May 8, 2015
Executives
John Mills - ICR Kevin Connors - President and CEO Ron Santilli - EVP and CFO
Analysts
Tom Gunderson - Piper Jaffray Zack Ajzenman - Griffin Securities
Operator
Greetings and welcome to the Cutera Inc. First Quarter 2015 Earnings Conference Call.
At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation.
[Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, John Mills of ICR.
Thank you, Mr. Mills, you may begin.
John Mills
Thanks, operator. Welcome to Cutera's first quarter 2015 earnings conference call.
On the call today are Cutera's President and Chief Executive Officer, Kevin Connors; and Executive Vice President and Chief Financial Officer, Ron Santilli. After management's prepared comments, there will be a question-and-answer session.
The discussion today will include forward-looking statements, reflecting management's current forecast or expectations of certain aspects of the company's future business, including any financial guidance provided for modeling purposes. Forward-looking statements are based on current information that is by its nature dynamic and subject to rapid and even abrupt changes.
All forward-looking statements are subject to risks and uncertainties including projected revenue, gross margin, operating expenses, profitability achievements, cash from operations and the impact of foreign currency fluctuations on the company’s international business. Such risks and uncertainties are discussed in a summary form in today's press release, the following prepared remarks and in the Q&A section that follows.
A detailed discussion of the risk and uncertainties is stated under the caption Risk Factors in the Company's 10-Q filed today with the Securities and Exchange Commission. Cutera also cautions you to not place any 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.
I'd like to draw your attention to the financial highlights table issued with the company's earnings release where the company has added geographic sourcing of their product revenue for North America versus the rest of the world or we are referring to it today as ROW in the script as well to provide additional clarity into their business. With that, I would like to turn the call over to Kevin.
Kevin Connors
Thank you, John. Good afternoon, everyone and thanks for joining us today to discuss Cutera's results for the first quarter ended March 31, 2015.
Revenue in the first quarter 2015 increased 18% to $19.1 million when compared to the same period last year. Our growth was all organic and was largely fuelled by our recently launched enlighten and excel HR products.
We are pleased in particular with product revenue growth of 48% in North America and 34% from rest of world, despite currency headwinds faced this quarter. We continue to gain momentum in North America with our strengthening sales team led by Larry Laber and we believe that this will continue to achieve year-over-year revenue growth and increased productivity throughout 2015 and beyond.
We will be closely monitoring our sales performance and we will continue to invest and expand as productivity improves. Core positions in North America accounted for approximately 43% for the first quarter orders with the balance of the orders received primarily from family practice physicians.
Our 34% rest of world growth demonstrates significant improvement versus last year, particularly after factoring the negative impact associated with the appreciation of the US dollar. When compared to the first quarter of 2014, the Japanese yen, euro and Australian dollar declined 16%, 21% and 14% respectively.
Our Executive Vice President of International Sales, Miguel Pardos who came on board last July continues to augment this global team and our business outside of North America is gaining momentum under his leadership. In particular, our European direct and our global distributor businesses showed strong performance.
We are pleased with the early customer response to our enlighten and excel HR products. One of our key objectives during the quarter was to build momentum and a solid reference base with these products through strategic sales to key opinion leaders in multiple countries.
In addition to new products, excel V and xeo continue to be a significant contributor to our overall company revenue. excel V is the new gold standard for vascular treatments and our multi-application xeo product is suited for any aesthetic office looking to offer a wide range of treatment options.
Gross margin in the first quarter is 53%, which is below our original expectations. Ron will provide further explanation and detail as part of his comments.
We have several initiatives to improve gross margin and we expect it to steadily improve beginning in the second quarter throughout the remainder of 2015. Turning to research and development, we have a very prolific engineering team, as is evident by our two new product platforms launched in 2014.
We are actively expanding our pipeline of new products and expect to be able to tell you more of these opportunities as we get closer to introducing them to the market. As has been our tradition, we remain -- we maintain our commitment to continued investments in product and clinical research and development, which drive exciting new product innovations.
The global market for aesthetic laser and energy-based products is growing at a steady pace. We believe the overall market is approximately $1.5 billion of products a year.
