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Cutera (NASDAQ:CUTR)

Q1 2011 Earnings Call

May 02, 2011 5:00 pm ET

Executives

Ronald Santilli - Chief Financial Officer and Executive Vice President

Kevin Connors - Chief Executive Officer, President and Director

John Mills - ICR

Analysts

Phillip Nalbone - Wedbush Securities Inc.

Thomas Gunderson - Piper Jaffray Companies

Dalton Chandler - Needham & Company, LLC

Anthony Vendetti - Maxim Group LLC

Morris Ajzenman - Griffin Securities, Inc.

Operator

Greetings, and welcome to the Cutera, Inc. First Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Mills of ICR.

John Mills

Thank you. By now, everyone should have access to the first quarter 2011 earnings release, which went out today at approximately 4 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 is available on its 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 improving profitability; the development and commercialization of existing and planned new products; potential revenue growth from strategic alliances and planned new products and obtaining regulatory clearances; natural disasters, including the unfortunate situation in Japan.

Also, management may make additional forward-looking statements in response to your questions. These forward-looking statements do not guarantee future performance and therefore, should not be relied on -- 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 recent 10-Q filed today, on May 2, 2011, with the Securities and Exchange Commission.

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

Kevin Connors

Thank you, John. Good afternoon, everyone, and thanks for joining us today to discuss Cutera's results for the first quarter ended March 31, 2011. On today's call, I'll provide an overview of the results, and then Ron Santilli, our CFO, will provide additional details on our operating and financial results. Finally, I will provide some closing comments and open the call to your questions.

Our first quarter revenue was $11.6 million, and our net loss was $3.9 million or $0.28 per share. Our revenue in the United States declined by $340,000 or 7% compared to the first quarter of 2010, due primarily to the time needed to ramp up our new North American sales management team and Titan refill -- reduce Titan refill volume due to the voluntary recall in the second quarter of 2011.

Our international revenue during the same period declined by $1.8 million or 19% due primarily to the recent earthquake disaster in Japan and lower revenue from our European distributor countries. This was partially offset by strength in our Asia Pacific distributors.

In the first quarter, we launched our Excel V, vascular laser system at the American Academy of Dermatology meeting. We did not have revenue associated with this product in the first quarter, but during the second quarter, we initiated commercial shipments in April. We look forward to a continued ramp-up of sales and marketing activities that include shipments of demonstration equipment to our sales organization and continued development of reference sites. We are encouraged by the results from the evaluation systems that have been in the hands of well-respected luminary physicians and look forward to rolling it out on a larger scale; first, in the United States, then internationally.

In the first quarter 2011, we estimated that the unfortunate events in Japan had a negative impact on our revenue by approximately $1 million. The Japanese market has been a strong growth opportunity for us over the past few years and represents approximately 25% of our revenue in 2010. The first quarter shortfall was the result of both of our inability to complete deliveries to certain customers, as well as our inability to solicit new orders in the second half of March. It is our belief, however, that the annuity revenue streams of filler, cosmeceuticals, Titan refill and service business in Japan has been impacted to a lesser degree during this challenging time. We will continue to closely monitor the market conditions.

We believe the following initiatives will put us in a stronger performance trajectory beginning in the second quarter of 2011. One, the commercial -- commencement of the commercial shipments of our Excel V laser system. Two, the recent FDA clearance of our GenesisPlus product for toenail fungus. We have been unable to initiate sales and marketing activities in our domestic market for this indication until receiving this clearance in March and April. As a result, we are now able to target approximately 15,000 podiatrists in the United States, and we believe the dermatology specialty will be interested in this product as many of them will -- do treat this condition on their practice. Our strategic alliance with PSS will allow us to ramp up and reach this in an expedient manner.

Three, our confidence in the leadership of our recently hired North American sales management team and the growth strategies that they have implemented, which we believe will result in stronger performance for the balance of the year. As a reminder, we hired Michael Poole as our VP of Sales and three new regional managers in less than five months, and we're pleased at how quickly they have assimilated into the role.

