Cutera Inc (CUTR) 2016 Q2 法說會逐字稿

Greetings and welcome to the Cutera Inc second-quarter 2016 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, you may begin.

Thanks, operator.

Welcome to Cutera's second-quarter 2016 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.

Please note that during today's call we will discuss non-GAAP measures for the statement of operations, net income, earnings per diluted share and cash generated by operations. These non-GAAP measures exclude non-cash expenses for stock-based compensation, depreciation and amortization of intangibles, as well as a nonrecurring legal settlement and associated fees.

Management believes that the adjusted financial results are more reflective of the measures of how management evaluates Cutera's results of operations and is consistent with financial metrics used by other companies to measure performance. We have included with our earnings release, a reconciliation from the GAAP results to the non-GAAP measures.

The discussion today will include forward looking statements reflecting management's current forecast for 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 financial guidance, 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, improve 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 today.

Cutera also cautions you to not place undue reliance on forward-looking statements, which speak only as of the date they were made. Cutera undertakes no obligation to update 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. With that, I'd 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 second-quarter 2016. We are pleased to report our eighth consecutive quarter of double-digit revenue growth, the highest a second-quarter revenue level in our history. Our strong financial performance has us positioned to return to sustainable annual profitability this year.

Our organic revenue growth was broad-based throughout our portfolio of our products. And we achieved meaningful productivity improvements in North America as well as several of our international markets. Our revitalized commercial team, particularly in North America, continues to gain momentum and we are excited about our opportunities for continued growth going forward.

Our North American sales team, led by Larry Laber, delivered another impressive performance by growing product revenue 55% when compared to the second quarter of 2015. Larry has aggressively recruited and assembled a first-class team of sales professionals and the year-over-year headcount growth and productivity improvements reflects his efforts and achievement. We finished the quarter with 50 field salespeople in North America as compared to 38 from a year ago. We will continue to expand our team and are also continuing to drive revenue growth.

During the second quarter 2016, 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, led by Miguel Pardos, experienced a 9% decline in product revenue year over year. This decline was primarily associated with our distributor network performance.

We continue to build out our international teams and distributor network and while performance will vary from quarter to quarter, we are well positioned for solid long-term performance. From a product perspective, we experienced strong revenue contributions from all major product lines, including our recently released enlighten and excel HR products. We are pleased with the performance of the entire portfolio of products and as we continue to grow our revenue across all product categories.

Gross margin improved from a year ago, primarily as a result of increased leverage in our manufacturing costs by increasing our revenue volume. We expect to achieve gross margin of 58% to 60% range in the third quarter and for the full-year of 2016.

Turning to research and development, innovation and technical leadership are the cornerstones of Cutera's culture and we are proud of our technical innovation incorporated in the enlighten product line. Cutera engineers have developed the first solid-state visible red laser for use in dermatology since the Ruby laser in 1962. This innovative solution will incorporate a third wavelength, 670 nanometers, resulting in greater clinical capabilities for our customers.

We believe our continued commitment to advancing our technology will provide our customers with unprecedented speed, removal of tattoo ink colors and a revitalization capability better than any device in the medical market today. We will also provide an expanded offering to better meet our customer's needs and budget requirements.

Our current enlighten product has FDA clearance for benign pigmented lesions and multi-colored tattoo removal. The newly developed enlighten 670 technology has received the CE Mark approval for the removal of benign pigmented lesions and multi-colored tattoos and is currently pending 510(k) clearance for the removal of benign pigmented lesions by the FDA.

With respect to our truSculpt technology and the growing body market, we are aggressively working on seeking expanded indications for use. In 2017 we plan to launch the significant product enhancement to our current platform, subject to FDA approval. We remain committed to advancing this technology and will provide our customers with an attractive path to allow them to upgrade their current systems to include the new capabilities.

Global market for aesthetic light and energy-based systems is growing at a steady pace and we estimate it is approaching $2 billion per year. Our broad range of products and expected market share expansion, commitment to innovation, as well as our strengthened commercial leadership team, should all serve as catalysts to fuel our growth as we look forward. Now I'd like to turn the call over to Ron to discuss our financials.

Thank you, Kevin, and thanks to all of you for joining us today on our second-quarter 2016 conference call. Second-quarter revenue was $27.5 million, up 22% when compared to the second quarter of 2015. Our year-over-year double-digit revenue growth rate during the past eight quarters validates our choices to drive growth organically, to investing internally in our commercial teams and introducing new and innovative products. The second-quarter 2016 revenue volume sets an all-time second-quarter record, which places us on track to achieve GAAP profitability with a full year of 2016.

