Cutera Inc (CUTR) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Cutera Fourth 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, Mr. John Mills, Investor Relations. Thank you. Please go ahead.

Thanks, operator. Welcome to Cutera's Fourth Quarter 2017 Earnings Conference Call. On the call today is Cutera's President and Chief Executive Officer, James Reinstein; and Chief Financial Officer, Sandra Gardiner. After the prepared comments, there will be a question-and-answer session.

The discussion today will include forward-looking statements. These forward-looking statements reflect management's current forecast or expectation of certain aspects of the company's future business, including, but not limited to, 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, productivity improvements and plans for stock repurchases. For words that may identify forward-looking statements, we encourage you to refer to the safe harbor statement in our press release earlier today. 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 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 or to reflect the occurrence of unanticipated events. Future results may differ materially from management's current expectations.

In addition, we will discuss non-GAAP financial measures, including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency into Cutera's ongoing results of operations, particularly when comparing underlying results from period-to-period.

Please refer to the reconciliation from GAAP to non-GAAP measures in our earnings release. These non-GAAP financial measures should be considered, along with, but not as an alternative to, the operating performance measures prescribed by GAAP.

With that, I would like to turn the call over to our CEO, Mr. James Reinstein.

Thank you, John. Good afternoon, everyone, and thanks for joining us today to discuss our 2017 fourth quarter and full year results. We are pleased to report that we achieved record revenue, sales, again, this quarter.

We recognized $47.6 million of revenue, a 26% increase compared to the fourth quarter of 2016. This revenue level is the highest quarterly revenue in the company's history and represents the 14th consecutive quarter of double-digit revenue growth.

During Q4, revenue growth was primarily driven by the truSculpt 3D body sculpting system, which we launched in the U.S. during the second quarter and in select European countries in the fourth quarter.

Additionally, our enlighten platform performed very well in the quarter, as did our legacy products, which continue to be meaningful contributors to our diversified portfolio. Geographically, we grew in both North America and our international markets.

Our North American sales, led by Larry Laber and Keith Adams, delivered another impressive quarter with system revenue growth of 35% compared to the same period in 2016. We continued to see productivity improvements within our field sales team, helping fuel the overall revenue growth.

In the fourth quarter, the productivity per salesperson was approximately $1.8 million compared to $1.5 million in the fourth quarter of 2016. We finished the quarter with 68 field salespeople in North America as compared to 59 in the end of the third quarter 2017.

Regarding our customer base. Core physicians, plastic surgeons and dermatologists in North America accounted for approximately 38% of our orders, consistent with the prior quarter. We believe this indicates the expansion of our channel reach to noncore physicians as well as continued strength with our core physicians.

In short, we continue to demonstrate an ability to sell to physicians looking to broaden their practices with a patient-pay procedural model. The body sculpting procedure is, certainly, of primary interest to these practices, and the new truSculpt 3D offers an ideal solution for them.

Our sales team, serving international markets, continues to make measurable improvements. Systems revenue grew by 19% from the prior year fourth quarter, reaching a record $11.5 million. This is the international teams' second straight quarter of achieving record quarterly revenue. We saw the strong revenue growth across many of our international markets from both our direct operations in Japan, Australia and Western Europe as well as strong traction from our distribution partners.

The international teams are demonstrating an elevated level of success, which we expect to continue throughout 2018 and beyond. One of the principal reasons I joined Cutera over a year ago was my contention based on my extensive international experience that Cutera had multiple opportunities to close the gap between the international and domestic performance.

Over the past 12 months, we have substantially reinforced our regional leadership in Asia, Europe and Latin America, with the recruitment of a number of experienced and talented leaders. While expected to see most of the progress from these changes in 2018, it is evident with the impressive growth posted over the last 2 quarters that this is just the beginning of what we believe is possible.

Regarding the overall leadership of the international teams, we have come to a mutual agreement with Miguel Pardos, who will resign his role as Executive Vice President of International Sales effective February 28 of this year. We appreciate Miguel's contributions and thank him for his professionalism throughout this process.

