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Cutera, Inc. (NASDAQ:CUTR)

Q1 2008 Earnings Call

May 6, 2008 5:00 pm ET

Executives

John Mills - ICR

Kevin P. Connors - President and Chief Executive Officer

Ronald J. Santilli - Chief Financial Officer and Vice President of Finance and Administration

Analysts

Thomas Gunderson - Piper Jaffray

Dalton Chandler - Needham & Company

Phillip Nalbone - RBC Capital Markets

Anthony Vendetti - Maxim Group

Jose Haresco - Merriman Curhan Ford & Co.

Operator

Welcome to the Cutera first quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the conference over to John Mills with ICR.

John Mills

By now everyone should have access to the first quarter 2008 earnings release, which went out today at approximately 4:00 pm eastern time. The release is available on the investor relations portion of Cutera’s website, at www.cutera.com, with our form 8-K filed with the SEC and available on its website at www.sec.gov.

Before we begin, Cutera would like to remind everyone that these prepared remarks contain forward looking statements, including statements concerning the planned improvements from our distribution network, long term domestic and international growth opportunities and strategies, future spending on various aspects of our operations, the success of our recently launched Pearl product, and the development and acquisition of other new products and applications and their anticipated introduction dates, and our planned increase in market share.

Also, management may make additional forward-looking statements in response to your questions. Factors that could cause Cutera’s actual results to differ materially from these forward looking statements include: the ability to improve sales productivity and increase sales performance worldwide; link to the sales cycle process; the ability to successfully develop and acquire new products and market them to both its installed base and new customers; unforeseen events and circumstances related to it’s operations; government regulatory actions; general economic conditions and those other factors described in the section entitled ‘Risk Factors’ in it’s most recent 10-Q filed May 6, 2008 with the SEC.

These forward-looking statements do not guarantee future performance; therefore you should not rely on them in making an investment decision without considering the risk associated with such statements. There are also cautions you do not place under reliance in forward looking statements, which speak only as of the date they were made.

Cutera undertakes no obligation to update publicly any forward looking statement to collect new information, events, or circumstances after the date they were made or to reflect the occurrence of unanticipated events.

With that, I will turn the call over to the company’s president and chief executive officer, Mr. Kevin Connors.

Kevin P. Connors

Good afternoon everyone and thanks for joining us today to discuss Cutera’s results for the first quarter, headed March 31, 2008. Today’s call will provide an overview of our results, and 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 revenue for the first quarter of 2008 was $21.6 million, which was 7% lower than the $23.3 million that was reported in the first quarter of 2007. Although we have experienced growth in our international business, increased our upgrade service and tightened refill revenue, these improvements were offset by declines in our domestic revenue.

U.S. revenue in the first quarter of 2008 was $12.4 million, or 22% lower than the amount reported in the first quarter of 2007. These results were caused, in part, by what we believe is a slowing domestic industry growth rate, but we are also disappointed at the performance levels of our North American business. However, we believe we have a seasoned sales management team and a stable sales workforce, and remain focused on improving our productivity levels.

In an effort to achieve higher performance in North America in the coming quarters, we will be focusing on several key initiatives, including the following: implementing sales aligned marketing programs, with a greater focus on Pearl and our PSS relationship; increasing sales management efforts and developing and mentoring our recent hires and preparing for the planned second half launch of our fractional product previewed recently at the ASLMS. We are closely monitoring our North American sales performance and will continue to focus on improving our results.

Our international revenue in the first quarter of 2008 grew by 25% when compared to the first quarter of 2007. The growth in our revenue came primarily from Japan, Australia, and many emerging global markets such as Brazil and European countries. We continue to be pleased with the adoption of Pearl in many of our key international markets and are leveraging the momentum.

In the past few quarters, we have made significant investments in our national business that included increased sales, marketing, and customer service efforts through the hiring of personnel and increased marketing in our international subsidiaries, expanding our distributor network in emerging markets, and opening a second office in Osaka, Japan. We are encouraged with our international teams’ progress and believe these investments position us well for future revenue growth.

Turning to research and development, we are continuing to increase our investment and R&D to develop innovative solutions, and expand the clinical understanding of our current products. We recently previewed our new fractional ablative technology at last month’s ASLMS meeting, with the response being very positive. This new device, designed to improve wrinkles by targeting the deep dermal layer, will enable us to compete in the expanding fractional ablative market and is expected to contribute to our revenue in the second half of 2008.

