Cutera, Inc.
Q4 2010 Earnings Call Transcript

Published: 3 Feb 2011

[Operator:]

Greetings and welcome to the Cutera Inc.’s fourth quarter and fiscal year 2010 earnings conference call. (Operator instructions) It is now my pleasure to introduce your host, Mr. John Mills of ICR. Thank you. Mr. Mills you may begin.

[John Mills:]

Thank you. By now, everyone should have access to the fourth quarter of 2010 earnings release, which went out today at approximately 4

[Kevin Connors:]

Thank you, John. Good afternoon, everyone, and thanks for joining us today to discuss Cutera's results for the fourth quarter ended December 31, 2010. On today's call, I'll provide an overview of our results, and then Ron Santilli, our CFO, will provide additional details on our operating and financial results. Finally, I will provide some closing comments and open the call to your questions. Our fourth quarter and annual 2010 revenue remained flat compared to the same period in 2009. During the fourth quarter of 2010, US revenue increased by 9% compared to the fourth quarter of 2009. This growth was primarily the result of improvements associated with the initiative discussed in the past few quarters, including the launch of our new Genesis Plus product, and improved productivity in our domestic sales force. We are pleased to show this growth and are focused on initiatives to increase our revenue in the US in 2011 and beyond. Our international business declined 7% compared to the fourth quarter of 2009. We experienced growth in most of our international markets, however, Australian volume was especially strong in the fourth quarter of 2009 due to the special tax incentive. This is the primary reason for the comparative decline in the fourth quarter of 2010. Additionally, we recognized record revenue in Japan in the fourth quarter of 2010. Our Japanese operations experienced growth in all the product categories, including the recently added filler in the cosmeceutical business. during the fourth quarter 2010, approximately 67% of our North American orders came from the core market of podiatrists. The podiatry specialty is a new perfect market for us, an opportunity to sell our Genesis Plus and other products. We are continuing to target the core market segments, as well as other established medical offices because we believe they offer the best growth opportunities in the current market environment. Titan annuity revenue for the fourth quarter 2010 was in line with our expectations at $934,000, a decrease of $590,000 from the same quarter in the prior year. This decrease was primarily due to the voluntary recall of certain Titan XL hand pieces. We provided our eligible customers with a fully refilled Titan XL hand pieces, which resulted in lower than normal Titan refill revenue. We are pleased with the sequential increase of approximately $300,000 of annuity revenue from the third quarter, which we believe will continue to increase until the return to a normalized quarterly revenue of $1.5 million in the second half of 2011. Turning to the cosmeceutical and filler products, in the fourth quarter of 2010 we had record revenue of $1.2 million from these products. as a reminder, in Japan we started distributing Obagi physician dispensed cosmeceutical products from February 2010, and has been distributing BioForm's Radiesse products since late 2008. These products augment our Cutera laser and light-based products. We are pleased with the recurrent revenue model and profit contributions, as well as the cross selling opportunities that these products provide. Currently, the cosmeceutical filler business and Cutera laser and light-based installed base overlaps by approximately only 10%. Turning to research and development, we believe that strategic ongoing investments in product research and development are critical to our future success. In line with that principle, we're continuing to invest in R&D for the next generation of technology and have increased our engineering and clinical research headcount to develop innovative solutions and expand the clinical understanding and applications of the current products. In our last earnings release call we stated that we plan to launch three new products by the end of 2011. Now let me share with you the current status of our product development efforts. One, during the third quarter of 2010 we commenced the stage launch of our new product, Genesis Plus, targeted internationally for the toenail fungus. We are pleased with the initial market response, and are excited about the growth opportunity of this market. We believe that this is a fast growing market where we’re targeting podiatry and dermatology specialties. Our new product utilizes our Nd YAG technology coupled with a