As mentioned, the international leadership team consists of regional leaders, most of whom were put in place during the past year. We expect them to continue the Cutera mission and are confident that they will continue to grow our presence globally through market share gains and geographical expansion.

We are very confident in their ability to deliver high rates of growth, as evidenced by their last 2 quarters of record-breaking revenue levels. I will be announcing a new reporting structure for this group in the near future, but in the interim, they will report directly to me.

Sandy will provide more detail on our fourth quarter results in a few moments, but I'm pleased with our record top line and a strong non-GAAP adjusted net income of $6.1 million or $0.42 per diluted share for the fourth quarter, and cash generated by operations of $6.7 million, an increase of 41% as compared to the fourth quarter of 2016.

Turning to research and development. One of the cornerstones of Cutera's culture is our commitment to offering superior technology. Overall, R&D spending in the quarter was up 20% from the same period in 2016, demonstrating our commitment to continuous improvement.

During the year, we enhanced our product development processes to allow for multiple projects to be run simultaneously, while ensuring that all functions of the company are integrated into the process from project inception.

The first product to be launched under this new process was the truSculpt 3D, which I'll provide an update about shortly. We are now operating under this new product development process with a nice lineup of projects rolling out in 2018.

We also made the strategic decision to get into selected new markets faster via external technologies. In January, we announced the North American launch of the Juliet laser that represents Cutera's first entry into the woman's health segment of the aesthetics market and offers patients with a best-in-class alternative to improving sexual function and overall vaginal health.

We also announced the launch of Secret RF, which is a new fractional radio frequency microneedling device that effectively remodels collagen, improves mild wrinkles and diminishes scars. These products were sourced from external manufacturers from whom we license the right for distribution in North America. We launched to the sales team in early January and are now actively selling these systems.

Our enlighten PICO + NANO Technology for tattoo removal and skin revitalization continues to represent one of the highest revenue generating platforms and fuels much of our growth. We're expanding our product offering by introducing a lower-cost version of our enlighten platform in 2018, focused on skin revitalization with our signature procedures, PICO Genesis and PICO Genesis FX, while continuing to expand indications for use in the North American market.

Now turning to our recent product launch that we are expanding geographically, the truSculpt 3D. During the fourth quarter of 2017, we expanded the launch of truSculpt 3D into select European markets and the response has been very positive. TruSculpt 3D was launched in North America in May 2017 and continues to meet our very high expectations. In the fourth quarter, truSculpt 3D accounted for the highest level of revenue for any of our platforms and we will continue the international rollout of this system in 2018.

I'd now like to say a few words about our enhanced efforts to support our expanding consumable product offering. We recently announced the creation of a new dedicated commercial team, allowing us to participate in the procedure-based recurring revenue, along with our physician customers.

The Secret RF and Juliet systems require a disposable tip for every procedure, similar to our existing truSculpt 3D handpiece. Accompanying the development of this commercial organization, we announced the launch of a new customer support portal, called CAMPsite, which provides materials to physicians and staff to develop their practices and train personnel. CAMPsite will also provide internal and external marketing programs to support our physicians' ability to generate patient awareness of new Cutera offerings.

2018 represents Cutera's 20th anniversary. We will be marking this milestone at various events, conferences and symposia starting this weekend at the American Academy of Dermatology.

After 2 decades of innovation and growth, we feel that we are just now entering the new era of Cutera. The global market for light and energy-based aesthetic systems continues to grow at a steady pace. According to Global Medical Aesthetics Market Analysis, industry revenue is expected to reach $26.5 billion by 2024.

Cutera expects to broaden our range of products, commitment to innovation and strong commercial teams will be the catalyst fueling our growth in the coming years.

I would now like to turn the call over to Sandy Gardiner, our CFO.

Thanks, James. As James stated earlier, we had a record fourth quarter with revenue of $47.6 million, representing 26% growth from the fourth quarter of 2016. This performance extends our double-digit year-over-year revenue growth to 14 consecutive quarters and is the highest level in company history. The growth was fueled by North America, where our systems revenue grew 35%, and international which saw 19% growth. We experienced revenue growth on both existing and new product lines with enlighten driving existing product growth and truSculpt 3D driving new product growth.

