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Cutera, Inc. (NASDAQ:CUTR)

Q2 2008 Earnings Call

August 4, 2008 5:00 pm EDT

Executives

John Mills - ICR

Kevin Connors - President and Chief Executive Officer

Ron Santilli - Chief Financial Officer; Vice President of Finance and Administration

Analysts

Thomas Gunderson - Piper Jaffray

Dalton Chandler - Needham & Company

Phillip Nalbone - RBC Capital Markets

Anthony Vendetti - Maxim Group

Gerry Heffernan - Lord Abbett & Company

Eric Ufrin - Progressive Investment

Operator

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

John Mills

By now everyone should have access to the second 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 cutera.com and with its Form 8-K filed with the SEC and available on the SEC’s website at sec.gov.

Before we begin, Cutera would like to remind everyone that these prepared remarks contain forward-looking statements, including statements concerning long-term domestic and international growth opportunities and strategies, future spending on various aspects of our operations and the development and commercialization of existing and planned products.

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; its ability to increase revenue and manage expenses worldwide, the length of the sales cycle process, its 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 August 4, 2008 with the SEC.

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

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

Kevin Connors

Good afternoon everyone and thanks for joining us today to discuss Cutera’s results for the second quarter ended June 30, 2008. On today’s call I’ll provide an overview of results, 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 revenue in the second quarter of 2008 was $24.8 million or 4% higher than the $23.9 million reported in the second quarter of 2007 and diluted earning per share was $0.05. We generated $3.5 million in cash from operations, international revenue increased 41% in the second quarter 2008 compared to the second quarter 2007 and accounted for half of the quarters revenues.

We are pleased to have achieved our goal of generating half of our business outside the United States. We believe that global diversification in our business is critical, particularly during this challenging period of the domestic market. We have built a direct sales and customer support presence in Japan, Canada, Australia, Switzerland, Spain, France and the U.K. and are establishing direct operations in China.

In addition we have distributors in approximately 35 other countries where we do not have a direct presence. We are encouraged by international teams’ progress as we experience strong contributions in Australia, Canada and emerging global markets. The investments we’ve been making in our international business during the past several years are now providing solid results and have us well positioned for future international growth.

The U.S revenue in the second quarter of 2008 was $12.4 million or 18% lower than the amount reported in the year ago quarter and sequentially flat compared to the first quarter 2008, U.S. revenue. We believe the year-over-year decline was primarily driven by and an economic slowdown which caused physicians to delay their decisions to make capital equipment purchases.

To manage our business through this uncertain environment, we recently implemented expense reduction measures including the restructuring of our North American sales team to 46 territories with a focus of bringing our expenses inline with current revenue levels. These initiatives are expected to improve our operating margins and help us achieve higher profitability.

Our product revenue in the second quarter of 2008 grew 4%, when compared to the second quarter of 2007. This growth of our installed base then creates other revenue opportunities to future sales upgrades, service and Titan refills. Our Pearl product has gained momentum in the marketplace and was a popular application with our customers in the second quarter of 2008. During the quarter we focused our sales and marketing efforts on Pearl in our North American business and we’re able to gain higher sales. Pearl continues to perform well in our international business.

Turning to research and development; we are continuing our investments to develop innovative solutions and expand the clinical understanding and applications of our current products. The development efforts related to our new ProFractional are continuing to produce positive clinical results and patient responses are exceeding our expectations. This new device designed to improve pronounced wrinkles by targeting the deep dermal layer will enable us to compete in this expanding fractional market.

We have submitted our 510k application for the FDA approval and plan to start commercial shipments within the next 90 days. Also we are pleased with the progress we’ve been making on many other R&D projects and are looking forward to providing more information on those developments in the coming quarters. Cutera continues to see high demand for our products outside of the core specialties of dermatologists and plastic surgeons.

During the second quarter of 2008, 23% of our U.S. orders came from core physicians with the balance of U.S. orders coming from non-core specialties. This is inline with Cutera’s goal a building and retaining a diverse customer base. Now I would like to turn the call over to Ron to discuss our financials in more details; Ron.

Ron Santilli

Thanks Kevin and thanks to all of you for joining us today on our second quarter 2008 conference call. Second quarter 2008 revenue was $24.8 million, a 4% increase when compared to the $23.9 million for the second quarter of 2007. Our net income was $661,000 or $0.05 per diluted share. Product revenue for the second quarter of 2008 increased 4% when compared to the second quarter of 2007. These results primarily reflect higher sales levels from our international market.

