Cutera Inc (CUTR) 2016 Q4 法說會逐字稿

Greetings and welcome to the Cutera fourth quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I'd 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 fourth-quarter 2016 earnings conference call. On the call today is Cutera's President and Chief Executive Officer, James Reinstein; and Executive Vice President and Chief Financial Officer, Ron Santilli. After the 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 change.

Forward looking statements include among others: statements regarding financial guidance, plans to introduce new products, expand our salesforce, 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 risk 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 7, 2016. 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 expectations. With that, I would like to turn the call over to Ron Santilli.

Thank you, John. Good afternoon, everyone, and thanks for joining us today to discuss our fourth-quarter 2016 results.

We're very pleased to report that we achieved record revenue in the fourth-quarter of 2016 of $37.9 million, which is a 26% increase from the fourth-quarter of 2015. This result marks our 10th consecutive quarter of double-digit revenue growth.

For the full year of 2016, we achieved record annual revenue of $118.1 million, which represents a 25% increase from 2015. This marks our second consecutive year of annual growth in excess of 21%.

Our organic revenue growth was broad based throughout our product portfolio, fueled primarily by our newer enlighten and Excel HR products, and secondarily by our legacy Excel V products. We achieved growth in both North American and international markets, with primary strength in the North American territory.

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

Our North American sales team led by Larry Laber delivered another impressive revenue achievement by growing product revenue 45% for the fourth-quarter and full-year of 2016 when compared to the same period in 2015. Our North American revenue has more than doubled in the last two years. Larry has aggressively recruited and assembled a first class team of sales professionals, and this year-over-year headcount growth and productivity improvements reflect his efforts and achievement.

We finished the year with 58 field sales people in North American as compared to 40 from a year ago. We plan to continue investing in this market, and project that we will have approximately 70 field people in this territory by December 31, 2017.

Further, we plan to closely monitor the revenue and productivity improvements of our sales teams and will continue to expand our team to drive revenue growth in 2017. During the fourth-quarter of 2016, core physicians in North America accounted for approximately 50% of our orders, with the balance of the order received primarily from family practice docs.

Our sales teams serving international markets, led by Miguel Pardos, grew product revenue 8% for the fourth-quarter of 2016 and 11% for the full-year of 2016 when compared to the same periods in 2015. We had strong revenue growth from our global distributor network, solid contributions from our direct operations in Japan and Australia, which were partially offset by some challenges in our European direct business.

We are extremely pleased to have generated $4.2 million of GAAP profit, over $5 million of EBITDA, and $4.7 million of cash from operations in the quarter. As a result, we were GAAP profitable and generated cash from operations for the full year of 2016.

This performance illustrates the leverage in our business model, which enabled us to achieve our goal of revenue growth and GAAP profitability in the full year of 2016. We are pleased with our overall financial trajectory, and I'm confident we will continue our growth in 2017.

Turning to research and development, innovation and technological leadership are the cornerstones of Cutera's culture and we're proud of many years of technical innovation incorporated in all of our products.

Our most recent product investments include the following. In December 2016, we launched our enlighten III system, which combines both Pico and nanosecond technology that enables our customers to perform best-in-class tattoo removal and skin revitalization procedures. The high energy system now has a third true red 670 nanometer wavelength, providing the most efficacious treatments in the fastest time compared to other devices on the market.

In November 2016, we received our FDA clearance for benign pigmented lesions on our enlighten III system. The enlighten system is cleared for multi-colored tattoo removal. We will continue investing in our enlighten platform, and plan to pursue additional clearances in the future to increase the utility of the enlighten platform to our customers and increase their return on investment.

Also in December 2016, we received a 510K clearance from the FDA for our truSculpt system for circumferential reduction. This clearance allows us to now market truSculpt for the temporary reduction in circumference of the abdomen which enables us to actively participate in the fast growing body sculpting market.

We plan to continue to invest in this platform in 2017 by extending it and adding a consumable element to the revenue stream. We also expect to gather additional clinical data and support from key luminaries in the industry.

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 innovation rolls out into commercial launch. The global market for aesthetic light and energy-based systems is growing at a steady pace, and we estimate is in excess of $2 billion per year. Our broad range of products, expected market share expansion, commitment to innovation and strengthened commercial teams should all serve as catalysts to continue to fuel our growth as we look forward.

As you likely saw from our recent announcement, the Board appointed James Reinstein as our new President and CEO. I am please to have James on board, and look forward to working with him in the future. I will now turn the call over to James.