We believe our broad range of products, the expected market penetration of new products as well as our recently hired commercial leadership team to position us to capture greater market share. I'd like to turn the call to Ron to discuss the financial results.
Ron?
Ron Santilli
Thanks, Kevin and thanks to all of you for joining us today on our first quarter 2015 conference call. First quarter revenue was $19.1 million, up 18% when compared to the first quarter of 2014.
Our US revenue grew 29%, while our international revenue grew 11%, despite significant foreign currency headwinds. Our growth was partially offset by declines in our skincare and refill businesses, which was largely tied to foreign exchange declines as well as the elimination of the radius product line in 2014.
We estimate the negative revenue impact associated with the appreciation of the US dollar to be in the range of $1 million to $1.5 million for the quarter. Our revenue during the past three quarters has grown year-over-year by 18%, 15% and 11% in the first quarter of 2015, fourth quarter of 2014 and third quarter of 2014 respectively.
We expect our revenue growth to continue and to be in the range of 15% to 20% year-over-year in each of the remaining three quarters of 2015. Gross margin was 53%, which is lower than we had originally expected.
Key reasons explaining this shortfall are as follows. First, higher than usual distributor volume.
Distributor revenue represented approximately 31% of our global product revenue compared to 25% in all of 2014. Distributor business yields a lower gross margin than our direct sales transactions.
We expect distributor volume to become a smaller percentage of our total product revenue going forward due to our expected greater growth rates in our territories where we sell directly to end-user customers. The second item is foreign currency weaknesses.
The three major foreign currencies that our sales are denominated in are the Japanese yen, the euro and the Australian dollar. This basket of currencies declined against the US dollar on average by 17% when compared to the same quarter one year ago, which had a negative impact on our ASPs and gross margin.
The third item is the key opinion leader transactions to build reference sites. This quarter, we achieved lower average selling prices for our new products as we seated key markets with discounted KOL units in order to build a solid reference base for the future.
We believe that we had seated key markets adequately and therefore expect to see improved selling prices going forward. And finally, as mentioned in last quarter's call, our new product manufacturing costs during early builds have been higher than anticipated.
We expect our cost base to materially decrease throughout the remainder of the year, as we complete the implementation of the initiatives to drive down costs. As such, we expect the second, third and fourth quarter 2015 gross margins to be in the range of 55%, 57% and 59% respectively.
I will now address our operating results. Sales and marketing expenses were $8.2 million or 43% of revenue in the first quarter of 2015 compared to $7.3 million or 45% of revenue in the first quarter of 2014.
The increase in spending is primarily related to $0.5 million non-recurring sales restructuring charge in connection with our North American sales team. The remainder of the expense -- of the increased expense is primarily due to salesforce expansion and commission on higher revenue.
We expect our sales and marketing expenses to grow moderately in absolute dollars in 2015, but decline as a percent of revenue as we leverage our salesforce with our anticipated revenue growth. Research and development expenses decreased to $2.4 million in the first quarter of 2015 from $2.6 million in the first quarter of 2014.
The decrease in spending is primarily associated with decreased material expense associated with the launch of excel HR and enlighten. We expect quarterly R&D spending to be in the $2.5 million range for the remainder of 2015.
General and administrative expenses were $3 million for the first quarter of 2015. This represents a $400,000 increase from $2.6 million in the first quarter of 2014.
The increase is primarily associated with increased personnel and stock-based competition expenses. For the remainder of 2015, we expect our quarterly G&A expense to be approximately $3 million.
Income tax provision, our tax provision is primarily attributable to international taxes related to our foreign subsidiaries and a small amount of minimum and capital base taxes in the US. As a reminder, we continue to maintain a 100% valuation allowance for our US deferred tax assets.
Our income tax expense for the first quarter was $50,000. Going forward, for modelling purposes, we suggest using an effective income tax expense of approximately $75,000 per quarter.
Our net loss for the quarter was $3.6 million or $0.25 per diluted share. This loss includes $0.5 million non-recurring charge associated with North America sales team restructuring and $1.3 million of non-cash expenses for stock-based compensation, depreciation and intangible amortization.
