Cutera, Inc. Q4 2009 Earnings Call Transcript

Feb. 8.10 | About: Cutera, Inc. (CUTR)

Cutera, Inc. (NASDAQ:CUTR)

Q4 2009 Earnings Call Transcript

February 8, 2009 5:00 pm ET

Executives

John Mills – IR, Integrated Corporate Relations

Kevin Connors – President and CEO

Ronald Santilli – EVP and CFO

Analysts

Tom Gunderson – Piper Jaffray

Adam Mecca [ph] – Canaccord Adams

Dalton Chandler – Needham & Company

Anthony Vendetti – Maxim Group

Operator

Greetings, ladies and gentlemen, and welcome to the Cutera Incorporated fourth quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. John Mills, senior managing director of Integrated Corporate Relations. Thank you. Mr. Mills, you may begin.

John Mills

Great. Thank you, Scott. By now, everyone should have access to the fourth quarter 2009 earnings release, which went out today at approximately 4:00 P. M. Eastern Time. The release is available on the Investor Relations portion of Cutera’s website at cutera.com and with its Form 8-K filed today with the SEC and available on the SEC website at sec.gov.

Before we begin, Cutera would like to remind everyone that these prepared remarks contain forward-looking statements, including statements concerning domestic and international growth opportunities and strategies, future spending, expense management and execution on various aspects of our operations and business, expectations for increasing revenue, generating cash and profitability, the development and commercialization of existing and planned products, and potential revenue growth from recently announced strategic alliances. Also, management may make additional forward-looking statements in response to your questions.

These forward-looking statements do not guarantee future performance and therefore you should not rely on them in making an investment decision without considering the risks associated with such statements. 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.

For a complete list of risk factors that could cause Cutera’s actual results to differ materially from the forward-looking statements, please refer to the section entitled Risk Factors in our most recently filed 10-Q, filed on November 2, 2009, with the SEC.

And with that, I will turn the call over to the company’s President and Chief Executive Officer, Mr. Kevin Connors.

Kevin Connors

Thank you, John. Good afternoon, everyone and thanks for joining us today to discuss Cutera’s results for the fourth quarter ended December 31, 2009. On today's call, I will provide an overview of our results. Then Ron Santilli, our CFO, will provide additional details on our operating and financial results. Finally, we will provide some closing comments and open the call to your questions.

Our revenue in the fourth quarter 2009 grew by 27% to $15.4 million compared to third quarter of 2009. This is our second sequential quarterly revenue growth quarter since the market downturn started in 2008, and we have now experienced sequential growth at this level for several years. We achieved growth in a number of our geographic markets, and are particularly pleased with contributions from our team in Australia and our US improvements. International business accounted for 66% of our revenue during the fourth quarter. We are pleased with results that international infrastructure is producing, which is playing a more significant role in our performance during these challenging times in the US for the aesthetic industry. As we have discussed on previous calls in 2009, we are continuing to target the core market segments of dermatologists and plastic surgeons, as well as establish medical offices, because we believe this represents the best growth opportunity in the current market environment.

In addition to improved revenue during the fourth quarter of 2009, we are pleased with the following financial achievements. One, 62% gross margin, resulting from stable ASPs, higher sales volume, and continued high product reliability. Two, we have returned to profitability due to higher revenue and the first half restructuring efforts. Three, and finally, we generated $3.2 million in cash from operations for the fourth quarter, and we achieved was the cash flow for the full-year 2009. We are pleased to have generated cash from operations in 2009, in spite of a declining market. This reflects the leverage of our business models as well as results of our restructuring efforts implemented in the first half of 2009.

Turning to the business development matters, we have been actively seeking complementary market-leading products to leverage our distribution network and enhance our product offering in selected international markets and we have recently announced the expansion of our product offering in certain geographies through alliances with Sound Surgical and Obagi Medical, Inc. Both of these companies produce market-leading products that are complementary to our existing products in the aesthetic market. We believe these new complementary products will provide value to our customers by incorporating more aesthetic technologies in their practice, which results in incremental practice revenue. Additionally, these alliances will provide us with new customer call points for our products. Last the Sound Surgical ultrasound-assisted liposuction product expands our product offering in the growing body contouring market in certain geographies.