proprietary delivery device with a temperature sensor to provide the practitioner and patient a consistent and safe treatment. Genesis Plus currently has a number of general indications for use in the United States that allow us to market the product to podiatrists and dermatologists. During the third quarter of 2010, we received a CE Mark with an indication for toenail fungus treatment. During the fourth quarter 2010, we submitted a 510 (k) application to the FDA with the intent to obtain a toenail fungus treatment indication. Later this week, at the American Academy of Dermatology annual meeting in New Orleans, we are launching a next generation comprehensive vascular workstation Excel V. Excel V is a high-performance vascular laser designed specifically for the core market of dermatologists and plastic surgeons. Excel V has a substantial number of key features that enable physicians to provide a vast range of clinical vascular treatment capabilities, both on the face and body, providing great value from a cost of ownership perspective. It has the versatility to treat all vascular lesions from shallow to deep with a delivery system that can precisely match the treatment beam to the target structure up to 12 mm in size. Physician controlled dermal cooling, while providing the ability to clearly see the vessels being treated, and an extremely broad combination of fluence and pulse duration that enables the physician the optimal treatment parameter for each patient, and no consumables or disposables, which is a significant competitive benefit. We took the Excel V to leading vascular specialist dermatologists and the clinical and user feedback was extremely positive with respect to its ease of use and availability with standard power, no warm up, and auto calibration. The delivery system design that is lightweight with excellent visibility and cooling. We are hearing [ph] the treatments are also much faster, it incorporates a variable spot beam with an ability to resolve at 0.1 mm increments, which in turn enables physicians to provide ideal treatment rather than limited to discrete spot sizes. Lastly, we plan to add another new product during the second half of 2011. More details associated with this product launch will be coming in upcoming quarters. We remain committed to the core physicians in developing high-performance solutions, and believe our new product launches will be reflected in our revenue in the future. Before I turn the call over to Ron, I like to reiterate that we are delighted to have Len DeBenedictis join our management team as Chief Technical Officer as was announced earlier in January. Len will expand our research and product development efforts further. We are pleased about the strengthening of our sales management team through the addition of Michael Poole as Vice President North American Sales. Michael and his team are focused on achieving great gains in this historically significant market. This important development has allowed Chris West to dedicate his time to further developing our Japan and Asia Pacific markets. We believe that these strategic challenges significantly strengthen our executive management team and position us for growth in 2011 and beyond. Now I like to turnover 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 2010 conference call. Fourth quarter in 2010 revenue remained flat when compared to the same period in 2009. Net loss for the fourth quarter was $1.3 million, or $0.09 per diluted share. Product revenue increased by 10% in the fourth quarter of 2010 when compared to the fourth quarter of 2009. We are pleased with the growth in our unit volume, however, this was partly offset by declines in our ASPs, which was primarily a result of customers purchasing fewer applications on our platforms, and a greater proportion of distributor revenue that has a lower selling price. Upgrade revenue for the fourth quarter of 2010 was unusually low at less than $98,000. In the fourth quarter, our sales team focused on selling systems to customers, which resulted in a lower volume of upgrades. Historically, a new product launch has resulted in an increase in upgrade revenue, however, we launched Genesis Plus, a standalone system that has not upgradeable to our existing product line. Service revenue for the fourth quarter of 2010 compared to the fourth quarter of 2009 was relatively flat at approximately $3.3 million. The primary components of service revenue is extended service contract amortization. This revenue has remained flat over the past several quarters due primarily to lower service contract amortization as a result of lower ASPs on our service contracts, offset by higher revenue from consumable hand piece purchases and time and material fees charged to