additional significant markets.

Gross margin improvement to 60% was one of the key goals for 2015 and a critical driver in helping us return to profitability, generating cash from operations. Our steady improvement in gross margin during 2015 is a further indicator that our commitment to improved operating leverage through a balance of strong revenue growth and cost reduction initiative by our engineering and operations teams.

I am extremely pleased to report our return to profitability in the fourth quarter of 2015. This has been a top priority for us and demonstrates a leverage in our operating model as we continue to build momentum.

Turning to research and development, I am pleased to announce that Dr. Lucas Hunsicker has been promoted to the position of Vice President of Research and Development. Lucas joined Cutera in 2008 as Director of Advanced Research and has led development of multiple technologies and innovative product concepts since then. Most recently, Lucas led the successful development of enLighten, from product conceptualization through production release and defined a multi-year product road map that we are aggressively executing.

I'm confident Lucas will provide strong leadership for the R&D team and his experience in technology innovation, product development and program management will maintain our reputation as a broad-based technology leader in our industry. We're committed to investments in product and clinical research and we are excited to showcase a milestone innovation for enLighten platform at this year's American Academy of Dermatology meeting in Washington DC.

The enLighten platform was engineered from inception to support multiple laser wavelengths and a third wavelength will be introduced that will broadly expand enLighten's treatment capabilities for benign pigmented lesions, as well as tattoo removal, pending regulatory clearances. We're certain that the addition of a new wavelength will heighten enLighten's broad global appeal.

The global market for light and energy-based systems is growing at a steady pace and we believe it is approximately $2 billion a year. Our broad range of products, the expected market share expansion, the launch of recently introduced platforms, as well as our strengthened commercial leadership team should all serve as catalysts to fuel our growth as we look forward.

As a result of a number of factors, including the anticipated positive cash flow, current stock price and a sustained positive operating business trajectory, our Board has approved an additional $10 million to be added to the stock repurchase program. I would like to, at this time, thank our global customers for their belief and partnership with Cutera, as well as our worldwide employees for their dedication and commitment to building our Company.

Now I will to turn the call over to Ron to discuss our financials in more detail.

Thanks, Kevin, and thanks to all of you for joining us today on our fourth-quarter 2015 conference call.

Fourth-quarter revenue was $30 million, up 18% when compared to the fourth quarter of 2014. Our year-over-year double-digit revenue growth rate during the past six quarters validates our choices to drive growth organically, to investing internally in people and projects. The present strength and breadth of our product offering, as well as our commercial results to date, are clear demonstrations that our investment decisions were correct. In 2016, we expect our revenue growth rate to be in excess of the overall market rate of growth for our industry, as a result of which, we expect to expand our market share in a healthy, global market.

As Kevin mentioned earlier, this quarter our international revenue was adversely affected by the declines in the major foreign currencies that we transact in. While we transact a significant percentage of our revenue in US dollars, our direct business in Japan, Europe and Australia is transacted in local currency.

In the fourth quarter of 2015 when compared to the fourth quarter 2014, the Japanese yen, euro and Australian dollar declined by approximately 6%, 14% and 19%, respectively. As a result, due to the reduced local purchasing power of our international customers, we estimate the foreign exchange-related negative impact on our revenue was in the range of approximately $1 million to $1.5 million.

Gross margin improved to 60%. As Kevin highlighted, achieving 60% gross margin in the fourth quarter was a key goal for us in 2015, and was a critical driver in helping us return to profitability and generating cash flow from operations. Our steady improvement in gross margin during 2015 is a further indicator of our commitment to improved operating leverage through a balance of strong revenue growth and cost reduction initiatives.

In addition, a higher ratio of direct-to-distributed business also contributed to improve the fourth-quarter gross margin performance. We expect our 2016 gross margin to be approximately 60%.