Now, turning to the balance sheet, cash flow operations consumed $6 million during the quarter. This unusually high cash consumption included $3.8 million of working capital reductions associated primarily with the substantial pay down of the year end accrued liabilities for personnel expenses, commissions, royalties as well as cash consumed for the increase in inventories.
We expect our working capital adjustments to be minimal in future quarters and as such, expect to generate cash from operations in the remaining three quarters of the year. Net accounts receivable at the end of the first quarter of 2015 were $10.4 million and our DSOs were 49 days due to higher back ended revenue from customer's repayment terms.
We expect our forward DSO to be in the typical 35 to 40 day range. Inventories increased slightly from $11 million at December 31, 2014 to $11.9 million at March 31, 2015.
The increase was due to an intentional build-up of inventories of our recently launched products as well as finished goods to help facilitate continued revenue growth, while maintaining efficiencies within the factory. Our financial position remains strong as we hold cash and investments at $76.1 million with no debt.
This represents over $5 of cash per outstanding share as of March 31, 2015. Our stock repurchase, we continue to have an active 10b5-1 share repurchase program under which we've repurchased 386,000 shares for $5.2 million in the first quarter of 2015.
We have $34.8 million remaining in our $40 million program approved by our board of directors as of March 31, 2015. We will continue to be opportunistic in repurchasing our shares in the future.
In conclusion, our current quarterly GAAP breakeven point is approximately $25 million and revenue reflecting adjusted gross margin levels and higher sales and marketing investments. Revenue achieved in excess of this range begins to reflect financial leverage in our business model, which is our expected goal given our significant commercial investments and broad portfolio of products.
We expect small GAAP losses in the second and third quarter, but expect to be profitable by the fourth quarter. Our expectation is that we will generate cash from operations in each of the next three quarters, which will include minimal changes to our working capital.
For 2015, while there are certain unpredictable factors that may affect or impact our global business, including unfavourable currency movement, we expect that each quarter we will continue to realize improvements in our financial performance. With that, I'd like now to open up the call to your questions.
Operator?
Operator
Thank you. We will now be conducting a question-and-answer session.
[Operator Instructions] And today's first question comes from Tom Gunderson of Piper Jaffray.
Tom Gunderson
Hi, good afternoon, guys.
Ron Santilli
Hi, Tom.
Kevin Connors
Hi, Tom.
Tom Gunderson
So one is just I missed it in the note. I got R&D, G&A and income tax guidance, what was the sales and marketing guidance?
Ron Santilli
In the sales and marketing, what we had said is that the absolute dollars are expected to increase but the percent of revenue is expected to decline as we expect revenue growth.
Tom Gunderson
Got it, thanks. And, Kevin, I'm curious, I think when we started out, there was a little bit of a backlog which you would expect on enlighten and a cool new product like that.
Maybe you said this in the opening remarks but I had to come in late, is there a backlog now or in Q1, and are you shipping to orders turnaround time relatively quickly in May?
Kevin Connors
Well, we're pleased with what we've seen from our operations team. They’ve really adapted to the ramp up in a way that we think allows us to take care of all of our customer needs.
So there are times when customers have to have delivery in a time sensitive manner. We have been able to successfully satisfy those needs and we think that going forward, I think it becomes even more straightforward for us to accommodate whatever demand we have for the product.
Tom Gunderson
Got it, thanks. I found your KOL comments interesting and I understand that.
But maybe you can correct me on this, but the list price on enlighten is significantly higher than any of your other lasers, and so my assumption is that doctors looking to buy that might shop around a little bit longer or a little bit more than they do on some of your other products. And I'm just wondering if you could, a, is that true in your view, and, b, could you remind us of what you feel are the key points in the competitive differentiation of enlighten over some of the other products that have come out?
Kevin Connors
Sure, Tom. Well, in terms of the sales cycle with enlighten, we indicated a couple of earlier calls that it was the first product in the company's history where without showing the product, we are able to take orders for it.
So I think there is a lot of excitement around this general technology space. And this happens to be one of the applications that we address that our customers are able to see clinical endpoints, fairly well-defined ways.
There are other technologies such as laser hair removal, where there is no obvious clinical change before the treatment and after the treatment. So that tends to help the sales cycle.
