Cutera Inc (CUTR) 2017 Q1 法說會逐字稿

Greetings, and welcome to Cutera, Inc., First Quarter 2017 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 today, Mr. John Mills with Investor Relations Incorporated. Thank you, Mr. Mills. You may begin.

Thanks, operator. Welcome to Cutera's First Quarter 2017 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, expansion of sales force, ability to increase revenue, reduce expenses, improve financial results, make productivity improvements, grow 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 May 1, 2017. 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 will turn the call over to James.

Thank you, John. Good afternoon, everyone, and thanks for joining us today to discuss our first quarter 2017 results.

We are very pleased to report that we exceeded our revenue guidance and achieved record first quarter revenue and significantly improved profitability. Our first quarter 2017 revenue was $29.3 million, which is a 31% increase from the first quarter of 2016. This result marks our 11th consecutive quarter of double-digit revenue growth and is actually our fifth-highest quarterly revenue performance in the history of the company.

The organic revenue growth was broad based throughout our product portfolio and driven primarily by both our newer enlighten and legacy xeo products. We achieved double-digit growth in North America and international markets with particular strength in the United States.

Our North American sales team, led by Larry Laber, delivered another impressive quarter with product revenue growth of 60% compared to the same period of 2016. We continue to see productivity improvements within our field sales team, helping fuel the overall revenue growth. We finished the quarter with 54 salespeople in North America compared to 58 at the end of 2016. This small decline in the number of reps was expected as year-end performance assessment resulted in changes.

Larry has aggressively recruited and assembled a first-class team of sales professionals as demonstrated by the year-over-year growth and productivity improvements. We will continue investing in this market and expect to have approximately 70 salespeople in this territory by the end of 2017. Further, we plan to closely monitor the revenue and productivity improvements of our sales teams as we continue to expand.

Regarding our customer base. During the first quarter of 2017, core physicians, plastic surgeons and dermatologists in North America accounted for approximately 46% of our orders with the balance of those orders received predominantly from primary care physicians. Our sales teams serving international markets, led by Miguel Pardos, grew product revenue 14% this quarter compared to Q1 2016.

We had strong revenue growth in several of our direct countries in Europe as well as Australia, along with solid contributions from our distributor network. We're focused on increasing the growth rate in our international markets with the recent addition of Mosbah Al Khatib to manage our distributor network in the Middle East. Mosbah and I worked together at Cyberonics, where he successfully grew that business in a similar role. At our Investor/Analyst Day in June, we will outline our plans to build markets in additional regions.

Our gross margin was 53% in the first quarter of 2017, which was lower than the previous quarter's 56% and our expectations. The decrease was due primarily to the greater-than-expected demand for our enlighten systems and associated upgrades.

Primary reasons for the enlighten III to have lower gross margins include, one, favorable -- offering favorable pricing to our installed base to upgrade to the enlighten III. These upgrades will decline throughout the year. Second, higher than initial cost, both manufacturing and service for our enlighten III system, are also expected to decline throughout the year. And finally, normal market seeding with key opinion leaders interested to act as centers of excellence in clinical trial study sites. This is an important marketing tool utilized during the early releases of new products.

In spite of our lower-than-expected gross margin, we are pleased to show GAAP bottom line improvement and positive EBITDA in what has historically been our weakest quarter of the year. We are pleased with our overall financial trajectory and remain focused on growing our top line and improved earnings throughout 2017.

Turning to research and development. Leading in innovation and offering superior technology are the cornerstones of Cutera's culture, and I'm proud to be joining a team with so many years of technical innovation incorporated into all our products.

Our most recent product accomplishments include the following: first, in 2017 -- I'm sorry, first, in December of 2016, we introduced through a limited market release the enlighten III system. The enlighten III combines both pico and nanosecond technology that enables our customers to perform best-in-class tattoo removal as well as the highly popular skin revitalization procedures. The high-energy system now has a third true red 670 wavelength, which we believe provides the most efficacious treatments in the fastest times when compared to other devices on the market. These features are critical for our customers as they look to increase the utility of the enlighten platform with a higher and more rapid return on their investment.

