Cutera's (CUTR) CEO Kevin Connors on Q4 2015 Results - Earnings Call Transcript

| About: Cutera, Inc. (CUTR)

Cutera, Inc. (NASDAQ:CUTR)

Q4 2015 Results Earnings Conference Call

February 08, 2016, 05:00 PM ET

Executives

John Mills - IR

Kevin Connors - President & CEO

Ron Santilli - EVP & CFO

Analysts

Tom Gunderson - Piper Jaffray

Anthony Vendetti - Maxim Group

Brian Freckmann - LS Capital

Zack Ajzenman - Griffin Securities

Operator

Greetings and welcome to the Cutera Inc. Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, John Mills. Thank you. You may begin.

John Mills

Thanks operator. Welcome to Cutera's fourth quarter 2015 earnings conference call. On the call today are Cutera's President and Chief Executive Officer, Kevin Connors; and Executive Vice President and Chief Financial Officer, Ron Santilli. After Management's prepared comments, there will be a question-and-answer session.

Please note that during today's call, we will discuss non-GAAP income statement measures for net income and net income per diluted share, which exclude non-cash expenses for stock-based compensation, depreciation, and amortization of intangibles. Management believes that the adjusted financial results are more reflective of the cash basis results of operations as well as comparable to similar measures used by their companies.

We've included with our earnings release, reconciliation from the GAAP results to the non-GAAP measures. The discussion today will include forward-looking statements, reflecting management's current forecast or expectations of certain aspects of the company's future business, including any financial guidance provided for modeling purposes.

Forward-looking statements are based on current information that is by its nature dynamic and subject to rapid and even abrupt changes. Forward-looking statements include among others, statements regarding plans to introduce new products, expand our sales force, ability to increase revenue, reduce expenses, improve financial results, make productivity improvements, grow our market share, realize benefits from additional investment, improve or maintain profitability and attract the market, generate cash from operations and plans for stock repurchases.

All forward-looking statements are subject to risks and uncertainties including those risk factors described in the section entitled Risk Factors, in our Form 10-Q as filed with the SEC on November 2, 2015.

But there are also causes you may not place undue reliance on forward-looking statements, which speak only as of the date they were made. Cutera undertakes no obligations to update publicly any forward-looking statements to reflect new information, events or circumstances after the date they were made or to reflect the occurrence of unanticipated events. Future results may differ materially from management's current expectations.

With that, I'll turn the call over to Kevin.

Kevin Connors

Thank you, John. Good afternoon, everyone. And thanks for joining us today to discuss Cutera's results for the fourth quarter 2015.

We're pleased to conclude 2015 with our sixth consecutive quarter of double-digit revenue growth and the fourth quarter revenue was essentially on par with our highest revenue quarter in our history. Our return to profitability demonstrate our ability to expand revenue, while realizing operating leverage as our gross margins improved to 60% with our operating margins improved as well.

This performance resulted in generating nearly $4 million in cash and GAAP EPS of $0.15 a share and non-GAAP EPS of $0.25 a share. Our organic revenue growth was broad-based throughout our product portfolio and we achieved meaningful productivity improvements in many of our global markets.

The ongoing results of our Tier projects to revitalize our commercial team have been generating a good momentum throughout 2015 and we're encouraged about our opportunities for continued growth in 2016.

Our North American sales team led by Larry Laber, delivered another impressive performance by growing product revenue 30% when compared to fourth quarter 2014 and 49% when compared to fiscal 2015 -- 2014.

Larry has successfully recruited and assembled a first-class team of sales professionals and the year-over-year growth and productivity improvements reflect the skill of his team.

During the fourth quarter 2015, core physicians in North America accounted for approximately 56% of our orders with the balance in orders received primarily from family practice physicians.

Our sales team in the rest of world region led by Miguel Pardos, increased product revenue by $1.1 million or 14%. We estimate our international revenue in the fourth quarter 2015 was negatively impacted in the range of $1 million to $1.5 million due to the appreciation of the U.S. dollar relative to other currencies.

Despite currency challenges, it's worth noting that our Australian direct operation and our new European direct teams and our global distributor sales channel have demonstrated significant improvement under Miguel's leadership.

We will closely monitor our sales performance -- sales team performance and will continue to expand our global sales team and we expect to continue to improve sales force productivity in the year ahead.

