Cutera Inc (CUTR) 2017 Q2 法說會逐字稿

Greetings, and welcome to the Cutera Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

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

Thank you, operator. Welcome to Cutera Second Quarter 2017 Earnings Conference Call. On the call today is Cutera's President and Chief Executive Officer, James Reinstein; Consulting and Interim Chief Financial Officer, Sandra Gardiner; and outgoing CFO, 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 sales force, ability to increase revenue, improved gross margin, reduced operating expenses as a percent of sales, make productivity improvements, 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-K as filed with the SEC on March 15, 2017 and updated in our Form 10-Qs subsequently filed. Cutera also cautions you to not place undue reliance on forward-looking statements, which speak as only 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.

And with that, I'd like to turn the call over to James Reinstein.

Thank you, John. Good afternoon, everyone, and thanks for joining us today to discuss our second quarter 2017 results. We are pleased to report that we exceeded our second quarter revenue guidance and achieved several records related to our financial performance in the quarter.

First, we recognized $36.4 million of revenue, which is a 32% increase from a second quarter of 2016. This revenue level is a company record for the second quarter and represents our 12th consecutive quarter of double-digit revenue growth.

Second, we earned $1.9 million of net profit, which is also a company record for a second quarter. Lastly, we generated $7.7 million of operating cash, which is a company record for any quarter.

During Q2, organic growth was broad-based throughout existing product portfolio, but the primary driver and largest contributor to the revenue came from the launch of our truSculpt 3D body-sculpting system, which we initiated mid-quarter. Additionally, enlighten and our legacy xeo products were also key contributors to our overall growth.

Geographically, we grew both in North America and in our international markets. Our North American sales team, led by Larry Laber, delivered another impressive quarter with a product revenue growth of 63% compared to the same period in 2016. We continue to see productivity improvements within our field sales team helping fuel the overall revenue growth. We finished the quarter with 56 field salespeople in North America as compared to 53 at the end of second quarter 2016. Larry continues to aggressively recruit, onboard and maintain a first-class team of sales professionals, as demonstrated by the year-over-year revenue growth. This is important to note that productivity per salesperson continues to increase during our sales force expansion. We will continue investing in our North American sales channel and expect to have approximately 70 field salespeople in North America by the end of 2017. Further, we will continue to closely monitor the revenue and productivity improvements of our sales teams as we expand.

Regarding our customer base, during the second quarter of 2017, core physicians, plastic surgeons and dermatologists in North America accounted for approximately 54% of our orders. The noncore physician customer base is more fragmented, but the largest group within that noncore was the primary care physicians looking to expand their practice beyond the usual managed care reimbursement fees with a revenue stream derived from patient-pay procedures.

Our sales teams serving international markets grew product revenue 7% compared to second quarter 2016. While this growth is not as high as I would like to see, we did have strong revenue growth in Japan as well as our Middle Eastern distributor territories where we recently added new leadership. We continue to view international as an opportunity and are focused on adding key people in critical territories, while we improve productivity of existing people to facilitate that growth. We recently hired [Henrique Luckmann] to manage our distributor network in Latin America and promoted Martin Kissinger to the leadership role in Europe. We expect these changes to improve the growth in the second half of '17, but more importantly, we will be well positioned for strong growth in 2018.

Our gross margins was 58% in the second quarter of 2017, which is higher than expected by 2 percentage points. This better-than-expected gross margin is primarily due to the greater percentage of revenue coming from our truSculpt 3D body contouring system. Additionally, we will continue to focus our initiatives to improve gross margins through manufacturing efficiencies and are targeting a 60% gross margin in the fourth quarter of 2017.

We are also pleased with a GAAP net profit of $1.9 million or $0.13 per diluted share. We expect to be profitable for the remainder of 2017, as we continue to grow revenues and leverage costs and expenses.

Turning to research and development. Leading in the innovation and offering superior technology are the cornerstones of Cutera's culture. We recognize the importance of new product introductions and will continue launching new products on a regular basis.

I will now provide an update on our recent product development accomplishments. During the second quarter of 2017, we introduced the new truSculpt 3D system targeting the body-sculpting market. We are pleased with the results of this launch, as this provides us with a highly competitive products in one of the largest and fastest growing segments in the aesthetics market. The truSculpt 3D is generating high customer interest, and it was the largest revenue contributor of all our platforms despite being launched mid-quarter and only in North America. Additionally, truSculpt 3D positively impacted our gross margin due to the higher prices that the team delivered, coupled with lower manufacturing costs.