Thank you, Ron. Actually, I would like to start by expressing my sincere appreciation for the job done by Ron over the past six months. He stepped in as the interim CEO while maintaining his CFO duties, and the Company never missed a beat. In fact, it was quite the contrary, and exemplified by the results you are hearing about today. In addition, Ron has demonstrated himself to be a true partner to me as I transition into the Company, and for this I'm truly grateful.

As I stated before, I'm absolutely thrilled to be joining Cutera at this very critical time in the Company's evolution. I come from the medical device space, having worked for Boston Scientific for over 17 years in multiple functions and geographies. Actually, most of my career at BFC were spent on three different ex-pat assignments starting in a pan European role based in the European headquarters in Paris, then moving to my first GM role in the Latin American region based in Mexico City, and finally spending over three years in Asia leading a region inclusive of all the BFC divisions.

I left Boston Scientific for Cyberonics which I believe represents a close analog to the current Cutera story, with a couple of key differences. At Cyberonics, we had a turnaround company to get to the revenue and earnings on track. The difference at Cutera is the commercial teams have already achieved exceptional growth in revenue, and we now need to continue with that momentum and leverage that growth in to a compelling earnings story.

I believe there's plenty of runway for Cutera to grow North American revenue, with continued focus on execution and improving rep productivity. But there's further growth to be achieved by expanding the North American sales team.

As Ron mentioned, Larry Laber has created a very impressive process to recruit and on board new reps and making them earnings positive in a shorter timeframe. The combination of improved field execution and sales team expansion will allow for continued growth in the coming years. Bottom line is that we will focus on execution and US salesforce expansion.

I also believe we have the opportunity to build on our growth in the international markets. I have built sales teams, created and led multi-national distributor networks throughout the world in multiple types of businesses. I'm sure we can find untapped opportunities in several markets we currently serve, as well as expand into other geographies.

Certainly, these are early days for me and I will expand upon my plans when we hold an analyst day on June 14, which will coincide with our annual shareholder meeting. But for now, I want to give you my assessment of how I see the story unfolding across three distinct areas, revenue growth, leverage, and earnings.

Number one is about revenue, and the star of the show is our superior technology and we will continue to feed into the other star which is the North American sales machine. We will continue to execute, as you've witnessed over the past two years, and we will continue to grow the team through the same processes that got us from around 40 reps in 2015 to the nearly 60 at the end of 2016.

Further on revenue, I fully expect to improve the results seen thus far in our international markets. The growth rates have been decent, but I'm not here to deliver decent growth, particularly from the size of the base. I have literally lived, worked, in every important geography around the world, and I know what it takes to build global teams through a variety of direct, distributor, and hybrid commercial models. I'm confident that the Cutera story going forward will include far more success in current and new geographies.

So the first chapter is about revenue and the second chapter is about leveraging that growth into meaningful earnings which will be the true measure of our success. We are focused on all elements to improve our earnings which involve our operations Vice President, Bernie Schneider, who is pooling millions of dollars out of our production materials expense with his strategic management of our supply chain.

Also, Lukas Hunziker, VP of R&D, is creating efficiencies in our product development process that will take costs out of the process while at the same time bringing the voice of customer VOC into the process much earlier. And finally, we will continue to focus on our sales and marketing expenses which have declined significantly as a percentage of revenue.

The third chapter of the new Cutera story is how we will manage our share count through an enhanced repurchase program. As you may have seen in our filing, the Board authorized up to $10 million for the repurchase of shares with the sole purpose to maintain a share count of approximately 14 million. This will give clear visibility of how well we leverage our growth and create a meaningful EPS measurement.

I should also point out that we have a fair amount of runway with carry-forward losses that excludes us from paying tax on USA earnings for some time. We're studying the impact of this asset, and will give clearer guidance on timing of taxes, but we know that we will not have a US tax burden on earnings in 2017 nor in 2018.

I look forward to giving more detail on these and other initiatives in June, but I expect to be measured across these three areas. Revenue growth with the quality of our technology and global commercial execution, our ability to leverage that revenue growth into earnings which you can translate into an EPS based on a consistent share count of approximately 14 million.

So for obvious reasons, I'm thrilled to be leading the Cutera team at this important juncture. It is a great team working extremely hard to make this a great company that will lead in the aesthetics market. I will now turn the call over to Ron to continue his financial review, and to provide financial guidance for 2017.

Thanks, James. As I had stated earlier, we had an impressive fourth-quarter revenue of $37.9 million and full-year 2016 revenue of $118.1 million. We expect revenue in the first-quarter of 2017 to be in the range of $26 million to $27 million, and for the full-year in 2017 to be in the range of $135 million to $140 million.