Historically, new clinical applications have been a catalyst revenue growth in the quarters following their introduction. Also, we are pleased with the growing number of positive clinical results and patient reports with our Pearl product and will continue our commitment to increase levels of clinical research. Cutera continues to see high demand for our products outside the core specialties of dermatologists and plastic surgeons.

In the first quarter of 2008 approximately 10% of our U.S. orders were from the core physicians. This compares to 14% of our U.S. orders in the year ago quarter. This is in line with Cutera’s goal of building and retaining a diverse customer base.

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

Ronald J. Santilli

The first quarter 2008 revenue was $21.6 million, a 7 % decrease when compared to $23.3 million for the first quarter 2007.

For the first quarter of 2008 we had a net loss of $542,000 or $0.04 per diluted share. Product revenue for the first quarter 2008 decreased 16% when compared to the first quarter 2007. These results primarily reflect lower levels of product revenue in the U.S. due to lower performance of our North American business.

Upgrade revenue for the first quarter of 2008 was $2.2 million, representing growth of 16% when compared to the first quarter of 2007. This growth continues to be driven by the Pearl application, as our existing customers continue to realize the benefits of this new technology.

Service revenue for the first quarter of 2008 increased 41% to $2.7 million when compared to $1.9 million in the first quarter of 2007. We expect this revenue growth to remain strong as our installed base continues to increase and our customers utilize our services to maintain the products after the initial warranty periods expire. Titan refill revenue for the first quarter 2008 increased by 23% to $1.4 million compared to $1.1 million in the first quarter of 2007. Titan remains a popular application that is sold on the majority of our Xeo systems.

I will now address our operating performance. Our gross margin in the first quarter of 2008 was 62% compared to a gross margin of 67% in the first quarter of 2007. A decrease in gross margin was primarily attributable to higher service revenue as a percentage of total revenue, which has a lower gross margin than our other revenue categories, and a reduced leverage of our fixed operating costs due to lower than expected product revenue. We have several internal initiatives with the goal of achieving target gross margin levels in the mid 60% range.

Sales and marketing expenses for the first quarter of 2008 were $10.3 million, or 48% of revenue, compared with $9.1 million or 39% of revenue for the first quarter of 2007. The increase in expenses in the first quarter of 2008 in absolute dollars was due primarily to expenses associated with our international sales and marketing efforts. The increase in expenses as a percentage of revenue was due primarily to lower performance of our North American business.

Research and development expenses in the first quarters of 2008 and 2007 were $1.8 million and $1.7 million respectively. Both amounts represented approximately 8% of revenue. We intend to increase our dollar investment in this area in our continuing pursuit to develop innovative products and applications.

General and administrative expenses decreased slightly to $2.9 million in the first quarter of 2008 from $3 million in the first quarter of 2007. These expenses are a percentage of total revenue increased to 14% in the first quarter of 2008 from 13% in the first quarter of 2007, resulting from the lower revenue base in the quarter. Our effective income tax rate for the first quarter of 2008 was 30%. For modeling purposes, we suggest using an effective tax rate of approximately 30% for the remainder of 2008.

According to the balance sheet, our financial position continues to remain strong. As of March 31, 2008 we had approximately $104.5 million in cash, marketable securities and long term investments. This represents approximately $8.20 per outstanding share.

Now I want to address the current issue of auction rate security. As with many companies, we hold a portion of our investment in auction rate securities. The primary issue with these securities is a lack of liquidity, due to failed auctions resulting from the overall credit concerns in the capital market.

All of our securities are AAA rated and invested in government-backed student loans. Included in our March 31, 2008 balance sheet is $11.5 million of auction rate securities, classified in long term marketable investments. During the quarter we recognize the $1.9 million unrealized loss reported in the equity section of our balance sheet.

We consider this impairment to be temporary, as we have the ability and intent to hold these securities until recovery of the unrealized loss. As a result, there is no impact to our first quarter income statement.

In accounts receivable the end of the first quarter of 2008 was $8.3 million and the DSO was 35 days. Our DSOs continue to be the best in the industry and within our target of 35 to 45 days, due to a thorough credit approval process and strong collection efforts.

Inventory has increased to $9.4 million at March 31, 2008, from $7.5 million at December 31, 2007. The primary reason for this inventory buildup was a higher level of finished goods due to lower than expected revenue in the quarter.