A few highlights about this launch include: first, the truSculpt 3D system includes an optional frequency of 2 megahertz developed to increase procedural efficacy while improving patient comfort. We also introduced the new glide protocol for use with the truSculpt 3D to further increase clinical efficacy. truSculpt 3D also includes a consumable element, which generates recurring revenue to the company once the system is in place or when a current model is upgraded. We're excited about increasing our presence in the body-sculpting market and believe truSculpt 3D and future enhancements will be a key contributor to increasing gross margin. We are continuing to invest in truSculpt and expect to have a hands-free offering via limited market release planned by the end of 2017.

As mentioned in our press release, the next generation of truSculpt has already received FDA clearance. While the commercial team is focused on the 3D launch, the development teams will complete work on the next-generation truSculpt, which will include a robust clinical study to demonstrate equivalent or superior results to our currently available truSculpt 3D. We will provide more detail on the new product at the time of launch.

Our enlighten PICO system for tattoo removal and skin revitalization continues to garner interest and revenue growth. We're committed to this product platform and have plans to expand its functionality and indications for use, enabling our customers to realize a greater return on their investment. We also plan to introduce a low-cost version in 2018 targeted towards the skin revitalization market.

Now let me provide an update on our Brisbane facility. Earlier this year, we signed a lease to move to a 100,000 square foot building in Fremont, California, which is approximately 25 miles southeast of our current facility. Soon thereafter, we were approached and offered $4 million to terminate the Fremont lease so that it could be leased by another party. We accepted the payment and have since renewed our existing lease in Brisbane for up to 5 years. We're planning to use some of the $4 million to upgrade our Brisbane facility to make the space more efficient as well as adding a showroom for hosting customer events. With these improvements and efficiency enhancements, we believe the current space of 66,000 square feet will meet our needs and support our growth for the next 5 years.

Overall, we expect 2017 to be a productive year for us. On June 14th, we held our Annual General Meeting of Shareholders followed by our first ever investor Analyst Day outlining our long-term strategic plan. During the event, we presented more details of our 3-4-5 Plan, which refers to tripling revenue and quadrupling the stock price within 5 years. The entire team supports this goal, and our second quarter performance has us on track to meet this objective.

I'm also pleased to report that the Board of Directors has authorized an additional $25 million to repurchase shares of the company's stock. We believe this is a strong indication that the board believes this team will continue to build value.

The global market for aesthetics, light and energy-based systems is growing at a steady pace. Based on our internal estimates using data from public company disclosures and our revenue estimates of private companies, we project the market will be in excess of $2.5 billion this year. Our broad range of products, expected market share expansion, commitment to innovation and strong commercial teams should be the catalyst fueling our growth in the coming years.

I would now like to introduce Sandy Gardiner, our Consultant and Interim CFO. I have worked with Sandy in the past, and I am pleased to have her on the team. Her prior experience assures me that she will seamlessly step into the role, deliver on the immediate objectives and provide me with the business counsel so critically needed from this position and that Ron Santilli has provided me so valuably since I joined Cutera.

I will now turn the call over to Sandy to provide some of her initial thoughts on Cutera.

Thank you, James. One of the most important considerations for a CFO when joining an organization is to ensure that the company has the right core team in place. After only a few weeks at Cutera, I can say that Ron has built a strong foundation with dedicated individuals prepared for where the company is going.

Cutera is at a very exciting stage of growth right now and with James' vision and key hires it is well positioned to reach the next level of success. As James mentioned, he and I have worked together in the past and therefore already have a strong partnership. I am pleased to join the organization to ensure a smooth transition, while the company conducts its search for a permanent CFO.

I will now turn the call over to Ron for his financial review.

Thanks, Sandy, and welcome to Cutera. As James stated earlier, we had a record second quarter with revenue of $36.4 million, representing 32% growth in the second quarter of 2016. This performance extends our double-digit year-over-year revenue growth to 12 consecutive quarters, and it's the second highest level in company history. The growth was fueled primarily by North America, where our product revenue grew 63%. International product revenue also grew at 7% 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 our recently launched truSculpt 3D body-sculpting system.

Although we had growth in many product lines, it is worth noting that revenue from our enlighten and xeo platforms also grew significantly compared to the same period in prior year. We are pleased with our continued revenue performance. And therefore, for the full year 2017, we are increasing our revenue guidance to a range from $144 million to $147 million.

