Aug 5, 2015
Executives
John Mills - ICR Kevin Connors - President and CEO Ron Santilli - EVP and CFO
Analysts
Kyle Bauser - Piper Jaffray Anthony Vendetti - Maxim Group Zack Ajzenman - Griffin Securities
Operator
Greetings and welcome to the Cutera Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode.
A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, John Mills of ICR. Thank you, Mr.
Mills, you may begin.
John Mills
Thanks, operator. Welcome to Cutera's second 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.
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 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.
And with that, I will turn the call over to Kevin Connors.
Kevin Connors
Thank you, John. Good afternoon, everyone and thanks for joining us today to discuss Cutera's results for the second quarter ended June 30, 2015.
Revenue in the second quarter of 2015 increased 27% to $22.6 million when compared to the same period last year. We are encouraged with the continued momentum and favorable trend of our revenue growth.
We have experienced double digit accelerated revenue growth in the past four consecutive quarter. Our growth has all been organic and fuelled primarily by our recently launched enlighten and excel HR products, as well as continued strong contributions from our legacy, excel V and xeo platforms.
Our North America sales team led by Larry Laber delivered particularly impressive 57% product revenue growth this quarter. Over the past six months, Larry has aggressively recruited and assembled a strong team of sales professional.
As his North American team develops further and gains momentum in the marketplace, we believe we will continue to achieve year-over-year revenue growth and increased productivity throughout the second half of 2015. Core physicians of North America accounted for approximately 53% over second quarter's with the balance of the orders received primarily from family practice physicians.
Our sales team and the rest of the world led by Miguel Pardos delivered strong 36% product revenue growth despite currency headwinds of the strong U.S. dollar.
Miguel joined us last year and also continues to build his global team that is gaining momentum under his leadership. In particular, our Australian direct operation and distributor sales channels have demonstrated significant improvement under Miguel's leadership.
We continue to closely monitor our sales organization, performance, and we’ll invest and expand further as productivity improves. From a product line perspective, this quarter's revenue growth was sourced primarily from our new enlighten and excel HR products and the continued growth in market penetration of our gold standard excel V vascular system.
Our flagship multi-application multi-technology xeo product also showed growth and remains a strong product platform that is suited for any aesthetic office seeking to offer a wide range of treatment categories. Gross margin in the second quarter was 57%, up 53% in the first quarter of 2015.
This margin improvement this quarter exceeded our earlier guidance and were result of favorable product mix, faster than expected utilization and manufacturing cost reductions, and Ron will add further color in a moment. Turning to research and development, we have a high performing engineering team, as is evident with our two new product pipelines in 2014.
During the second quarter our R&D team completed the first enlighten product extension that provides even more customized benign pigmented lesion treatments by extending treatment parameters. The expanded function has been received favorably by our Asian customers and gives a significant performance edge to enlighten and creates better versatility over other picosecond systems.
We’re always looking to expand our pipeline with new products and expect to be able to tell you more about these in the coming quarters. We maintain our commitment through continued investments in product and clinical research and development, which drive exciting new product innovations.
The goal of market for aesthetic light energy based products is growing at a steady pace and now in our opinion is in excess of $1.5 billion a year. We believe our broad range of products, the expected market share expansion of our new products, as well as our strengthened commercial leadership team to position us to continue to capture a greater market share based on an organic growth strategy.
Now I’d like to turn the call over to Ron, to discuss our financials in more detail. Ron?
Ron Santilli
Thanks Kevin, and thanks to all of you for joining us today on our second quarter 2015 conference call. Second quarter revenue was $22.6 million, up 27% when compared to the second quarter of 2014.
Our U.S. revenue which includes service and hand piece resale revenue grew 36%, while our international revenue grew 20%, despite significant foreign currency headwinds.
Our year-over-year revenue growth has been accelerating during the past four quarters and was up 11%, 15%, 18%, and now 27% in the past four quarters respectively. We expect our year-over-year quarterly revenue growth to be in the range of 15% to 20% in the second half of 2015.
As Kevin mentioned earlier this quarter our international revenue was adversely affected by the declines in the major foreign currency that we transact in. When compared to the second quarter of 2014, the Japanese yen, euro and the Australian dollar each declined in the 20% range.
As a result, we estimate the foreign exchange related negative impact on our revenue was in a range of $1 million to $2 million. Gross margin was 57%, which is higher than the second quarter guidance of 55% and higher than 56% realized one year ago.
As Kevin mentioned earlier, we have several key initiatives targeted at increasing our gross margin and we're tracking ahead of schedule. During the quarter our margin improved to a favorable - our product improved due to a favorable product mix and new product manufacturing cost reductions at a faster rate than previously expected.
We expect third quarter gross margin to remain in a 57% range and to see it increasing to approximately 59% in the fourth quarter of 2015, given the fourth quarter is seasonally our strongest revenue quarter of the year. I will now address our operating expense results.
Sales and marketing expenses were $9.1 million or 40% of revenue in the second quarter of 2015 compared to $7.8 million or 44% of revenue in the second quarter of 2014. The increase in absolute spending is primarily related to sales force expansions, commissions and higher revenue and associated marketing activities.