Fourth quarter revenues also marked a 25% sequential quarter increase compared to the third quarter of 2017.

Gross margin was 57% in the fourth quarter, 48 basis points lower than the fourth quarter of 2016. Gross margin was impacted primarily by increased warranty costs and investments in our service organization to support our expanding customer base.

We have steadily been investing in the service organization since mid-Q3 2017. This investment includes additional headcount as well as providing the field engineers a greater number of on-hand parts to more efficiently support our customers.

The additional headcount under Michael Palumbo's direction is also focused on the growth of service revenue, largely driven by service contracts for systems coming off warranty. We expect higher service revenue in the future quarters as the service contracts sold now will result in future revenues due to the amortization of revenue over the period the services are provided. In addition, we believe we will begin to leverage these investments in 2018, which will lead to improvements in gross margin in the future.

I will now address our operating expense results. Total operating expenses as a percent of revenue were 48% in the fourth quarter of 2017. This compares to 46% in the fourth quarter of 2016 with an increase mainly driven by higher sales and marketing costs attributed to new product launches and expansion of our commercial team.

In addition, we continue to increase our investments in R&D. Sales and marketing as a percent of revenue was 32% in the fourth quarter compared to 31% of revenue in the fourth quarter of 2016. The increase from the prior year quarter represents continued investments in our global commercial channels, including the build-out of our new commercial team that is expanding the consumable side of our business, enabling us to gain market share with continued above-market revenue growth rate.

Research and development expenses increased 20% to $3.5 million or 7% of revenue in the fourth quarter of 2017 compared to $2.9 million or 8% of revenue in the fourth quarter of 2016.

As you can see from the recent introductions of Juliet and Secret RF, we continue to expand our portfolio of products to address new and existing markets. We remain committed to investing in engineering and clinical research that drives new product innovation and supports 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 $3.9 million in the fourth quarter of 2017 or 8% of revenue compared to $3 million and the same 8% of revenue in the fourth quarter of 2016.

Operating income was $4.5 million in the quarter compared to $4.4 million in the same period of 2016.

Interest and other income was $138,000 in the fourth quarter of 2017.

Income tax benefit was $18.2 million in the fourth quarter of 2017. We mentioned to you on our third quarter call that as of September 30, 2017, we had a full valuation allowance against our U.S. deferred tax assets. Due to our recent history of cumulative profits in the U.S. as well as expected future profits, we determined that as of December 31, 2017, it is more likely than not that a portion of our U.S. deferred tax assets would be realized for federal and U.S. states, except California. Therefore, we recorded a net valuation allowance release of $26.3 million, representing a significant portion of our valuation allowance against our U.S. deferred tax assets.

We continue to maintain a full valuation allowance against the net deferred tax assets, primarily relating to the state of California. The release of the valuation allowance resulted in an income tax benefit in the fourth quarter, partially offset by recording the current tax provisions for our U.S. and foreign-based operations. As we enter into 2018, we no longer have a full valuation allowance to offset our tax provision in future periods.

As a result, in 2018, we respect -- we expect a combined effective tax rate for our worldwide operations of approximately 10% to 12%, which includes the effect of the decreased corporate federal tax rates resulting from the 2017 Tax Reform.

Now turning to the Tax Reform. As you are all well aware that Tax Cuts and Jobs Act was signed into law in late December and became effective on January 1. We are required to recognize the effect of the tax law changes in the period of enactment, such as remeasuring our U.S. deferred tax assets and liabilities in accordance with U.S. GAAP.

In the fourth quarter, we recorded a $7.3 million adjustment to our U.S. deferred tax assets, which consist primarily of net operating losses and tax credit carryforwards. While there are many moving pieces, the key impact to our business is that it meaningfully lowers our expected future tax rate. We do not expect the Tax Reform significantly impact cash flow in the near term.