Gross margin was 58% in the second quarter, higher than our previous guidance of 56%. As James mentioned, the increased gross margin is primarily due to the higher-than-expected volume of our truSculpt 3D systems. We continue to focus on several initiatives to continue increasing gross margin and are targeting full year 2017 gross margin to be in the range of 58% to 59%.

I will now address our operating expense results, where we experienced significant leverage in our performance driving down total operating expenses as a percent of revenue from 63% in the second quarter 2016 to 53% in the second quarter of 2017.

Sales and marketing expenses as a percent of sales decreased to 35% in the second quarter of 2017 compared to 39% of revenue in the second quarter of 2016. We will continue to aggressively invest in our commercial channels, enabling us to gain market share with above-market revenue growth rates.

Research and development expenses were $3 million or 8% of revenue in the second quarter 2017 compared to $2.7 million or 10% of revenue in the second quarter 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.

General and administrative expenses were $3.6 million in the second quarter of 2017 or 10% of revenue compared to $4 million or 15% of revenue in the second quarter of 2016. As a reminder, the second quarter of 2016 G&A expense included a $1.2 million legal settlement. When adjusted for this, our G&A expenses increased approximately $800,000. We plan to continue investing in our administrative infrastructure to better support our planned revenue growth.

Interest and other income was $276,000 in the second quarter of 2017. This included approximately $125,000 of interest income and $90,000 of net foreign exchange gains resulting from revaluing our foreign net assets, primarily from the strengthening Japanese yen, in addition to the normal interest income on 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 of plus or minus $100,000.

Income tax expense was $59,000 in the second quarter of 2017. This included income tax expense for our normal foreign and capital-based taxes. For 2017, we expect an estimated tax rate of approximately 5%. As a result of our recent history of cumulative profits in the U.S. as well as the expected future profits, we anticipate reversing the valuation allowance on our U.S. deferred tax assets and expect to record the full tax provision for U.S. income taxes beginning in 2018. We currently have approximately $42 million of U.S. net operating loss carryforwards for federal income tax purposes.

Our GAAP net income for the quarter was $1.9 million or $0.13 per diluted share. This represents the company record performance for a second quarter 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. Accordingly, we are increasing our earnings guidance to the range from $0.50 to $0.54 per share for the full year of 2017. This 2017 EPS expectation excludes the onetime $4 million gain on the facility cancellation that James described earlier on the call. The EPS range increases by approximately $0.25 for this onetime tax-affected other income.

Turning to the balance sheet and cash flow. Net accounts receivable at the end of the second quarter of 2017 were $18.2 million and our DSOs were 45 days. For the remainder of 2017, we expect our DSOs to remain within this 45-day range. Inventories were $16.9 million at June 30, 2017, representing a $1.2 million increase from the $15.7 million at March 31, 2017. The higher inventory level is needed to meet our projected revenue growth plans. Inventories are currently turning approximately 4 times per year.

Cash from operations generated a company record $7.7 million for the quarter, illustrating strong leverage from our business model. We expect to be cash flow positive in future quarters, as we continue to leverage our revenue growth. 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 June 30, 2017, we held cash and investments of $53.2 million with no debt, representing approximately $3.80 per outstanding share.

During the second quarter of 2017, we repurchased 194,000 shares for a total of $4.1 million at an average price of $21.29 per share. As a reminder, starting from 2015, we have invested a total of approximately $52 million to repurchase about 3.6 million shares of our stock at an average price of $14.41. Our board recently approved an incremental $25 million to be added to our presently active stock repurchase program. We plan to continue repurchasing shares and hope to achieve a fully diluted weighted average share count of approximately 14 million shares for the full year of 2017.

In my closing comments, I believe James and Sandy are the right fit to an already strong management team, and I'm confident that the company will continue to execute the revenue and growth plans and further increase shareholder value. Now that the strengthened management team is in place, this will be my final conference call, #54 since our first call in March 2004. I want to extend my thanks to many people who have worked with me during these past 16 years to help grow and position Cutera to the company it is today: first, to the founders who created this company from their collective visions; second, to all of my colleagues, past and current, for their loyalty and support; and finally, to the investor community for their continued support of the company.

I would like to now turn the call over to James for his closing comments.

