Cutera Inc (CUTR) 2016 Q3 法說會逐字稿

Greetings and welcome to the Cutera Inc. third-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is in recorded.

I would now like to turn the conference over to your host, Mr. John Mills of ICR. Thank you, Mr. Mills you may begin.

Thanks, operator. Welcome to Cutera's third-quarter 2016 earnings conference call. On the call today is Cutera's Interim Chief Executive Officer and Chief Financial Officer, Ron Santilli. After Ron'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. Forward-looking statements include, among others, statements regarding financial guidance, plans introduced 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 Securities and Exchange Commission 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 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.

With that I'd like to turn the call over to Ron.

Thank you, John. Good afternoon everyone and thanks for joining today to discuss our third-quarter 2016 results. I am pleased to report that we exceeded the pre-announced preliminary results reported on October 11. We achieved revenue in the third quarter of 2016 of $30.3 million which is a 31% increase from the third quarter of 2015. This revenue represents a record third-quarter and the second highest quarterly revenue in our history.

This result also marks our 9th consecutive quarter of double-digit revenue growth. We are happy to report that are gross margin improved sequentially as well as year-over-year and am particularly excited about our return to GAAP profitability which illustrates the leverage in our business model.

Our financial performance in the third-quarter, and overall financial trajectory, has us on track with our previously stated goals of strong revenue growth and GAAP profitability for the full-year of 2016. Our organic revenue growth was broad-based throughout our product portfolio and we achieved significant productivity improvements in both of our regional markets in North America and the rest of the world.

The management changes we implemented in hiring industry experienced veterans to lead our commercial teams have paid off as it is reflected in our revenue improvements over the past two years. We remain optimistic about our opportunities for continued long-term growth.

Our sales team and the rest of the world region led by Miguel Pardos delivered an impressive 52% increase in product revenue year over year driven by a well-balanced growth in the Asia-Pacific region as well as with our European distributors. In particular, we achieved strong growth in our Japanese and Australia direct operations.

Foreign currency changes with the Japanese Yen moved favorably when compared to the third-quarter 2015, resulting in a favorable revenue impact of approximately $600,000 when measured in constant currency. We had no other meaningful changes in other foreign currencies.

Our North American sales team led by Larry Laber also delivered yet another impressive revenue achievement by growing product revenue 28% when compared to the same period last year. For the first nine months of this year, North America product grew by 44%, compared to the same period last year.

Larry has aggressively recruited and assembled a first-class team of sales professionals and the year-over-year head count growth and productivity improvements reflect his efforts and achievement. We finished the quarter with 56 field salespeople in North America as compared to 42 one year ago.

And seeing the market opportunities in North America as well as the productivity improvements experienced over the past two years under the leadership of Larry, we plan to continue investing in this market and project that we will have approximately 60 field salespeople in this territory by December 31, 2016. Further, we plan to closely monitor the revenue and productivity improvements of our sales teams and will continue to expand on our team to drive revenue growth in 2017.

During the third quarter 2016, core physicians in North America accounted for approximately 55% of our orders with the balance of the orders received primarily from family practice docs. From a specific product perspective, we are pleased with the performance of our entire product portfolio as we continue to grow our revenue across all of our categories. In the current quarter we experienced strong revenue growth, from not only our recently released enlighten and excel HR products but also from our legacy xeo, excel V, and truSculpt platforms.

Turning to research and development, innovation and technological leadership are the cornerstones of Cutera's culture and we are proud of the many years of technical innovation incorporated in all of our products including enlighten. We are planning to continue investing in the enlighten platform and our current product extensions include the following.

We recently launched our PicoGenesis application enabling our customers to perform skin revitalization procedures utilizing our high-energy system providing an effective treatment in the fastest time. And, we just recently received a 510(k) clearance from the FDA for our third wavelength a true red 670 nanometer for benign pigmented lesions that will allow for greater clinical capabilities for our customers.

We plan to launch our three wavelength enlighten 3 platform at the end of this quarter. We're in the process of finalizing this launch plan but do not expect it to have a meaningful impact on the fourth quarter shipments. We believe this new product will be the best in class, three wavelength laser in the market, that will allow our customers the ability to remove all tattoo ink colors and provide PicoGenesis skin revitalization with improved efficacy and faster treatment than any other system in the market.

Lastly, as mentioned in our second-quarter conference call, we are planning to increase our investment in our truSculpt platform to enable us to more aggressively compete in the body sculpting market. We currently have a pending FDA submission for a circumferential reduction clearance and plan to make some exciting product line enhancements in 2017, subject to FDA approval, that will include adding a consumable revenue stream.

We believe that our enhanced version of truSculpt for circumferential reduction will offer compelling advantages in terms of efficacy and return on investment for the practitioner when compared to existing offerings for body contouring in the marketplace today. Recall that truSculpt is based on a proprietary RF technology which we believe is best suited her body contouring as it selectively targets fat cells and will ford as a meaningful cost advantage.