Turning to research and development, we are continuing to develop innovative solutions and expand the clinical understanding and applications of our current products. We believe the strategic ongoing investments in product research and development are critical to our future success. In line with that principle, we are continuing to invest in R&D. At the end of November, we announced our plan to postpone the launch of our TruSculpt body contouring product and we are continuing our clinical research for this technology. During a review of clinical data, we determined the established clinical protocols did not consistently yield the targeted outcome. We believe the potential market for non-invasive body contouring is very large and we are continuing our clinical research to achieve predictable, measurable clinical improvement; and we have a strong history of introducing leading products with a high level of clinical efficacy that we share customer success and satisfied patients. We will continue our research efforts and we will commercialize the technology, if and when it has met our standards that our customers have come to expect from us. We are actively pursuing a number of other development programs and we will be providing more information later in the year.

And now, I would like to turn the call over to Ron to discuss our financials in more detail.

Ron Santilli

Thanks, Kevin, and thanks to you all for joining us today on our fourth quarter 2009 conference call. Due to significant changes in the recent business environment, we are providing more of our financial comparison to the preceding quarter instead the same quarter a year ago. We believe this will assist you with better understanding of the improvements in our business trends.

Fourth quarter 2009 revenue grew by 27% to $15.4 million compared to the third quarter of 2009. This is particularly important for us, as it reflects the second quarter of sequential revenue growth since the market downturn. Net income for the fourth quarter was breakeven. This breakeven performance included a $351,000 or $292,000 net of tax or $0.02 per diluted share non-recurring R&D materials charge, associated with the postponement of the TruSculpt product release.

Product revenue for the fourth quarter of 2009 increased 35% when compared to the third quarter of 2009. This growth occurred as a result of higher volume and stable ASPs. Growth in this revenue category is important, given this typically represents purchases by new customers, which provides additional long-term growth to our recurring revenue categories. Upgrade revenue for the fourth quarter of 2009 increased 51% when compared to the third quarter of 2009. Our customers continued to express interest in our Pearl and Pearl Fractional products, and as such they represent an increasing percentage of our upgrade revenue.

The clinical results of our Pearl Fractional products are exceeding our expectations and we will continue our focus on selling to the core specialties and building relationships with the market’s segment opinion leaders.

Service revenue for the fourth quarter of 2009 increased to $3.3 million compared to $3.2 million for the third quarter of 2009. This revenue has remained fairly flat over the past few quarters, due primarily to fewer customers purchasing extended service contracts in response to strong product reliability and the current economic environment.

Titan annuity revenue for the fourth quarter of 2009 was $1.5 million compared to $1.3 million for the third quarter of 2009. A significant percentage of our revenue is sourced from existing customers. During the fourth quarter of 2009, 45% of our revenue was derived from sales of service, upgrades, and tightened annuity revenue. We remain committed to strong customer satisfaction and believe we will continue to realize revenue growth from our annuity revenue categories once the economy becomes more stable.

I will now address our operating performance. Our gross margin improved to 62% in the fourth quarter of 2009 compared to 60% in the third quarter of 2009. The higher gross margin percentage was due primarily from higher revenue, reduced manufacturing expenses from our first half restructuring efforts, and lower service expenses resulting from continued strong product reliability. Sales and marketing expenses were $6.1 million or 40% of revenue for the fourth quarter of 2009. This expense level represents an increase of approximately $1 million compared to the third quarter of 2009 and was primarily due to increased commission and travel related expenses attributable to the increased revenue.

Research and development expenses increased by approximately $200,000 from $1.7 million in the third quarter of 2009 to $1.9 million in the fourth quarter of 2009. This expense increase was due primarily to a $351,000 non-recurring charge associated with the postponement of our TruSculpt product launch.

General and administrative expenses were $2.1 million in the fourth quarter, which is flat compared to the third quarter of 2009. Interest and other income, net, was $174,000 in the fourth quarter of 2009 compared to $288,000 in the third quarter of 2009. The lower income is due primarily to lower yields on our investment portfolio and higher foreign exchange losses in the fourth quarter of 2009.

Our income tax benefit for the fourth quarter of 2009 was $250,000. This included a benefit of approximately $273,000, resulting from legislature that allowed net operating losses to be carried back up to five years, compared to two years prior to the enactment of the act. For modeling purposes, we suggest using an effective income tax rate of approximately 20% in 2010.