customers who were out of warranty. Titan annuity revenue for the fourth quarter of 2010 was in line with our expectations at $934,000, a decrease of $590,000 from the same quarter in the prior year. This decrease was primarily due to our voluntary recall of certain Titan XL hand pieces. We provided our eligible customers with a fully refilled Titan XL hand piece, which resulted in a lower than normal Titan refill revenue. We were pleased with the approximately $300,000 increase in Titan refill revenue from the third quarter, which we believe will continue to increase until we reach our normalized $1.5 million on a quarterly basis in the second half of 2011. Fillers and cosmeceutical revenue was $1.2 million for the fourth quarter of 2010, which was up significantly from the fourth quarter of 2009. The primary reason for this growth was Obagi Japan cosmeceutical sales of approximately $750,000 in the fourth quarter of 2010. We started selling Obagi products in Japan in February 2010, and are pleased with this increase in revenue source and the cross selling opportunities this relationship provides. A significant percentage of our revenue is sourced from existing customers. During the fourth quarter of 2010, 41% of our revenue was derived from sales of upgrades, service, Titan refills, and filler and cosmeceutical products. We remain committed to strong customer satisfaction, and believe we will continue to realize revenue from these annuity revenue categories. I will now address our operating performance. Our gross margin was 59% in the fourth quarter of 2010 compared to 62% in the fourth quarter of 2009. The 59% margin is lower than we expected at our current revenue level due primarily to the following, lower ASPs for our product as a result of customers purchasing fewer applications on our platforms, a greater proportion of distributor revenue that has a lower gross margin, and a temporary decline in our Titan refill revenue the traditionally has a higher gross margin than our consolidated gross margin. We have historically targeted 60% gross margin at quarterly revenue levels in the $14 million range. Due to the reasons just mentioned above to achieve 60% gross margin, we believe our quarterly revenue now needs to be at approximately $15.5 million. Below this revenue level, our margin will be lower and conversely above this revenue level they will be higher. Sales and marketing expenses remained flat at $6.1 million or 40% of revenue in the fourth quarters of 2010 and 2009. Research and development expenses were $2.2 million for the fourth quarter of 2010 compared to $1.9 million for the fourth quarter of 2009. This increase was due primarily to material spending associated with our new product development effort. As Kevin mentioned earlier, we plan to increase our investments in R&D and expect multiple product launches in 2011. As a result, we expect R&D expenses to increase. Note that at revenue levels higher than our fourth quarter 2010 revenue of $15.2 million, we expect that R&D expenses as a percentage of revenue will decrease from the 14% rate in the fourth quarter of 2010. General and administrative expenses were flat at $2.2 million for the fourth quarter of 2010 compared to $2.1 million for the fourth quarter of 2009. Interest and other income net was $144,000 for the fourth quarter of 2010 compared to $174,000 in the fourth quarter of 2009. The lower income is due primarily to lower yields on our investment portfolio, which reflects our focus on capital preservation during the recent uncertain financial market. In the fourth quarter of 2010, we had a net benefit from income taxes of $127,000, which resulted partly from the expiration of the statute of limitations related due to the audit of some tax years as a result, as well as certain foreign deferred tax benefits recorded at the end of 2010. For modeling purposes, we suggest using an effective income tax expense of approximately $50,000 per quarter in 2011. Turning to the balance sheet, our financial position remained strong. As of December 31, 2010, we had approximately $97 million in cash, marketable securities and long term investments with no debt. This represents over $7 per outstanding share. During the fourth quarter, our operations consumed approximately $400,000 of cash. Net accounts receivable at the end of the fourth quarter of 2010 were $4.2 million and DSOs were 25 days. Inventories at the end of the fourth quarter declined by approximately $700,000 when compared to the third quarter of 2010. We continue to aggressively manage this asset, and are turning our inventory in the range of 3 to 4 times per year. Now that I've concluded my overview of Cutera's financial performance, I'll turn the call back to Kevin.