Also, just last month in April 2017, we introduced our new truSculpt 3D system targeting the body sculpting market. Our truSculpt 3D system includes an optional frequency of 2 megahertz developed to increase procedural efficacy while greatly improving patient comfort. We also introduced the new glide protocol to further enhance the truSculpt's efficacy.

This new offering will also include a consumable element, which we will -- which will begin recurring revenue to the company once the truSculpt 3D is placed or a current model is upgraded. We're excited about this pending launch and believe this new product iteration will contribute marked improvement to our overall gross margin.

Additionally, we will continue investments in the truSculpt by providing a hands-free offering in the platform in the second half of 2017. We will, of course, continue gathering additional clinical data in support from key luminaries in the industry.

Overall, we expect 2017 to be a productive year for us. On June 14, we will have our Annual Meeting of Shareholders followed by a first-ever investor/analyst presentation outlining our long-term road map. This presentation is open to our investors as well as interested research analysts. At the event, we will outline our plans to meet the 3, 4, 5 objective. This refers to tripling our revenue, that is the 3; quadrupling our share price refers to the 4; and the 5 is the number of years in which we want to accomplish these goals. 3, 4, 5 is an internal mission that the whole team is behind and striving to make a reality.

The global market for aesthetic light and energy-based systems is growing at a steady pace, and based on our internal estimates using data from public company disclosures and our revenue estimates of private companies, we project the market to be in excess of $2 billion this year. Our broad range of products expected market share expansion, commitment to innovation and strong commercial teams should be the catalyst [to] continue fueling our growth in the coming years.

I would now like to turn the call over to Ron for his financial review and comments before we open up the call to your questions.

Thanks, James. As James stated earlier, we had record first quarter revenue of $29.3 million, representing 31% growth in the first quarter of 2016. This performance extends our double-digit year-over-year revenue growth to 11 consecutive quarters.

The growth was fueled primarily by North America, where our product revenue grew 60%. International product revenue also grew at a healthy 14% on a year-over-year basis. We experienced revenue growth over the same period in the prior year in most of our product lines with particular strength coming from enlighten, our recently launched picosecond technology for tattoo removal and skin revitalization. Although we had growth in many product lines, it is worth noting that revenues from our xeo platform, our flagship multi-application and multitechnology product also grew insignificantly compared to the same period in the prior year.

We expect revenue in the second quarter of 2017 to be approximately $32 million. And for the full year, in 2017, we are increasing our guidance to $140 million compared to the previous range of $135 million to $140 million that we had provided in February 2017. Gross margin was 53% in the first quarter and was lower than we had originally expected for the various reasons that James stated earlier. As a result of our various gross margin initiatives, we expect gross margin to increase sequentially to approximately 56% in the second quarter 2017 and increasing thereafter in the range of 57% to 60% for the second half of the year with the third quarter at the lower end of the range.

Key initiatives that we are focusing on to improve gross margins include: reduce enlighten -- reduce discounted enlighten III upgrades. These upgrades were at low gross margins in Q1 2017 and were temporarily provided to support our loyal customers. Two, to increase enlighten ASPs as we reduce the need to seed key opinion leader and reference sites. Three, reduce enlighten III cost of goods, as this product matures in the manufacturing process and its field reliability improves. Four, leverage our fixed cost on a projected higher revenue in the remaining quarters of the year. And finally, implement cost-reduction initiatives for product cost of goods sold with a target of reaching an overall 59% to 60% gross margin rate in the fourth quarter of 2017.

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 37% in the first quarter of 2017 compared to 39% of revenue in the first quarter 2016. 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 37% of revenue in the second quarter of 2017, and it should decrease steadily throughout the year as our revenue grows, resulting in approximately 35% of revenue for the full year of 2017.

Research and development expenses were $2.9 million or 10% of revenue in the first quarter 2017 compared to $2.7 million or 12% of revenue in the first quarter of 2016. We continue to invest in R&D while leveraging this expense as a percent of revenue. We remain committed to investing in engineering and clinical research that drives new product innovation and support our clinical superiority.

We are planning to moderately increase our investments in R&D activities as the most recent investments are providing targeted revenue growth and commensurate returns. As such, we plan R&D spend in the range of $3 million to $3.3 million in each of the remaining quarters in 2017.