Upgrade revenue for the second quarter of 2008 decreased 26% when compared to the second quarter of 2007. This decrease was primarily attributable to our large number of upgrade sales in the second quarter of 2007 when we commenced shipments of our new Pearl product.

Service revenue for the second quarter of 2008 increased 30% to $2.7 million when compared to $2.1 million in the second quarter of 2007. We expect this revenue growth to remain strong as a size of our install based continues to increase and customers use our services to maintain their products after the initial warranty period expires.

Titan refill revenue for the second quarter of 2008 increased by 27% to $1.6 million compared to $1.2 million in the second quarter of 2007. We are continuing to see a higher level of refill orders and are pleased to see our customer procedure volume grow, which is reflect of a positive market acceptance. Titan remains the popular application that is sold on a majority of our Xeo systems.

We are continuing to experience growth in our business from existing customers. During the second quarter of 2008 26% of our revenue was derived from sales of service upgrades in Titan refill. We are committed to strong customer satisfaction and believe we will continue to realize strong growth rates in our annuity revenue categories.

I will now address our operating performance. Our gross margin in the second quarter of 2008 was 63%, compared to gross margin of 67% in the second quarter of 2007. The decrease in gross margin was primarily attributable to higher service revenue as a percentage of total revenue, which is a lower gross margin than our other revenue categories and an increase level of international revenue to distributors, which has lower gross margins than our direct revenues.

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 second quarter of 2008 were 10.4 million or 42% of revenue compared to $9.2 million or 39% of revenue for the second quarter of 2007.

The increase in expenses in the second 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 than expected U.S. revenue. Recently, we resized our North America sales team to 46 territories. It is our belief that this action along with other expense reducing measures will position our business to a higher level of profitability at current revenue level.

Research and development expense in the second quarter of 2008 was $2 million as compared to $1.9 million in the second quarter of 2007. Each of those quarters, R&D expense was 8% of revenue. We intend to increase our investment in this area in our continued pursuit to develop and commercialize innovative products and applications.

General and administrative expenses increased slightly from $2.9 million in the second quarter of 2007 to $3 million in the second quarter of 2008. General and administrative expense was 12% of revenue for each of those quarters. Our effective income tax rate for the second quarter of 2008 was 31%. For modeling purposes we suggest using effective tax rate of approximately 30% for the remainder of 2008.

Turning to the balance sheet, our financial position remains strong as we experience strong cash generation, reduced inventory levels and lowered our account receivable DSO levels. As of June 30, 2008 we had $107.8 million in cash, marketable securities and long-term investments with no debt. That number divided by the 12.8 million outstanding shares of our common stock as of June 30, 2008 translates to more than $8.40 per outstanding share.

We are pleased with the $3.5 million of cash generated by operations during the quarter and believe we can continue being accretive especially in light of the expense reduction measures we recently implemented. Net accounts receivable at the end of the second quarter of 2008 was $9.2 million and the DSO’s were 34 days. Our DSO’s continue to remain strong and we were better than our target of 35 to 45 days due to a thorough credit approval process and strong collection efforts.

Inventories declined to $8.6 million at June 30, 2008 from $9.4 million at March 31, 2008. The primary reason for this inventory decline was the reduction in our finished goods inventory partially offset by higher inventories associated with purchases of Pearl Fractional parts in anticipation of that planned product launch.

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

Kevin Connors

Our performance for the second quarter of 2008 showed improved performance over our first quarter 2008 results. We grew our revenue showing particular strength in our international markets, returned the profitability and generated $3.5 million in cash from operations in the quarter. As mentioned earlier, we recently implemented a number of expense reduction measures with a focus on bringing our expense inline with current revenue levels.

We are addressing our cost structure and effort to improve profitability and as an example we recently resized our North American sales team to 46 territories which we believe is better balanced with today’s market environment. Additionally, we have a number of other initiatives now underway, which we expect to reduce costs primarily in our service and marketing functions. We believe these additional initiatives will improve our operating margins and help us achieve higher profitability.

In the coming quarters we’ll be focusing our efforts on increasing revenue productivity with our resized North American sales team, preparing to launch the Pearl Fractional which we expect will be within the next 90 days, continuing our commitment to investing in R&D and continuing our efforts on managing expenses to ensure that they remain within targeted levels.