Five, strengthening our research and development leadership with the addition of Len DeBenedictis, as our Chief Technical Officer, in the first quarter 2011. During the first quarter, approximately 52% of our North American orders came from core physicians and podiatrists. The podiatry specialty is a new target market for us and represents an opportunity to now actively market and sell our GenesisPlus and other products. We are currently -- continuing to target the core market segments, as well as established medical offices, because we believe they offer the best growth opportunities in the current market environment.

Turning to our Cosmeceutical and Filler products. In the first quarter of 2011, we had revenue of $1.1 million from these products. As a reminder, in Japan, we started distributing Obagi physician-dispensed cosmeceutical products in February 2010, and we've been distributing BioForm's Radiesse products since late 2008. These products augment our Cutera laser and light-based products. We are pleased with the recurring revenue model and profit contributions, as well as the significant cross-selling opportunities that these products provide. Currently, cosmeceutical and fillers and Cutera laser and light-based installed base overlaps by approximately 10%. In the first quarter of 2011, we expanded the product line by adding ELASTILash and CLENZIderm, and we are continuing to evaluate other lines from Obagi.

Turning to research and development. We believe that strategic ongoing investments in product research and development are critical to our future success. In line with that principle, we're continuing to invest in R&D for the next generation of technology and have increased our engineering and clinical research headcount to develop innovative solutions and expand the clinical understanding of our – and applications of our current products. Now I'd like to share with you the current status of our recently introduced products and future development efforts.

One, in April 2011, our GenesisPlus product received FDA approval for toenail-fungus treatment. We will -- This will enable us to enhance our sales and marketing efforts to approximately 15,000 podiatrists and many dermatologists in the United States to capture a larger percentage of the toenail-fungus treatment market.

Two, we launched our Excel V vascular laser in February at the American Academy of Dermatology meeting and commenced shipments of this product in April. During the second quarter of 2011, we expect to ramp up our sales and marketing activities associated with this product launch and record revenue from this product.

Three, lastly, we plan to add another product launch during the second half of 2011. More details associated with this product launch will be forthcoming in the upcoming months. Now I'd like to turn the call over to Ron to discuss our financials in more detail.

Ronald Santilli

Thanks, Kevin, and thanks to all of you for joining us today on our first quarter 2011 conference call.

First quarter of 2011 revenue was $11.6 million or 15% lower than the first quarter of 2010. Net loss for the first quarter was $3.9 million or $0.28 per diluted share. Our product revenue declined in the first quarter by 28% when compared to the first quarter of 2010. This decline was due in part to the recent earthquake disaster in Japan, as well as lower revenue from our European distributor countries. We believe that our product revenue will increase sequentially beginning in the second quarter of 2011 due to the commencement of Excel V system shipments and the sales and marketing activities surrounding the GenesisPlus FDA approval that Kevin discussed earlier in the call.

Upgrade revenue declined by 32% to $821,000 in the first quarter of 2011 compared to the same period in 2010. Historically, a new product launch has resulted in an increase in upgrade revenue. However, in 2010, we launched GenesisPlus, a stand-alone system that is not upgradable to our existing products.

Service revenue for the first quarter of 2011 was -- compared to the first quarter of 2010, was flat at $3.3 million. The primary component of service revenue is extended service contract amortization. This revenue has remained flat over the past several quarters due primarily to lower service contract amortization as a result of lower ASPs on our service contracts, offset by higher revenue from consumable handpiece purchases and time and material fees charged to customers who are out of warranty.

Titan annuities revenue in the first quarter of 2011 was in line with our expectations at $1.1 million, a decrease of $265,000 from the same period in the prior year. This decrease was primarily due to our voluntary recall of certain Titan XL handpieces. We provided our eligible customers a fully refilled Titan XL handpiece, which resulted in a lower-than-normal Titan refill revenue. We were pleased with the sequential increase of approximately $122,000 of annuity revenue from the fourth quarter of 2010, which we believe will continue to increase until we return to our normalized quarterly revenue of $1.3 million to $1.4 million in the second half of 2011.