From a product perspective, we experienced strong growth from our legacy portfolio as well as our recently launched products, in particular enlighten our flagship picosecond and nanosecond tattoo removal and benign pigmented lesion treatment laser continue to demonstrate global appeal and it's become a major revenue contributor for the company.

While we've been granted a number of important regulatory clearances today, we anticipate a number of additional regulatory clearances from geographies around the globe to allow us to market enlighten an additional significant markets.

Gross margin improvement of 60% was one of the key goals for 2015 and a critical driver in helping us return to profitability and generating cash from operations.

Our steady improvement gross margin during 2015 is a further indicator that our commitment to improved operating leverage through a balance of strong revenue growth and cost reduction initiative by our engineering and operations team.

I'm extremely pleased to report our return to profitability in the fourth quarter 2015 has been a top priority for us and demonstrates the leverage of our operating model as we continue to build momentum.

Turning to research and development, I’m pleased to announce that Dr. Lucas Hunsicker has been promoted to the position of Vice President of Research and Development. Lucas joined Cutera 2008 and was Director of Advanced Research and has led the development of multiple technologies and innovative product concepts since then.

Most recently Lucas led the successful development of enLighten from product conceptualization through production of the release and defined a multiyear product roadmap that we're aggressively executing.

I’m confident Lucas will provide strong leadership for the R&D team and his experience and technology innovation, product development and program management will continue or maintain our reputation as a broad based technology leader in our industry.

We're committed to investments in product and critical research and we are excited to showcase a milestone innovation for our enLighten platform at this year’s American Academy of Dermatology Meeting in Washington DC.

The enLighten platform was engineered from its inception to support multiple laser wave lengths and a third wave length will be introduced that will broadly expand enLighten streaming capabilities for benign pigment lesions as well as tattoo removal pending regulatory clearances.

We're certain that the addition of a new wave length will heighten enLighten's broad global appeal.

The global market was light and energy-based systems is growing at a steady pace and we believe that it’s approximately $2 billion a year. Our broad range of products, the expected market share extension, the launch of recently introduced platforms as well as our strengthened commercial leadership team should all serve as catalyst to fuel our growth as we look forward.

As a result of a number of factors including the anticipated positive cash flow, current stock price and a sustained positive operating business trajectory our Board has approved an additional $10 million to be added to the stock repurchase program.

I would like at this time thank our global customers from the belief and partnership with Cutera as well as our world-wide employees for the dedication and commitment to building our company.

Now I'll turn the car to Ron to discuss our financials in more detail.

Ron Santilli

Thanks Kevin and thanks to all of you for joining us today on our fourth quarter 2015 conference call.

Fourth quarter revenue was $30 million up 18% when compared to the fourth quarter of 2014. Our year-over-year double-digit revenue growth rate during the past six quarters validates our choice as to drive growth organically through investing internally in people and projects.

The present strength and breadth of our product offering as well as our commercial results to date are clear demonstrations that our investment decisions were correct. In 2016, we expect our revenue growth rate to be in excess of the overall market rate of growth for our industry as a result of which we expect to expand our market share in a healthy global market.

As Kevin mentioned earlier, this quarter our international revenue was adversely affected by the decline in the major foreign currencies that we transact in.

While we transact a significant percentage of our revenue in U.S. dollars, our direct business in Japan, Europe and Australia has transacted in local currency, in the fourth quarter of 2015 when compared to fourth quarter of 2014 the Japanese Yen, Euro and Australian dollar declined by approximately 6%, 14% and 19% respectively.

As a result due to reduced local purchasing power of our international customers, we estimate the foreign exchange related negative impact on our revenue was in the range of approximately $1 million to $1.5 million.

Gross margin improved to 60%, as Kevin highlighted achieving 60% gross margin in the fourth quarter was a key goal for us in 2015 and was a critical driver in helping us return to profitability and generating cash flow from operations.

Our steady improvement in gross margin during 2015 is a further indicator of our commitment to improved operating leverage through a balance of strong revenue growth and cost reduction initiatives.

In addition a higher ratio of direct to distributed business also contributed to improved fourth quarter gross margin performance. We expect our 2016 gross margin to be approximately 60%.