[Kevin Connors:]

Thanks Ron. For the next two quarters, we remain focused on the following key initiatives One, achieving higher sales productivity through improved management focus; two, turning our sales and marketing efforts on physicians in the core market, while maintaining a strong presence in the non-core market; three, continuing to cultivate relationships with key opinion leaders; four, continuing our efforts on multiple R&D projects that include the following, one, the continued launch of the Genesis Plus product, two, launch of our new vascular workstation Excel V to the core market, and three, focusing our efforts on an additional new product scheduled for the second half of 2011. With the appropriate swift execution of these important initiatives, we believe we will achieve our goal of increasing revenue and improve leverage of our operating expenses resulting in increased performance. Now, I'd like to open up the call to your questions. Operator?

[Operator:]

(Operator instructions) Our first question is from Phillip Nalbone with Wedbush. Please go ahead with your question.

[Phillip Nalbone:]

Hi, thank you very much. Kevin, I'll start with you. You just reported your best US growth since Q4 of 2006. What has happened? What is turning around? Is it market dynamics, is it the new product, is it sales force productivity? How would you assess the mix on your domestic performance?

[Kevin Connors:]

Phil, we are pleased to see that and able to make the course corrections to get our growth trajectory in a positive direction, and nice to see double-digit growth relative to the year ago. It is a number of things. I think we have struggled over the years making the shift from the non-core segment of the market to the core segment. Clearly with the product development activities we are seeing nice up tick there. Genesis Plus has done very nicely and we think the new product that we have been able to get in our hands of key opinion leaders is also giving us access to the part of the market that we think is available [ph] to us.

[Phillip Nalbone:]

Kevin, would you dare to hazard a guess as to what the US growth rate for the aesthetic laser market is likely to look like on a year-over-year basis over the next couple of quarters?

[Kevin Connors:]

Sure. So Ron, we have data on what it has been historically for 2010 versus 2009, it is relatively flat, wasn’t it?

[Ron Santilli:]

Single digit growth maybe.

[Kevin Connors:]

Single digit growth. But we are hopeful that the same newspapers that you are reading are reflecting the optimism in our business, if we can get more of economic rebound that we're going to benefit from that. And we are also hopeful that the downdraft has been severe and protracted, such that there potentially could be an issue of pent-up demand once things do get more stabilized on the economic front. But we are hopeful that the industry can experience double-digit growth.

[Phillip Nalbone:]

Okay, great. One more for you, Kevin, and I'll go back into the queue, can you talk a little bit more about the FDA pathway for the toenail fungus indication? Exactly what sort of claim are you aiming for? Is this a 510(k) or a PMA? And any guess as to timing?

[Kevin Connors:]

It is a 510(k), and there is a predicate device that has been cleared for this indication. We’re looking for the exact same language in our indication. We have been working with the agency to understand what they are looking for and have worked in tandem with them to construct the 510(k). so we are hopeful that the agency reviews it and gets a favorable response from it. We submitted it several months ago, so we’re waiting to get a signal from the FDA as to how they view it. In the case that we don’t get a clearance with the predicate 510(k), we also have clinical work that we are currently doing that will be able to support any potential requirements they have for clinical validation of our technology.

[Phillip Nalbone:]

Are you seeking an appearance-based claim or something a little more clinical, like destruction of the underlying fungus condition?

[Kevin Connors:]

It is an aesthetic claim that shows the improvement of the appearance of this condition, which we think is going to be just fine in terms of us having the ability to talk about toenail fungus specifically.

[Phillip Nalbone:]

Okay. Thank you very much.

[Operator:]

The next question is from Bill Knox with TIG Advisors. Please go ahead with your question.

[Bill Knox:]

Hey, guys, two quick questions, if I could. First, do you expect to be cash flow positive this year, 2011, given your current outlook?

[Ron Santilli:]

Yes, if you look in the current quarter Q4, we consumed about $428,000 from an operating perspective, and part of that was consumed by an increasing accounts receivable. So we are pleased that with what occurred in Q4. So looking into 2011 we are certainly planning to be accretive from a cash perspective.

[Bill Knox:]

Okay, great. And secondly, Kevin, you alluded to it on the call about your international business, and specifically a year ago, Australia.

[Kevin Connors:]

Yes.