We expect our sales and marketing expenses to grow moderately in absolute dollars in the second half of 2015, but continue to decline as a percent of revenue as we leverage our sales force with our anticipated revenue growth. Research and development expenses were $2.7 million in the second quarter of 2015, up from $2.6 million in the second quarter of 2014.
We remain committed to continued investments in product and clinical research and development that are driving our new product innovation. As we enter expense intensive phases in new product development cycle, we project quarterly spending will be in the range of $2.5 million to $3 million per quarter for the remainder of 2015.
General and administrative expenses were $3 million for the second quarter of 2015. Our G&A spending is better than $3 million range during the past four quarters.
We expect to continue in that range in the third quarter and slightly higher in the fourth quarter of this year reflecting higher seasonal expenses. Our net loss for the quarter was $1.9 million or $0.13 per fully diluted share.
This includes $1.3 million of non-cash expenses related to stock based compensation, depreciation, and intangible amortization. We expect our third quarter financial performance to be similar to that as the second quarter and expect to be profitable on a GAAP basis in the fourth quarter of this year.
Turning to the balance sheet and cash flow, net accounts receivable at the end of the second quarter of 2015 were $8.9 million and our DSOs were 36-days. We expect our DSO to remain in the 35 to 40-day range.
Inventories increased from $11.9 million at March 31, 2015 to $13.5 million at June 30, of 2015. The increase was due to intentional buildup of inventories associated with our recently launched products to facilitate continued revenue growth, while maintaining efficiencies within the factory.
Cash from operations generated $1.4 million during the quarter due primarily to working capital changes. We expect to be cash neutral in the third quarter and generate cash in the fourth quarter.
Our cash position remains strong as of June 30, 2015 as we hold cash and investments of $66.3 million with no debt, which represent approximately $4.70 per outstanding share. We continue to remain active with our share repurchase program under which we repurchased 386,000 shares for $5.2 million in the first quarter of 2015 and repurchased almost 900,000 shares for $12.5 million in the second quarter of 2015.
In total, we have repurchased almost 1.3 million shares for $17.7 million in the first half of the year. We remain active in repurchasing our shares and over $22 million remaining in our Board approved $40 million share buyback program.
In conclusion, we're pleased with our revenue growth, plus margin improvements, generation of cash from operations and finally that we’re nearing our financial breakeven point. We expect our third quarter financial performance to be similar to our second quarter performance and expect to be profitable in the fourth quarter of this year.
We will continue investing in our R&D and our commercial operations and expect to continue leveraging this spending as a percentage of revenue. Our current quarterly GAAP breakeven point is approximately $25 million in revenue.
For the second half of 2015 while there are certain unpredictable factors that may impact our global business including unfavorable currency movement, we expect that each quarter will continue to realize improvements in our financial performance. I'd like to now open up the call to questions.
Operator?
Operator
[Operator Instructions] Our first question comes from the line of Thomas Gunderson from Piper Jaffray. Please proceed with your question.
Kyle Bauser
Hi, good afternoon. This is actually Kyle Bauser on for Tom.
So you've talked about building reference sites through KOL transactions and doing this by discounting those units in order to build a solid base. One, where you wanted to be in this respect.
And two, have ASPs bounced back a bit or are you still discounting quite a bit?
Ron Santilli
Yes. The ASPs did bounce back a bit, as we had expected because we were seeding with these luminary transactions early on which is product launches that we've recently had.
And we are satisfied that we've got the adequate coverage throughout the country and the world in various locations to continue seeding growth in these product lines.
Kyle Bauser
Okay. It sounds like you still quite a bit remaining in your stock repurchase program.
Can we assume continued purchases each quarter and did you give your estimates for fiscal year 2015 average share account?
Ron Santilli
We did not give an average share account. First of all, we do remain active, we have 10b5-1 in place for our share repurchase.
I believe we've purchased about 17 million as of the end of June. And we're continuing to be active in the market.
Kyle Bauser
Okay. Looking at the U.S.
sales force, you still had around 40 territories, and how much do you anticipate that growing over the remainder of the year and next year?
Kevin Connors
We're pleased with the expansion that we saw in North American headcount or the expansion in terms of some new folks we got onboard and we are happy with all the hiring that had happened that we're able to get them trained and supported by our sales leadership, and we think that continued hiring is our plan going forward.
Kyle Bauser
Okay. All right, and then lastly it looks like, I think you guys said the FX impact for sales is about $1 million to $2 million in the quarter.
You've given a range of 15%, 20%, as reported growth for roughly the next couple of quarters. Do you have internal estimates for what that range would be in constant currency terms?
Ron Santilli
I do not have the constant currency for the quarter, at least the, our International business have grown $2 million or 20% when compared to the quarter a year ago. On a constant currency basis that would be about $1 million higher, 31%.
All I'm assuming in a go forward basis is that exchange rates remain flat, as to today's rate. But I'm not assuming any other change.
