Feb 13, 2012
Executives
John Mills - Senior Managing Director Kevin P. Connors - Chief Executive Officer, President and Director
Analysts
Thomas J. Gunderson - Piper Jaffray Companies, Research Division Dalton L.
Chandler - Needham & Company, LLC, Research Division Anthony V. Vendetti - Maxim Group LLC, Research Division Morris Ajzenman - Griffin Securities, Inc., Research Division
Operator
Greetings, and welcome to the Cutera Incorporated Fourth Quarter and Fiscal Year 2011 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
Thank you. By now, everyone should have access to the fourth quarter 2011 earnings release, which went out today at approximately 4 p.m.
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 today with the SEC and available on its website at sec.gov.
Before we begin, Cutera would like to remind everyone that these prepared remarks contain forward-looking statements, including statements concerning domestic and international growth opportunities and strategies; future spending, expense management and execution on various aspects of Cutera's operations and business; expectations for increasing revenue, generating cash and improving profitability; the development and commercialization of existing and planned new products; potential revenue growth from strategic alliances and planned new products; and financial performance and integration risk associated with the Iridex aesthetic business unit acquisition. Also, management may make additional forward-looking statements in response to your questions.
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 associated 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. 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 on November 7, 2011, with the Securities and Exchange Commission.
With that, I'll turn the call over to the company's President and Chief Executive Officer, Mr. Kevin Connors.
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 fourth quarter ended December 31, 2011.
On today's call, I'll provide an overview of our company performance, then Ron Santilli, our CFO, will provide an overview of the financial results. Finally, I will provide some closing comments and open the call to your questions.
We are pleased with our fourth quarter 2011 revenue growth of 22%. Our U.S.
revenue increased by 27%, and our international revenue improved by 19% compared to the fourth quarter 2010. This revenue improvement was a direct result of the following key initiatives.
The first key contributor to our revenue growth last quarter was the sales management changes that we implemented earlier in 2011. Our recently assembled North American sales management team under the leadership of Michael Poole has been executing effectively, and their strategies are generating improved performance.
On an annual basis, our U.S. revenue increased 21% compared to 2010.
Our 19% international growth was primarily sourced from our performance in Australia, Japan and Canada. Our international revenue growth during the fourth quarter was partially offset by a decline in our revenue from Europe due to restructuring of our European sales team.
With the improvements being implemented there, we anticipate our European business to be back on a growth trajectory in 2012. The second key contributor was the recent introduction of new products.
Our GenesisPlus for toenail fungus targeted to podiatrists continues to perform well. In addition, the toenail fungus product is also used for warts and other rejuvenation procedures.
During the quarter, we continued to see significant revenue contribution from this product sourced primarily from the U.S. business.
Our premier vascular system, Excel V, that provides practitioners with the ability to treat all vascular conditions, both on the face and body, continues to gain traction in the marketplace. We remain in early-stage launch of this product and are expanding our installed base of reference sites.
The final contributor to our revenue growth was the continued growth of our filler and topical products from Merz and Obagi. Revenue from this product category grew $370,000 or 31% in the fourth quarter 2011 compared to fourth quarter of 2010.
The improvement in this product category is also having a favorable impact on the Cutera business as this type of product complements our laser and light-based products. We believe that with our strength in sales management teams and new product offerings, we're well positioned for continued revenue growth.
We currently have 29 sales territories in the United States and Canada and are planning to increase this team to approximately 34 by the end of 2012. We'll expand our team further if our sales performance supports it.
We closed the acquisition of Iridex's aesthetic business on February 2, and we welcome the Iridex employees to the Cutera family. We believe this business combination provides a great opportunity for us and are in the process of fully integrating this business into Cutera.
The primary advantages of this acquisition are as follows. One, Iridex's VariLite product, a small, compact vascular product, complements our Excel V and other vascular products; two, there will be numerous cross-selling opportunities of Cutera products into the Iridex installed base of approximately 6,000 systems; three, we will leverage the combined field service organization in supporting a significant service business; four, given the Iridex installed base of customers that's concentrated in the core market, this should result in increased penetration of Cutera products into the core market; five, Iridex has a strong brick [ph] presence in France, which will contribute to strengthen our European operation and future revenues from this region.
Beginning in the second quarter of 2012, when the integration is anticipated to be completed, we would expect this acquisition to be incrementally profitable to Cutera on a quarterly basis. Ron will address the financial impact of this transaction later in the call.
Turning to research and development. We believe that strategic ongoing investments in 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. Earlier this year, we created the Cutera clinic located in our headquarters in Brisbane, and we believe that the in-house-capability performed clinical studies for our new and existing products will enable us to bring new products and applications to the market faster.