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

Question and Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Tom Gunderson from Piper Jaffray; please go ahead.

Thomas Gunderson - Piper Jaffray

The last that I have, there were 64 territories, is that rate similar from 64 to 46?

Ron Santilli

Tom, we had 64 territories at the end of September ’07 and then it fluctuated slightly at the end of ’07 to 60 and then 58 at the end of March and then in early July we just changed that to 46.

Thomas Gunderson - Piper Jaffray

Early July, so nothing in Q2 from that savings; can you put some sort of dollar amount on that savings on an annualized basis or anyway you want to give it to us?

Ron Santilli

Yes, I wasn’t giving it in dollars, but at the end of March 31 we had 58 territories and we ended the quarter with about 51, 52 territories.

Thomas Gunderson - Piper Jaffray

And you do want to put dollars on it?

Ron Santilli

No, I wasn’t planning to put dollars on that.

Thomas Gunderson - Piper Jaffray

Can you give us some sense; there is going to be attrition, I mean the assumption would be you kept the top 46, but what kind of normal turnover was there during the quarter as well?

Kevin Connors

Yes Tom, we didn’t see any aberrant turnover levels during the quarter, so we’re committed to keeping 46 territories as the targeted level at this point and we think that we have a very strong team and for the levels that we’re looking for in our domestic business we think we’re well positioned particularly with the new product launch on the horizon.

Thomas Gunderson - Piper Jaffray

Okay and then two quick questions on the breakdown of revenues. Service was down sequentially for the second quarter in a row; can you help me make numerical sense out of that. Are there old devices that are going out of service or how does that work when you straight line it and there should be more devices every quarter than the last quarter?

Ron Santilli

It is a question, you did raise it last time Tom and we believe we should be seeing sequential growth in the service revenue. In these past few quarters we’ve seen good year-over-year growth but of course the sequential growth has been minimal and I’m not sure how to characterize it going forward, other than we do expect to go particularly on a year-to-year level. It’s just there are so many variables that go into that number that it’s causing some fluctuations here in the short-term.

Thomas Gunderson - Piper Jaffray

Okay and that was the answer you gave the last time I asked it too; it’s just that the short term has got doubled length, so I was hopping there was some more info. It sounds like it’s just a mix of variables that’s hard to pin down. This should be my last question, I’ll get back in queue; on the disposables it keeps going up, don’t they know that there is a bad consumer economy out there and that it’s not suppose to grow and not to be too facetious here, but what I’m thinking is that is it your opinion that your existing customers are doing okay and that the weakness is coming from adding new boxes to newer existing customers?

Kevin Connors

Yes, Tom I think you hit the nail on the head there; the Titan refill revenue is the only direct way that we could monitor application volume with our customers and that growth rate has really picked up. So obviously that suggests that the Titan application continues to be popular with our physicians and their patients and it’s our belief that the biggest challenge we have is not so much procedure demand but just a cautious physician when it comes to making a major capital equipment purchasing decision.

Thomas Gunderson - Piper Jaffray

But Kevin you probably pulled your existing companies recently, are they comfortable or are the average incomes from the laser continuing to go up like they did in the last several years?

Kevin Connors

Well it has been growing at single digit levels. We do those poles twice a year and we have another meeting coming up in Chicago later this month, but we will be getting fresh data at that point, but having up to the minute data, everything that we’ve seen so far suggests that the revenue volumes that our customers are generating is still in the same range that we’ve experienced historically.

Operator

Thank you. Our next question comes from the line of Dalton Chandler from Needham & Company; please go ahead.

Dalton Chandler - Needham & Company

So, let me ask first on ASP’s; last quarter you’re pretty specific that ASP’s were holding in pretty much unchanged is that still the case.

Ron Santilli

Yes still the case. Overall when you look at the product line the average selling prices are holding fairly constant.

Dalton Chandler - Needham & Company

Okay and just a follow-up on the Titan refill revenue growth. For a while there after you introduced the product you had some very nice growth and then it sort of flat lined for a while and now in what everyone believes is this lousy market it’s actually started to grow again. I mean is there any further insight you can give us on that?

Kevin Connors

Well I think that we have launched some different hand pieces for our Titan customers and we offer a broader range of solutions today and it could be that the technology that we developed has resulted in higher procedure volumes, but clearly the numbers speak for themselves and we’re pleased with 25% plus growth in the Titan annuity business.