Thanks, Ron. And I want to reiterate what I've been saying since I joined Cutera in January of this year. I have greatly enjoyed working with Ron, and I appreciate his support during my transition and his dedication to the company. He's handing over a company in great shape and positioned well to achieve the 3-4-5 Plan. So thank you, again, Ron, for your partnership during my tenure, and we all wish you well on your next phase.

In conclusion, we're pleased with the achievement of our 12 consecutive quarters of double-digit revenue growth and significant improvement in profitability and cash generation. We expect to continue year-over-year revenue expansion and market share gains in 2017 and further expect annual GAAP profitability and generating cash from operations.

I'd now like to turn the call over for questions. Operator?

(Operator Instructions) Our first question is from Chris Lewis from ROTH Capital Partners.

Now first, obviously, truSculpt 3D, let's open to kind of dig in there a little bit. Just -- James, just can elaborate on just what you're seeing with the launch of 3D at this point and kind of what's driving the positive market reception for that product?

Sure, Chris. The -- this is our entry, or I guess, our second entry into the body-sculpting market. And it's the first time where we had really good clinical efficacy to go behind it. And there is a physician, Dr. Tahl, out of Chicago who provided us with a solid study demonstrating an average circumferential fat reduction of 24%, which is market, if you will. And that, coupled with the sales team that is really hungry and eager for new products, allowed them to get out and launch this product and really far exceed the expectation we had for the launch. And I think it also speaks, one, to the sales team, but also to the market that this is a very exciting space. A lot of physicians are looking to get into body sculpting that they don't currently have in their practice. And so it's kind of a perfect storm for us to come out with this product. And it's the efficacy that it brings.

Great. And what's the timing expectation for 3D launch internationally? And I guess, what needs to be done to prepare ahead of that?

So I was actually in Europe a week before last for the European training. We're doing other regions as well. Demos have already been shipped to overseas regions. And so we'll begin commercial shipment in Q3 .

Okay, great. And in terms of just sales force expansion plans, I think you reiterated your goal to get to 70 by the end of this year. So how should we think about the cadence of when those reps will be added to get to that goal by the end of this year? And then how should we think about kind of the productivity ramp of reps once they're onboard?

So we've modeled the productivity to be at about $1.2 million or so. And that's how we closed out 2016. Or for full year 2016, the rep productivity was about $1.2 million per head. In Q2, we're actually at $1.7 million. And year-to-date, we're at $1.4 million. So we're kind of far exceeding that rep productivity at the same time we're expanding. We've closed the quarter at 56 -- headcount of 56 in North America. We're actually -- not that I want to get too much into Q3, but we're already at 60 in Q3. And we'll continue to add heads as the quarter progresses. The sales organization, sales leadership under Larry and team, they tend to do most of their hiring early mid-quarter and then towards the end of the quarter, go after the -- chasing the revenue. So we should fully expect to be at the 70 ramp or at the 70 count -- headcount by the end of the year.

Our next question is from Anthony Vendetti from Maxim Group.

I just first wanted to thank Ron and wish him well in his next endeavors and a pleasure working with you, Ron, and wish you nothing but the best.

Thanks, Anthony. Appreciate that. It's been great. Appreciate it.

And then just on the -- James, on the new products you're talking about. I understand the rollout for truSculpt and limited release of a hands-free product by the end of the year. And then I missed the comment about next year. Was there another product that you mentioned for next year, and what was that?

I haven't gone beyond mentioning the truSculpt hands-free. We are -- we certainly have other development projects going on with regards to enlighten, and we'll have those launches in 2018. But the only one we're talking about right now is certainly the truSculpt 3D, which certainly has a lot more legs on that launch. And then we'll follow that up with the hands-free version of truSculpt. Again, limited market release by the end of the year and full release in 2018.

In terms of pricing on that, James, is there an expected list price on the hands-free product?

We haven't nailed that one down yet, Anthony.

Okay. And just in terms of -- as you're ramping up R&D, is there a specific category within the aesthetics market that you see or that the firm sees as an opportunity? Or is there something that is complementary to what you're currently doing? I'm just trying to figure out, as you're planning for 2018 other than the enhancement in enlighten and the focus now on truSculpt, if there is a particular disease category, product category that you're focused on or the R&D -- your R&D team is focused on?