Fillers and Cosmeceutical revenues was $1.1 million in the first quarter of 2011, which was up significantly from the first quarter of 2010. As a reminder, we started selling Obagi products in Japan in February 2010 and are pleased with this increase in revenue source and the cross-selling opportunities this relationship provides.

Kevin mentioned earlier, in the first quarter of 2011, we introduced two new Obagi products that we believe will be well received by our customers and will contribute to our future revenue growth of this product category.

A significant percentage of our revenue is sourced from existing customers. During the first quarter of 2011, 54% of our revenue was derived from sales of upgrades, service, Titan refills and Filler-Cosmeceuticals products. We remain committed to strong customer satisfaction and believe we will continue to realize revenue from these annuity revenue categories.

I will now address our operating performance. Our gross margin was 55% in the first quarter of 2011 compared to 58% in the first quarter of 2010. The 55% margin is lower due primarily to reduced leverage of our relatively fixed manufacturing costs as a result of lower overall revenue volume, lower Titan refill revenue during the quarter, that traditionally has a higher gross margin than our consolidated gross margin and some set-up costs associated with the launch of our Excel V product such as tooling and other fixed costs. We believe our gross margin will improve to approximately 60%, with quarterly revenues in the $14 million to $15 million range. Below these revenue levels, our margins will be lower, and conversely, above these revenue levels, they will be higher.

Sales and marketing expenses were $5.9 million or 51% of revenue in the first quarter of 2011, compared to $6.4 million or 46% of revenue in the first quarter of 2010. The lower expense level was due primarily to lower promotional and marketing-related expenses.

Sales and marketing expenses, as a percentage of revenue were at 51%, due primarily to the lower revenue. We expect to improve the leverage of our sales and marketing organization with the anticipated increase in revenue beginning in the second quarter of 2011.

We have 27 sales territories in North America and are encouraged by the recent sales management changes and growth strategies implemented that Kevin touched upon earlier, and believe they will result in increased growth in North America starting from the second quarter of 2011.

Research and development expenses were $2.1 million for the first quarter of 2011 compared to $1.5 million for the first quarter of 2010. This increase was due primarily to materials spending and personelle expenses associated with our new product-development efforts. As Kevin mentioned earlier, we plan to increase our investments in R&D and expect another product launch in the second half of 2011.

General and administrative expenses were relatively flat at $2.3 million for the first quarter of 2011 compared to $2.2 million for the first quarter of 2010. We don't anticipate much quarterly variations in this spending going forward, except that our second quarter expenses are typically higher than the first quarter due to our stock-compensation expenses related to the issuance of annual stock grants to our outside board members.

Interest and other income

[audio gap]

was $184,000 for the first quarter of 2011 compared to $166,000, first quarter of 2010. Income tax expense in the first quarter of 2011 was at $32,000, which primarily related to our foreign businesses. As a reminder, we have 100% valuation allowance for our U.S. taxes and have only a small amount of minimum and capital based taxes in the U.S. For modeling purposes, we suggest using an effective income tax expense of approximately $50,000 per quarter for the remainder of 2011.

Moving to stock-based compensation expenses. For modeling purposes, beginning in the first quarter of 2011, we have included pretax stock-based compensation expenses by function of the standard analysis in the earnings release tables. So please refer to that if you have questions.

Turning to the balance sheet, our financial position remains strong as of March 31, 2011. We had approximately $96 million in cash, marketable securities and long-term investments with no debt. This represents approximately $7 per outstanding share.

During the quarter, our operations consumed approximately $1.5 million of cash. Due to the leveraging of our business model, as our revenue improves, this should result in improved profitability and cash from operations. Net accounts receivable at the end of the first quarter of 2011 were $3.3 million and our DSOs were 26 days.

Inventories at the end of the first quarter of 2011 increased by approximately $820,000 when compared to the fourth quarter of 2010. The increase is due primarily to our buildup of Excel V inventory, associated with that product launch. We continue to aggressively manage this asset and are turning our inventory in the range of 3x to 4x per year.