Gross margin was 58% in the fourth quarter, and was lower than expected due primarily to the following reasons. One, higher than expected initial costs of our enlighten III platform, which are expected to decline as we implement initiatives to drive down costs in the manufacturing process.

Two, key opinion leader transactions to build reference sites. This quarter, we experienced lower selling prices for our enlighten III product as we see the key markets with discounted key opinion leader units in order to build a solid reference base for future revenue growth. We believe that we have [seen] the key markets adequately and therefore expect to see improving forward selling prices.

And three, slightly lower ASPs resulting from product bundling transactions as we continue to grow our revenue. We expect gross margin to be in the range of 57% to 60% in 2017, starting at the lower end of this range in the first quarter and increasing steadily throughout the year as we increase our revenue volume and achieve manufacturing cost reduction.

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 31% in the fourth-quarter of 2016 compared to 33% of revenue in the fourth-quarter of 2015. We finished the full-year of 2016 at 35% of revenue, an expense level that favorably exceeded our expectations.

We will 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 sales and marketing expenses to be approximately 38% of revenue in the first-quarter of 2017, which includes higher seasonal expenses for our annual sales meeting and American Academy of Dermatology and ASLMS trade show meetings. And it should decrease steadily throughout the year as our revenue grows, resulting in approximately 35% to 36% of revenue for the full-year of 2017.

Research and development expenses were $2.9 million in the fourth-quarter of 2016. We remain committed to investing in engineering and clinical research that drive new product innovation and support our clinical superiority.

We're planning to moderately increase our investments in research and development activities as the most recent investments are providing targeted revenue growth and commensurate returns. As such, we plan to spend in R&D in the range of $3 million to $3.2 million in each quarter in 2017.

General and administrative expenses decreased from $3.2 million in the fourth-quarter of 2015 to $3 million in the fourth-quarter of 2016. We expect our quarterly general and administrative expenses to range from $3 million to $3.3 million in each quarter in 2017.

Interest and other loss net was $204,000 in the fourth-quarter of 2016. This included approximately $350,000 of foreign exchange losses, resulting from revaluing our foreign net assets from a strengthening US dollar, which was partially offset by interest income of $94,000.

We are very pleased to report that our GAAP net income for the quarter was $4.2 million or $0.30 per share. We achieved our goal of profitability for the quarter and the full-year of 2016. We expect to increase our profitability in 2017, given our revenue growth projections and continued leverage in our model.

We expect EPS guidance of $0.06 to $0.08 loss for the first quarter, given the seasonality of our business, and earnings per share of $0.45 to $0.50 per share for the full-year of 2017. Note that as of the end of 2016, we had approximately $42 million of US net operating loss carry forwards for federal income tax purposes. While we may be subject to limitations, we do not anticipate paying US tax in the next two to three years other than the minimum US and international taxes we are currently paying.

Turning to the balance sheet and cash flow. Net accounts receivable at the end of the fourth-quarter of 2016 were $16.5 million and our DSOs were 40 days. In 2017, we expect our DSOs to be in the 35 to 40 day range.

Inventories were $15 million at December 31, 2016. In the fourth quarter, our inventories decreased by $1.5 million from September 30, 2016 due to record revenue shipments and our inventory turns were over 4; 4 times costs. Cash and operations generated $4.7 million for the quarter. We expect to be cash flow positive in future quarters, as we continue to leverage our revenue growth, and we don't expect any significant changes in other working capital other than normal quarter-to-quarter fluctuation.

Our cash position remains strong, and as of December 31, 2016, we held cash and investments of $54.1 million with no debt, which represented nearly $4 per outstanding share. As a reminder, in the last two years, we invested total of approximately $45 million to repurchase 3.3 million shares of our stock at an average price of $13.70. We remain confident in our outlook, and in 2017 we plan to repurchase shares to a level that will result in fully diluted weighted average share counts at approximately 14 million shares for 2017.

In conclusion, we are pleased with the achievement of our 10 consecutive quarters of double-digit revenue growth, with the past two years at 21% plus growth. Achievement of substantial profitability and cash generation from operations and our strong cash position.

For 2017 and beyond, while there are certain unpredictable factors that may impact our global business, including unfavorable currency movements and domestic and international macro economic 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 2017.

We further expect to sustain annual GAAP profitability, and continue generating cash from operations. I'd like to now open up the call to your questions. Operator?

Thank you, at this time we'll be conducting a question-and-answer session.

(Operator Instructions)

Our first question comes from Zack Ajzenman from Griffin Securities. Please go ahead.

Thanks, good afternoon, and welcome aboard, James.

Thank you.

I'll start with the most germane news to the space today, that is Allergan's acquisition of Zeltiq. Would love to hear your thoughts in general there.