At December 31, 2017, we had approximately $35 million of federal net operating loss carryforwards and $21 million of state net operating loss carryforwards available to offset future taxable income. We expect to be able to utilize these net operating loss carryforwards in advance of their expiration date beginning in 2029.

Please note that because of the significant changes into the law, the overall impact of the U.S. Tax Reform is subject to further analysis as this legislation is interpreted and clarified.

Our GAAP net income for the fourth quarter of 2017 was $22.9 million or $1.57 per diluted share. Non-GAAP adjusted income for the same period was $6.1 million or $0.42 per fully diluted share. Non-GAAP adjustments include noncash stock-based compensation, depreciation expense and the release of a significant portion of our valuation allowance against certain U.S. deferred tax assets, partially offset by the revised measurement of the U.S. deferred tax assets resulting from the U.S. Tax Reform.

Now turning to the balance sheet and cash flow. Net accounts receivable at the end of the fourth quarter of 2017 were $20.8 million and our DSOs improved 5 days sequentially to 40 days.

Inventories were $28.8 million at December 31, 2017, representing a $5.1 million increase from $23.7 million level at September 30, 2017. The higher inventory level is needed to meet our projected revenue growth plans. Inventories typically turn approximately 4x per year.

Cash from operations was $6.7 million in the fourth quarter. Operating cash flow for the full year 2017 was $14.3 million, up $12.3 million from 2016.

Our cash position remains strong. And as of December 31, 2017, we held cash and investments of $35.9 million, with no debt, representing approximately $2.66 per outstanding share.

During the fourth quarter of 2017, we repurchased approximately 504,000 shares for a total of $21.4 million at an average price of $42.43 per share. With these repurchases in the quarter, we fully utilized our share repurchase authorization. Fully diluted shares outstanding were 14.57 million for the 3 months ended December 31, 2017, and 14.73 million for the year ended December 31, 2017.

Turning to the guidance for 2018. We expect revenue in the range of $178 million to $181 million, representing an 18% to 20% increase over 2017. We expect gross margin percentages in the range of 57% to 58% and operating expenses to remain consistent with the 2017 level in the range of 52% to 54% of revenue, as we continue to invest in product development and the scalability of our operations.

Lastly, as previously stated, we expect an effective tax rate of approximately 10% to 12%. This results in an adjusted EBITDA in the range of $15 million to $17 million as compared to $13.2 million in 2017.

Non-GAAP net earnings per diluted -- fully diluted share is expected to be in the range of $1.03 to $1.11 for the full year 2018 as compared to $0.93 for the full year of 2017.

We have assumed noncash stock-based compensation between $8 million and $9 million and approximately 15 million weighted average shares outstanding for the full year 2018.

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

Thanks, Sandy. We are very excited about 2018 and the growth opportunities we have in front of us.

We enter the year with the strongest portfolio of product offerings in the company's history. We have a commercial sales team focused solely on recurring revenue opportunities and the recently expansion of our global service offering.

As our guidance indicates, we expect continued year-over-year revenue expansion and market share gains in 2018, as well as increased annual profitability and cash from operations.

I would like to thank all of the Cutera team for a strong year in 2017 and the great position we have for us as we enter 2018.

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

(Operator Instructions) Our first question comes from Jim Sidoti of Sidoti & Company.

Great. I was just going through some of the details in the guidance for 2018. If I look at 2017, the revenue was weighted towards the back half -- about 56%, 57% of the revenue came in the back half of the year in '17. Do you expect that to be the same in 2018?

For the most part, yes, Jim, that's generally how we grow. We've been growing quarter-over-quarter consecutively from Q3 to Q4. Even though Q3 was our largest quarter on record, we did grow 25% over that quarter in Q4. So it tends to have, I'd like to say, a hockey stick element to it, but it certainly is a second half of the year weighting towards how we'll roll out the revenue in 2018.

And then can you update us on the status of the hands-free fat removal product? And if that is included in the guidance for 2018?