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

Kevin Connors

Thanks, Ron. With appropriate Swiss execution of the key initiatives we’ve detailed, we believe we will achieve our goal of increased revenue and improved leverage of our operating expenses in the second quarter, resulting in improved performance.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Phil Nalbone with Wedbush Securities.

Phillip Nalbone - Wedbush Securities Inc.

So Kevin, you haven't given financial guidance in a very long time. So in some fairness to the company, Street expectations for the quarter were indeed a made-up set of assumptions. But the industry is growing again and after Cutera's big improvement in the December quarter, I think it was pretty reasonable for us to expect some growth for Cutera on a year-over-year basis in the March quarter. You missed by a wide margin. Walk us through exactly where the weaknesses were in the quarter. What went wrong in North America? Exactly, what went wrong in Japan, considering that I believe you get the vast majority of your revenues from within the city limits of Tokyo, which was largely unaffected by the natural disasters. And then, talk about why there was no contribution from new products, or perhaps there was some, but it would appear that there was very little in the March quarter. And then I'll have a follow-on.

Kevin Connors

Okay. Let me see it if I can hit on all these. First of all, the last one, the new products, we did launch GenesisPlus in the third quarter. But we've been clear that the FDA clearance was uncertain to us. So we're happy to finally get that in the current quarter. So that prevented us from marketing that product for that indication in the U.S. market, which is typically the biggest opportunity for new product launches. Japan, we indicated the shortfall was for two reasons. One is that we had product that we couldn't deliver. As it turned out the earthquake tsunami left certain facilities damaged and we couldn't get the sold equipment delivered to the site. That's improved since, but that had an impact. And then, as you know, this is anomaly of business with the last couple of weeks typically being the most significant period of contribution of new orders and we weren’t able to do that. So we look at that as somewhere around $1 million of impact from there. North America, we talked about Michael Poole joining us at the very end of Q4. And we think his impact has been felt. We hired him to build a strong team. And as we mentioned in the script, Michael has brought a new leadership to the next level below him. So we're pleased to be able to get seasoned industry people to join us, and in the interrim also brought some new sales reps to the company in the first quarter. And there is that time delay from those changes that would be reflected in the top line. And so we're looking forward to the balance of the year to see that growth trajectory continue. We think the trends look positive in North America, and I think the activity that we're seeing here is markedly different but we didn't see it all impact the top line in Q1. But we think the steps we're taking are the right steps. And we think that with the new indication for the toenail fungus coupled with Excel V being launched at the American Academy of Derm meeting in mid-quarter, we didn't ship -- our products didn't in the first quarter, but we have initiated commercial shipment of that in the first month of this quarter. So did I hit on all of the bullet points you touched on there, Phil?

Phillip Nalbone - Wedbush Securities Inc.

I think you did. Look, going forward, we're going to need to build models. We're going to need some sense for how you're managing the business for growth. Can you give us some sense for when your internal models suggest a resumption of year-over-year growth in the business? Does that happen this quarter or two quarters out or three quarters out? And Ron, if you could remind us, at what level of quarterly revenues do you get back to breakeven and generating cash?

Kevin Connors

Well, let me touch on the first one, Phil. First of all, we're not going to get into the details of it but from an order perspective, we trended nicely in North America in Q1 relative to the previous year. And we think that with the key product launch information we just discussed, coupled with our sales team being invigorated, we think that the current quarter we're expecting improvements in growth. So this is nothing that we're pushing out for the second half. We think that the decisions we made were the right ones and we think we're going to see the impact to that in the interim.

Ronald Santilli

Right. So we expect the growth not only year-over-year but sequentially, looking at Q2. In terms of your other question, Phil, we expect to be cash-accretive in the $14 million range, quarterly revenue of $14 million and breakeven GAAP in the $15 million per quarter region.

Phillip Nalbone - Wedbush Securities Inc.

All right. Thank you very much.

Operator

The next question is from Tom Gunderson with Piper Jaffray.

Thomas Gunderson - Piper Jaffray Companies

The up sequentially, I just want to make sure that we're getting this right. The increase from the product approvals, the settling down of the sales force et cetera will be more than enough to make up for any slowness in Q2 in Japan?