Now, I would like to address our operating expense results. Sales and marketing expenses increased slightly during the quarter when compared to the fourth quarter of 2014, but declined as a percent of revenue from 37% in the fourth quarter of 2014 to 33% in the fourth quarter of 2015, as we were able to leverage expenses across higher sales volume.

We expect our sales and marketing expenses to grow moderately in absolute dollars in 2016 but continue to decline as a percent of revenue as we leverage our expenses based on our anticipated revenue growth. As such, we expect 2016 sales and marketing expenses to be approximately 35% of revenue, starting higher in the first quarter and decreasing sequentially throughout the year.

Research and development expenses were $2.8 million in the fourth quarter of 2015, slightly up from the $2.6 million in the fourth quarter of 2014. We remain committed to continued investments in engineering and clinical research that drive new product innovation.

We are planning to increase our investments in research and development activity, as the most recent investments are providing targeted revenue growth and commensurate results. As such, our quarterly spend is anticipated to range from $2.7 million to $3 million per quarter.

General and administrative expenses declined from $3.4 million in the fourth quarter of 2014 to $3.2 million in the fourth quarter of 2015. The slight reduction was due primarily to higher legal spending in the fourth quarter of 2014. We expect our quarterly G&A expenses to range from $3 million to $3.2 million per quarter in 2016. This modeling imputes the impact of the suspended medical device tax, which was approximately $612,000 in 2015.

Our net profit for the quarter was $2.1 million, or $0.15 per diluted share. This profit level was 7% of revenue. On a non-GAAP basis, after adjusting for the $1.4 million of non-cash expenses related to stock-based compensation, depreciation and intangible amortization, our net profit would have been approximately $3.4 million, or $0.25 per diluted share, which is greater than 11% of our revenue.

For the full year of 2016, we expect to be profitable and cash-accretive from operations. However, note that we expect the first quarter of 2016, our seasonally lowest revenue quarter of the year, to yield a net loss, but expect to be profitable the remaining three quarters of 2016.

Turning to the balance sheet and cash flow, net accounts receivable at the end of the fourth quarter of 2015 were $11.7 million and our DSOs were 36 days. We expect our DSOs to remain in the 35- to 40-day range in 2016.

Inventories were $12.1 million at December 31, 2015, significantly decreased from the $13.5 million at the end of the third quarter of 2015. This represents an improvement of annual inventory turns to 4.0. This was another key objective achieved in 2015.

Cash from operations generated $3.9 million during the quarter, due primarily to our net income of $2.1 million and $1.4 million of non-cash items. 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 working capital assets other than normal quarter-to-quarter fluctuation.

Our cash position remains strong and as of December 31, 2015 we held cash and investments of $48.4 million with no debt, which represented approximately $3.73 per outstanding share. Fourth quarter of 2015, we spent $3.5 million of cash on our share repurchase program. This brings the total cash used in 2015 for stock repurchases to $40 million, for which we repurchased and retired 2.8 million shares. As Kevin mentioned earlier, our Board has approved an additional $10 million to be added to the stock repurchase program.

In conclusion, we are pleased with the achievement our continued revenue gross margin improvements, leveraging of our operating expenses, our cash position and are particularly excited that we have returned to profitability. For 2016 and beyond, while there are certain unpredictable factors that may impact our global business, including unfavorable currency movement and substantial international political headwinds, we believe we will continue to realize improvements in our financial performance.

We expect healthy revenue expansion and continued market shares gains in 2016. We further expect to leverage our operating expenses, resulting in GAAP profitability and cash generation from operations in the year ahead as well.

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

(Operator Instructions)

Tom Gunderson, Piper Jaffray.

Hi, good afternoon, everybody. Ron, just a quick clarification. I may have missed it. Did you guys reiterate your 10% to 15% revenue growth for 2016 that you gave us last quarter?

We didn't talk about the specific revenue growth for 2016 other than we expect to exceed the market rate of growth.

