Cutera, Inc.
Q3 2013 Earnings Call Transcript

Published: 5 Nov 2013

[Operator:]

Greetings, and welcome to the Cutera, Inc. Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Mills of ICR. Thank you, Mr. Mills. You may begin.

[John Mills:]

Good afternoon, everyone. Thank you for joining us today to review Cutera's financial results for the third quarter ended September 30, 2013. On the call today is Kevin Connors, Chief Executive Officer; and Ron Santilli, Executive Vice President and Chief Financial Officer. Kevin will start the call with a brief review of the quarter, then Ron will discuss third quarter financial performance. Finally, the company will open the call for your questions. Before we start, I want to touch upon any forward-looking statements made during the call including management's belief and expectations about the company's future results. Please be aware they are based on the best available information to management and assumptions that management believes are reasonable. 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. Future results may differ materially from management's current expectations, forward-looking statements, including statements concerning financial guidance on future revenue growth, expense levels, gross and net margins, the result of cost improvement initiatives and other financial metrics. Expectations for increasing revenue, the development, commercialization and revenue growth potential of existing and planned new products. While we manage to commercialize new products and we attempt to launch products according to our plans, there is risk both from regulatory and technical challenges that our actually launch -- that our actual launch date could be delayed or the launch of certain products may never occur. Management plans for the repurchase of Cutera stock. Management and the Board of Directors make no assurances to the magnitude of our planned share repurchases, although we have established board approved limits and the company has to comply with regulatory and repurchase volume restrictions. Also, management may make additional forward-looking statements in response to your questions. For a complete list of risk factors that could cause Cutera's actual results to differ materially from the forward-looking statements, please refer to the section entitled Risk Factors in the company's most recent 10-Q filed today with the Securities and Exchange Commission. With that, I'll turn the call over to Kevin Connors, Cutera's President and CEO. Go ahead, Kevin.

[Kevin P. Connors:]

Thank you, John. Good afternoon, everyone, and thanks for joining us today to discuss Cutera's results for the third quarter ended September 30, 2013. Our revenue for the third quarter of 2013 was $16.8 million. Our current quarter revenue contraction was primarily due to the following key reasons

[Ronald J. Santilli:]

Thanks, Kevin, and thanks to all of you for joining us today in our third quarter 2013 conference call. Our revenue was $16.8 million or a decline of $2.6 million from the third quarter of 2012. This decline was primarily due to the following factors

[Operator:]

[Operator Instructions] Our first question comes from the line of Tom Gunderson with Piper Jaffray.

[Thomas J. Gunderson:]

So you must be disappointed with those results and you delineated the contraction or the decline into several parts. Let me focus on just one of them, and that would be truSculpt. In North America, we don't have any FX to worry about, you're not going to impact the dollar-yen trade anytime soon. But on truSculpt, you had a competitor report last week that did surprisingly well in the quarter with their non-invasive fat reduction. And I'm just wondering how you compare, Kevin, your performance, not just in the quarter, but maybe in the last 9 months, 12 months, to what ZELTIQ has been doing. And is it simply a matter of expanding sales territories by 4 or 5, or adding an applicator? Or is there something else that needs to be done to change the momentum?

[Kevin P. Connors:]

Sure, Tom. Well, obviously, we track our key competitors and ZELTIQ is one in the body contouring space that's done very well. And as we mentioned in the script, we see this market as an attractive market. We don't have the track record of being in the market as long as that company and the Liposonix product as well. And there's been a fair amount of clinical story that's emerged over the years with those -- both of those companies, and this has been the 1-year anniversary because halfway through Q3 of last year is when we launched this product. So relative to those companies, we still think we're early in the game. Maybe it didn't come across as a strategy in the script, but this notion of bringing specialization to the sales force is something that we're encouraged by the first experience of truSculpt because it did result in a higher level of focus on that product, which translates -- I'm sorry, with Excel V. We were able to just raise the bar in terms of the focus on that product and in the script we mentioned that we're looking at that model to serve as the model for other products. Obviously, truSculpt would be one where we think we have a tremendous opportunity with the product that we have today, and then we've been expanding the applicators over the years, so it just seems like we really need to be measuring our performance in this market relative to the other key competitors. And so it's a major opportunity for us, particularly in North America.

[Thomas J. Gunderson:]

And, Kevin, if on the specialization, you move out of specialization for podiatry and put it more in the general group, I get that, there's more territories and so more opportunities to make calls. How many -- and you're talking about success with Excel V. I know it's early, but how many sales guys are working -- specializing in Excel V?