Kevin Connors

Well, let's dig into Japan a little bit. As you know, Tom, last year, we talked about how our performance in Japan had just been setting record levels. So we think that we've got a very strong team and we've got a very nice business model with diversified revenue sources. It's unfortunate to experience what that group has had to manage through. But the good news in Japan, if there is good news in any of this is that capital equipment is a significant part of our revenue, but we also get a significant part of our revenue from more recurring sources. So topicals, injectables, our Titan Refill business, as well as our Service business represents a significant portion of our business. So we don't think that is as exposed to the uncertainty in the region. We don't expect our Capital Equipment business to go to zero. But it's hard for us to understand how we should look at that as we look into the future. The team itself is still very active in the marketplace, and it's a very resilient team. And we think that we'll manage through this as best we can.

Thomas Gunderson - Piper Jaffray Companies

Okay. And then if I shift to North America and the new VP of Sales and three new regional managers, and I think I heard you say in the answer to the previous question that there was some new people put into territories. First, can you give us a sense of what the turnover was at the territory level? And second, are you on May 2 at full force, up and running, everything quick in as far as sales management and territory management?

Kevin Connors

Sure, Tom. Well, we're delighted to have Michael join our comeback to Cutera in December. And we have him here to build that team. So it wasn't just Michael we're looking to hire. We're looking for Michael to build a world-class team to take us to where we need to be in this industry. And they, in turn, have brought some top talent with them. So I'm not aware of any gaps in terms of maybe a territory or two but not a material amount that's open. So we're very pleased with the caliber of the sales reps that we've been able to recruit.

Thomas Gunderson - Piper Jaffray Companies

Yes, sorry to interrupt, but it's not just open territories that I'm looking at because we could have said that three months ago or six months ago. What I'm looking at is that whatever that subjective part of it is that caused the downturn in Q1, that's behind us, and in Q2, you're ready to go. People have got their quotas and they're out there working at full force. Is that a fair statement?

Kevin Connors

I feel as if the team has solidified, and we're expecting a nice performance in the second quarter. It's not in flux.

Thomas Gunderson - Piper Jaffray Companies

Okay. All right. That's it for me. Thanks.

Operator

The next question is from Dalton Chandler with Needham & Company.

Dalton Chandler - Needham & Company, LLC

I just want to make sure I heard this right. Did you say the impact of Japan in this quarter was $1 million in revenue?

Kevin Connors

That's the rest of it, yes.

Dalton Chandler - Needham & Company, LLC

Okay. So you're including laser sales in there as well as the fillers and topicals?

Kevin Connors

That's predominantly, or in fact, I'd say, it's exclusively laser and upgrades. We didn't have a disruption from the other source of revenue. As we indicated, Dalton, Japan represented 25% of our revenue last year. So it's a material part of our business.

Ronald Santilli

There was a piece of our revenue, Dalton, that was sitting in customs. And customs had literally shut down. So it couldn't clear, that was a piece. And then Kevin indicated earlier, the solicitation of other orders at the end of the quarter that typically occur, and that's the $1 million.

Dalton Chandler - Needham & Company, LLC

Okay. And then just to clarify again on the new products. The Excel V is shipping in commercial quantities now. The GenesisPlus is approved, but you've not started to ship in commercial quantities, is that right?

Kevin Connors

Well, we are. We were limited from marketing that indication until we got the clearance in Q2. So we were not able to market that treatment in Q1 and it wasn't reflected in our numbers like we'd like it to be.

Dalton Chandler - Needham & Company, LLC

Okay.

Ronald Santilli

The indication and the Excel V both started in April. That's when we were ready to roll.

Dalton Chandler - Needham & Company, LLC

Okay. All right. Thanks, that's all I had.

Operator

The next question is from Morris Ajzenman with Griffin Securities.

Morris Ajzenman - Griffin Securities, Inc.

You gave us a specific number, $1 million impact revenue in Japan. Then you spoke about, earlier, lower European sales in this quarter. Would you care to venture what sort of dollar impact that was when you say “lower”? And then looking out, is there any reason to believe that that's going to pick up into the second quarter? Any visibility you have there?