So we continue to make headway with that. As you know, we actually delayed the launch of it because of the success we're having with the truSculpt 3D. So we're basically holding on the launch as well as taking that time to add some features that we think could be game changing. And we expect the rollout of that product in 2018, probably the second half.

Okay. And is there a significant contribution from that included in the revenue guidance you gave today?

The -- that the contribution, I mean, will be up against the comps of the truSculpt 3D. So overall, we do expect some growth, but we are going to be up against the comps of the truSculpt 3D. However, it's -- that assumption of revenue and a pick of the revenue is built into the '18 guidance for sure.

Okay. Right. And Sandy, the $8 million to $9 million of stock-based expense that you have in the non -- you excluded from the non-debt -- non-GAAP guidance, is that after tax or before tax?

That actually is before tax.

Okay. So if I tax effect that at about 12% and then I assume 15 million shares, so that's about $0.50 of EPS?

Yes. So that's why -- we have felt that guiding to a non-GAAP EPS is more appropriate because of the significant moving parts, not to mention the Tax Reform and how that is going to affect us, but also the increase in stock-based compensation. So going forward, we'd like to provide you with a non-GAAP EPS as a better comparable for year-over-year.

Okay. So the metrics you gave for sales and marketing and G&A for 2018, I assume that excluded the stock-based expense?

No. Those were actually GAAP. The only 2 guidance measures that are non-GAAP is the earnings per share and the adjusted EBITDA. The gross margin as well as the operating expense range at 52% to 54% are GAAP measures.

(Operator Instructions) Our next question comes from Anthony Vendetti of Maxim Group.

Yes. I just wanted to talk about the -- some of the 2 new products. Can you talk about the royalty arrangement, or how that's going to work in terms of how you're going to account for it?

So the arrangement we have with the OEM manufacturers is that we basically import the product to North America at a transfer price. And then we work of a -- we have a gross margin built off of that transfer price. And essentially, it accounted -- it's accounted for as the cost of goods.

Cost of goods. And you have exclusive distribution in the U.S., correct?

In -- for both products in North America. So U.S., Canada.

Across the North America. Okay, great. And then just on the picosecond technology, your enlighten product, that there is a lot of competition in that space. And we've been hearing over the last several quarters that there has been some price competition. And I was just wondering, are you seeing any pricing pressure? And if not, why do you believe you're not seeing pricing pressure with the enlighten?

No. We're, absolutely, seeing far more competitive deals when it comes to the PICO and nanosecond technology. While the overall price has eroded a bit, I can tell you that because of our technology, because of our execution out in the field, we have been able to maintain a nice premium versus the -- even on head-to-head competitive deals, we've been able to still win the revenue with a higher price, sometimes as high as 20%.

Okay. And then I missed the beginning of the call. I didn't know if you talked about any sales, what the percentage of your sales in the fourth quarter were bundled sales where you sold more than one product into a client?

We didn't comment on that. And we're -- basically, we're estimating it or the number we're looking at is about 20% of our revenue were bundled sales in North America.

20% bundled. And I thought I caught the end of this, but I know you would hire people internally to build the sales force to help accelerate the build-out of the North American sales force. I was just wondering, has that expedited the number of hires in the fourth quarter? How many did you hire in the fourth quarter and what's the year-end goal for 2018?

So we definitely did hire 2 what we call internal recruiters, 2 individuals that joined the company in beginning of Q4. And we were able to add about net 9 sales individuals in North America. They're also helping on R&D with the recruiting there as well for our facility here -- our R&D facility here in the headquarters in new Brisbane. And then for the goals for 2018, we're looking to add about a net 12, call it, in North America, so going from...

68.

68 to about 80 by the end of '18.

(Operator Instructions) If there are no further questions, I would like to turn the callback over to Mr. James Reinstein for closing comments.

Thank you very much, and thanks everyone for participating in our call today. We will be attending a number of investor events in the next few months. And we will be featuring our new products this weekend in San Diego at the American Academy of Dermatology. We hope to see you there. Good afternoon, and thank you for your continued interest in Cutera.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.