Getting back to your comment about average selling prices Dolton, what’s particularly interesting about that is that with half our business going through our international channel that also has our blended distributor volume in there. So that’s typically what would transfer price so, that would suggest that average selling prices are actually going very well with that.

Dalton Chandler - Needham & Company

Okay and then on the new, the Pearl fractional, you mentioned several times you expect it to be selling it within the next 90 days. Should we assume that you actually made that 510k filing a few months ago.

Kevin Connors

We’ve been in discussions with the FDA for longer than that and we have been going back and forth with them about various requests and so we’ve been able to satisfy the questions that they’ve had and they’ve got that application in front of them. It doesn’t necessarily guarantee that we will get a clearance, but to the best of our knowledge we have satisfied their questions and we’re hopeful to get that clearance in the next 90 days.

Dalton Chandler - Needham & Company

Just a final question here; our September quarter is a seasonally weak quarter typically and you are going to have it looks like 18 fewer sales reps for this September than you had in last September, so I know you’ve shied away from giving any guidance, but would it be reasonable to assume that domestic sales would be down again in this quarter?

Kevin Connors

Well, Dalton I think we’re looking to extract higher volumes of productivity from the sales team and I think the extent of the reduction we have of what people do in the company for some of the newer heirs, so to have some of the more seasoned people take those territories were hopeful, that we can actually see an up tick in sales productivity. It’s still a significant sales force and we think its ample size to represent us with the new product launch that we have planned this year.

Operator

Thank you, our next questions comes from the line of Phil Nalbone from RBC Capital Markets; please go ahead.

Phillip Nalbone - RBC Capital Markets

You repeat my numbers quite handily. I think you managed very well through some tough times. Isn’t this a cause for some optimism here Kevin, shouldn’t you be giving us some sort of outlook on the next couple of quarters.

Kevin Connors

Phillip we would really like to be able to do that and I think over this last several quarters we’ve been able to establish somewhat predictable international growth, but we have been sequentially flat in our North American business and we are very hopeful that we get the FDA clearance and we can start shipping the new product here in the next 90 days, but until we see signs of predictable growth in the U.S. business I think we are going to hold off on making those kinds of statements about our future performance.

Phillip Nalbone - RBC Capital Markets

Okay I can certainly understand the reluctance to provide guidance given the uncertainties about the domestic market. Your overseas business is clearly very lively; could you give us some sense for what you expect that component of your business to look like for the balance of the year?

Kevin Connors

Well, I think the one thing to point out about our international business is we’re pleased relative to our peers that the growth rate that we are experiencing abroad is better than our competitors, but we have other competitors that have been in the international markets longer than we have and have a larger base. So, we are capturing share abroad and we also think that the market abroad is growing at a more healthy rate than we are seeing here in the states, but we would like to continue to have some more growth rates going forward.

Phillip Nalbone - RBC Capital Markets

I’m unclear how you achieved this latest GAAP down in the sales force headcount. I think Ron said it was 51 or 52 at the end of the June quarter, it’s now 46; did you just let attrition play out or did you actually send some people packing?

Kevin Connors

Well we did have some territories that opened up, relatively few though during the quarter that we didn’t replace, but most of them are just tough decisions that we had to make in order to size our sales and marketing expenses, what we think are reasonable business levels. With that said, we are still looking for growth in our business with the new product launch.

Phillip Nalbone - RBC Capital Markets

Given that approach to the downsizing, should we anticipate any sort of onetime charges any severance costs in the September quarter?

Ron Santilli

Nothing would be appreciable there so.

Operator

Our next question comes from the line of Anthony Vendetti from Maxim Group; please go ahead.

Anthony Vendetti - Maxim Group

Can you give us a little bit more color on the Titan refills; that 25% year-over-year increase was that mostly from the international market and then if you could just talk about which products drove the 41% growth internationally?

Kevin Connors

We don’t have that Titan revenue split by geography, but I would have a strong impression that most of that is from our domestic business. We have a strong Titan business and annuity business out of Japan and other international markets, but the lion's shares is coming out of our U.S. operation.