[Bill Knox:]

I think some tax incentive. If you were able to back that out and normalize for apples-to-apples compare, what would that kind of year-on-year growth be?

[Ron Santilli:]

Yes, this is Ron.

[Bill Knox:]

Okay, Ron.

[Ron Santilli:]

You are right. We actually had a decline year-over-year of 7% of our international business of revenue volume. If you were to back out the Australian number, which was unusually high in revenue volume in the fourth quarter of 2009 due to a special tax incentive that was provided in that country, if you were to back that out our international volume actually grew 21% from the fourth quarter of 2009 to the fourth quarter of 2010. We saw growth in many, many of our international markets with Japan leading the way with significant or record revenue growth.

[Bill Knox:]

Okay, great. Thanks, guys.

[Kevin Connors:]

Thank you, Bill.

[Operator:]

The next question is from Tom Gunderson with Piper Jaffray. Please go ahead with your question.

[Tom Gunderson:]

Hi, good afternoon, guys.

[Kevin Connors:]

Hi, Tom.

[Tom Gunderson:]

So on Excel V, is – congratulations on the impending launch. Is that ready to ship now?

[Kevin Connors:]

We are planning to have it available to ship this quarter. We are, as the press release indicated today, we have it at New Orleans now, and we will be talking about it in our booth, and we are excited with the clinical feedback from most respected people in aesthetic and vascular dermatology.

[Tom Gunderson:]

The reason I ask is usually inventories go up on an impending launch, and your inventories went down. So I was just wondering, is there anything unusual about this? Can you ship from some other – from manufacturing side or something like that?

[Ron Santilli:]

Actually, the inventory associated with this product, the Excel V actually went up during the quarter. We just had some significant decline in other inventory levels. So that is just reflective of the management we have been focused on in producing our inventory levels.

[Tom Gunderson:]

Got it, thanks. And then staying on that same theme of Excel V, were there any beta test sites, any sales at all in the quarter that were attributed to this?

[Kevin Connors:]

No, we haven’t been focused on our sales efforts until this meeting. We wanted to really approach this with a strategy that we get it in the hands of people that we think are very influential. So we have probably had this in the hands of 15 physicians, and so that has been the focus this past quarter and in the early part of this quarter really to hear what they have to say about it. So far we have been delighted with the response so far. Now we are at a point where we are ready to commercially launch the product.

[Tom Gunderson:]

Kevin, were those revenue-generating units or trials –

[Kevin Connors:]

No, that wasn’t the strategy. We are not looking to do that. We’re really looking to build the story.

[Ron Santilli:]

Tom, there is zero revenue associated with Excel V in this quarter.

[Tom Gunderson:]

0.0. Got it, the sales force. Are they getting trained this weekend, or are they already been trained?

[Kevin Connors:]

We did training last quarter for Excel V specifically, and we are here in New Orleans with the sales force next door getting four days of additional training. So we really are looking to roll this out with a well-positioned sales organization.

[Tom Gunderson:]

Got it. You gave us a number – I'll switch a little bit here, you gave us a number of 64% of sales same from core and podiatry. How much of that was podiatry?

[Ron Santilli:]

About 26% was podiatry with 38% coming from the core, a total of 64%.

[Tom Gunderson:]

Thanks. And last question from me right now is, I had in my notes from previous that maybe we were expecting an order to come through – a shipment to come through to spa or health club. Was there any of that in the quarter?

[Kevin Connors:]

We had one – the shipment – the organization you are thinking about happened in the first quarter a year ago, and we have a very good relationship with that organization and we are in active discussions for a subsequent order, but we didn’t recognize any revenue for that in the fourth quarter.

[Tom Gunderson:]

Got it. That's it for my guys, thanks.

[Ron Santilli:]

Thanks Tom.

[Operator:]

The next question is from Anthony Vendetti with Maxim Group. Please go ahead with your question.