We're excited at the pipeline of new product opportunities and have augmented our team with top talent that we believe will enable us to continue to develop, differentiate exciting products for years to come. At the end of the quarter, we launched MyQ in Japan for deep dermal pigmentation and melasma and are pleased with the early market activities.
By addressing the deep dermal pigmentation and melasma, the MyQ system complements our current array of lasers for the anti-aging market. We plan to evaluate other geographies for this product sometime midyear.
We plan to enter the body contouring segment of the aesthetic market by launching our TruSculpt product at the American Academy of Dermatology meeting in mid-March. TruSculpt is the latest breakthrough technology we've got [ph] for noninvasive body contouring and sculpting that targets subcutaneous adipose tissue to smooth body contours.
TruSculpt's innovative technology uses an RF energy source with targeted heating to selectively disrupt fat cells without damaging the surrounding skin. In 1 or 2 pain-free treatments, TruSculpt provides remodeling to smooth and sculpt body contours.
The unique TruSculpt dual-hand piece system allows the operator to selectively tailor the patient's treatment to a wide range of troublesome areas for optimal results. This product had 510(K) clearance and recently received a CE Mark as well.
Now I'd like to turn over the call to Ron to discuss our financials in more detail.
Kevin P. Connors
Thanks, Ron. As we begin 2012, we remain focused on the following key initiatives: one, continued growth from our recently launched products with GenesisPlus in the podiatry market and Excel V in our core market; two, integration of Iridex's aesthetic products and service business, which we will believe will result in incremental revenue and improved company performance; three, introduction of our TruSculpt body contouring product at the AAD in March with planned shipments commencing in the second quarter; four, expansion and continued performance improvements of our North American sales team; five, continued focus on research and development efforts to enable new product launches in the future as well as build on the clinical support of our existing products; six, there are many internal initiatives to improve our gross margin, to improve our operating performance; seven, to remain positive cash flow from operations starting in the second quarter of 2012 and beyond.
With appropriate swift execution of these important initiatives, we remain focused on expanding our global business and leveraging our operating expenses, which should result in improved operating performance and cash from operations. We believe that our worldwide distribution network, strong cash position, no debt and expanding portfolio of products offer continued long-term opportunities for Cutera.
Now I'd like to open up the call for your questions. Operator?
Operator
[Operator Instructions] Our first question comes from the line of Tom Gunderson from Piper Jaffray.
Thomas J. Gunderson - Piper Jaffray Companies, Research Division
So I'll focus on TruSculpt, I guess. Kevin, you may have said this, but I missed it.
Could you give us the timing of the launch? Is that a worldwide launch or a U.S.
launch? The price point and the difference from your previous technology that stopped a couple of years ago on noninvasive?
Kevin P. Connors
Well, the product will be shown at the American Academy of Dermatology meeting in San Diego later this quarter. And that meeting typically has about 1/3 of the attendees coming from outside the United States, so it is the largest single dermatology meeting that we attend.
And as we indicated in the script, we have an FDA indication that’s cleared and as well as a recent CE clearance that allows us to go to European Union as well as other countries. So it's a global launch.
But as is typical, we tend to get traction here in North America first, and we typically see the international revenues slightly lag, and that's been the pattern from new product launches, historically. But we have planned shipments, revenue shipments for the second quarter of the year.
Thomas J. Gunderson - Piper Jaffray Companies, Research Division
Got it. And the price point and the difference from previous?
Kevin P. Connors
The difference from previous is it's really the electrode design. The core technology in the console hasn't change materially.
But what we had to do is to understand how to get a more uniform energy distribution, and we've been successful in accomplishing that. So it's really leveraging the long research that we've done on the console that allows us to make these modification to the design.
And by improving the profile, we're able to minimize discomfort, which was one of the issues that we were challenged with the first time. And in terms of price point, we haven't rolled that out yet, but it's going to be somewhere in the $100,000 range, somewhere in that range.
Operator
Our next question comes from the line of Dalton Chandler from Needham & Company.
Dalton L. Chandler - Needham & Company, LLC, Research Division
Are there any disposables associated with TruSculpt?
Kevin P. Connors
There is a planned annuity revenue stream with the product launch.
Dalton L. Chandler - Needham & Company, LLC, Research Division
Okay. And then on Iridex, did you bring over any of their sales reps?
Kevin P. Connors
Yes, we -- the organization was relatively small, and we hired 3 direct reps as well as the majority of their service organization.
Dalton L. Chandler - Needham & Company, LLC, Research Division
Okay. And could you just remind us of the price points on their products?
Kevin P. Connors
They're anywhere from about $50,000 to $100,000.
Operator
Our next question comes from the line of Anthony Vendetti from Maxim Group.
Anthony V. Vendetti - Maxim Group LLC, Research Division
Just a follow-up on the Iridex products. They've gone through a couple owners -- well, at least Laserscope has, and you bought the combined Iridex Laserscope aesthetic business.