Overall we expect 2017 to be a busy year for us and we look forward to updating you on future calls as our exciting pipeline of product innovations rolls out into commercial launch. The global market for aesthetic light and energy-based systems is growing at a steady pace and we estimate it at approximately $2 billion per year. Our broad range of products, expected market share expansion, the commitment to innovation, as well as our strengthened commercial leadership teams, should all serve as catalysts to fuel our growth as we look forward.

As mentioned in August of this year our board has commenced a search for a permanent CEO. The naming of a permanent CEO is expected to be completed by the end of the calendar year.

Turning to our financial performance, as I stated earlier we had an impressive third-quarter revenue of $30.3 million, we expect our revenue growth rate to continue to be in excess of the overall market rate of growth for the industry and we are guiding the fourth quarter 2016 revenue to be approximately $36 million or 20% growth compared to a very strong fourth quarter 2015. We further expect to grow our revenue in 2017 to be within the range of our recent growth rates and expect to be GAAP profitable and cash accretive for the full-year 2017. We will provide more specific guidance on 2017 during our fourth quarter earnings call in February of 2017.

Gross margin increased slightly from 58% in the third quarter 2015 to 59% in the third quarter of 2016. This was due primarily to our ASP's remaining firm as well as improved leverage in our revenue growth. Gross margin improvement is a key goal for our Company to drive increased financial performance.

We expect gross margin to further improve in the fourth quarter to approximately 60%. For 2017, due to the seasonality of our revenue during the quarters, we expect to be able to continue improving our gross margin modestly on a year-over-year basis.

I will now address our operating expense results where we experienced significant leverage in our performance. Sales and marketing expenses, as a percent of sales, decreased to 35% in the third quarter of 2016 compared to 38% of revenue in the third 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 fourth quarter 2016 sales and marketing expenses be in the range of 34% to 35% of revenue.

Research and development expenses were $2.9 million in the third quarter of 2016. 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 R&D spend is anticipated to be in the range of $2.8 million to $3.2 million in the fourth quarter and in 2017. General and administrative expenses decreased from $2.9 million in the third quarter 2015 to $2.7 million in the third quarter of 2016. We expect our quarterly general and administrative expenses to range from $3 million to $3.2 million in the future quarters.

And now, the best part, our GAAP net income for the quarter was $1.6 million or $0.12 per share. We're pleased to have executed our plans to achieve profitability for the quarter and expect to achieve GAAP profitability for the full-year of 2016 as well. We also expect to be profitable in 2017 given our revenue growth projections and continue to leverage in our model.

Turning to the balance sheet and cash flow, net accounts receivable at the end of the second-quarter of 2016 were $11.7 million and our DSOs were 35 days. In the future we expect our DSOs to be in the 35 to 40 day range. Inventories were $16.5 million on September 30, our inventories increased from June 30 due to the ramp up for expected revenue growth and the plan launch of our enlighten 3.

Cash from operations generated over $1.6 million for the quarter. We expect to be cash flow positive in future quarters as we continue to leverage our revenue growth and we do not expect any significant changes in other working capital assets other than normal quarter to quarter fluctuations. Our cash position remains strong and as of September 30, 2016 we held cash and investments of $46.4 million with no debt, which represented approximately $3.50 per outstanding share.

In the third quarter of 2016, we repurchased approximately 176,000 shares for $1.9 million. We have approximately $5.1 million in our authorized $10 million share repurchase program and plan to be opportunistic with repurchasing our stock.

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

We expect continued, healthy year-over-year revenue expansion, and market share gains in the fourth quarter of 2016 and into 2017. We further expect to sustain our annual GAAP Profitability and continue generating cash from operations.

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

(Operator Instructions)

Anthony Vendetti of Maxim Group

Thank you. I'm wondering if you could get into a little more detail on truSculpt, you mentioned you expect to have a new consumable component to it and you are seeking FDA clearance, 510(k) clearance, for circumferential reduction. I was wondering if you could tell us whether -- any change to the product? Is it an upgrade to the product or is it just a trial that you are submitting for the circumferential reduction clearance? And that if you could give us a little more detail on what the consumable will look like or how much it will cost or any detail around that would be helpful. Thanks.

Sure. Clearly, increasing our presence in the body sculpting market is a priority of ours, and the truSculpt product has been and is a good product. As RF technology targets the fat, so we have always believed in that but we have not had the appropriate commercial indication or clearance to aggressively market it. So the reason we have conducted the studies that we have recently done and the application that we submitted is to get us to aggressively participate in that.

In addition to the current product, we want to enhance it. We've got some exciting things that we will add in 2017 and we will talk more then as we get closer, but with that, with the enhancements we will also add a consumable model to the product. So again, we will talk more in 2017 as we get closer but those are the general feelings and the direction that we are headed into the body market.

Okay, then in terms of, with enlighten, there seems to be a lot of competition there, we heard there is price competition in the Picosecond technology space, I was just wondering whether you are seeing any ASP erosion with enlighten or any of your other products right at this point?