[Anthony Vendetti:]

Thanks. Good afternoon, guys. The 2011 second half product that you are mentioning, can you talk a little bit more about that particular product, maybe the expected application for that?

[Kevin Connors:]

That at this point Anthony really are so focused on, the Genesis Plus offering, and continue to roll that out and then obviously this weekend the Excel V (inaudible) focused on.

[Anthony Vendetti:]

Was this product, the one for the second half, this was one of the products that you had mentioned in the third quarter call, and you are just finalizing specifically where it's – when going to come out?

[Kevin Connors:]

We have been consistent in talking about three product launches with the third one coming in the second half. So there has been no change from our position.

[Anthony Vendetti:]

Okay. And cosmeceutical area, looks like those revenues sequentially have gone down. Is that accurate? And if so, what would be the reason for that do you think?

[Ron Santilli:]

I think sequentially it went up just a small amount Anthony from $1.1 million to $1.2 million if I remember it right. I’m going to look at my record now. Yes, went from $1.1 million in the third quarter of 2010 to $1.2 million in the fourth quarter of 2010. And that is relative to $807,000 in the second quarter of 2010. So there has been a nice upward tick on that from that revenue source.

[Kevin Connors:]

And again that is just limited to our business in Japan.

[Anthony Vendetti:]

That's just Japan. Okay. Okay. And then if you could give the breakout of stock-based comp, Ron?

[Ron Santilli:]

Sure. Cost of sales is about 158,000, and sales and marketing 286,000, R&D was 152,000, and general and administrative was 384,000 for a total of 980,000.

[Anthony Vendetti:]

Okay. And then lastly on the ASPs you mentioned that they went down, but the main reason is it sounds like when, I guess, customers order the Xeo or some other product that has hand pieces, they're ordering fewer hand pieces, at least initially? Is that – and then I guess you said more distributor-type sales. Is that the main reason, the only reason, or has there been any pricing pressure? Or is it mostly attributed to these two things?

[Ron Santilli:]

Those are the primary reasons Anthony. There may be a small amount of erosion, but the primary reasons are those two.

[Anthony Vendetti:]

Okay. The distributor, though, with international revenues down a little bit this quarter –

[Kevin Connors:]

Anthony, I think the way we look at it the comparisons are to an extraordinary Australian quarter.

[Anthony Vendetti:]

Okay.

[Kevin Connors:]

Growth elsewhere to be quite strong.

[Ron Santilli:]

And remember Australia is a direct country for us. It is not a distributor country. So, we were actually up significantly internationally, about 21% when you back out that Australia piece.

[Anthony Vendetti:]

Okay, so international, because of that strong 4Q ‘09, if you back that out, international was actually up 21%.

[Kevin Connors:]

That is correct.

[Anthony Vendetti:]

Okay. Okay. That –

[Kevin Connors:]

And then looking at the distributor volume as you are referring to right now, Australia is a direct country. So our distributor business is also very healthy and was up significantly.

[Anthony Vendetti:]

Okay. And just – I missed the part where you were talking about the Titan refills, is that recall now complete, and you expect it to be back on track? Is that – I missed part of that.

[Ron Santilli:]

Yes the recall is complete. It is actually a closed matter with the FDA. We have done all the swaps we were supposed that we had promised to our customers with full refilled hand pieces, and now we are starting to see much more of those hand pieces being used and coming back to replacement. So we had nice sequential growth in our Titan refill revenue category, and we expect more growth in Q1 and Q2 of 2011.

[Anthony Vendetti:]

Okay. Excellent, guys. All right. Look forward to seeing you at AAD. Thanks.

[Ron Santilli:]

Great. Thanks Anthony.

[Operator:]

The next question is from Morris Ajzenman from Griffin Securities. Please go ahead with your question.

[Morris Ajzenman:]

Hi, Kevin. Hi, Ron.

[Kevin Connors:]

Hi, Morris.

[Ron Santilli:]

Hi, Morris.