Now I would like to address our operating expense results. Sales and marketing expenses increased slightly during the quarter when compared to the fourth quarter 2014, but declined as a percent of revenue from 37% in the fourth quarter of 2014 to 33% in the fourth quarter of 2015 as we were able to leverage expenses across higher sales volume.

We expect our sales and marketing expenses to grow moderately in absolute dollars in 2016, but continue to decline as a percent of revenue as we leverage our expenses based on our anticipated revenue growth.

As such, we expect 2016 sales and marketing expenses to be approximately 35% of revenue starting higher in the first quarter and decreasing sequentially throughout the year.

Research and development expenses were $2.8 million in the fourth quarter of 2015 slightly up from the $2.6 million in the fourth quarter of 2014. We remain committed to continued investments in engineering and clinical researches that drive new product innovation. We're planning to increase our investments in research and development activity as the most recent investments are providing targeted revenue growth and commensurate results.

As such our quarterly spend is anticipated to range from $2.7 million to $3 million per quarter. General and administrative expenses declined from $3.4 million in the fourth quarter of 2014 to $3.2 million in the fourth quarter of 2015.

The slight reduction was due primarily to higher legal spending in the fourth quarter of 2014. We expect our quarterly G&A expenses to range from $3 million to $3.2 million per quarter in 2016.

This modeling imputes the impact of the suspended medical device tax, which is approximately $612,000 in 2015.

Our net profit for the quarter was $2.1 million or $0.15 per diluted share. This profit level was 7% of revenue. On a non-GAAP basis after adjusting for the $1.4 million non-cash expenses related to stock-based compensation, depreciation and intangible amortization, our net profit would have been approximately $3.4 million or $0.25 per diluted share, which is greater than 11% of our revenue.

For the full year of 2016, we expect to be profitable and cash accretive from operations. However note that we expect the first quarter of 2016, our seasonally lowest revenue quarter of the year to yield a net loss but expect to be profitable in remaining three quarters of 2016.

Turning to the balance sheet and cash flow, net accounts receivable at the end of the fourth quarter of 2015 were $11.7 million and our DSOs were 36 days. We expect our DSOs to remain in the 35 to 40 day range in 2016.

Inventories were $12.1 million at December 31, 2015, significantly decreased from the $13.5 million at the end of the third quarter of 2015. This represents an improvement of annual inventory turns to 4.0. This was another key objective achieved in 2015.

Cash from operations generated $3.9 million during the quarter due primarily to our net income of $2.1 million and $1.4 million of non-cash items. We expect to be cash accretive in future quarters as we continue to leverage our revenue growth and we don’t expect any significant changes in working capital assets other than normal quarter-to-quarter fluctuation.

Our cash position remains strong and as of December 31, 2015, we held cash and investments of $48.4 million with no debt which represented approximately $3.73 per outstanding share.

Fourth quarter of 2015 we spent $3.5 million of cash on our share repurchase program. This brings the total cash used in 2015 for stock repurchases to $40 million for which we repurchased and retired 2.8 million shares. As Kevin mentioned earlier, our Board has approved an additional $10 million to be added to the stock repurchase program.

In conclusion, we're pleased with the achievement of our continued revenue growth, gross margin improvements, leveraging of our operating expenses, our cash position and are particularly excited that we have returned to profitability.

For 2016 and beyond, while there are certain unpredictable factors that may impact our global business, including unfavorable currency movement and substantial international political headwinds we believe we will continue to realize improvements in our financial performance.

We expect healthy revenue expansion and continued market share gains in 2016. We further expect to leverage our operating expenses resulting in GAAP profitability and cash generation from operations in the year ahead as well.

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

Question-and-Answer Session

Operator

At this time we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Tom Gunderson from Piper Jaffray. Please proceed with your question.

Tom Gunderson

Hi good afternoon everybody. Ron just a quick clarification, I may have missed it, did you guys reiterate your 10% to 15% revenue growth for 2016, which you gave us last quarter?

Ron Santilli

We didn’t talk about the specific revenue growth for 2016 other than we expect to exceed the market rate of growth.

Tom Gunderson

Okay. And then Kevin on enLighten and on the new wavelength and the product you’re going to show at the Dermatology Meeting in Washington, I’m not that technically inclined as you know as far as lasers go.

Is that an additional laser that’s put into the box? Can you give us a little bit more on that? Is it a higher cost, higher price, can it be -- can be old enLighten be upgraded to the new enLighten. Just a little bit more color if you would?