General and administrative expenses were $3.2 million in the first quarter 2017 or 11% of revenue compared to $3.2 million or 14% of revenue in the first quarter 2016. We continue to improve leverage in this cost center and expect our quarterly G&A expenses to range from $3.2 million to $3.4 million in each of the remaining quarters in 2017.

Interest and other income was $273,000 in the first quarter of 2017. This included approximately $100,000 of foreign exchange gains, resulting from revaluing our foreign net assets, primarily from the strengthening Japanese yen in addition to the normal interest income in our cash balances. We expect other income to be approximately $150,000 in each quarter for the remainder of 2017. Please note, this amount will be subject to foreign exchange fluctuations.

Income taxes was a net tax benefit of $118,000 in the first quarter 2017. This included income tax expense for our normal foreign and capital-based taxes, which was offset by a tax benefit recorded for the first quarter -- for the quarter 2017, U.S. tax loss related to projected AMT tax that would be payable for fiscal 2017, given we are projecting the full year to be profitable.

Going forward, we expect an estimated tax rate of approximately 5%. As a reminder, we have a valuation allowance on our deferred tax asset with approximately $41 million of U.S. net operating loss carryforwards for federal income tax purposes.

Our GAAP net loss for the quarter was $1 million or $0.07 per diluted share. This is our best first quarter financial performance since 2008 and demonstrates the leverage we are achieving with our growing top line.

We expect to be profitable during the remaining quarters in 2017, given our revenue growth projections and continued leverage in our model. We expect EPS of approximately $0.03 for the second quarter and are reiterating earnings in the range of $0.45 to $0.50 per share for the full year 2017.

Turning to the balance sheet and cash flow. Net accounts receivable at the end of first quarter of 2017 were $17.9 million and our DSOs were 55 days. This is a higher-than-normal DSO for us and was primarily a result of higher-than-normal revenue at the end of the quarter as well as some increased receivables for some international distributors with extended payment terms. For the remainder of 2017, we expect our DSOs to be in the 40-day range.

Inventories were $15.7 million at March 31, 2017, representing a $700,000 increase from the $15 million at December 31, 2016. This slightly higher inventory level is needed to meet our projected revenue growth plans.

Cash from operations consumed $3.8 million for the quarter but were cash positive from an adjusted EBITDA perspective. Our cash consumption resulted primarily from working capital requirements, including increased accounts receivables and inventories as well as decreasing accrued liabilities from our seasonally high year-end levels.

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 assets other than normal quarter-to-quarter fluctuations.

Our cash position remains strong, and as of March 31, 2017, we held cash and investments of $48.4 million with no debt, which represented approximately $3.50 per outstanding share.

During the first quarter 2017, we repurchased 140,000 shares for a total of $2.9 million at an average price of $20.68 per share. As a reminder, starting from the first quarter of 2015 up through the first quarter of 2017, we have invested a total of $47.9 million to repurchase 3.4 million shares of our stock at an average price of $13.99.

We remain confident in our outlook. And in 2017, we plan to repurchase shares to a level that would result in a fully diluted weighted average share count at approximately 14 million shares for 2017.

In conclusion, we are pleased with the achievement of our 11th consecutive quarters of double-digit revenue growth and significant improvement in profitability.

For 2017 and beyond, while there are certain unpredictable factors that may impact our global business, including unfavorable currency movements and domestic and international macroeconomic 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 annual GAAP profitability and generating cash from operations.

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

(Operator Instructions) Our first question comes from Anthony Vendetti with Maxim Group.

Wanted to talk a little bit about the enlighten III. A, I know there was some -- a lot of upgrades, I guess, that impacted the margin. I was wondering if you could talk about was the gross margin impacted more by upgrades to enlighten III or more from bundling? And then just a little more color on whether or not you have another indication for enlighten III.

Sure. I'll take that. Hi, Anthony. Certainly, the upgrade had an impact on it because those are low gross margin, and this is temporarily provided just to support our loyal customers. We also saw enlighten III -- we're continuing to seed that market. So the key opinion leaders, the discounting there, which is also temporary -- also impacted the margins. And the cost of goods associated to enlighten III, being a new product, was higher initially, but we expect that to come down as the year goes on. When you look at the bundling that has an impact, and I'd say it's a mixture of all those that impacted the lower gross margin than expected originally.