And sure, this is materially more expensive than our product portfolio, but I think these other factors where they’re able to kind of see that technology, gives clinical endpoints that are fairly easy to appreciate and relative to the competitive landscape, we have had several situations where they have evaluated us up against competitor, but we think we are faring pretty well with that so far.
Tom Gunderson
Want to put a number on that? Are you getting 75%, 80%, 90% of those?
Kevin Connors
Well, we always hear about the ones we win, Tom.
Tom Gunderson
You get 100% of the ones you got, good job.
Kevin Connors
That's right.
Tom Gunderson
Okay, thanks. That's it for me, Kevin.
Kevin Connors
Alright, thank you.
Operator
Thank you. And the next question comes from Zack Ajzenman of Griffin Securities.
Zack Ajzenman
Thanks, good afternoon. First question just looking at gross margins here and thinking about the year going forward and the guidance that you gave, Ron.
Correct me if I'm wrong, but the guidance kind of implies that on a year-over-year basis gross margins will likely be about flat; is that right?
Ron Santilli
Right. There is not a tremendous growth year-over-year as we’re in the process of improving these, the cost bases of our new products.
And of course, we’re assuming the foreign currencies are kind of remaining constant.
Zack Ajzenman
Okay. So given some of these one-off kind of issues where KOL transactions that were kind of moving past and moving past some of the manufacturing inefficiencies that come with the ramping of the products, can you better maybe help me understand why we wouldn't see better leverage to the gross margin line moving in to later this year?
Ron Santilli
That’s certainly very possible. We've given -- the guidance that we gave today, but the possibility of being able to do better is out there.
Kevin Connors
And I think one other point that Ron covered in the script, we had a significant distributor mix this quarter, which was outside of our original plan and the interest for this product outside the United States is exceptionally high as well in the quarter. So both of those factors coupled with the key opinion leader program that we had as well, those were all headwinds on the margin issue.
Zack Ajzenman
Got you. One quick question on Canada, I know it's kind of been underwhelming over the past year or so.
How did Canada perform this quarter?
Ron Santilli
We don't disclose any specifics on those, on a country-by-country basis.
Zack Ajzenman
Okay. That's fine.
Alright. So more of a strategic type question moving over to the sales force.
There were major investments in 2014 in response to inadequate sales coverage and also in anticipation of some of these new exciting products. In the U.S.
in particular, can you share some more insight on where the sales force productivity is today versus maybe this point last year and where realistically we think we can get to over the next couple of years?
Kevin Connors
Well, we -- again just for background, we target 40 territories in the sales management and support, above and beyond that. I think that with the sales leadership we have, they are targeting significant improvements in sales force productivity, but there is a ramp up period for any new hires that are on board, the organization, so that takes six months to nine months to get that up to full contribution level and ultimately we think that targeting something north of $1.2 million sales territory with the rep that has tenure in that 6 to 9 month range is where we plan to drive the business.
Zack Ajzenman
Okay, great. And then last question just on maybe anecdotally on truSculpt.
Any color on the thought process on some of the prospects for possibly expanding the current label that truSculpt has here in the U.S. and kind of if there are any ongoing studies or anything anecdotally would be great.
Kevin Connors
Yeah. It's something that we're actively working at this point and again, I think it's important to recognize that it's a global opportunity with truSculpt and we have broader clearances for the product outside in most of the major markets and so we’re clearly working initiatives outside of the US to capture a larger portion of that market opportunity, but there are certain limitations for our indications for use that we need to be sensitive to and expansion of the indications is an active discussion that we are currently pursuing here.
Zack Ajzenman
Great, thanks a lot.
Operator
Thank you. [Operator Instructions] Alright, there are no more questions in the present time.
I would like to turn the call back over to management for any closing comments.
Kevin Connors
Thank you for participating in our call today. We'll be attending many investor conferences and marketing events in the second quarter and we look forward to updating you on the business progress in the second quarter 2015 conference call in August.
Good afternoon and thank you for your continued interest.
Operator
Thank you. This concludes today's teleconference.
You may disconnect your lines at this time. Thank you for your participation.