Can you talk about which of those combined products you think has the most promise in terms of 2012? And are these slightly lower margin than the products you currently have?
Kevin P. Connors
We -- as Ron indicated in the script, we've got long-term -- meaning, in the next 6 months, we have plans to get our gross margins even higher. We have the interim supply agreement that won't have the margins that we anticipate in the long term.
And in the case of our overall strategy to be dominant in the vascular category, this product is one that we competed against quite regularly. So I think their visible vascular product has done pretty well in the marketplace.
And so we'll have a corner on green technology for vascular, which is something that we are very excited about. However, they've got a number of other products.
One that's really quite slick is the tabletop solid-state system that's extremely reliable and offers 2 wavelengths and a very novel delivery system that has been very well received. So we see that as a really exciting product that allows to have a depot [ph] repair and the ability to ship this lightweight, compact device overnight to customers that have any service issues.
So we've rolled that out at our sales meeting in the beginning of this quarter, and the team is very excited to have that in their bag. And we're also as excited that we now have a corner on green in this industry.
Anthony V. Vendetti - Maxim Group LLC, Research Division
Okay. And the TruSculpt, which you're launching officially, I guess, at AAD, is that -- was that the planned product that you were scheduling to launch?
Or do you have another product that could be unveiled at AAD?
Kevin P. Connors
Well, we're excited to be able to again talk about Excel V. This is our second year at AAD to talk about it.
We've got a much broader story to tell now. So it's that, it's the Iridex product, and it's TruSculpt.
And in terms of what we're working on R&D, there are multiple programs that are actives that we -- as we mentioned on this call. We're not working on just one technology.
We've got multiple things going on, and it's important that we have a full portfolio of exciting technologies to pick from as we roll out new products.
Anthony V. Vendetti - Maxim Group LLC, Research Division
Okay. So lastly, on TruSculpt.
Where -- body contouring is obviously one of the faster-growing markets out there. There's a number of companies out there that have products using different energy sources.
In terms of efficacy versus pain, where would you put TruSculpt's -- how does TruSculpt look in terms of the competitive landscape in your view?
Kevin P. Connors
Well, we haven't done any side-by-side comparisons with some of the other newer technologies in the market right now. But with that said, patient -- the patient experience is something that's been very important to us as we have worked on the technology, and we've made great strides in addressing that.
And the feedback we're getting from patients that have had this treatment is that discomfort is not going to be a limitation in terms of market acceptance. And in terms of efficacy, we've got that -- all that information coming in with each passing day.
I think it's important to recognize that this category is not one that has results that will have large volume in the [ph] production of tissue. I mean, this is relatively modest.
So with that caveat, we see a very large market opportunity for something that can be done with a comfortable experience as well as measurable results after the treatment.
Anthony V. Vendetti - Maxim Group LLC, Research Division
Okay. And Ron, just a quick question.
I just want to make sure I got this right. Did you say 43% of revenues from this quarter were from GenesisPlus?
Anthony V. Vendetti - Maxim Group LLC, Research Division
Maybe.
Anthony V. Vendetti - Maxim Group LLC, Research Division
North American. Okay.
Did you want to give the revenue number or...
Anthony V. Vendetti - Maxim Group LLC, Research Division
Okay, okay. 46% of orders.
Okay.
Operator
[Operator Instructions] Our next question comes from the line of Morris Ajzenman from Griffin Securities.
Morris Ajzenman - Griffin Securities, Inc., Research Division
Just a little clarity on the Iridex. I think you said $11 million annual run rate, which brings you to about $2-point-let's-call-it-3 million, approximately, $2.2 million, $2.3 million per quarter, if that's right, looking at 2012.
In the first quarter, should we just assume 2/3 of that number? Is there any seasonality to those numbers?
Morris Ajzenman - Griffin Securities, Inc., Research Division
Okay. Change in subject.
In this quarter, gross margins were, what, 59.5%, yet your revenues were about $18.5 million. Kind of listening to you guys in the past, though you never give guidance, I would have thought, as you approached the range that you actually displayed, your gross margins would have exceeded 60%.
Any comment on that?
Morris Ajzenman - Griffin Securities, Inc., Research Division
Okay, okay. And lastly, it looks like, if look at the noncash compensation on a pro forma basis, you were about at breakeven for the quarter.
Is that about right?
Operator
There are no further questions in the queue. I'd like to turn the call back over to management for closing comments.
Kevin P. Connors
Thank you for participating in our call today. We look forward to seeing you at the ROTH Capital conference in Laguna Niguel, California, and the Maxim Growth Conference in New York, both of which will take place in March.
We'll update you on our business progress on the first quarter call, which is in May 2012. Good afternoon, and thanks for your continued interest in Cutera.
Operator
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.
You may disconnect your lines at this time, and have a wonderful day.