Okay. And then is there a new clearance for enlighten III that you can discuss? Or what's currently out there? What are you currently marketing?

Yes, we recently just received an expanded clearance that basically provides increased energy to get greater efficacious results as well as faster speed with the product -- with the larger slot size. So it's beneficial to our customers.

And then there was some news regarding truSculpt at ASLMS. I was wondering, is there any update on truSculpt? And whether or not, other than what was provided on the call, is there any indication that truSculpt growth has picked up since the new clearance for the reduction -- the circumferential reduction in the abdomen?

Well, we're continuing to increase the truSculpt line. So yes, the clearance and many other things come into play. But the recent announcement at ASLMS is brand-new, and so that product is just hitting the market right now. It'll be more of a Q2 and forward product in terms of its performance in the product line.

Anthony, this is James. The 3D that I had mentioned during the prepared statements. That product we're just now getting the fields' sales force trained on it as well as the glide protocol. And -- so that will be a second half Q2 launch and a Q3 second half launch for U.S. and international markets.

Okay. And then the major upgrade with consumable and hands-free, that's by the end of the 2017 still?

Actually the 3D does include a consumable element. The details of which we'll present at our Investor/Analyst Day in mid-June.

Okay. And the hands-free one. Is that a 4Q? Or is that later than that?

Yes, that's second half.

Our next question comes from Jim Sidoti with Sidoti & Company.

Great. Can you give us a target on where you think you'll end the year in terms of the number of salespeople?

In North America, we'll have 70, so up from the -- we closed out last year at 58. We had some performance assessments and normal churn, which is much higher in the first quarter of the year. But I will say, 2017 demonstrated the lowest turnover rate that we've seen in our sales organization. However, it's not uncommon that you have movement, and so we did go to 54 salespeople in the U.S. However -- or in North America. By the end of the year, we do expect to be at 70.

And there's been an incredible amount of consolidation in the past several weeks. Are you able to get some good salespeople from some of those consolidating firms?

We absolutely have a great deal of interest from those that are [feeling insecure today] by all the movement. We've made a couple of opportunistic hires within North America and also in international. So I think we're taking advantage, but we're also being very cautious of the culture that Larry and his team has built. And we don't really want to disrupt that. Larry's done a great job of onboarding nonindustry sales professionals. And as he says, he builds laser reps. He doesn't hire them.

Okay. And then it seems like you have your plate full in the U.S. Between the enlighten III and the truSculpt, you have plenty of catalysts to motivate your salespeople here in the U.S. What's the big thing that you think will drive growth outside the United States in 2017?

Well, we're just now in the process of releasing the enlighten III in international markets, and then the same truSculpt 3D with glide protocol will be launched internationally in the second half of the year -- actually starting in Q2, we'll be launching that in international markets. And then just like in the U.S., the second half of the year, we'll be launching hands-free or what we're calling internally the truSculpt 2.0. That cover your question?

Our next question is a re-questioning from Anthony Vendetti.

Yes, just to go back to the enlighten. Are you able to break out the new sales versus upgrades for the quarter?

We don't break out those specifics, but we did have a good deal of both. It exceeded our demand, not only for new system sales but also our installed base coming back to us to upgrade to that third wavelength. So we got a lot of enlighten business during the quarter.

Okay. And then on bundling, what percent of your revenues was from bundling? And what percent of your product sales from bundling?

That number just continues to go up. Let me see -- I'm sorry. Just grabbing. Just a second here. Yes, for the quarter, when you look at a year ago, the bundling business was up about 48% from a year ago. So that just shows you, as 2016 progressed, we continued to increase the volume coming through bundling, and that's continuing into 2017. For the quarter, it represented -- about 17% of our North America product sales came from a bundled transaction.

Okay. And would you say that, that had -- so that had a little bit of impact on gross margin but not a lot. Is that correct?

That's correct. It certainly had some impact on gross margin because, as we're bundling transactions, that is bringing typically a lower selling price. And so it does have an impact on gross margin.