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

Kevin P. Connors

Our performance of the first quarter of 2008 did not meet our internal targets. As mentioned earlier, we will be focusing our efforts in the coming quarters on a number of strategic programs designed to improve company performance.

Some of those initiatives are as follows. One: increasing performance in our North American business by implementing sales aligned marketing programs, including a greater focus on Pearl and our PSS relationship. Increasing sales management efforts and developing and mentoring our recent hires, and preparing for the planned second half launch of our fractional product previously previewed at the ASLMS.

Two: we will also be continuing our investments in our international markets. Three: the evaluating and implementing measures to manage expenses and improve gross margins. Four: continuing our commitment to R&D spending and new application. Last, while we will remain focused on driving revenue growth, we will closely monitor sales and marketing expenses to ensure that they remain within targeted levels.

We have a strong portfolio of products and upgrades, including our Pearl. We believe that Pearl has tremendous upside, in that, as we continue developing clinical support and educating the market about the benefits of Pearl, over the competing solutions, we improve our performance in the skin rejuvenation market.

We are also excited about our Pearl fractionated product, which we expect will receive FDA approval and start shipping in the second half of 2008. We are committed to making Cutera the leading global provider of lasers and light based aesthetic equipment and remain confident in the opportunities in our industry and our business and believe the worldwide market for laser and light-based aesthetic equipment will continue to grow in 2008 and beyond.

Now I would like to open the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Thomas Gunderson - Piper Jaffray.

Thomas Gunderson - Piper Jaffray

It has been a long time since we have seen a sequential decline in service revenue. Is there something going on there that does not meet the eye right away?

Ronald J. Santilli

With regard to Q4 service revenue, we actually had a non recurring charge or revenue, I should say, of about $150,000 related to our Japanese operations. If you would back that out, you would see a slight sequential increase.

Thomas Gunderson - Piper Jaffray

And that is the way it should go into the visible future, right?

Ronald J. Santilli

We would expect that, yes.

Thomas Gunderson - Piper Jaffray

Speaking of Japan, higher international spending on your sales and marketing line, which I am still surprised just a little bit as to the size of that given the revenue base, but spending on international makes sense, if that is what is growing. Were there things that accountants would not call one time, but Wall Street investors might, as in opening offices or signing bonuses, something like that?

Kevin P. Connors

I cannot say that there is anything that jumps out, Tom, other than we have been spending quite a bit in terms of the hiring plan for our sales, marketing and customer support personnel. A lot of that happened leading up to the end of the year so it is affecting the income statement in the quarter.

As you mentioned, we see the opportunities there. We have been investing in international business for several years now, and we are seeing some nice traction in certain pockets, but we see tremendous opportunities where we have made significant investments as well.

Thomas Gunderson - Piper Jaffray

Would that $10 million plus be a dollar run rate that would be a base going forward in the year?

Kevin P. Connors

The $10 million, you are referring to sales and marketing?

Thomas Gunderson - Piper Jaffray

Correct.

Kevin P. Connors

Obviously it does not go down. It will not go down right now. We have made commitments to that. If you look at our business, the first quarter is seasonally the softest for us, so the sales and marketing expense looks out of whack. Historically, Ron, could you go over what we have been at in other first quarter levels?

Ronald J. Santilli

In Q1 ‘06 we were about 41% in sales and marketing and in Q1 ‘07 our sales and marketing expenses percentage of revenue was about 39%. We typically run high in Q1, then is comes down as the year progresses.

Kevin P. Connors

With that said, Tom, is that it is still at a higher level as a percent than we typically have.

Ronald J. Santilli

And part of that is the denominator.

Thomas Gunderson - Piper Jaffray

Lastly, as a subject that I am curious as to your answer, Kevin. You have a lot of competition out there. You have established your technology, you have established your new products, sequence, etc. but you have brand names that arguably the consumers know better, whether we are talking Fraxil or Smart Lypo or Thermage. Does the hiring of a marketing VP, with Kraft foods and Kodachrome on a resume, lead us to believe that maybe there will be more marketing and some more branding of the Cutera product line?

Kevin P. Connors

I think you are right in describing the market as being very competitive. We have seen from time to time many competitors come out with well branded offerings that have resonated with consumers. We do recognize the importance of moving forward, of really distilling our messages and really positioning both our products and our company in the best light in a very dynamic marketplace. We are very pleased to have hired Sharon recently, and we think that she will be able to provide a lot of leadership with the things you have discussed.