We expect our revenue growth rate to be in excess of the overall market rate of growth for the industry and we are guiding third-quarter 2016 revenue volume to be similar to that in the second quarter of 2016. Based on our current growth projections we expect third-quarter 2016 revenue growth to grow on a year-over-year basis at approximately 20%.

Gross margin improved 118 basis points to 58.2% in the second quarter of 2016, from 57.1% in the second quarter of 2015. This was due primarily to the improved leverage from our revenue growth, as well as an improved product mix.

As Kevin mentioned earlier, gross margin improvement is a key goal for our Company to drive increased financial performance. We expect gross margin in the 58% to 60% range in the third quarter of 2016 and the same range on an annual basis in 2016.

I will now take a moment to address our operating expense results. Sales and marketing expenses, as a percent of sales, decreased to 39% in the second quarter of 2016 compared to 40% of revenue in the second quarter of 2015. We continue to aggressively invest in our commercial channels to build out our distribution network, enabling us to gain market share with above-market revenue growth rates.

We expect our sales and marketing expenses to grow moderately in absolute dollars quarter over quarter, but continue to decline as a percent of revenue as we leverage our expenses based on our anticipated revenue growth. As such, we expect our third quarter of 2016 sales and marketing expenses to be in the range of 38% to 39% of revenue.

Research and development expenses were $2.7 million in the second quarter of 2016, and the same amount in the second quarter of 2015. We remain committed to continued investments in engineering and clinical research that drive new product innovation.

We are planning to slightly increase our investments in research and development activities, as the most recent investments are providing targeted revenue growth and commensurate returns. As such, our quarterly R&D spending is anticipated to range from $2.7 million to $3 million in the coming quarters.

General and administrative expenses increased from $3 million in the second quarter of 2015 to $4 million in the second quarter of 2016. The second quarter of 2016 included a $1.2 million legal settlement and associated fees. After adjusting for this charge, our general and administrative expenses declined when compared to the previous year. We expect our quarterly general and administrative expenses to range from $3 million to $3.2 million in the third and fourth quarters of this year.

Our GAAP net loss for the quarter was $1.2 million. On a non-GAAP basis, we would have been profitable by $1 million after adjusting for the $1 million of non-cash expenses related to primarily stock-based compensation and the $1.2 million for legal settlement and associated fees. We expect a similar revenue and financial performance in the third quarter to what we just experienced in the second quarter, excluding the nonrecurring legal settlement and associated expenses.

Turning to the balance sheet and cash flow, net accounts receivable at the end of the second quarter of 2016 were $11.2 million and our DSOs were 37 days. In the future we expect our DSOs to be in the range of 35 to 40 days.

Inventories were $14.7 million at June 30. Our inventories increased from March 31 due to inventory ramp-up for expected revenue growth and our second generation enlighten product lines.

Cash from operations consumed $308,000 during the quarter after adjusting for the $1.2 million in legal settlement and associated fees. Cash generated by operations was approximately $1 million.

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 other working capital assets other than normal quarter-to-quarter fluctuations. Our cash positions remained strong and as of June 30, 2016, we held cash and investments of $43.3 million with no debt, which represented approximately $3.30 per outstanding share.

In the second quarter of 2016 we repurchased 251,000 shares for $2.6 million per our share repurchase program. We plan to continue to utilize our $10 million authorized stock buyback and will be opportunistic with repurchasing our stock.

In conclusion, we are pleased with the achievement of our continued revenue growth, gross margin improvements, leveraging of our operating expenses and our strong cash position. In the third quarter of 2016 and beyond, while there are certain unpredictable factors that may impact our global business, including unfavorable currency movements and international political headwinds, we believe we will continue to realize year-over-year improvements in our financial performance.

We expect continued healthy revenue expansion and market share gains in the remainder of the year. We further expect to leverage our operating expenses, resulting in GAAP profitability and cash generation from operations for the year remainder of 2016.

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

(Operator Instructions)

Zach Ajzenman, Griffin Securities.

Thanks, good afternoon. Nice traction there on the top line. But moving a little further below to gross margins, it seems as if compared to previous expectations for 2016, with 60% gross margin, the range seems to have been at least on the low end, lower just a bit. Now it sounds like 58% to 60% of the expectations for gross margin this year. Can you provide a little more color as to why that might be that the low end of the range is a tad bit lower than the initial guidance for the year?

Sure, Zach, this is Ron. As you know, we grew from 57.1% from a year ago to 58.2% for the current quarter. So we're still trending very favorably on the gross margin as a result of product mix and a lot of those efficient cost reductions that we made last year.

Expectations had us in a range between 58% and 60%, so we're on the lower edge of that range. But we still feel good and there are normal quarter to quarter fluctuations that occur with product mix and whatnot. But we're still feeling good between the 58% to 60% range, whether it's for Q3 or for the full-year.