And it's no secret that fat reduction has been the most popular category in terms of growth in the space. In your view, does this broader indication for truSculpt give Cutera enough to market a product head on in the non-invasive fat reduction market, or will even broader indications be necessary?

Thanks for the question, and this is James. The space has obviously been attractive for some time, there's been some consolidation and that will probably continue. As evidenced by a leading competitor in the space being acquired or the announcement of the acquisition.

With regards to sculpting, the truSculpt indication, I think it's positive news for us. TruSculpt itself is already our fastest growing segment, our fastest growing product line. So we're really pleased with this space, and we're encouraged that Allergan believes that it's a $4 billion market which we would concur. It's a large market, and it's also the fastest growing market and it's also, like I said, the fastest growing segment for Cutera.

Okay. And sticking with truSculpt, how should we think about some of early marketing efforts and dollars that will be used to market truSculpt's broader capabilities? And will there be a specialty salesforce marketing the product?

No, we won't add to -- we won't have a specific salesforce for truSculpt. We think that within the current team in North America as well as international that we can hit the customer base with that group.

With regards to marketing effort, we certainly will be featuring it at the AADD, The American Academy of Dermatology coming up in just a few weeks. And we will also put some marketing effort or clinical study effort behind so we can expand upon our claims, as well as demonstrate its superior ability when it comes to body sculpting.

Okay. And last one for me here, appreciate the color on the 2017 outlook and the numbers certainly look strong. But just curious why the gross margin level wouldn't be higher given the improved scale and these short-term pressures related to KOL placement and initial cost of enlighten III ramp presumably alleviating?

Yes, that's a good question, Zack. Let me first remind us that for the last three years, we've continued to grow gross margin from 56% in 2014 to 57% in 2015, and now 58 % in 2016. So the trend of our gross margin line has been good.

However, we've been always trying to get to that 60% plus level. And in the fourth quarter, we experienced the unusual or start-up manufacturing costs for our enlighten III product as well as seating those lasers in to key opinion leaders' hands before future reference sites and further growth of business.

In addition, we're continuing to see, as part of our revenue growth, an increased level of bundling that also has an affect on ASPs. So we see some level of erosion, although it's coming with revenue growth.

So from that perspective, we still are expecting gross margin growth from the -- we've seen it for the last three years, and we expect it in the future. It just may not be as high as what you had originally planned.

Got it. Thank you.

Thanks, Zack.

(Operator Instructions)

Our next question comes from Larry Haimovitch from HMTC. Please go ahead.

Good afternoon, gentlemen, and, James, welcome aboard.

Hello, Larry.

Thanks, Larry.

Ron, a quick question for you. Cash flow, what was the total cash flow, positive cash flow, for 2016 and what's your projection for 2017?

For 2016, I think from operations we had generated about $2 million for the year. And for 2017, that number should grow north of $10 million for just the year.

Okay, great. Question on the tattoo removal. I know this has been a very important product for you in the last several quarters, and I know you've enhanced the technology with the new improvements recently.

That market has become very competitive. Could you provide any color, I understand there's about six or seven players in the market, give us some color on the competitive landscape and how you guys are faring given that it is seemingly private market at this point?

Yes, I think there's a lot of competitors, not all with FDA approval, so there's certainly more outside the US than we see inside the US. And inside the US, I will say that it's very competitive. But I think our product has been as demonstrated it's critical efficacy pretty well.

We've got our key luminaries on board, and we've been able to actually grow that line even with the competition out there. So from that perspective, bringing out enlighten III we think was actually a very positive thing, adding that third wavelength and adding PicoGenesis to the product as well. So we will continue to enhance the product just to keep high value in it.

It was not your fastest growing product line in the last 12 months, so it sounds like you mentioned another product was or product line was.

Well, it was a very fast growing product line. I'd say both -- really our whole product portfolio has been growing. So the first, second and third place don't change much. Enlighten is up there, just as is truSculpt.

Okay. And then one more, and I'll jump back in queue. And that's a question on truSculpt, you really titillated my interest when you mentioned the idea of some sort of consumable for truSculpt. As you know, you have not had that, as you well know, Zeltiq has had that for several years and it's been one of the keys to their success. Is there anything you can share with us about the consumable developments for truSculpt?

Not at this time, other than we certainly plan to invest in the product platform and expand it. And we expect to be adding the consumable elements back to it by the end of this year as well.

Those specifics we'll come out with more as we get closer, but that's clearly our intent that we see the growth in that -- in the body sculpting market. And as James had mentioned earlier, it's one of our key growing products when you look at it year over year.

