Cutera Inc (CUTR) 2018 Q1 法說會逐字稿

Greetings, and welcome to the Cutera Inc. First Quarter 2018 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, Matthew Scalo, Head of Investor Relations and Corporate Development. Thank you. You may begin.

Thanks, operator. Welcome to Cutera's First Quarter 2018 Earnings Conference Call. My name is Matt Scalo, and I recently joined Cutera as Head of Investor Relations and Corporate Development. On the call today are 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 as of current information, that is, by its nature, dynamic and subject to change. The forward-looking statements include, among others, statements regarding financial guidance, plans to introduce new products, and productivity improvement. For words that may identify forward-looking statements, we encourage you to refer to the safe harbor statements in our press release earlier today.

All forward-looking statements are subject to risks and uncertainties, including those risk factors described in section entitled Risk Factors in our Form 10-K, as filed with the SEC on March 26, 2018, and updated in our Form 10-Qs, subsequently filed.

Cutera also cautions you not to place undue reliance on forward-looking statements, which speak only as of the date they are made. Cutera undertakes no obligation to update publicly any forward-looking statements to reflect new information, events or circumstances or to reflect 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, operating performance measures prescribed by GAAP.

With that, I will turn the call over to CEO, James Reinstein.

Thank you, Matt. Good afternoon, everyone, and thanks for joining us today to discuss our 2018 first quarter results.

From a revenue perspective, the company performed well in what is normally a seasonally slow quarter, generating sales of $34.1 million or growth of 16% over first quarter 2017.

North American sales -- system sales continue to be vibrant, growing 31% over Q1 2017. The drivers of this growth are combination of elevated ASPs across most of our platforms as well as the contribution of newly launched systems, which bring with them a recurring revenue component related to their usage. I'm referring to our truSculpt 3D body sculpting system, the Juliet women's health system and the Secret RF microneedling system. In fact, these 3 franchises contributed over 35% of global revenue in the first quarter.

Larry Laber, our VP of North American sales, along with Keith Adams, our Director of North American sales, continue to have the North American team executing at very high levels.

Consistent with the prior quarter, our core customer segment, comprising of dermatologists and plastic surgeons, accounted for 42% of our North American orders in the first quarter. We believe this indicates continued strength in our core customer market, along with expansion of our channel reach into noncore physicians. In short, we continue to demonstrate an ability to sell to physicians, looking to broaden their practices with a patient-pay procedural model.

Our North American sales force remain constant at 68 reps, which is not unusual considering the first quarter tends to experience higher turnover. We expect to expand this group by 10 to 12 reps in 2018. In addition, we've commenced building our consumable sales force and expect to hire approximately 10 reps by the end of this year.

As for international results, which were flat year-over-year, solid double-digit growth in Europe, Middle East and Australia were offset by an administrative regulatory issue in Japan that impacted the registration of our products in that country. This issue created a distraction for the Japanese team that has been completely resolved, and we are confident the team will deliver our full year expectation.

The growth in other regions benefited from an expansion of our marketing programs, including the first ever Middle East Cutera University, which was held in Dubai and just prior to the Dubai Derma Congress in March. Marina Kamenakis, our global VP of Marketing and Clinical, orchestrated an event that featured well known key opinion leaders from the U.S. and the region. Marina and her team will continue to provide these valuable educational programs in other regions, including an event in Asia later this quarter.

We continue to grow our international sales team with the addition of a net 9 reps in the first quarter. This includes the expansion of direct operations in Spain, where we expect the team to begin generating revenue this quarter.

Our new facility in Madrid will be a training center for our Cutera teammates and, of course, provide a showroom and clinical training center for our customers.

Our gross margin was 51% in the quarter and remains in line with our full year goal of 57% to 58%. We've talked about the company's need to make structured investments in order to sustain our short-term and long-term growth rates.

We began as this effort in late 2017 with a focus on our field service team and manufacturing efficiency. Our VP of Service, Mike Palumbo, continues to make considerable progress with the service organization. He is effectively adding talent, ensuring the team is equipped with the right level of parts to provide our customers with rapid response times and improve their productivity. This, we expect, will put us in a better position to grow the long-term recurring service revenue.