Kevin Connors

Sure, Morris. We have a direct presence, as well as a distributor-management strategy in Europe. And our direct operation did reasonably well, but our distributor business was off by somewhere around $1 million. So we don't see that as a market-condition issue. And we have a sales management that's been modified to rectify that. And we anticipate us getting that situation improved in the near term.

Morris Ajzenman - Griffin Securities, Inc.

So the near term, meaning into the second quarter maybe into the third quarter?

Kevin Connors

Well, all we had said is we're disappointed with the first quarter performance, and that's being addressed. So we’d like to see that going into the first -- the second quarter and throughout the balance of the year.

Morris Ajzenman - Griffin Securities, Inc.

And on the -- again, congratulations on the toenail fungus machine FDA approval. And yet you have a pretty large population base there. It wouldn't take much -- even a 1% share will be very meaningful. I think the machine retails for $72,000, is that right?

Kevin Connors

That's right. That's the list.

Morris Ajzenman - Griffin Securities, Inc.

That's the list, yes. What sort of share gains or what sort of size market do you see for this? Where are you getting initial orders without being too specific. Should we be excited about this for the next year? Or will this take longer before you -- I mean, it wouldn't take too many units to have a meaningful impact on the top line. How does this play out? How do you see this impacting?

Kevin Connors

Yes, it is a significant market opportunity, and the number of -- the patient population demographics are very favorable to support a sizable Capital Equipment business. With that said, this is our first product offering that targets podiatrists. We're also targeting dermatologists, and our global sales experience with that has been pretty exciting. We're finding it looks different around the world, but we're finding lots of interest in this application and we can't really forecast with that could be in the near term. But patients are very satisfied with these treatments and physicians are finding tremendous demand. And it's a lucrative private-paid procedure for them to add to their practice.

Morris Ajzenman - Griffin Securities, Inc.

So there's no way you can help us in getting some sort of feel for what this means for next few quarters? Will it be anything meaningful? Or will it be very modest, the next quarter or two, specifically from this new introduction?

Kevin Connors

Well we had somewhere around 25% of our revenue comes from this application in North America, so -- and that's without the clearance. So it's early in the rollout, and we're the first major company that has a global rollout of this application. And we're continuing to stay very close to it.

Operator

[Operator Instructions] The next question is from Anthony Vendetti with Maxim.

Anthony Vendetti - Maxim Group LLC

So 25% is -- Kevin, is that – when you said 25% of, is that total revenues or laser revenues?

Kevin Connors

I think that's by units. Total revenue.

Ronald Santilli

Total revenue in dollars.

Kevin Connors

Yes.

Ronald Santilli

Approximately 25% is Japan.

Kevin Connors

Oh okay. I thought we were talking about [indiscernible].

Ronald Santilli

Oh I'm sorry. I'm sorry, maybe I misunderstood. What's the question, Anthony.

Anthony Vendetti - Maxim Group LLC

It's about the GenesisPlus. But they're both 25%, so...

Kevin Connors

They're both 25%, yes. 25% in the case of GenesisPlus, is the percentage of unit sales.

Anthony Vendetti - Maxim Group LLC

Units, okay. And remind us so -- since it wasn't yet FDA cleared for toenail fungus, what were most of the physicians buying it for? Or are they just using it off-label?

Kevin Connors

Well, there is awareness of lasers for this application. So we've had a lot of physicians -- or podiatrists and physicians that have contacted us. We're out in the market. We got the CE mark, we've had that for some time. And as a result, we have an international part of our website, where we have been able to provide information of this technology. And now with the U.S. clearance, we're really excited to be able to have targeted marketing campaigns to exploit this.

Anthony Vendetti - Maxim Group LLC

Okay. And I think, I heard the number 53% when you were talking about core, including podiatrists. Is that right for sales for this quarter?

Ronald Santilli

Yes, we had 35% in the core, and the podiatry was actually 17%.

Kevin Connors

Oh, it was 17%. I'm sorry.

Ronald Santilli

It was 26% last quarter. So it's going to move around.