In terms of the products abroad that are doing well, we’ve commented in the call that Pearl has continued to do well outside the United States and I think one of the things that we’ve recognized is that Pearl is a different technology for improving the epidermal appearance and we’ve had a lot of competition with other technologies here in the United States that haven’t made the impact in the international market. So, we think that we’ve done particularly well with Pearl where these other technologies haven’t made the impact that we’ve seen here in the states. So, Pearl business has been very strong abroad but aside for that it’s the same product set that we’re having success with here in the states.

Anthony Vendetti - Maxim Group

So, Xeo and Titan are selling well internationally?

Ron Santilli

Yes; still the dominant source, yes.

Anthony Vendetti - Maxim Group

Okay and the $11.5 million in long-term investments, is that auction rate securities that you intend to hold to maturity?

Ron Santilli

That is correct Anthony. We have the ability to hold those to maturity. As such we have approximately $1.9 million of unrealized loss in the balance sheet, nothing to the income statement. The numbers changed negligibly in the quarter.

Operator

Our next question comes from the line of Gerry Heffernan from Lord Abbett & Company; please go ahead.

Gerry Heffernan - Lord Abbett & Company

I would like to ask just to understand a little bit better; the revenue by product category, we have the products and the product upgrades and the big flip from what happened in the first quarter to the second quarter between those two categories. I’m trying to understand whether there’s some significance there in that?

Ron Santilli

This is Ron, in the upgrade section a year ago we had commercially launched the upgrade for the Pearl product and so we had a lot of pent-up demand that we were fulfilling and as such that made it look like a decline this quarter; it was a decline this quarter, but we were comparing to that pent-up demand. Does that help to understand at least the upgrade section?

Gerry Heffernan - Lord Abbett & Company

Well I guess; so the upgrades in the first quarter were up 16% because you were not selling the Pearl yet, in the first quarter of ’07?

Ron Santilli

I’m referring to Q2 ’07.

Gerry Heffernan - Lord Abbett & Company

I understand that, but what I’m trying to understand is why we flipped from the first quarter to the second quarter. In first quarter, product upgrades were up 16% and so the first quarter ’08 over the first quarter ’07 being up 16% is because we had the Pearl in ’08 and we did not have the Pearl upgrade available in the first quarter ’07.

Ron Santilli

Yes, that would be correct.

Gerry Heffernan - Lord Abbett & Company

Then how about for the products, where the products were down 16% in the first quarter ’08 over the first quarter ’07, but up 4% in this quarter.

Ron Santilli

And we drove that up to 4% this quarter was the international volume that was up significantly.

Kevin Connors

Jerry, I think in general we see some lumpiness in the upgrade business typically when we have a new application that we will launch; we see a surge in that. However, one of the most important factors for us is to find new users, so we are pleased to see growth in our product sales, because that’s an indication that we can create new accounts and they are a source of future opportunities in terms of upgrades in the Titan refill business.

Gerry Heffernan - Lord Abbett & Company

In regards of the Pearl Fractional where we were talking about 90 days are we talking just domestic or is that domestic and international?

Kevin Connors

Well we’ve planned a global launch, so we’re looking to be able to get regulatory approvals in the major global markets with that.

Gerry Heffernan - Lord Abbett & Company

Where are we as far as getting those approvals?

Kevin Connors

Well we have been working with the CE Mark so we are prepared to be able to shift to Europe and we also have a Clearance in Australia. We’re working the other markets as well including Canada and Japan.

Gerry Heffernan - Lord Abbett & Company

Okay, but you think that you’ll be able to sell it domestic within 90-days; when do you expect to be able to sell within Australia, within Japan, within Europe?

Kevin Connors

Well Australia and Europe within that same window, Japan we’re still working on that.

Gerry Heffernan - Lord Abbett & Company

Okay, so you expect to have a major part of globe covered on the Pearl Fractional within the same 90 day period?

Kevin Connors

Yes, but again with the caveat that this is for the domestic market, its contingent on the FDA clearance being granted.

Gerry Heffernan - Lord Abbett & Company

And for those other markets?

Kevin Connors

We already have the CE mark for Europe.

Gerry Heffernan - Lord Abbett & Company

Right, so you’re just waiting to get the domestic before you go anywhere with it?

Kevin Connors

Not necessarily, but we’ve planned to have FDA clearance in the next 90-days in which case we should… (Multiple Speakers)

Gerry Heffernan - Lord Abbett & Company

Have you sold any Pearl Fractional international yet?

Kevin Connors

No, we have not. In a typically sequence that we’ve had is to focus on the domestic launch, but doesn’t mean that we have to stay with that same strategy going forward.