Further investments are being made in our manufacturing operations. Dan Mindlin, our new VP of Operations, who joined the company earlier this year, immediately identified process improvements that should enhance output, improve our inventory management and reduce our cost of goods.

We expect these initiatives in service and manufacturing to have a positive impact on gross margins in the future, but, of course, require the investments being made now.

Turning to new products. In January, we commenced the launch of the Juliet laser, a best-in-class product for improving female sexual function and overall vaginal health. We also launched the Secret RF, which is a fractional radio frequency microneedling device that effectively remodels collagen, improves mild wrinkles and diminishes scars. I couldn't be more pleased with the strong demand we are seeing for both systems, and we anticipate these platforms will contribute strongly to our growth in 2018 and beyond.

We also expect the Juliet launch in addition -- in additional geographies this quarter and we'll provide an update on our progress on our next call.

Our enlighten franchise for tattoo removal and skin revitalization continues to expand as we introduced the latest version, enlighten SR, in April. The SR focuses on skin revitalization with our signature procedures, PICO Genesis and PICO Genesis FX. At the recent American Society of Laser Medicine and Surgery conference in April, customer enthusiasm for expanding product line was at record levels and was a fresh reminder to me of the enormous market opportunity for Cutera.

Lastly, the company plans to provide more detail on our project pipeline as well as a general corporate update at an Analyst Day later in the year.

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

Thanks, James. First quarter revenue was $34.1 million or 16% growth over the first quarter of 2017. North America's system revenue grew 31%, driven by continued strong demand for our truSculpt 3D system and the successful launches of the Juliet and Secret RF systems.

When we look outside these 3 products, it is important to note that average selling prices for our core xeo and excel systems increased over the first quarter 2017. We believe this reflects 2 key points: first, the market in both core and noncore segments continue to experience robust demand; and second, great execution by our sales force as we continue to price our laser systems at a premium.

International revenue was basically flat versus the first quarter of 2017. Europe saw healthy mid-teens growth, but this was offset by a decline in Japan. As James mentioned, an administrative issue impacted our ability to sell our full portfolio of products for a portion of the first quarter in Japan. This was resolved by the end of the first quarter and we remain confident the team will deliver in 2018.

In addition to the healthy demand for our systems, Cutera is focused on expanding recurring revenue portion of our total revenue. In the first quarter, recurring revenue, defined as service revenue plus consumable revenue and skincare sales, accounted for approximately 20% of total revenue in the first quarter.

We continue to see consumable revenue growing strong, supported by our expanding dedicated commercial team. This will become more meaningful over time as over 40% of our systems sold in the first quarter will generate consumable revenue going forward.

Moving on to gross margin and operating expenses. Gross margin was 51% in the first quarter or 200 basis points lower than the first quarter of 2017. In the past couple of quarters, we have talked about our plans to invest more heavily in our service organization and manufacturing processes through the end of 2017 and 2018.

We continue to move forward with these projects and where appropriate, accelerate other activities ahead of schedule. These incremental activities include outfitting the expanding global service team to support strong growth, especially in OUS markets going forward. In addition, in order to provide the highest level of service in select markets, we continue to focus on expanding longer-term service contract coverage. We estimate these 2 activities, along with projects to improve manufacturing efficiencies, contributed to the incremental increase in our first quarter cost of goods. We expect these investments to lead to our -- to an improvement in gross margin in the longer term and also expect gross margin for the full fiscal year to be in the range of 57% to 58%.

Sales and marketing expense, as a percent of revenue, was 38% in the first quarter compared to 37% of revenue in the first quarter of 2017. The increase reflects continued investment in our global sales channels, including the build-out of our commercial consumable team, which will enable us to gain market share over the longer term.

Research and development expense increased 21% to $3.6 million or 10% of revenue in the first quarter of 2018, flat as the percentage of first quarter 2017 revenue.

We remain committed to investing in engineering and clinical research that drives new product innovation.

General and administrative expenses were $5.4 million in the first quarter of 2018 or 16% of revenue compared to $3.2 million or 11% of revenue in the first quarter of 2017. The increase in general and administrative expenses in the quarter was the result of higher audit and tax fees related to the adoption of ASC 606 and the release of a significant portion of our valuation allowance against certain U.S. deferred tax assets as well as the ongoing infrastructure build-out cost compared to a year ago.