But gross margin expectation or guidance for you by the end of the year -- to exit the end of the year like in fourth quarter, you're still expecting gross margin to be in the 58% to 60% range?

Yes, that's correct. I think, we're going to be able to get there by the time we exit the year based on the initiatives that we described, which we're aggressively pursuing.

Okay. Well, I just wanted to say, Ron, it's been a pleasure to work with you, and at this point that you'll be moving on, but wanted to wish you the best of luck with your future.

Thanks. I appreciate that Anthony. It's been great.

He's not leaving tomorrow, though. Just to keep the [roll on.] Just to comment on that. We do have a search ongoing, and Ron -- he and I have worked extremely well together, and he has agreed to stay on until we find his successor, and then he will remain as needed until the transition is complete.

Absolutely.

James, can you say where you are in the search? Is it beginning stage? Do you have candidates already identified?

We have some candidates identified, and they're going through the process now.

Our next question comes from Brian Freckmann with LS Capital.

Okay. Great quarter, great North American numbers. I'm surprised on 54 salespeople. That's a big number. So to the sales force, they're doing a good job. And I know this is going -- I don't know how best this question comes out, but I appreciate the guidance as always. That's extremely helpful.

Would you care to help us out with the back half of the year? And I only ask that because, after beating the first quarter revenue numbers and giving guidance, obviously, one of the headlines is that you missed the EPS number. And I think -- it seems like after having a really good revenue number, it'd be better if people could sort of figure out what the back half would look like so they can have some sense of putting together their models. And I was hoping you could help us out a little bit -- because it's a big ramp, what your kind of guesstimates are on how that should flow through each quarter?

Well, I think, Brian, if you go back and look historically, which I'm sure you've looked, the back half is the largest part of our profitability. That's where we get the greatest leverage from the model. That's where the bulk of the revenue, certainly over 50% of it comes in the second half. And -- so we expect -- when we talk about that EPS guidance of $0.45 to $0.50, obviously, a great piece of that -- the greater share is going to come in the second half. I don't have any specific numbers other than those that I laid out there for you, but we expect to have a big half just as we did -- big second half as we did last year and the year before and as the history kind of dictates.

Right. Maybe to ask it in a different way. I mean, obviously, given the first quarter number and the second quarter guidance, all your earnings will come from the back half. I think it's more of a question of rather than having people put in the third quarter estimate that might be too high, not understanding sort of the impacts of [one together.] I mean, I'm just trying to figure out how one should think about what the good sense just going back to last -- using last year third quarter and fourth quarter as comps, I guess, I'm just getting at the fact that you guys have had some good revenue numbers. It looks like business is getting better for you and just trying to make sure that, that is conveyed in the correct manner.

Yes, I mean, that's a good point. And certainly, we expect to be profitable for the remaining quarters of the year, Q3 and 4 with 4 being obviously the largest contributor. We're talking about $0.03 for Q2, and that's going to leave the remainder of the $0.45 to $0.50 being in the back half. And -- but we expect to finish strong. We've got a lot of initiatives driving that. And again, the history would dictate that you're -- we're going to have a lot of profit develop in the second half.

Okay. Okay. I mean, -- sorry, if I took last year's sort of the breakdown of the profits in that same format, would that be a good place to start?

Yes, I think so.

Okay. With -- like fourth quarter maybe being double what third quarter is, if my memory serves me -- I mean, maybe not exactly but almost?

Yes, I mean, you're going to get great leverage. If your margins are going to -- your gross margins are going to be in that 58% to 60%, and you're going to really get leverage from the OpEx, as we've done in the past, we're going to see that same thing in Q4 with higher revenue than we had certainly in Q4 '16.

At this time, I would like to turn the call back over to management for closing comments.

Thank you. And thank you all for participating in our call today. We will be presenting at various investor conferences, and we have our first-ever Investor/Analyst Day following our Annual General Meeting to be held on June 14, 2017, at our corporate headquarters in San Francisco. We intend to showcase our products and facility with on-site treatments. We look forward to updating you on our business progress in the second quarter of 2017 conference call in August 2017. Good afternoon, and thank you for your continued interest in Cutera.

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