Okay. And on the distribution business, understand the volatility, given especially some of the regions that you guys are exposed to, but can you give us a little better handle on the numbers? Maybe distribution as a percent of the total Company this quarter, how that compares to that historical proportion?

Sure, again, that ranges from quarter to quarter too. I think this particular quarter we were on the lighter end, somewhere around the 15% range. And other quarters it can be as high as 25%, to give you an idea. But that does move from quarter to quarter.

Okay. And then on the share count, there was a difference between the diluted shares outstanding and then non-GAAP diluted shares outstanding of 500,000 shares. Can you provide some exhalation behind that?

Yes, that would be if we were profitable, which in a non-GAAP basis, we were profitable. And then you would be adding back some additional shares in the diluted count. So it turns out to be about 500,000 shares.

Okay. And then lastly on the share count, you guys repurchased 250,000 shares or so this quarter. However, the diluted share count increased by about 600,000. So it seems like there was about 800,000 shares or so issued. Can you give us a better handle on how we should think about the outstanding share count going forward?

Yes. That is a typical count that occurs. We have an employee stock purchase plan's which has issuances. And then there's an annual merit equity grant for employees that goes out every year at this time as well. So, there's a few things. But with regard to the upcoming next two quarters, we wouldn't expend many shares -- it wouldn't be a significant amount of shares expended at this time.

All right. Thank you.

Dan Mendoza, Prospect Capital Advisors.

I've got a few questions. On the North American sales force, how many of -- I think you mentioned that there's 50, how many of them have been there for more than a year at this point?

Probably somewhere close to 40 or so.

Okay. And then trying to get a sense for what productivity is looking like for a tendered salesperson today in a short- to intermediate-term goal on that front?

We've been very pleased in terms of the ramp-up for our new salespeople. It's been at record performance levels in terms of coming up to speed quickly and it should be debt to our sales strong management leadership team. They work very closely teaching the business to the new hires. So we're seeing both a pretty dramatic expansion in terms of headcount. We plan to end this year close to 60. And we're also seeing expansion in terms of sales force productivity.

Okay. And then one on the buyback. The Company's posted a series of pretty impressive quarters and it's not really reflected in the stock price at present. With your cash flow expectations for the second half of the year and the cash on hand, what's your thought on being a little bit more aggressive with the buyback at current prices?

Well, we are accumulating at the maximum daily allowable rate, which is tied to the trading volume. So at this price level, we've been accumulating as much as we can.

Okay. And then lastly you talked about having some product enhancements in 2017, on the truSculpt front. Without giving too much away, is there anything you can share in terms of what's on offer for doctors and patients in 2017?

Well, we're currently completing an FDA submission for truSculpt to expand our indications for use. We're very limited in terms of how we can market the product here in the US and we are looking to change that.

We like the category. We see a lot of exciting opportunities for our technology and we'll be talking more about what a next-generation device will look like when we get closer to launch. But we're hopeful that has an impact on our business, assuming we are able to successfully get the FDA indication that we're looking for. It should have a positive impact on our business the first half of next year.

Great. Thanks very much.

Thank you.

(Operator Instructions)

Anthony Vendetti, Maxim Group.

Good afternoon, just a couple quick questions. End of the year I know you been ramping up the US sales force and I was wondering, what's the end-of-the-year projections for the sales force?

And you have a combination of direct and indirect internationally. What is that level at on a direct basis? And is that going to be pretty much steady or are you still looking to add some international direct salespeople?

Hi, Anthony. We ended the quarter at June 30 with about 50 field sales guys here in North America. We're targeting around the 60 range by the end of the year. But we're going to be opportunistic as the year goes on to add accordingly. On the international side, we're a mixture of direct and distributors but we've got about 25 to 30 salespeople and we'll continue to add there and be opportunistic as well, as we see fit.

Okay. And in terms of gross margin, 58% to 60% for the third quarter and the number that came this quarter was a little bit lighter than we were expecting. Is it a product mix issue? Or ASPs, a little pricing pressure in certain product categories or certain products in general? Or can you comment on the gross margin profile?

Yes. It's really more of the product mix and just fluctuations from quarter to quarter. Not seeing significant ASP resistance there, it's mostly product mix.

Okay. Kevin, you said in terms of the buyback -- or Ron -- you said that you guys are purchasing as much as you can on a daily basis at this level, based on the restrictions that are out there. Is that the intent until you get to the full $10 million under the new plan? Or is it going to be a day-to-day review as to whether or not it make sense to go ahead and do that?

We're not managing that from day to day. We have a certain threshold at which we want to accumulate as much as we can at this level certainly. The Board approved initially a $40 million repurchase and then second, a $10 million share repurchase. And we, at this time, will continue to purchase our shares.