Kevin Connors

Sure, we’re very excited about this Tom as we talked about to support technology platform we see tremendous flexibility in future product expansion, opportunities with us and one of the areas that as is particularly excited is the fact that we can incorporate additional wavelengths of enLighten in this case.

This is going to be a visible red picosecond technology and we can leverage the core engine that we have in the product and obviously introduce additional hardware in order to get the technologies cooperate, but doctors really do value a visible red wavelength in dermatology and one of the areas that we’re excited about is to be able to successfully treat a broader range of tattoo colors with this and so there are things that have been done to work around incorporating a true laser technology per se, but the clinical results are typically not nearly as impressive as we believe we'll be introducing here.

So there is -- to put additional hardware there are some incremental cost, but as we get regulatory clearance as we can talk about pricing and things like upgrades when we get FDA clearance.

Tom Gunderson

Got it. But you’ll be showing it at the meeting, but it’s not available till we get FDA approval?

Kevin Connors

That's correct.

Tom Gunderson

Okay. And then one last question on enLighten and that is Asian market, you’ve pointed out to us that that could be a bigger market because of pigmented lesions for enLighten as compared to rather large markets for tattoo removal in the U.S. and elsewhere.

Has any of news that we've been getting from the beginning of the year on Asia and weakness on Asia materials, oils, steel, construction etcetera does any of that have any impact for you guys on the consumer market, does it shift down or haven’t you seen anything out?

Kevin Connors

On the consumer side, I would suggest that we're not seeing it to get that. So, I think the patient, what you're referring to, the appetite for these procedures is pretty resistant and we haven't seen economic pull back to the result and lower interest from the patients.

But the business environment as you can imagine is more challenging. We're really particularly impressive what our team Asia has done, seeing our business in Japan actually show us a nice recovery. We’re very happy with our team in Australia and New Zealand. So the headwinds are greater but we have a team that under Miguel's leadership has really risen to the challenge.

Tom Gunderson

Okay. Thanks. That’s it for me guys.

Kevin Connors

Thank you.

Operator

Our next question comes from the line of Anthony Vendetti from Maxim Group. Please proceed with your question.

Anthony Vendetti

Thanks, good afternoon.

Kevin Connors

Hey Anthony.

Anthony Vendetti

Yeah, how are you doing guys? Just in terms of the new product platform at AED in DC, is this a brand new platform or an enhancement of something that you currently have in the market today?

Kevin Connors

Well, we will be introducing, again this is without -- we don’t anticipate having the clearance possible. We'll have a submission done at the time of the meeting, but we’re adding tremendous additional clinical capability not just with the new visible red wavelength but also significantly augmenting other important specifications of the device.

So this is really taking enLighten to another level. We think it’s a scenario that we want to maintain our technological leadership in the space and we've got more things that we’re working on with the platform beyond us.

Anthony Vendetti

Okay. Great. And then Ron I know you said, you didn’t reiterate specifically on this call 10% to 15% growth, but growth ahead of the industry and I certainly don't want to put words in your mouth, but can we assume in that, that guidance that was provided last call is unchanged at this point?

Ron Santilli

Well, I think Anthony what we’re kind referring to here is we still see a good strong growing market. We’ve got a good basis of growth that we at 21% when you compared '14 to '15.

So, we see '16 as a very strong year and we do believe we will exceed the market rate of growth in 2016. So, we will continue growing our share, but we don’t have a specific number per se to give you today in terms of to help you with modeling.

Anthony Vendetti

Okay. And then…

Kevin Connors

And just to augment that, depending on who you want to include in the peer group to make the estimate about what's happening in the overall market, but we think it’s a double-digit growth rate and our view of the market hasn’t changed and our commitment to capture greater share continues.

Anthony Vendetti

Okay, that’s helpful and then on the non-GAAP number Ron, I was just curious if you could elaborate a little bit more because I think it's been a non-GAAP number that’s included depreciation and amortization and it looks like this quarter to $0.25 numbers in adjusted cash EPS number because it's taken out all non-cash expenses including depreciation and amortization, is that a switch that started this quarter and we should expect that going forward?

Ron Santilli

Yes, that’s correct Anthony. I think now that we’ve turned the corner into the profitability zone, I think it's more helpful for you to see that as we're showing positive EPS, what it would be in this non-GAAP basis. So we will continue providing this presentation.