Okay. And then, Kevin, on enLighten and on the new wavelength and the products you are going to show at the dermatology meeting in Washington, I'm not that technically inclined, as you know, as far as lasers go. Is that an additional laser that is put into the box? Can you give us a little bit more on that? Is it a higher cost, higher price? Can the old enLighten be upgraded to the new enLighten? Just a little more color, if you would.

Sure. We are very excited about this, Tom. As we talked about with the support technology platform, we see tremendous flexibility in future product extension opportunities with this.

One of the areas that has us particularly excited is the fact that we can incorporate additional wavelengths of light. In this case, this is going to be a visible red picosecond technology. We can leverage the core engine that we have in the product and obviously, introduce additional hardware in order to get the technologies to cooperate.

Doctors really do value a visible red wavelength in dermatology and one of the areas that we are excited about is to be able to successfully treat a broader range of tattoo ink colors with this. And so there are things that have been done to work around incorporating a true laser technology, per se, but the clinical results are typically not nearly as impressive as we believe we will be introducing here.

With additional hardware, there is some incremental costs. But as we get regulatory clearances, we can talk about the pricing and things like upgrades when we get FDA clearance.

Got it. But you will be showing it at the meeting but it's not available until you get FDA approval?

That's correct.

Okay. Then one last question on enLighten and that is the Asian market. You've pointed out to us that could be a bigger market because of pigmented lesions for enLighten as compared to a rather large market for tattoo removal in the US and elsewhere.

Has any of the news that we've been getting from the beginning of the year on Asia and weakness in Asia, on materials, oil, steel, construction, et cetera, does any of that have any impact for you on the consumer market? Does it sift down or haven't you seen anything yet?

On the consumer side, I would suggest that we are not seeing it get to that. I think the patient, if that's what you are referring to, the appetite for these procedures is pretty resistant. And we haven't seen economic pullback as a result of lower interest from the patients.

But the business environment, as you can imagine, is more challenging. We are really particularly impressed with what our team in Asia has done, seeing our business in Japan actually show some nice recovery. We're very happy with our team in Australia and New Zealand. So the headwinds are greater but we have a team that, under Miguel's leadership, has really risen to the challenge.

Okay, thanks. That's it from me, guys.

Thank you.

Anthony Vendetti, Maxim Group.

Thanks, good afternoon. How you doing, guys? In terms of the new product platform at AAD in DC, is this a brand new platform? Or an enhancement of something that you currently have in the market today?

Well, we will be introducing -- again, this is without -- we don't anticipate having the FDA clearance. It's possible we'll have a submission done at the time of the meeting. But we are adding a tremendous additional clinical capability, not just with the new visible red wavelength but also significantly augmenting other important specifications of the device.

So this is really taking enLighten to another level. We think it's an area that we want to maintain our technological leadership in the space. We've got more things that we're working on with the platform beyond this.

Okay, great. And then, Ron, I know you said you didn't reiterate specifically on this call 10% to 15% growth ahead of the industry -- and I certainly don't want to put words in your mouth -- but can we assume then that guidance that was provided last call is unchanged at this point?

I think, Anthony, what we are referring to here is we still see a good strong growing market. We have got a good basis of growth that we, at 21%, when you compare 14% to 15%. So we see 2016 as a very strong year and we do believe we will exceed the market rate of growth in 2016, so we will continue growing our share. But we don't have a specific number per se to give you today in terms of to help you with modeling.

Okay. And then -- go ahead, Kevin.

Just to argument that, depending on who you want include in the peer group to make the estimate about what's happening in the overall market, we think it's a double-digit growth rate. Our view of the market hasn't changed and our commitment to capture greater share continues.

Okay, that's helpful. And then, on the non-GAAP number Ron, I was curious if you could elaborate a little bit more. Because I think it's been a non-GAAP number that's included, depreciation and amortization, and it looks like this quarter, the $0.25 numbers and adjusted cash EPS number, because it's taking out all non-cash expenses including depreciation, amortization. Is that a switch that started this quarter and we should expect that going forward?