Operator

Our next question comes from Dalton Chandler - Needham & Company.

Dalton Chandler - Needham & Company

You mentioned that you were disappointed with the quarterly results that they fell short of your internal goals. Was that entirely unit based or are you seeing USP pressure as well?

Kevin P. Connors

Dalton, the average selling prices have not moved appreciatively. We were hoping for more product sales. I think that is the source of the comment, with the caveat that it is our toughest quarter in terms of revenue achievement. We think that we are certainly staffed for a much higher business level than we have achieved in the first quarter.

Dalton Chandler - Needham & Company

To come back to the sales and marketing question again, was there a significant step in the quarter? You had mentioned you had been spending on it all along. Was there a big increment in it this quarter?

Kevin P. Connors

My comment was really about our international sales and marketing expenses. Those have been ramping up. Ron, the U.S. levels haven’t changed terribly.

Ronald J. Santilli

Not appreciatively.

Kevin P. Connors

So it is really to the international commitments that we have made that have been creeping up over the past several quarters.

Dalton Chandler - Needham & Company

There was no unusual increase in the international either?

Kevin P. Connors

Well, they were planned increases. We see opportunities there and we are making investments, and we will continue to, but we like what we are seeing in the fundamentals of those markets.

Dalton Chandler - Needham & Company

Then, on the domestic side, what are you seeing with regard to your current sales force and its ability and potential turnover?

Kevin P. Connors

Well with the turnover issue, I think we have been relatively stable. We have not had any elaborate turnover issues in the quarter. We have been pretty stable in terms of the hiring as well. We did a lot of hiring last year. We think that that work is behind us and we think we are pretty well staffed.

Dalton Chandler - Needham & Company

Could you just remind us how many U.S. territories you have?

Ronald J. Santilli

In North America we had, at the end of March, 58 territories with about 56 on hand at that time. There were about two openings at that time.

Dalton Chandler - Needham & Company

What else can you tell us at this point about the new Pearl fractional? Anticipated pricing and is it a disposable component?

Kevin P. Connors

We do not have FDA clearance, so we cannot quote pricing at this point. We think that the market for having a more significant solution for the treatment of wrinkles is real, and this is another submarket of the fractionated technology market that is really quite new. We think that we will be in the market at the early stages. At the last [AED] it seemed that the products that we are targeting in this market have gotten a lot of attention by physicians.

We think that the wavelength that we have established with Pearl has given us excellent results and we think we will be able to leverage that for this new submarket within the fractionated space. We also believe that this really does play to the strength of the Xeo platform because most of the major players in this space are offering a one technology answer and commanding a pretty attractive selling price, well north of $100,000.

We think that Xeo, having the flexibility to have a broad range of the most popular laser and light-based applications, will really allow us to position it very nicely among the other two major competitors in this space.

Dalton Chandler - Needham & Company

Who do you view as the two major competitors?

Kevin P. Connors

We think the most recent offering by Reliant, and the luminous product in this space as well.

Dalton Chandler - Needham & Company

You did not mention if there is a disposable?

Kevin P. Connors

There is not a disposable.

Dalton Chandler - Needham & Company

Finally, the upgrade path?

Kevin P. Connors

Again, Dalton, more of the same. We offer this to our customers as an upgrade once we get the FDA clearance.

Operator

Our next question comes from Phillip Nalbone - RBC Capital Markets.

Phillip Nalbone - RBC Capital Markets

I am just looking for a little more color on the challenges in your North American business. Can you talk a little bit about how this is manifesting itself at the product end of it? The inability to sell upgrades to the existing customer base. Is it more challenging environment to sell new systems? How do the non-core physicians play into this? Is that suddenly a real issue here because of the economy?

Kevin P. Connors

Well, I think there are a number of things happening here Phil, and we do have the benefit of having a number of our publicly traded competitors report their results for the first quarter. It seems that across the board, with the exception of one of our competitors, they have seen softening in their U.S. business.

We think that it is more of a challenging environment than it was a year ago, and to a large extent, each quarter we are learning new things about the macro issues that we certainly were not able to anticipate a year ago. We are trying to manage our way through it as best we can and we think that new, exciting applications has historically been the way the we have been able to grow our business during some tough times. We are focused on bringing new applications to the market as quickly as we can, and we are pleased with what we have going on in the lab here.