[Kevin P. Connors:]

Right now, we have 4. And we have -- each one of the specialists teamed with a territory. So a territory is typically 8 reps or so. And then the specialist works with those other 8 reps to really cultivate the business and the particular specialty. So this is a different specialization relative to what we had with the podiatry sales force. We're finding there's much greater efficiencies with this model than what we had with the large geographies in podiatry.

[Thomas J. Gunderson:]

Got it. And then one last area and I'll let some others ask questions, and that is new products. New products saved you the last time you had a downturn in the market in the overall recession and you brought yourself back up with a series of new products, Excel and truSculpt being 2 of them. And now, we've got some new products coming up at Derm. The real new, new product for me at least is the new tattoo laser. Now in the past, you've shown these at the Derm meetings and then launched them later. Is that the way we should look at the new tattoo laser, or is it going to be closer to being ready to commercialize?

[Kevin P. Connors:]

Well, we are always mindful of the timing of talking about new product launches, and we talked about 3 different products that we're excited about. With the laser hair removal platform, obviously, it would be a risk of cannibalizing our core hair removal business if we would have a delay in the launch of that. So we feel like that's pretty far along. And the regulatory assumptions with all these, but we think that having the ability to go to market soon after the debut of these products is a key goal for us. I think -- so it's -- the R&D team really is working extremely well together, and we've really augmented the team and foreseen the results in terms of prolific activity in the new product department.

[Operator:]

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

[Anthony V. Vendetti:]

So, Kevin, I just want to understand the new products at AAD just to follow up, I guess. Is the new high-performance laser system that was scheduled to be launched at the end of the year is now going to be 1 of the 3 launched at AAD or is that separate?

[Kevin P. Connors:]

No, that's correct. You got it right.

[Anthony V. Vendetti:]

Okay, okay. And is that the picosecond one or is that the -- which one was that of the 3?

[Kevin P. Connors:]

Okay, so we talked about 3. So one is the hair removal platform with the alexandrite technology, as well as Nd

[Anthony V. Vendetti:]

But the -- I'm just trying to understand, the one that was supposed to be launched by the end of the year, is that the picosecond one or was that the laser one?

[Kevin P. Connors:]

No, we were looking at the hair removal platform by the end of the year.

[Ronald J. Santilli:]

The alexandrite moved to AAD to make sure our resources are there to get both the alexandrite and the pico products ready for AAD.

[Anthony V. Vendetti:]

Okay. Got it. Got it. And just can you give us an update on the -- on where you are with the FDA process for the picosecond?

[Kevin P. Connors:]

On past calls, we talked about having a constructive discussion with the FDA. We were able to have our team meet with the reviewer of the division, the branch chief, I believe, was there, and talked about the path to getting an ultimate indication for both pigmented lesions and the removal of tattoos. So it was a very good meeting. And so we have plans for both of those 510(k)s being submitted. And whether we got -- whether we get the clearance in time for the meeting or not, clearly, we're working towards that. But that's out of our control, to some extent.

[Anthony V. Vendetti:]

Sure, sure. No, I understand that. And then lastly on the sales force. In terms of the reorganization there and so forth, do you feel -- because the softness now in Canada has been sort of an ongoing story for this year, do you feel with the change made specifically there, the management change there, that, A, you're on the right path to turn that around? And then when specifically was that management change made?

[Kevin P. Connors:]

Specific date, I couldn't tell you the exact date, but it was the first month of the third quarter, I believe, yes. So the team in Canada, as we talked on various calls in the past, we've had a really successful track record, and a team of great achievers who are still intact largely and we've made -- we've expanded there. And so we have some new people on board. But we're really digging into the details of getting that business level to where it needs to be and we don't think that the market has changed. There are always bumps that happen, but we believe we've got the right people on the ground and we just think that staying closer to the execution on these opportunities should get the business where it needs to be.

[Operator:]

Our next question comes from the line of Morris Ajzenman with Griffin Securities.

[Morris Ajzenman:]

First question, you went through some of the shortfalls

[Kevin P. Connors:]

Yes, sure. I mean the -- I think you have it right in general, Morris. And we didn't put a number on truSculpt, but clearly, as we talked earlier in the call, we see what's happening with one of our competitors in particular, we see that as a huge market and -- which represents a tremendous opportunity for us that we're clearly focused on getting our fair share. But in terms of the industry, clearly, the ZELTIQ performance is notably fantastic. But we're still waiting for some of our other competitors to report and then we'll gauge our performance relative to the whole peer group. But the short answer is we've got to get more of the truSculpt opportunity in our business.

[Morris Ajzenman:]

Let's just switch over to podiatry. PinPointe, that was a small competitor, has been acquired by a larger, well-known competitor of yours, and they seem to be having better traction. Is that part of the reason, with revenues being down year-over-year, you talked about sales force, but are there competitive pressures that's impacting you there?