Yes, that's correct, Anthony. I think now that we have turned the corner into the profitability zone, I think it's more helpful for you to see that as we are showing positive EPS, what it would be in this non-GAAP basis. So we will continue providing this presentation.

Okay. And then lastly on the 2016 where you said first-quarter 2016, as we all know, is the weakest quarter. It would be unprofitable and you said after that, profitable. Were you talking on a non-GAAP or a GAAP basis going forward after the first quarter being negative?

I was referring to GAAP in that statement.

Okay, so going forward, 2016 in the second quarter, it should be positive from a GAAP basis starting the second quarter?

That's correct.

Okay, great. All right, guys, thanks a lot. I appreciate it.

Thanks.

Brian Friedman, LF Capital.

Hey guys, how are you?

Hi, Brian.

Just a quick -- Ron, you said, I think, sales and marketing 35% estimate for 2016. Your G&A number again, looks fairly flat throughout the year ex the tax credit. What should we expect from headcount throughout the year?

We don't expect large changes in headcount, as we're really trying to leverage our whole model, other than we will continue to add sales people as opportunistically as possible as we continue to improve productivity. So on the commercial side of the business, we will continue to make investments when it makes sense.

Okay, so G&A should look fairly similar as the fourth quarter. R&D roughly similar and then savings of about 200, 300 basis points on S&M, sales and marketing, is that about correct?

That's right. That's the range that we are targeting. Similar-type level of spending for both R&D and G&A with some normal increases as the revenue grows, but not scaling with the revenue growth that we anticipate.

Great, okay. Thank you very much.

Thanks, Brian.

Zach Ajzenman, Griffin Securities.

Thanks, good afternoon. Just a question on given the macros in the markets and that translating to your customer mindset. Can you talk about, or has the sales team relayed anything in terms of the physician anxieties when it comes to making these purchases? Any color on customer psyche, given the backdrop of the macros?

Sure, that's a good question. We just had our North American sales meeting a few weeks back and that's always a good barometer of what the sales force, at least, is thinking. We've been doing this every year so I think that's the most enthusiastic team that we have seen in memory.

And I just returned from Japan and had a review of our Asian business. And going over to Europe to do that later. I feel that there's a lot of speculation about recession and things of that nature. But quite frankly, if it's a garden-variety recession, I don't think it has much of an impact on the business.

Probably the greater variable is foreign exchange in our international business. But I am actually quite encouraged by places like Australia and Japan where the macro would seemingly be more challenging. However, we have a very focused team of people and we believe that consumer interest of patient interest in these procedures is fairly resilient.

Okay, great. Turning to a question that is actually stemming from the 10-Q from Q3, there was a reference to one distributor partner who accounted for 17% of the outstanding accounts receivable balance. Can you provide some context behind that customer? And whether or not they still represent at least 10% of accounts receivable?

Yes, it's a major distributor for us that is selling very high volume. The receivable is well within its normal range, but it's just they've -- it's been a very high-volume distributor that continues to sell through the product line. But it did represent a big piece of the AR at the end of that last Q filing.

Okay. Then last one, on headcount here in North America. I may have missed it, but what's the current sales rep headcount?

I think we're still floating around the 40 direct salespeople here in North America. Again, as we said earlier, we will be opportunistic in adding in that area as our productivity continues to be very positive there.

Great, thanks, guys.

There are no further questions at this time. I would like to turn it back over to management for any closing remarks.

Thank you for participating on our call today. We will be attending many investor conferences and marketing events in the first quarter, including our attendance at the American Academy of Dermatology meeting in March, Washington DC. We look forward to updating you on our business progress on the first quarter 2016 conference call in May 2016. Good afternoon and thank you for your continued interest in Cutera.

This concludes today's conference. Thank you, you may disconnect your lines at this time.