Turning to the balance sheet, our financial position remains strong. As of December 31, 2009, we had $106.9 million in cash, marketable securities, and long-term investments with no debt. This represents approximately $8 per outstanding share. During the fourth quarter, our operations generated $3.2 million of cash. For the year, we were slightly cash positive, in spite of a declining market. Net accounts receivable at the end of the fourth quarter of 2009 were $3.3 million and the DSOs were 20 days. Our DSOs continued to remain strong and were better than our targeted 35 to 45 days, due to a zero-credit frugal process and strong collection efforts.

Inventories decreased by approximately $1.5 million from September 30, 2009 to December 30, 2009. We are pleased with the reductions made in the quarter and year to date and remain diligent in our management of this important asset.

Now that I have concluded my overview of Cutera’s financial performance, I will turn the call back over to Kevin.

Kevin Connors

Thanks, Ron. We are pleased to report meaningful sequential growth and are committed to increasing our market share in today's environment. We will continue to explore strategic opportunities and develop exciting new products going forward. We would like to take this opportunity to thank our shareholders and employees for their support during 2009 and look forward to the opportunity to strengthen our company in 2010 and beyond.

Now, I would like to open up the call to your questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Our first question is coming from the line of Mr. Tom Gunderson with Piper Jaffray. Your line is open. You may proceed.

Tom Gunderson – Piper Jaffray

Good afternoon. I have got a couple of questions, but let me just start with a clarification. That one-time R&D charge for TruSculpt postponement, is that a cash or non-cash?

Ron Santilli

That would be cash.

Tom Gunderson – Piper Jaffray

Okay. And then, maybe since you did so well overseas and you highlighted Australia, Kevin, is this a trend we should look at going forward and were these one-time sales to distributors or do you consider these flow-through kinds of sales?

Kevin Connors

Well, with regard to Australia in particular, we are direct there. So we don't have any distributor business speak about there. It is our feeling that the economy is quite different in the different geographies and we are trying to be opportunistic where we see healthier fundamentals and clearly Canada and Australia and other parts of the world are pretty strong for us. So I think that the trends have been moving in this direction. We have had a majority of our business outside the United States now for probably about a year. So it has been continuing to expand.

Tom Gunderson – Piper Jaffray

Thanks. And then, Kevin, core business versus primary care physicians, how did that match up in the quarter?

Kevin Connors

Ron has got that.

Ron Santilli

We were approximately 46% for the quarter our orders were associated with core physicians, which would leave 54% with the non-core.

Tom Gunderson – Piper Jaffray

Got it. And is that a US number that you gave?

Ron Santilli

Yes, that is.

Tom Gunderson – Piper Jaffray

Okay. And then, could you talk a little bit about 2010 relative to Obagi and Sound Surgical? Is that going to affect margins and if so, how?

Kevin Connors

Well, we don't have any guidance to give in terms of what we expect from these new partners, but we are pleased to have two strong brands in our bag now. And as we have mentioned in the script, it is not worldwide distribution for both of these and in the case of Obagi, it is just Japan. But we started with distributing our Solera line in Japan a couple of years ago and that has worked out very well and our customers like having one company that they can talk to about the broad range of aesthetic practices.

Tom Gunderson – Piper Jaffray

Got it. And then last question, we are on I think on the Titan hand pieces, I continue to be amazed that those go up in a tough market and reflective of that people who have lasers are using them and using them more. Was there any price changes during the year or should we look at those hand pieces as being total unit increases?

Ron Santilli

During the year, there were no price increases on Titan refills, so it would reflect nothing but usage.

Tom Gunderson – Piper Jaffray

Got it. Okay, thank you very much.

Operator

Thank you. Our next question is coming from the line of Adam Mecca [ph] with Canaccord Adams. Your line is open. You may proceed with your question.

Adam Mecca – Canaccord Adams

Great, thank you. First question, going back to the international performance, has there been any change? You said you were being opportunistic. Does that mean you have added any sales reps in certain areas in Canada or Australia or any change besides just the business is just stronger there?

Kevin Connors

I think it is pretty much the latter. We hadn't made any significant changes to sales headcount.

Adam Mecca – Canaccord Adams

Okay. And is there any – can you talk about the difference in terms of – I am assuming a lot of it is credit approval is it a lot different in Australia or Canada relative to how it is in the States?

Kevin Connors

Well, I tell you, the States is probably the most challenging market as relates. We are not having the resistance abroad that we are seeing here.

Adam Mecca – Canaccord Adams

Okay. How about moving off to new products, can you give any guidance in terms of when you think you might have something you would like to bring to the market in the US? Are you thinking about launching anything at AAD in March?