Okay. And with the remaining cash that you have left, is there any other uses that you see for it at this point? Or is it mostly share repurchase?

The later, Anthony. As you know, we are making pretty significant investments in the business as it is. Sales force and R&D investments are at record levels. So we think what we don't need to have that much cash on the balance sheet. We think that at this price level that it's a great time to be opportunistic.

Sales and marketing was a little bit higher than we were expecting also, so is it due to the ramp in hiring direct salespeople? Or was there some additional marketing or advertising that went on this quarter?

I'd say yes and yes in general, Anthony, that we're just continuing to promote and invest in the marketplace and become better known out there and more aggressively seek market share. So it's kind of across the board.

Okay. And then lastly on truSculpt, Kevin, I know you're looking for additional indications right now. It's deep dermal heating, I guess, where are you in that FDA process? Have you applied for additional clearances? Waiting for questions? What kind of clearance are you hoping to get?

We had a meeting with the FDA to lay out what we think is the path to getting broader indications. It was a constructive discussion. We've done clinical work that we're currently in the process of assembling for a 510(k) submission.

Okay. So you're in the process of getting together info for the submission, you have already done some clinical. Can you talk about the clinicals? How many people? Or not yet?

I don't want to get into that level of detail, but we're encouraged by our findings and we hope to work very closely with the agency to secure broader indications.

Okay, great. And lastly, on updates for next year in terms of new product platforms. I noticed, like you said, you're going to increase spending in R&D. Is there a timeframe or an expectation for 2017 in terms of new product platform?

Again, I think we're very encouraged with where we believe we can go next with the truSculpt technology and also include some features and benefits that we think are going to make a big difference. And then of course, the 670 wavelength for enlighten, we think is a big deal as well. So I think those two development programs are going to have, I believe, a very positive impact on the business.

Okay, great. All right guys, thanks. Appreciate it.

Thanks, Anthony.

Larry Haimovitch, HMTC.

Good afternoon, gentlemen. Kevin, the improvements that are coming in the tattoo removal product, can you characterize them beyond what you said in the press release? Obviously it's going to add to the applicability. Is getting the red color a particularly important advancement for that technology in your mind?

It certainly is, Larry. We're working on a pretty amazing technology to remove the five most popular tattoo ink colors. And as you know, different colors of light are more effective on certain tattoo inks. So by having a three wavelength solution, we're the only ones out there that can provide the patient with better outcomes with fewer treatments. So we think this is a big deal and we also think that adoption of next-generation tattoo technology is in its infancy.

Okay. And Ron, a question for you. The sales were up nicely but the Company's still running at a significant loss. Can you discuss any updates on the level of sales we need to get to breakeven?

Well, the loss actually was a small profit once you remove the nonrecurring legal settlement and associated expenses. And then when you add back the non-cash related stock-based comp and amortization, depreciation, it gets about a $1 million profit.

Oh, okay. I didn't see that. Where is that in the income statement? The legal expenses?

The legal settlement and the associated expenses are in general and administration expenses. $1.2 million.

Oh, yes, I see it here. Okay, good. So, cash flow for the quarter was, when you net it all out -- if you just look at the operating activities, not the extraordinary expenses but the operating activity, you are cash-flow positive, correct?

That's correct. The cash flow from operations consumed about $300,000 but when you add back to $1.2 million, you get nearly $1 million of cash accretiveness.

Okay. And then one final question on the cash, a couple of other people have talked about the buyback. Do you and the Board have a certain level of cash that you want to keep a minimum of? Obviously you don't want to run all your cash down with buybacks. Where do you, as the CFO, or where does the CEO, Kevin, or the Board, start to feel uncomfortable with cash level?

Well, certainly with the Board's approval of the second repurchase program, there's comfort that getting our cash down to somewhere in the $20 million range is something that we think is more than sufficient. We haven't had a specific discussion to talk about at what point do we stop repurchasing stock. But we think this is a great time to be buying our shares.

Okay. Thanks, Kevin. Thanks, Ron.

Thanks, Larry.

Anthony Vendetti, Maxim Group.

Sorry if I missed it, what was the $1.2 million legal settlement for?

I can't disclose any of the specifics of it, but it's a one-time nonrecurring legal matter that we had where there was a settlement fee as well as there were legal expenses associated that will not continue forward.

Yes, Anthony, we are bound by a confidentiality requirement here.

Okay. I think I know which one it is now that I -- Okay, I understand. Thanks.

You're welcome. Thanks.

There are no further questions. I'd like to turn the call back over to management for closing remarks.

Thank you for participating in our call today. We will be attending many investor marketing events in the third quarter and hope to see in the coming months. We look forward to updating on our business progress in the third quarter 2016 conference call in November 2016. Good afternoon and thank you for your continued interest in Cutera.

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