In terms of the non core physicians, I think the credit is certainly a consideration, but I think the feedback that we get from our partners that offer leases to our customers is that people with good credit are able to still get good leasing alternatives in the market today. I think the bar has been raised for customers that might have been on the edge a year ago, they are having a very difficult time getting leasing alternatives in the market. Ron, do you want to comment on that?

Ronald J. Santilli

Particularly in the medic-spa market or the non-physician. Those two different sub markets are probably the ones that are becoming more difficult for us to get credit approved. When it comes to physicians that have been in practice for quite some time, that have a good financial background, which many of them do, those still are processed fairly routinely.

Phillip Nalbone - RBC Capital Markets

I realize this calls for a lot of subjective judgments and commentary, but I am going to ask it. Relative to your internal targets for the quarter, how much would you say the shortfall was the product of the sales force disruption or lack of productivity and how much was the economy?

Kevin P. Connors

You are right, Phil, that is a very subjective question and we have spent a tremendous amount of time trying to tease those two things out of that equation, but it is almost impossible to do. I think there are a number of things that we look at.

One is that we do see that in our international business we think that we have got a very strong portfolio that has done well with our direct and sales organization as well as our distributor model. I think we do have a solid product offering. However, we also see the benefit of launching into new applications and we are committed to doing that. I think that companies in our space that have tapped into the high growth opportunities have performed better.

So, I think that it is clear we need to be focused on offering new applications in the future and that would help improve the performance of our North American business and we have done that time and time again. We are also staying close to the expanded sales force. We hired a lot of people last year. As we commented earlier, we think that has stabilized, but we are dealing with a number of new managers that have been promoted into those roles from a sales rep role. So we are training new managers as well as new sales people on our North American sales team. We think that they are doing all the right things to move those people along.

Phillip Nalbone - RBC Capital Markets

Maybe you can help me reconcile two sets of numbers here. I was under the impression that Cutera ended the December quarter with 64 North American sales territories. Is that correct?

Ronald J. Santilli

Yes, there were 64 territories at the end of December. At the end of December, we actually had 60 territories. We had 64 at the end of September.

Phillip Nalbone - RBC Capital Markets

So does that represent continual turnover, or does it represent a paring back of the number of territories?

Kevin P. Connors

Well, there is some level of turnover that happens with the sales team, particularly when the numbers get as large as we have today. Obviously, in a more challenging environment, we’re scrutinizing the decisions to replace or not. We started the expansion at the beginning of last year when we thought the market in North America was growing in the 20% plus range, and we think that number has changed. We are still committed to a large direct sales force here in North America, but we’re looking at those decisions on a one up basis.

Operator

Our next question comes from Anthony Vendetti - Maxim Group.

Anthony Vendetti - Maxim Group

In terms of the new product launch that you mentioned, Kevin, on the bottom of the first page: “looking forward to plan new product launch later this year”. Are you talking about a new product platform, or is that the fractional Pearl?

Kevin P. Connors

It is the latter, Anthony.

Anthony Vendetti - Maxim Group

Are there any other products that you are expecting this year?

Kevin P. Connors

We have not announced anything new for this year.

Anthony Vendetti - Maxim Group

In terms of the sales force, now that you are down to 58 territories, I think, Ron, you mentioned 56 were staffed at the end of March 31, 2008. Have you filled those other two positions at this point, or are you still evaluating whether or not you need to?

Kevin P. Connors

I do not know if we have or not, but we certainly are evaluating those each time they come up.

Anthony Vendetti - Maxim Group

In terms of gross margin, I know based on the fact that lower product revenues and higher service revenues, these are a little bit lower. You mentioned, I think, a goal of mid-60s or so. How do you see that playing out this year? Is that a goal for 2009 or is that a goal to try to get to by the end of this year?

Kevin P. Connors

Anthony, we looked at the gross margin number slipping over the last couple of quarters and in the fourth quarter call we mentioned that we had a manufacturing absorption issue. I think you have recognized that fourth quarter revenue levels are significantly higher than we have throughout the year, so we are staffed for it and we felt the negative impact of that in the fourth quarter.

As we dug into it, we recognized that the good news is that our material cost as a percentage of revenue has stayed relatively stable. So, we see some other controllable costs in our business that are an opportunity for us to set a target that we think is reasonable, in the mid-60s range, with the caveat that this is what we think is a relatively normal revenue levels.