Kevin Connors

Well, we don't have any plans as we mentioned in the script. We hope to be able to update later in the year regarding what we have in the pipeline.

Adam Mecca – Canaccord Adams

Okay. And then, any comments about the outlook for the US business going into 2010? Have you found January and February to be an improving climate; are more customers seeking out new products and looking for the upgrade or how are things changed relative to November or December?

Kevin Connors

Well, can’t read the [inaudible] too much on that. January is typically a pretty quiet month for the industry. We can just point to the last quarters, we have been able to see nice sequential growth and we are hoping that that will continue.

Adam Mecca – Canaccord Adams

Okay, great. Thank you.

Operator

Thank you. Our next question is coming from the line of Dalton Chandler with Needham & Company. Your line is open. You may proceed with your question.

Dalton Chandler – Needham & Company

Good afternoon. Maybe if I could just push a little bit more on the prior question, I understand that you only give the specific timeline. If not showing anything new, should we expect something new at some point this year?

Kevin Connors

We just can’t comment on when we plan to have our next product launch and as we get closer to it, we will certainly be discussing it on this call.

Dalton Chandler – Needham & Company

Okay, well. With regard to the TruSculpt, I believe it is already clear for cellulite. Can you talk about what the clinical goal is you are trying to achieve that you haven't gotten to yet?

Kevin Connors

Right. We have had the cellulite clearance for quite some time. What we are trying to accomplish is to have a more meaningful impact on treating relatively small volumes of fat and getting a repeatable result. So we are just – we are seeing some improvement in some patients, but we are just not able to – at this point, come up with the treatment protocol that gives us predictable outcomes.

Dalton Chandler – Needham & Company

Okay. And when you expect to start selling the Sound Surgical and Obagi products?

Kevin Connors

We signed those contracts and we are planning to start with Obagi this quarter and Sound as well.

Dalton Chandler – Needham & Company

Okay. And then, just lastly, I think the mix of core and non-core physicians shifted pretty favorably toward the core physicians versus last quarter. Is that a result of your sales force retraining program? What

Kevin Connors

Yes. We are pleased to see it bounce back. It can move around a little bit, particularly in Canada, every now and then we get some non-physician business that makes that look less desirable, but you know, we are hoping that going forward that we can exceed 50% of our business going into the core physician category.

Dalton Chandler – Needham & Company

Okay. Where do you stand with the retraining process?

Kevin Connors

Well, we are never done with it. We just had our global sales meeting in the first month of the quarter and we are just shining a bright light on it and making it clear that we think it is really important that our sales team be properly trained when they are going up against or going in front of [inaudible] that is a very sophisticated buying physician and we need to make sure that our team has all the tools they need to be successful.

Dalton Chandler – Needham & Company

Okay. Thanks a lot, guys.

Operator

Thank you. (Operator instructions) Our next question is coming from the line of Mr. Anthony Vendetti with Maxim Group. Your line is open. You may proceed with your question.

Anthony Vendetti – Maxim Group

Thanks. You had nice improvement in gross margin this quarter. And I was wondering what you attribute that to. Obviously, there has been some firming in pricing, but an actual improvement what do you attribute that to this particular quarter?

Ron Santilli

Well, the volume certainly helped. That is our primary indicator, as well as our first half restructuring efforts are starting to play here in Q4. So those are the two primary ones that allowed for the gross margin.

Anthony Vendetti – Maxim Group

Specifically, what kind of restructuring are you –

Ron Santilli

In the first half, when we had our downsizing, changing the staff, those levels over the course of the first half, we had much higher manufacturing expenses, even leading into Q3, but by Q4, we had attained the level that we were looking for.

Anthony Vendetti – Maxim Group

Okay, Ron. And what about the sales force [inaudible] number of territories or what was the count the end of this quarter?

Ron Santilli

It has remained about the same. In North America, we have got about 30 territories.

Anthony Vendetti – Maxim Group

Okay. And if you could just give us the stock-based comp breakdown.

Ron Santilli

Sure. I think for the quarter, let us see – for the quarter it was about $840,000. And if you want to get the cost of goods sold portion, about $149,000 was cost of goods sold.

Anthony Vendetti – Maxim Group

Are you going to break it out between R&D, sales and marketing, or –

Ron Santilli

Sure. $227,000 is for sales and marketing. R&D is $109,000; and $355,000 for G&A.

Anthony Vendetti – Maxim Group

Okay. You know, particularly, obviously, Australia has been strong in your direct fare. Any other segments particularly strong internationally? How is Japan doing? Any comments on that.