Operating loss was $4.7 million in the quarter compared to a $1.4 million loss in the same period in 2017.

Our GAAP net loss for the first quarter of 2018 was $2 million or $0.15 per diluted share. Non-GAAP adjusted net loss for the same period was $0.3 million or $0.02 per fully diluted share. Non-GAAP adjustments include noncash stock-based compensation, depreciation and amortization expense.

Weighted average shares outstanding was 13.6 million versus 13.8 million in the year-ago period.

Turning to the balance sheet and cash flow. Net accounts receivable at the end of the first quarter of 2018 were $19.9 million, and our DSO improved by 3 days from a year-ago quarter to 52 days. Inventories were $31 million at March 31, 2018, representing a $2 million increase from December 31, 2017, or an inventory turn ratio of 2.3x, which is below our historical 4x figure during the first quarter of 2017.

The higher inventory level was driven by an increase in finished goods inventory in anticipation of future sales.

Cash used in operations was $10 million for the first quarter compared to $3.8 million in the first quarter of 2017. This change from a year ago was driven by our increased infrastructure cost, the increase in finished goods inventory and the payment of bonuses, commissions and sales achievement awards on a very successful 2017.

Our cash position remains strong. And as of the end of March 31, 2018, we held cash and investments of $24 million with no debt, while working capital was $40.2 million.

Turning to our 2018 guidance. We reiterate our 2018 financial guidance with a target revenue range of $178 million to $181 million, representing an 18% to 20% increase over 2017. We expect 2018 gross margin to be in the range of 57% to 58%. We forecast operating expenses as a percent of revenue to remain unchanged in the range of 52% to 54%, as we continue to invest in product development and the scalability of our operations.

Non-GAAP earnings per diluted share is expected to be in the range of $1.03 to $1.11.

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

Thanks, Sandy. In summary, Cutera is constantly striving to provide our physician customers with a portfolio of the most innovative and highest quality products with a premier level of service that enables them to best serve their patient's needs. With the operational investments made to date, Cutera is better positioned to execute on this mission and take advantage of the tremendous growth opportunities ahead. Management is also focused on making resource allocation decisions that are strategically relevant and offer attractive returns to our shareholders.

As the company continues to execute and drive strong double-digit revenue growth in 2018, I expect our gross margins to improve from the levels, along with increased profitability and cash from operations.

I would now like to open up the call for questions. Operator?

(Operator Instructions) Our first question comes from Chris Cooley with Stephens.

Can you hear me, okay?

Very well, Chris.

Couple from me here to start. Could you maybe quantify for us what you think the impact to the first quarter was associated with the Japanese regulatory issue? And then I'd be curious as well, you talked about holding up and actually increasing your ASPs during the quarter with strong demand for not only Secret, Juliet and truSculpt, but also the core business. We'd actually heard that there's actually some pressure on the PICO space here recently. So would love to get your thoughts on just the overall demand when we think about it by category? And how you see the competitive position for Cutera within those respective segments?

Okay. Sure, Chris. Let me take the pricing question first. That -- what we realized basically in all of the categories is an increase in our average selling price with the exception of that PICO category that you mentioned. We do still maintain a premium price within that category compared to competition. However, there is quite a bit of pricing pressure in that category, where we did see a decline in our own ASPs. However, xeo, excel V and HR, all appreciated either a slight or more reasonably -- slightly larger increase in our average selling price, which is a great testament to the North American sales team as well as some of the direct markets teams in international markets by being able to command that premium price. Your first question was with regards to Japan. Don't really want to quantify a specific number. I will say that without this distraction and the need to exchange products, which the team was really focused on doing as well as getting the manufacturing -- for manufacturing license reinstated, which they actually did in record time and allowed us to start shipping the products again, I would say that international probably would have seen double-digit growth without that issue.

Okay. And if I could maybe just squeeze one more and then I will get in queue. Are you able to provide any color in terms of the lift to total growth in the quarter from the step up in ASP? So basically just kind of trying to tease out the volume versus a pricing type equation?