Well, I mean, you can look at some of the larger categories within the space. Body-sculpting, from our perspective, has been a focus, because it really is one of the largest and fastest growing. And I'm pleased to say that we're in that in a very serious manner with the truSculpt 3D. And then beyond that, where I think we have gaps in our market share would be in, call it, face, skin revitalization, pigmentation. That really fits well with what we have planned for with enlighten. So beyond that, we really aren't disclosing or discussing what we've got in the pipeline.

Okay. And are there any -- I know you talked a little bit about the international release for truSculpt. But any timeline on things like getting China approval, which seems to be an arduous task these days, or what that timeframe is or expected time line is for that?

Not that we're discussing right now. I will say, we do have the YCC conference in Barcelona end of August, early September, which is when we'll do the European or international launch of truSculpt 3D.

The next question is from Jim Sidoti from Sidoti & Company.

So again, I just want to echo what Anthony said to Ron. It's great working with you, Ron, and all the best going forward. And then a couple of questions for the quarter. Do you think there was pent-up demand for the 3D, and that's why you had such a big uptake at the beginning? Or do you think you'll be able to keep this momentum going throughout the rest of the year?

I think there's still some legs on this launch. We certainly got out fast. I think it's a testament to the sales organization that Larry has put together. The way this launch was planned out, it was probably the first launch that we've slid into the new product development process, although it was late in that process that we implemented. However, it really was all departments of the company working in concert to get this product released. And I think that really added to the success of it in the quarter and fully expect to continue into Q3, Q4 and early '18.

And then the hands-free version, that's a new console as well, correct?

Yes, that will be a very different product. And that's why we wanted -- we're very pleased with the 3D launch. And as a result, we think that gives us the time to make sure we do the next-generation, right, because it will be a very different product. It will be hands-free. We want to do the work clinically to ensure that we're getting the same results, if not better, than we're getting from the 3D. And we want to be able to go out with good before-and-after photos and that ultrasounds with the clinical proof demonstrating the efficacy.

And then the regulatory path is already clear, though, it sounds like, no issues with that?

Yes, we did get that approval last week.

Okay, great. And then the last question, can you just repeat, Ron, the comments you made about the $4 million for the -- now that you're not going to move out of Brisbane? Was that included in your GAAP EPS guidance or was that excluded?

I have excluded it from the GAAP guidance that we gave. But just as a reference, when it comes through in Q3, it will be about $0.25 impact as a nonrecurring item reported in other income.

Our next question is from Larry Haimovitch from HMTC.

James, there's hardly anything not to love about the quarter. The only thing that stood out to me was the tremendous disparity between international and domestic. And this has been several quarters now. With all due respect to Larry Laser, as I call him, who has done a magnificent job and has really made a massive difference to the company since he joined. What do you view as the issues? I know you've made a change in management in Latin America. We've talked about that. You've probably talked about it. What's it going to take to get the international business to at least pull its weight better than it is, because right now it's clearly lagging?

I agree with you, in those -- in my comments, in my prepared statement that we should be growing at a faster rate internationally. But what I will say is that not unlike many U.S.-based multinationals, the attention given and the support provided to international markets and the regions has actually been lacking from the corporate standpoint. And that's why -- and I can speak firsthand about this having been working for Boston Scientific and living in Europe, living in Latin America as well as living in Asia and realizing that you don't always get the support you need and the attention that is required to develop and grow the business. My conversations with Miguel are specifically about what his needs are and where his attention should be focused. And I can tell you where he's giving the attention and getting that support, we're starting to see results, Middle East being of recent, the most to benefit from the attention. Japan, prior to that, has a really good quarter and consecutive quarters out of Japan. And with [Henrique Luckmann] going down into to Latin America, I fully expect that we'll start seeing the results there going into 2018.

James, do you think that the wide disparity between those 2 regions, international and domestic, will start to narrow, therefore that -- domestic can't grow at 60% for every quarter. That would be just unbelievable. And it would certainly sound like the international performance at 7% is going to improve?

Well, there's no reason why international shouldn't be growing at solid double digits. And not that I want to reduce any expectation of the North American team; however, you're right that they should be growing at a fairly comparable rate.

This does conclude the question-and-answer session. I'd like to turn the floor back over to management for any closing comments.

So in closing, thank you for participating in our call today. We will be presenting at various non-deal road shows and investor conferences during the second half of the year and hope to see you there. Additionally, we will be updating you on our business progress on the third quarter of 2017 in a conference call in November of this year. Good afternoon, and again, thank you for your continued interest in Cutera.

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