Anthony Vendetti

Okay. And then lastly on the 2016 where you said first quarter '16 as we all know is the weakest quarter it would be unprofitable and you said after that profitable, were you talking on a non-GAAP or GAAP basis going forward after the first quarter being negative?

Ron Santilli

I was referring to GAAP in that statement.

Anthony Vendetti

Okay. So going forward 2016 in the second quarter it should be positive from a GAAP basis starting the second quarter?

Ron Santilli

That’s correct.

Anthony Vendetti

Okay. Great. All right guys. Thanks a lot. Appreciate it.

Ron Santilli

Thanks.

Kevin Connors

Thank you.

Operator

Our next question is from the line of Brian Freckmann from LS Capital. Please proceed with your question.

Brian Freckmann

Hey guys, how are you?

Kevin Connors

Hi Brian.

Brian Freckmann

Just a quick updated maybe Ron, you said, I think, sales and marketing 35% estimate for 2016. Your G&A number again, just looks fairly flat throughout the year ex the tax credit. What should we expect from headcount throughout the year?

Kevin Connors

We don’t expect large changes in headcount as we’re really trying to leverage our whole model other than we’ll continue to add sales people as opportunistically as possible as we continue to improve productivity. So on the commercial side of the business, we’ll continue to make investments while it makes sense.

Brian Freckmann

Okay, so G&A should look fairly similar as the fourth quarter. R&D roughly similar and then savings of about 200, 300 basis points on S&M, sales and marketing, is that about correct?

Kevin Connors

That’s right. That's kind of the range that we’re targeting similar type level of spending for both R&D and G&A with some normal increases as a revenue growth, but not scaling with the revenue growth that we anticipate.

Brian Freckmann

Great. Okay. Thank you very much.

Ron Santilli

Thanks Brian.

Kevin Connors

Thanks Brian.

Operator

We have one more question today from the line of Zack Ajzenman from Griffin Securities. Please proceed with your question.

Zack Ajzenman

Thanks, good afternoon. Just a question on given the macros in the markets and that translating to your customer mindset. Can you talk about, or has the sales team relayed anything in terms of the physician anxieties when it comes to making these purchases and any color on customer psyche, just given the backdrop of the macros?

Kevin Connors

Sure it’s a good question. We just had our North American sales meeting a few weeks back and so it’s a good barometer what the sales force is expecting and we’re doing this every year.

So I think this is the most enthusiastic team that we’ve seen in memory and I just returned from Japan and had our view of our Asian business and going over to Europe to do that later, but I feel that there is a lot of speculation about reception and things of that nature, but quite frankly if it's a garden variety reception, I don’t think it has much of an impact on the business probably the greater variable was foreign exchange in our international business, but I’m actually quite encouraged by places like Australia and Japan where the macro would seemingly be more challenging.

However we have a very focused team of people and we believe that consumer interest or patient interest in these procedures is fairly resilient.

Zack Ajzenman

Okay, great. Turning to a question that's actually stemming from the 10-Q from Q3, there was a reference to one distributor partner who accounted for 17% of the outstanding accounts receivable balance. Can you provide some context behind that customer? And whether or not they still represent at least 10% of account receivable?

Kevin Connors

Yes it’s a major distributor for us that’s selling very high volume. The receivable is well within its normal range, but it’s just -- it’s been a very high volume distributor that continues to sell through the product line but it did represent a big piece of the AR at the end of the last Q filing.

Zack Ajzenman

Okay. And then last one, just on headcount here in North America. I may have missed it, but what's the current sales rep headcount?

Kevin Connors

I think we’re still floating around the 40 direct sales people here in North America and again as we said earlier we will be opportunistic at adding and adding in that area as our productivity continues to be very positive there.

Zack Ajzenman

Great. Thanks guys.

Operator

There are no further questions at this time. I would like to turn it back over to Management for any closing remarks.

Kevin Connors

Thank you for participating on our call today. We'll be attending many investor conferences and marketing events in the fourth quarter including our attendance at the American Academy Dermatology Meeting in March in Washington DC.

We look forward to updating you on our business progress on the first quarter 2015 conference call in May 2016. Good afternoon and thank you for your continued interest in Cutera.

Operator

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

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