Well, most of the increase actually did come from volume as a percentage, but there certainly was a nice contribution on the pricing indication as well.

Yes. I think the pricing is just -- I think the pricing just shows that we're able to maintain or slightly increase our ASPs, which more importantly shows that we didn't decline.

Our next question comes from Jon Block with Stifel.

Couple of questions for me. Jim, maybe just high level, the overall environment for North America equipment, we'd love to hear your thoughts there. You've got at least one competitor talking about hiring a lot of reps recently and integrating them and maybe getting more aggressive in terms of how they're approaching the market? So just taking a step back, we'd love to hear your thoughts on sort of the competitive environment right out there -- out there right now in North America?

Well, I think certainly as has been the last few years, several quarters, the North American sales organization is just performing at a very high level, growing over 30% this quarter. When you look at competition, lot of which are private. So it's hard to get a real handle. But I can assure you that we're outpacing the market at a north of 30% growth rate. Given the demand for salespeople and sales -- within our own sales organization, we certainly -- we're net-net remained at the 68 number, which is not surprising and fully with what we expected. But we certainly did hire quite a few, but we also let some go as well. Hopefully that cover your question?

Yes, yes, certainly did. And then just for gross margins for the year. Sandy or James, I don't know if you want to give any color sort of on the cadence of the improvement. It was lower than what we were expecting in 1Q, but you held your expectations for the year. So maybe the step up 2Q versus 3Q versus 4Q, how should we see that unfolding throughout 2018 ? And then I just got one more quick one.

So I think for Q2, it's -- we've talked about we're making these investments both in service and manufacturing. So in Q2, we expect to still make some of these investments because we have accelerated the investments for the long-term growth. But suffice to say, we expect over the course of the year both with completing or largely completing the investments, but also the mix of the products as we've always talked about 3D drives a higher gross margin. But then the launch of Juliet and Secret were very successful in the first quarter, and we continue to see that, that will improve and lift gross margin over the rest of the year as well.

And I think to add to that, these investments are really focused on improving either cost of goods or our ability to more efficiently manufacture as well as service the products. And then while probably not as a significant contributor as we will see in outer years, but we still -- we'll start to see the consumable products selling on these products -- on these systems that we're selling now, the Juliet, the Secret and the truSculpt 3D.

Okay. And last one for me, just a little bit nitpick, Sandy, for you. You reiterated the guidance, the $1.03 to $1.11 in non-GAAP EPS. Remember, previously that was, I believe, off the 15 million share count. Is that the same? And I just ask because the 1Q '18 share count was a little lower than what we were thinking about?

Yes. So it is still off of the 15 million because we do see average weighted shares as we go through the year, both with divesting the PSUs, RSUs. We expect that to tick up a little bit. So close to the 15 million and that does still also include the 8 million to 9 million of the stock-based compensation as well.

Our next question comes from Anthony Vendetti with Maxim Group.

Yes, just wondering if you could talk a little bit more about enlighten SR. You launched it globally, I guess, in April. What expanded indications, because obviously the picosecond laser, are there new FDA cleared indications? Or what expanded indications will this be used for? And with picosecond in general under some pricing pressure, what do you expect the ASP to be?

So probably won't discuss specific ASPs for it. However, the launch of this product was really to answer what's going on in PICO, where other competitors are out there with less power devices, with fewer wavelengths and still trying to price within this category. So the SR is focused just on skin revitalization versus being the premier tattoo removal device that the enlighten III is. And that's really what it's geared for. There is not any expansion of indication. It's just an offering within the enlighten family.

And so is it more -- James, then is it more of a scale down where it's just going to do skin revitalization, whereas the other one will do more? Or...

Yes, absolutely, Anthony. That's exactly what it is for, and probably geared more towards the international market.

Okay, more towards international. And then on truSculpt 3D, are you going to wait for the Analyst Day to do an update on the hands-free status?

I can give you an update there, which is that it's still in line with the original timing for launch, which would be in Q3 of this year. And so that hasn't changed and we look forward to having that launch during the third quarter.

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

Can you hear me?

Yes, we can, Jim.