As the revenue level moves in the positive direction, we think that number can be leveraged to the positive. You have seen historically that we have had gross margins in the low 70s, so we think we can return to those levels if we are able to get the significant revenue volume back where we have seen it historically.

In the meantime, we think that reasonable revenue levels, setting a target for the mid- 60s is something that we should set as a goal. In terms of how long it takes to get there, well, we are working on that now. We are not going to commit that we will have it next quarter, but we certainly are working with the team to get there as quickly as we can.

Anthony Vendetti - Maxim Group

On ASP, they have not decreased materially? I think [Candela] mentioned to you that they were down 4% to 5%. Do you want to quantify materially? Are you using the materiality rule of 3%?

Kevin P. Connors

I did not think of that rule when I commented on it. In general, Anthony, we have been able to add more value to the Xeo platform with new applications. As you have seen, our average selling price has actually moved north over the years, pretty significantly. With the launch of Pearl, we saw some positive impact of the selling price there. It is not to say that we are not in situations where the prices are in question. We have to respond to those, but we have a number of different models that we can offer the market, so we are able to deal with it that way.

Anthony Vendetti - Maxim Group

Okay, and lastly on PSS, you mentioned it is one of the things you want to improve upon. I know that the relationship has been intermittently great, and then in some quarters, not as good as you would expect. Where is that now and what would you like to do to try to make that more consistent going forward?

Kevin P. Connors

I think the consistency is the biggest challenge we have had with it. I do not think we have ever characterized the relationship as not being good. We work very well with the team. PSS has somewhere around 200 vendors that they work with, so the challenge for all of us that are partners at PSS is to get their mindshare.

Ronald J. Santilli

Actually, Anthony, we have been pleased with the output from PSS. In 2007, they helped to contribute to something north of $14 million in our revenues in the U.S. We do believe that it is an opportunity for us and we are going to continue working that relationship and that partnership.

Operator

Our final question is from Jose Haresco - Merriman Curhan Ford & Co.

Jose Haresco - Merriman Curhan Ford & Co.

You have mentioned several times now that the quarter was disappointing. Can you give us a little bit of flavor as to where in the quarter the disappointment lay? Is it in the beginning of the quarter, in terms of building that initial sales pipeline or more towards the end as you are trying to close the deal? Could we start with that one?

Kevin P. Connors

Well, Jose, I do not really have an answer for that. The way that the business unfolds, and I think for the entire industry, is the order rate is backend loaded. I think every company in this space, if not every capital equipment manufacturer, would like to have smooth orders throughout the quarter and get one thirteenth of the business every week, but it just does not work that way. We would love to have that problem fixed, but I do not think we are alone with that. By definition, we expect a lot of business to come at the very end and we just did not see the uptick in our North American business. As I mentioned, it typically is the softest quarter for us, but we still saw nice growth in our international business.

Jose Haresco - Merriman Curhan Ford & Co.

. As you were headed into the quarter in January, were your initial sales pipeline or your leads coming out of the ADD and things like that giving you a sense that – with the understanding that Q1 is always tough – that your funnel would be big enough to carry you through the quarter?

Kevin P. Connors

Well, first of all the ADD is not until mid quarter and so January is a pretty quiet month for the space. We think we are doing the right thing in terms of lead generation, but we think that doctors are just taking longer to make those buying decisions, and we have heard that from other competitors in this space so we do not think we are the only ones feeling that. We think we are doing the right things in terms of getting the pipeline where we need it to be, but at the end of the day, we were not able to get many of those deals across the finish line.

Jose Haresco - Merriman Curhan Ford & Co.

On the SG&A I think you mentioned that a good chunk of the junk was because you had continued to build infrastructure overseas. Is it possible for you to quantify the impact of currency in the first quarter and establishing those U.S. channels?

Ronald J. Santilli

You know, I have not quantified that. I do not think it is significant because we do incur a fair amount of our expenses in U.S. dollars as well as the foreign currencies. I did not do a calculation, and I do not think it is a material number.

Operator

Ladies and gentlemen, that does conclude our question and answer session.

John Mills

Thank you for participating in our call today. We look forward to updating you on our progress at our second quarter conference call in August. Good afternoon and thank you for your interest in Cutera.

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