[Morris Ajzenman:]

Just a follow-up on one of the earlier questions about inventories, you actually spoke about inventory reduction ex the new introduction, so you have actually I guess you have kind of gotten your hands around the inventory level there. Is that complete as far as you are concerned in the fourth quarter, as far as the inventory reduction?

[Ron Santilli:]

Yes, I think we have been working at aggressively. I wouldn’t anticipate any further reductions in inventory, but we were very pleased with what we have accomplished during the past year in our inventory reduction.

[Morris Ajzenman:]

Can I then ask what the impact was to gross margin of inventory reduction in this quarter?

[Ron Santilli:]

For the inventory reduction?

[Morris Ajzenman:]

Yes.

[Ron Santilli:]

It really wouldn’t have impacted the gross margins. It just means we were buying less and storing less.

[Morris Ajzenman:]

Okay. So it wasn't that you sold through –

[Ron Santilli:]

No, it wasn’t that. There wasn’t any kind of a margin impact. It was more of a management of the asset.

[Morris Ajzenman:]

Got you. Moving quickly to the cash burn, $428,000 cash burn, and then you look at the accounts payable being up $1.2 million.

[Ron Santilli:]

Yes.

[Morris Ajzenman:]

Therefore you are looking at – if there's no increase in the accounts – not accounts payable, accounts receivable.

[Ron Santilli:]

Accounts receivables.

[Morris Ajzenman:]

I'm sorry, accounts receivable. Looking into next quarter, so if all things being equal, then you would then be generating $600,000, $700,000, $800,000?

[Ron Santilli:]

Yes, we certainly believe that the level is at $15 million per quarter. It is very doable to generate cash. And the key thing when you look at cash flow statement is you look at the net loss of 1.3 million at the top, and we have guided to stock based compensation charges of around 1 million. Those roughly offset, and the rest of the asset, if they remained fairly flat basically it puts us at about a breakeven point from a cash perspective, or even generating cash.

[Morris Ajzenman:]

Right. And one other – two other items, one on your upgrades, you talked about the sales focus with more new products in this particular quarter, and it looks like that might be – is that going to be something going forward, where upgrades will not be at the sort of levels it has been previous quarters because of the more focus on new products, and some of the new products not having upgrades associated with it?

[Kevin Connors:]

Yes, the two new products that we’ve launched in the last six months are dedicated systems, and we’re finding that core physicians tend to prefer having dedicated systems. Dedicated systems don’t offer an update opportunity for the existing installed base.

[Morris Ajzenman:]

So, therefore, upgrades will be a – in a declining mode the next couple of quarters as you compare to previous years?

[Kevin Connors:]

Well, it tends to move around quite a bit in terms of upgrades. But what that does do is provide us with new products that are able and turn and go back to our existing installed base.

[Morris Ajzenman:]

And one last question. It looks like on a seasonal basis – I don't know whether from the fourth to the first quarter, there looks to just be a revenue decline usually. Is that something we should expect, or is that those trends will not be in place based on internal growth capabilities?

[Kevin Connors:]

Well, you can look at our experience historically and that has typically been the case that we’re doing what we can to get growth for 2011.

[Morris Ajzenman:]

Okay. But no count [ph] in the first quarter, as far as not being able to offset that sort of decline on the fourth quarter/first quarter basis?

[Kevin Connors:]

We are not giving guidance on our revenue projections, but we’re hopeful of getting a nice growth as a result of these new products, and some of the initiatives we have taken with our sales organization, and other internal initiatives.

[Morris Ajzenman:]

Thank you.

[Ron Santilli:]

Thanks Morris.

[Operator:]

The next question is from Dalton Chandler with Needham & Company. Please go ahead with your question.

[Dalton Chandler:]

Hi, good afternoon.

[Kevin Connors:]

Hi, Dalton.

[Dalton Chandler:]

The Obagi product launch has been so successful in Japan. Do you have the potential to expand that to additional geographies?