Great. On the G&A line, you said you had some expenses due to the auditors and some consultants because you're changing your tax status. Should we consider that kind of a onetime item? And what's a good level for G&A spending for the rest of the year?

Yes. So it is a onetime event in the first quarter, that was related to the closing of the year, when all of that was going on. So that is considered the onetime event. And I would say, thinking about it for the year, as we have discussed in our guidance, we expect to maintain the same levels as last year. So roughly 9% to 10% as a percentage of revenue.

Okay. Then on the balance sheet, other assets went up about $5 million in the quarter. Can you tell me what that was?

Yes. So in relation to the implementation of ASC 606, we actually -- you have to capitalize your costs and go back and flow it through retained earnings and put it in the appropriate places. So that -- a lot of that has to do with the capitalization of the commission that we needed to take back to the balance sheet.

Okay. Right. Then you noted that consumables were about 20% of revenue in the quarter. How does that compare with the year ago?

A year ago, it was 14%.

Okay.

And that does include the service agreements, parts and labor.

In both this year and last year?

Correct. Yes. So the addition this year, call it the upside to the growth, one is that we did have an uptick in the percentage of systems that did purchase a service agreement that did go up. However, we'll start to see that revenue kind of basically clocking every month or reported every quarter as well as for the first time, we've got real consumable revenue, meaning participating in the procedures of revenue. So we're either selling a needle cartridge or a tip for the Juliet or a handpiece for the truSculpt.

Okay. And you said you were going to add 10 reps for consumables, that's in addition to the 12 that you have -- you have plans to add for systems, is that correct?

Yes, that's correct. And we've got 3 of them already on board and they are downstairs training as we speak.

Okay. So if we look out 4, 5 years, where would you like to see consumables as a percentage of revenue?

Yes. I think, we're taking out to 2021, we should be, call it, north of 10%, maybe closer to 15% to 20% would be that number.

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

Just a couple of follow-ups. Bundled sales this quarter, did you give that percentage -- do you have that percentage?

Yes. We didn't actually give it, but it remains in line with the prior quarters of roughly about 20% of our sales are in bundled transactions.

Okay. And then, I know you mentioned you hired some direct reps internationally. How many direct reps do you have internationally right now?

Sorry, just got to look that one up (inaudible). We have 48 direct reps in 10 countries.

Okay. And -- so Miguel Pardos is no longer at Cutera I guess, as of February. Is there someone that has replaced him? Or is someone in a different role that's doing what Miguel was doing for international sales?

No, this far we haven't replaced him. The search is ongoing, and we are certainly narrowing the list. And in the interim, the 5 regional leaders are reporting directly to me.

Okay. All right. And then, I know you have hired 2 internal people to help with the recruitment of direct sales reps here in the U.S. Has that target for the end of 2018 -- has the target changed, has that increased, is it still around 80, is that the direct sales reps number for 2018?

Yes. We remain -- we want to add 10 to 12 per year going forward. And so we should land this year up, call it, around 80. If it's 78, fine; if it's 82, even better.

And our next question comes from Larry Haimovitch with HMTC.

Sandy, this is a up follow-up to the question that Jon Block asked. For the first quarter, gross margin was 51%. I thought you've said the gross margin for the year was going to be 57%, did I hear that correctly?

That is correct, 57% to 58% for the full year.

Full year. So that would imply by the fourth quarter probably gross margins in excess of 60%. Now I haven't penciled up a math exactly, but it would certainly imply a very nice step up in gross margins through the year to where you'd exit at over 60%. Is that math sound approximately correct?

Our target has always been internally to the 60% and that's what we are continuing to strive for, but -- with both these investments, but also the product mix. And the efficiencies that we're actually putting in within manufacturing that should lower our cost of goods.

Okay. So 60% never means realistic?

Yes. We're just reiterating the 57% to 58%, which has that implication, which you've stated.

Ladies and gentlemen, it appears there are no further questions at this time. I'll turn it back to management for closing remarks.

So thank you very much. We appreciate everyone joining the call today. And look forward to seeing you at upcoming health care conferences as well as the investor/Analyst Day that we'll have later in the year. Thanks, and good day.

This concludes today's conference. All parties may disconnect. Have a great day. Thank you.