We believe that market is there, so we're going to be investing further into ours. Not only in extending the platform, but establishing the clinical efficacy of proven results so that we can play at a higher level.

Thanks, guys. I'll jump back in the queue.

Thanks.

Thanks, Larry.

Our next question comes from Anthony Vendetti from Maxim Group. Please go ahead.

Thanks. Just in terms of the ASPs and bundling, I know some of your competitors that have already announced. Results have said that bundling this quarter in particular was higher than average.

I was just wondering, are you bundling more of your products this quarter than in the past, if so, what percent of your products -- product sales this quarter were bundled? And then if you could talk just a little bit about ASPs across the product portfolio, or has there been any pricing pressure on a particular product category?

Yes, this is Ron, Anthony. I think in general, the ASPs have been holding pretty firm. But I think you bring up a good point on the bundling side which does allow for an avenue of discounting, but it's also contributing to the revenue growth.

And we saw in the quarter about 21 % of our units in North America were included as a bundled sale, and that number is only -- has been trending upwards from us. A year ago, the number was very small, but in the current quarter it was actually, as I mentioned, 21%. So we're continuing to see more and more growth there, which comes with some discounting. But outside of the bundling transactions, the ASPs seem to be holding pretty well.

We think the upside of being able to bundle outweighs the pressure on the ASPs that we haven't seen to be as significant.

Okay. And then just in terms of seeking additional clearances for truSculpt. We noticed you had that clearance at the end of the year for temporary circumferential reduction.

Can you talk a little bit about what additional clearances you're trying to get? And can you get additional clearances you believe for truSculpt the way it's currently configured, or does the product need an upgrade to get additional clearance?

So we think the clearance we have now allows us to compete and talk about fat in the market. What we also need to do in conjunction with that is build upon a clinical story, and really come out with the demonstrated clinical benefit of truSculpt versus the other platforms that we're competing against. As well as we iterate upon the product and come out on the next version of it, that will certainly build a lot of features, benefits, but also a much better clinical performance.

Okay. And then, and then in terms of -- any other new product platforms in the pipeline or planned for 2017 or is it building on the current portfolio?

Well, we're going to build upon the enlighten. Basically the enlighten III was released in a very limited market fashion in December of 2016. So we will build upon that, certainly have it as a significant part of our launch at the AAD here in a couple of weeks. And then building upon the indication we got for truSculpt, and then at the end of the year launching the next version of truSculpt 2.0.

Okay. And then, lastly, on DTC, James, I know obviously some of your competitors spending a lot, $25 million, $30 million plus, others maybe $6 million -- maybe $4 million to $6 million. What's your plan to get the word out there about some of Cutera's products, raise the profile? Because obviously in terms of revenues, you're much smaller on a magnitude basis than some of your competitors.

Yes, I think there's certainly some opportunity for us to enhance how we are marketing our products to consumers, as well as how we're developing physician practices. I have experience in doing both, and certainly will bring that experience to the Company and build upon what they've started.

Really, if you look at the messaging in the last six months has significantly improved, and I think it's just a better opportunity to do so. As far as the spend, I think we're going to be fairly consistent with our sales and marketing spend of the past as a percentage of revenue.

Okay, great. Thank you.

Thanks, Anthony.

Our next question comes from Zack Ajzenman from Griffin Securities. Please go ahead.

Thanks for the follow up. Just one here. Can you remind us what percentage of enlighten's install base is expected to upgrade to enlighten III over time? And on that note, how do you view or asses the current penetration rate for enlighten's addressable market in the US?

In terms of your -- the first part of the question of what percent do we expect to upgrade, I don't have an exact number of that. But I think we'd expect a fair amount of them, a fairly high percentage, because I think that third wavelength has real value to their practice. So we would expect over time to see a substantial amount of the install base add the enlighten III.

In terms of how we see that business being penetrated, I think looking at the Picosecond technology, it's not at tattoo removal, but revitalization and other things. The platform will -- can ultimately be used for many different treatment forms for the physician to use and make money, and that's the investment. So from that perspective, we believe it's very low in penetration levels at this time.

Okay, thanks.

Thanks, Zack.

Thank you. This does conclude the question-and-answer portion. I'd like to turn the floor over back to Mr. Reinstein for any closing comments.

Thank you very much, and also thanks all for participating in our call today. We will be presenting at various investor conferences, and we'll also be attending the American Academy of Dermatology meeting in early March.

We look forward to updating you on our business progress on the first quarter of 2017 at our conference call in May. And also, to reiterate, we will be having an investor analyst day on June 14 of this year. Good afternoon, and thank you for your continued interest in Cutera.

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