Gerry Heffernan - Lord Abbett & Company

In a previous question you made the comment that you’ve been able to establish a good sales rate internationally and that we’ve at least hit a sequentially flat revenue here in the domestic market; you’re not willing to really call it bottom yet nor start putting out guidance, but are we at least in a sufficient enough steady state that you would feel comfortable starting to put the balance sheet to work. What time, is it appropriate to start using this cash balance that we have at our disposal or doing something to improve value here?

Kevin Connors

Well we’ve acquired a $25 million of our stock last year and we are constantly looking at opportunities to acquire things that make sense with our business and that’s something we actively are looking at, but we need to find something that really fits.

Gerry Heffernan - Lord Abbett & Company

We acquired $25 million as well with the stock last year; that was at a higher price, what about this year?

Kevin Connors

We’ve not done anything yet.

Gerry Heffernan - Lord Abbett & Company

Understood; why not? What can we expect to go in that? What are thoughts that you would like to do on that?

Kevin Connors

Well, I think it’s a topic that we have filed with our Board and so it’s always possible that we could decide to acquire more of our stock, but I think we are trying to understand, whether there are opportunities out there to allow us to go our business in a faster way and so we’re probably more inclined to keep that option open.

Operator

Our next question comes from the line of Ken Thomas from Progressive Investment; please go ahead.

Eric Ufrin - Progressive Investment

It’s actually [Eric Ufrin] for Ken, good quarter and I just want to touch base in regards to FAP. I know you guys usually keep your product introductions quite close your vest, but with three competitors out there with the FAP solution now I was wondering if you could comment on your view of that market?

Kevin Connors

What specific technology you’re referring to?

Eric Ufrin - Progressive Investment

Smart Lipo, Slim Lipo in particular?

Kevin Connors

So that laser lipolysis market. I think the body contouring space is certainly an exciting market; we’ve seen a lot of growth and what our competitors are doing with the laser assisted liposuction. We believe we’ve got some in-house initiatives in place that are exciting, but we just don’t talk about then until we’re ready to launch.

Eric Ufrin - Progressive Investment

Also can you comment on the sales cycle, what you’re seeing there and in regards to financing any impact there whatsoever in the marketplace?

Ron Santilli

No real impact to financing Eric. I think what we do see in the small piece of our business that’s MedSpa related, those typically are difficult to get finance, but the majority of our sales are to physicians and physician based we haven’t being seeing any significant problems on the financing side.

Operator

Our next question comes from the line of Dalton Chandler from Needham & Company; please go ahead.

Dalton Chandler - Needham & Company

I was just wondering if you could tell us anything about your anticipated pricing for the new Pearl Fractional.

Kevin Connors

Dalton, we can’t talk about pricing until we get the FDA clearance, but we do think it’s a premium product and the clinical experience we have, this wavelength for bleeding the epidermis is quite exciting. So, we think we should have a lot of features and benefits that allow us to really distinguish our technology, but we can’t speak to pricing until we are able to get the FDA clearance.

Dalton Chandler - Needham & Company

Understood, when you say you think it’s a premium product that implies that it should cost more than the existing Pearl, is that fair to say?

Kevin Connors

Well, we have many different versions or many different offerings with regard to Pearl that’s available and upgrades available, the extension of the Xeo and so certainly as we look at our new product, we’re looking at the competitive landscape and what the pricing structure is there and running costs and when we come up with our Pearl Fractional pricing, we’ll have the competitive landscape inline, but we do think it will be a premium.

Operator

Thank you and further question from the line of Anthony Vendetti from Maxim Group; please go ahead.

Anthony Vendetti - Maxim Group

Thanks. Just really quickly on R&D; it was a little bit higher than we we’re expecting at about 220,000 and also 220,000 more than first quarter. Is this a sustained up-tick in R&D or should we expected to trial back down to the $1.5 million, $1.6 million range?

Ron Santilli

When looking at our R&D investment, I think it’s fair for us to continuing investing in that line. So, no I don’t think you’ll see it going down; I think it’s only going to going upward.

Operator

Thank you and at this time I would like to turn the call back over to Kevin Connors; please go ahead.

Kevin Connors

Thank you for participating on our call today. We look forward to seeing you at various investor events during the quarter and to updating you on our third quarter conference call in November. Good Afternoon and thanks for your interest in Cutera.

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