[Kevin P. Connors:]

What acquisition are you referring to, Morris?

[Morris Ajzenman:]

Well, PinPointe is now part of, I think, Cynosure now.

[Kevin P. Connors:]

It's a distribution agreement, it's not an acquisition agreement. But at least I haven't seen any news break on that. So that's been in place for 1.5 years or so. So that's not new. I think in the case of our experience in podiatry is that we have that dedicated team, and some of those sales reps did very, very well. But as I alluded in the prepared comments, the overall approach created some inefficiencies because the reps were carrying or covering such a large geography. So with our early positive experience with the specialist model, we think that other products should make sense to evaluate that as well.

[Morris Ajzenman:]

Okay, one last question and I'll get back on queue. On the Titan and truSculpt hand piece refills, they're both down sequentially and year-over-year in double digits, mid teens to lower 20 -- mid-12% range. And truSculpt, again, being rather new -- it's my presumption that Titan is it a bigger percentage decline? Can we read into this in any manner?

[Ronald J. Santilli:]

Well, there's 2 primary reasons there. One, the Titan hand piece refill is largely being impacted in Japan with the yen because that -- we have a big install base there. So that's pulled part of it down. And truSculpt, we've gone to a non-refillable process. So we're not getting the refill business there either.

[Kevin P. Connors:]

If the customer is willing to pay for a service contract with it. So we -- it's just a different bundling approach.

[Ronald J. Santilli:]

Correct.

[Operator:]

[Operator Instructions] Our next question comes from the line of Jack Wallace with Sidoti & Company.

[Jack Wallace:]

In previous quarters' calls, you've been nice enough to break out truSculpt and Excel V as a combo, as a percentage of sales. What was that figure for this quarter?

[Ronald J. Santilli:]

Just the combination. We may have made a comment, but we don't have any regular disclosure regarding those 2 items.

[Kevin P. Connors:]

Yes, I remember making a comment. I think the -- of the product sales. It was like 50% at that -- at one quarter. We don't have that calculation in front of us, Jack. But anecdotal, the -- our Excel V had nice growth year-over-year and truSculpt, we'd be seeing opportunities for improved performance.

[Jack Wallace:]

Okay. And then, I guess, just looking out a couple of years now, I mean -- part of the last couple of quarters here of relative underperformance and part of you are pointing at the sales staff. Part of it has been now a little bit of the truSculpt not maybe getting adapted as quickly as anticipated with the new products to be commercialized in the upcoming year. And I guess, 2 years out, do you see these products becoming a significant, say, in the 30% to 50% range of revenue contribution or do you still see your legacy products going ahead and being much larger contributors like they had, say, last year?

[Kevin P. Connors:]

Well, we think that a couple of things going on. Number one is that with the prolific R&D activities that are underway, we think that the product portfolio is going to be very fresh. I mean we're making major strides in doing that. So I think continuing to step on the accelerator on the development programs, and I think that we have other things in mind for -- beyond what we talked about in today's call. But it's also clear to us that we have to get our commercial house in order in terms to maintain the proper focus on all these different products. It's great to have an ever broadening portfolio of products, but it does make it incumbent upon us to structurally identify how we're going to maintain focus on the legacy products rather than this year has modeled, give it a lot of focus and other product categories get a lack of attention.

[Jack Wallace:]

And then you mentioned in the prepared remarks and again in the questions-and-answer session here that the podiatry segment was disappointing, was down year-over-year and likely sequentially. How much of that was an impact from the de-specialization of that segment?

[Kevin P. Connors:]

It's hard to get a number on that. But clearly, we -- this script and press release, we try to provide more granularity of the various components of the business so that you can get a better sense of the magnitude of these various things. All I'll say is that we haven't concluded that the market disappeared on us. We wrapped up the fourth quarter of last year with a very strong podiatry end, and we're certainly are doing what we think is appropriate to get our fair share back.

[Jack Wallace:]

And lastly here, can you maybe break out the, I guess, the mix of the repurchase in the quarter? How much of that was from the discretionary repurchase and how much of that was on the other repurchase that had the specific triggers within it?

[Ronald J. Santilli:]

All of it was from discretionary. And we -- the 10b5-1 has not reached its threshold yet.

[Operator:]

There are no further questions at this time. I'd like to turn the floor back over for closing comments.

[Kevin P. Connors:]

Thank you for participating on our call today. We will be attending a number of investor events in the coming months, and we'll update you on business progress in the fourth quarter of 2013 on the conference call on February 2014. Good afternoon, and thanks for your continued interest in Cutera.

[Operator:]

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