Kyle Bauser
Okay, great. Thanks.
That's it for me.
Operator
Our next question comes from the line of Anthony Vendetti from Maxim Group. Please proceed with your question.
Anthony Vendetti
Sure. Thanks very much.
So just following on the FX and then I have a couple of questions on some of the products. Even though there was a $1 million to $2 million impact around from the strong dollar, can you talk about the actual dollar amount that was related just to pure FX currency translation impact?
Ron Santilli
Well, if you want to take the currency in the second quarter of 2015, and using Q2 of 2014 rates, that's roughly $1 million right there.
Anthony Vendetti
Right, that's a million, okay. And then you estimated something in addition to that was due to maybe loss sales because of the strong dollar, correct?
Ron Santilli
That's correct. And what that means is roughly half of our international business is conducted in U.S.
dollars i.e. with distributor transactions.
And that means there is weakening purchasing power on their side.
Anthony Vendetti
Sure. Understood.
Okay,– that's fine. And then just on enlighten, clearly there are two strong competitors out there itself, picosecond laser technology.
Can you - and some of them have given color on either the number of sales or the dollar amount of sales. Can you give us any more color on how well enlighten is doing either in terms of the number and then what's the ASP at, I know you said it's bounced back a little bit here, what should we look at as a reasonable ASP in general?
Ron Santilli
Let me address the numbers and then let Kevin talk further about enlighten itself. In terms of the ASPs, we did see a nice bounce back as we had anticipated because of our initial seeding that had taken place in the first half of the year, a lot of it being in the second quarter.
And we are continuing to drive our selling prices there and so value, and as Kevin will talk further, we've enhanced the product with our low energy green option that we also believe add value to the product. In addition to that, there is a product mix, where we're selling more direct and that also brings a higher blended average.
So, from that perspective we got the bounce back we were expecting in selling prices.
Kevin Connors
Hi Anthony. We were particularly pleased with the expansions in North America.
So I think the team did a nice job of really focusing on enlighten. And we think that the product has some pretty compelling features and benefits that we're hearing very exciting things from our customers.
And as we talked about in the past, we think this is a platform that will have lots of product line expansion opportunities. And we are delighted that the engineering team is able to respond towards the lower energy green which is important to our business that's interested in providing a solution for benign pigmented lesions we are able to get to the proper operating parameters to successfully treat those patients.
Anthony Vendetti
Do you need a third wavelength for that, Kevin, or two wavelengths enough?
Kevin Connors
We continue to expand future directions with wavelength, something that's important to us but we're hearing very positive things with the current wavelength that we have to treat this and this is one area in Asia that's particularly exciting.
Anthony Vendetti
And just a couple more things on products and then I'll jump back in the queue. Excel HR obviously you knew, you have removable products, obviously hair removal has been around for awhile, can you talk about –since that help contribute to growth, what about that product is contributing to the growth vis-à-vis the competition at hair removal products out there for a long time?
Kevin Connors
Well, I think one of the things that we were pleased to see was our legacy products, as well as our new products continuing to expand. We think that it's a good reflection of the way that the sales team is presenting these new products while not turning their attention away from the legacy products.
Hair removal has been around for a very long time, but it's still one of the larger treatment categories in the space and having a flagship platform now with excel HR, we think keeps that portfolio very fresh.
Anthony Vendetti
Then just one last question on R&D, in terms of how we should look at the next 12 to 18 months, is there an expectation of a new product or two that we should see some time in 2016 maybe in conjunction with AAD or [indiscernible]?
Ron Santilli
As we get closer to that Anthony, we'll share what our thoughts are. But we're pleased to be able to - to get the product line expansion in the past quarter.
Anthony Vendetti
Okay, great. Thanks guys.
Operator
[Operator Instructions] Our next question comes from the line of Zack Ajzenman from Griffin Securities. Please proceed with your question.
Zack Ajzenman
Thanks. Good afternoon guys.
First question, last quarter Q1, there was unusually high distributor mix of business that pressured gross margins, does this proportion return to a more normalized level this past quarter?
Kevin Connors
I would say not that it's contractive in the distributor business fact, we still feel real good about our distributor volume, but our direct business has actually increased which then causes it to be distributor business to be a little bit more diluted.
Zack Ajzenman
Okay, got you. Could you maybe elaborate a bit more on truSculpt's prospects or trends over in Europe, or it has some broader indications now that [indiscernible] has for about a year or so now clearly making some meaningful investments overseas?
Kevin Connors
TruSculpt specifically, we don't have anything that's unique overseas with that product, we have broader indications for use in Europe for example with that product. And we're working with our both direct operations, as well as our distributor partners to capture a larger part of that market.
Zack Ajzenman
Okay, great. Thanks guys.
Operator
I'd like to hand the call back over to Kevin Connors, for closing comments.
Kevin Connors
Thank you for participating in our call today. We'll be attending many investor conferences and marketing events in the third quarter.
We look forward to updating you on our business progress in the third quarter 2015 conference call in November. Good afternoon, and thank you 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.