[Kevin Connors:]

We are pleased with it, and I think we have got a nice partner with Obagi. It is something that is – the two organizations are working very well together. We know that Obagi has a direct sales organization here in North America. So that takes that of the table. We do like the model, and we’re looking at other ways to expand the relationship both through expansion of geographic coverage as well as new products, but there are nuances in each country that we have to consider, and we think that the strong brand of Obagi in Japan has really provided the revenue opportunities, as well as our ability to introduce our products to the existing Obagi customers.

[Dalton Chandler:]

Okay. And then just shifting gears to the new dedicated workstations. Is your strategy here to go through all of the major indications and introduce a dedicated workstation for that particular indication?

[Kevin Connors:]

We have stated that is the driving strategy going forward looking at a number of different things, but we do think that as it relates to developing products for dermatologists and plastic surgeons, they do like to have high performance products that are best in class. As we look at that market those are the types of products that we will develop.

[Dalton Chandler:]

Okay. And I apologize if I missed it, but have you given an update on the (inaudible) element?

[Ron Santilli:]

There are no updates at this time Dalton, but it is still an active program and we are hopeful to have that introduced to the market when we are formally prepared to do so.

[Dalton Chandler:]

Okay, and just a quick housekeeping question. What is your sales headcount now?

[Ron Santilli:]

Sales headcount, we have in North American about 27 territories, and there is about 25 internationally.

[Kevin Connors:]

Outside of North America.

[Ron Santilli:]

Outside of North America.

[Kevin Connors:]

Yes.

[Dalton Chandler:]

27 in North America, and how many internationally?

[Ron Santilli:]

25.

[Dalton Chandler:]

Okay. All right. Thanks, guys.

[Kevin Connors:]

Thank you.

[Operator:]

We have time for one more question. The question is from Phillip Nalbone with Wedbush. Please go ahead.

[Phillip Nalbone:]

Kevin, I'm sorry I know you want to get down to Bourbon Street and start drinking hurricanes, but a couple of questions. Can you tell us the regulatory status of product number three targeted for the second half?

[Kevin Connors:]

We don’t have a clearance for that right now, but we got some submission [ph] in for something that we just don’t have it yet.

[Phillip Nalbone:]

Okay. Ron, a housekeeping question, the balance sheet shows cash and short-term investments of $90 million. If you include the long-term investments, it's a $97 million balance. What is in the long-term investment category? How liquid are those assets?

[Ron Santilli:]

Those are our auction rate securities. So, those aren’t liquid at this time, but it seems like we are getting liquidation slowly. In fact, I got an e-mail just today there is 250,000 of it that just became liquidated at par, but they are all auction rate securities.

[Phillip Nalbone:]

Okay, great. Last question, Kevin, the Excel V product, this is really directed at a product that has been in the market for quite some time by Candela. I'm blanking on the name of it, their big high-end vascular laser. Can you tell us what that product does annually in terms of sales, and really, what the market opportunity is here for a competing product?

[Kevin Connors:]

Yes, that competitor doesn't break that product out by revenue, but we think it is $150 million market easily, and we are – we respect that product, and it does things that allow dermatologists that provide very straight-forward procedure. And what we're trying to do is build upon that with a broader range of vascular treatments that can be supported with more cost effective solution, as well as some of the other things that a 2011 product offering can provide versus something that's been in the market for a while.

[Phillip Nalbone:]

And so $150 million annual worldwide market for a vascular laser?

[Kevin Connors:]

(inaudible), but as I said no one breaks it out by category. So, we’re just estimating.

[Phillip Nalbone:]

Got it. Okay. Thank you very much.

[Kevin Connors:]

Okay. Well, thank you for participating in our call today. We look forward to seeing you at various investor events during the quarter, and updating you on our first quarter conference call on May 2011. Good afternoon and thanks for your continued interest in Cutera.

[Operator:]

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