We have always had heavy competition out there but our ASPs are continuing to hold firm as indicated in our trending upward gross margins. We are seeing a pretty good situation out there for ASPs.

Okay, in terms of international it sounds like you had a really nice bounce back quarter there. Up 52%, was that APAC or international product revenue total?

That would be all of the international or rest of world, we should say, everything but North America and Canada.

Okay, great. Then, lastly on the sales you said you ended the quarter with 56, what was the goal by the end of the year.

60, six zero, by the end of the year.

And then on product bundling, some of the companies in this space are seeing more of that, did you see more of that this quarter than you did last quarter, less of that, is that part of the strategy going forward or not really?

We are just continuing to see more and more multi-unit sales and that is probably due to the multiple platforms that we have focused on the hair removal, the tattoo, skin revitalization, of course our multi-application, multi-technology xeo product and then truSculpt. So, we have got such a wide array of products that with our more aggressive and more salesforce we tend to just see more bundled systems, so that certainly is part of our long-term strategy as well.

Okay and then just lastly, on new product platforms is there anything planned for 2017 in terms of the new product platform other than stuff that you have mentioned in terms of consumable and new clearances for truSculpt?

We have not mentioned anything about a new platform yet other than our focus on enlighten and truSculpt in 2017.

Okay. Great. Thanks.

Thanks Anthony.

(Operator Instructions)

Zack Ajzenman of Griffin Securities

Hi. Thanks, good afternoon Ron.

Hi Zack.

Question on enlighten 3, which sounds like it is going to launch towards the end of this year, is that going to be a global launch or just here in North America?

We will probably start close to home to begin with and then ultimately, in 2017, we will be expanding it outside the US.

Okay. In the first half of the year the international product --

Zack? Not hearing you very well, Zack.

Sorry can you hear me now?

Is that much better.

First half of the year, the international product business seemed to drag a bit, it was down mid-single digits through the first half of the year. I believe a part of that declined or a meaningful part of that decline had to do with the distribution business. Can you give us a little more insight into what the distribution business did here in Q3?

Sure, the distribution business can be lumpy or can fluctuate from quarter to quarter. If you look at the rest of the world business on a nine-month year-to-date basis and you compare 2016 to 2015, our rest of world business is up about 12%. So we are pleased with that but we also understand that there can be some fluctuations from quarter to quarter. Keep in mind, half of our international business or rest of world business is direct and the half is coming through distributor network.

Got you. And a question on enlighten, I am curious as to what percent of enlighten buyers currently or this past quarter are dermatologists?

You know, originally when we launched the product we really thought enlighten, with its price point and its premier capability was going to be primarily targeted to derms and plastics, the core market. But the fact of the matter is, in terms of our current sales volume level it is the same group of, the same breakdown as our general core, non-core, roughly 50/50 between core and non-core. So we see a lot of non-core that is primarily family practitioners that are buying into the enlighten product as well.

Interesting. Okay, great. Thanks a lot.

Brian Freckmann of LS Capital.

Hey, guys congratulations on the quarter.

Hey Brian.

Just a quick question on you outlook on the fourth quarter, can you maybe get a little more granule about -- obviously, within that $36 million, should we be looking at the ratios that we had last year of percent of products to other and North America to international and apply those to that same $36 million or is there anything specific that you should call out that might be different?

I don't see anything different that is changing from any of the current trends that we're seeing today, Brian.

Okay. Then, that just a question, what is your expectation potentially on the headcount next year? I know you said about 60 this year, but I'm just trying to get a sense of what that might be in 2017.

We haven't talked about 2017 yet, we will on the next conference call. We do believe it will obviously go up and we are still seeing nice performance in productivity as well as growth in the marketplace. But we are selective in how we are adding out there, but we definitely expect to continue adding salespeople and to continue to grow the productivity levels.

Okay. Then finally just as you think about getting -- I think your indication was just right below 60% margins in the fourth quarter. As you look at that, what is the variation between product lines? Is there a range you could think about, as you think about what products have you sold in the quarter. Is there any variability? Was it 59% to 61% or how do you think about that?

That's a good question. There always is a range because we have not only product variation with different margins but we have direct versus indirect distribution which has different margins. And I think our range probably is as you just mentioned, in between the 59%, 61%, I just call it the approximately 60% just to make it a little simpler for the analysts and other people modeling. But you're right, the range is probably more into the 59% to 61% range depending on how the product mix and distribution mix comes in for the quarter.

Okay. You said you guys would provide some form of a full-year 2017 guidance after the fourth quarter call, is that correct?

That is correct. We'll be prepared at that point to talk more about 2017.

Good, all right guys. Thank you congratulations.

Thanks, Brian.

Ladies and gentlemen we have reached the end of our question-and-answer session. I would now like to turn the call back to Mr. Ron Santilli for closing remarks.

Thank you, we will be attending some investor marketing events in the fourth quarter and hope to see you the coming months. And look forward to updating you on our business progress on the fourth quarter 2016 conference call in February of 2017. 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.