Kevin Connors

We saw growth from a large number of countries, and we are pleased that it is not one geography having a strong quarter; it was really spread around nicely.

Anthony Vendetti – Maxim Group

Okay. And Kevin, maybe you could just talk a little bit about the US market and your sense that even though credit remains tight, that a) pricing is firming up or b) that we are seeing a bottom in terms of demand.

Kevin Connors

Well, as Tom Gunderson commented earlier, the only indicator we have in our business that is tied directly to the procedures is the Titan annuity side of the business, and we are seeing some modest growth there. So I think the procedure side, as far as we can tell, seems to be in decent shape. And I think in terms of the macro issues, I think it could well be that we have gotten better at dealing in the current climate at winning business today.

Anthony Vendetti – Maxim Group

So based on that, it sounds like with tightened procedure volume moving up a little bit, is it – I mean, I don't want to get too optimistic here too ahead, but at least based on this quarter, it looked like procedure volume picked up a little bit and we don't know if that is a trend, because it is just one quarter, but you have now had, like you said, two sequential improvements on a quarterly basis. How do you want to characterize that?

Kevin Connors

Well, we are happy with the 27% sequential growth. It has been a long time since we have been able to speak of a number in that range. And in a normal market, the fourth quarter is the strongest one, but the industry has gone through a pretty challenging couple of years and so have we returned to a more normal business cycle is the open question, but we are pleased to be able to have two quarters of sequential growth.

Anthony Vendetti – Maxim Group

And lastly, just on the competitive front, would you attribute some of the strength that you are seeing and maybe some of your public companies are seeing due to some may be weakness in the private sector as the financial constraints have heard some of the other companies maybe.

Kevin Connors

Well, it is much better to whether I bet strong or stronger balance sheet. We have certain competitors that don't have that luxury and it must put a strain on the business.

Anthony Vendetti – Maxim Group

Okay. And you know, on the territories, you had 30. Is that what you are planning on sticking at for the rest of this year or are you going to look to selectively add as the market picks up?

Kevin Connors

Well, we think we have got bandwidth with the 30. We think that there are opportunities that have increased sales volume and that is one thing we are monitoring very closely as we think we need to improve upon that. So I still think we have got plenty of spring left in that sales force to rebound if the market cooperates, but in the near term, we don't have any plans to add territories.

Anthony Vendetti – Maxim Group

Okay, great. All right, great, thanks guys.

Operator

Thank you. Our final question comes from the line of Adam Mecca with Canaccord Adams. Your line is open. You may proceed with your question.

Adam Mecca – Canaccord Adams

Can you hear me now? Sorry about that. I just wanted to harp on the opportunistic comment about the international markets. If there wasn’t a change in sales force, was there any kind of shift in terms of moving sales reps from one territory or one region to another geographic region? Or has everyone stayed in place?

Kevin Connors

I am not quite sure if I am.

Adam Mecca – Canaccord Adams

You referenced travel expenses and commissions, so I am just asking like was there a shift of sales reps to more opportunistic markets if you move folks from Japan down to Australia for whatever just to add more feet on the street?

Kevin Connors

No, we haven't done anything material like that. You know, we have promoted some people, but we haven't made any strategic moves to relocate sales people.

Ron Santilli

The higher commission and travel expenses; the commission of course is a link to the higher revenue. Travel is just additional promotional efforts and activities going on in the quarter, this was also what drove those up.

Adam Mecca – Canaccord Adams

Okay. So that 30%, almost 40% growth in the international on a sequential basis, that is all just organic putting more [inaudible] in place?

Kevin Connors

Yes.

Ron Santilli

Yes.

Adam Mecca – Canaccord Adams

And the Titan refills, was that more so in the US – you know, utilization, was it higher in the US or outside of the US? Can you talk about that?

Kevin Connors

It is mix, on a relatively installed base, our Titan annuity business is probably strongest in Japan. So but we are seeing it from across the board.

Adam Mecca – Canaccord Adams

Okay, great. Thank you so much, guys.

Operator

Thank you. This does conclude our question and answer session. I would like to turn the floor back to Mr. Kevin Connors for any closing remarks.

Kevin Connors

Thank you for participating on our call today. We look forward to seeing you at various investor events during the quarter and to update on our first quarter conference call in May. Good afternoon, and thanks for your continued interest in Cutera.

Operator

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you very much for your participation.

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