Anthony Vendetti - Maxim Group LLC

Okay. So core was 35%, but plus the podiatrists, you're at 52%, 53%?

Ronald Santilli

Yes, 52%. Yes, exactly in that range.

Anthony Vendetti - Maxim Group LLC

Okay. And in terms of -- shifting to the second half product launch, is that more of a July, August thing? Or is it more likely back half of the year for the new product launch?

Kevin Connors

Well, as we mentioned in the both the press release and the script, we're really delighted to have Len DeBenedictis join the company in January. And he has been serving all the R&D programs that were currently active, and he's finding lots of exciting things. And with the Excel V now being a launched product that's shipping and getting the FDA clearance for the GenesisPlus, those are both significant things from the R&D perspective. But we have a commitment to plan to launch another product before the end of the year. And beyond that, we're looking at the 2012 engineering pipeline, and we're excited about what we've got for next year as well.

Anthony Vendetti - Maxim Group LLC

Okay. Great. And then just -- I know you probably can't, for competitive reasons, provide too much information, but maybe you could talk about whether or not it's a product that addresses something your current products address, if it addresses something competitors don't currently address or don't currently address well, if it has a disposable component, anything like that, that you can help us with.

Kevin Connors

We're going to stay silent to that, Anthony for competitive reasons. But I think, probably the take-away message here is that we've even stepped up our R&D commitment, and we think we've got some really exciting future products that we'll be commercializing.

Anthony Vendetti - Maxim Group LLC

Yes, and Len, I know from his days at Reliant. So on Japan then, so it was approximately, as you said, a $1 million impact mostly from laser and upgrade sales. And that was really towards since the tsunami happened beginning of March, it was basically the second half of March last three weeks or so in March. Is it your view that things are relatively back to business in Japan? Or is it too tough to say on what the potential impact would be for the second quarter of this year?

Kevin Connors

I think in terms of how our operation is functioning, it's largely back to normal. There are some interruptions that have happened in terms of power and some things about transportation that have been impacted but they seem to be getting better with each passing day. We're being cautious in terms of how painting the future of the Capital Equipment business just because it's a fluid situation and we're still getting lots of traction in terms of the sales and marketing activities. It hasn't shut down, but how that translates into revenue is something we want to get more experience with before we comment on.

Anthony Vendetti - Maxim Group LLC

Yes, it's hard to gauge the demand even if operations are largely back at this point. It's too early. Okay.

Kevin Connors

Yes, it's too early.

Anthony Vendetti - Maxim Group LLC

Yes, and just, lastly on the margins, Ron, you commented, I guess, on what you need to do to get back to the core, what your gross margin used to be in terms of revenues. So the lower margin in this quarter is mostly or completely attributable to the lower revenues, and I guess, the tack-on question to that is, is ASP still stable for the business? And then if you could just comment on the credit markets?

Ronald Santilli

Sure. The ASPs, our competitive side hasn't changed significantly. The lower margin's primarily driven to the higher relatively fixed cost associated to the operation. So the $11.6 million is what drove that gross margin down, to a lesser degree, because we have lesser Titan Refill business and that's high-margin business. But that's on its -- coming back from the voluntary recall last year. And then we did have some set-up costs associated with the Excel V product launch, tooling and other fixed costs that were expensed during the quarter that impacted the margins. So as we mentioned, kind of in the $14 million to $15 million range we expect to be able to get back to a 60% gross margin. With regard to the credit markets, I mean, they're still very tight out there, but the customers that we're targeting, the physicians with established offices typically are able to find financing whether it's through leasing companies or bank loans. And we aren't having significant problems as is evident through our DSOs in terms of collecting for the people that are really creditworthy and looking to buy the products.

Anthony Vendetti - Maxim Group LLC

Okay. Great. Thanks.

Operator

There are no further questions in queue. I'd like to turn the call back over to Kevin Connors for closing remarks.

Kevin Connors

Well, thank you all for joining us today to learn more about Cutera. And we look forward to updating you in the future.

Operator

This concludes the teleconference. You may disconnect your lines. Thank you for your participation.

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