Feb 20, 2019
Operator
Greetings, and welcome to Cutera’s Fourth Quarter 2018 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, Matthew Scalo.
Matthew Scalo
Thanks, operator. Welcome to Cutera's fourth quarter and 2018 full year earnings conference call.
My name is Matt Scalo, Cutera’s Vice President of Investor Relations and Corporate Development. And on the call today is Cutera's Chief Operating Officer and Interim CEO, Jason Richey; and Chief Financial Officer, Sandra Gardiner.
After the prepared comments, there will be a question-and-answer session. The discussion today includes forward-looking statements.
These forward-looking statements reflect management's current forecast or expectation of certain aspects of the company's future business, including, but not limited to, any financial guidance provided for modeling purposes. Forward-looking statements are based on current information that is, by its nature, dynamic and subject to change.
Forward-looking statements include, among others, statements regarding financial guidance, plans to introduce new products, regulatory approvals and productivity improvements. For the words that may identify forward-looking statements, we encourage you to refer to the Safe Harbor statement in our press release earlier today.
All forward-looking statements are subject to risks and uncertainties, including those risk factors described in section entitled Risk Factors in our Form 10-K as filed with the SEC and updated in our Form 10-Q subsequently filed. Cutera also cautions you not to place undue reliance on forward-looking statements, which speak only as of the date they are made.
Cutera undertakes no obligation to update publicly any forward-looking statements to reflect new information, events or circumstances or to reflect the occurrence of unanticipated events. Future results may differ materially from management's current expectations.
In addition, we will discuss non-GAAP financial measures, including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency into Cutera's ongoing results of operations, particularly when comparing underlying results from period to period.
Please refer to the reconciliation from GAAP to non-GAAP measures in our earnings release. These non-GAAP financial measures should be considered along with, but not as alternatives to, the operating performance measures prescribed by GAAP.
With that, I would like to turn the call over to our Chief Operating Officer and Interim CEO, Jason Richey.
Jason Richey
Thank you, Matt. Good afternoon and thank you for joining us today.
Last summer, I joined Cutera as Chief Operating Officer to help execute on the company’s key initiatives. In January, at the request of the Board of Directors, I accepted the added responsibility of Interim CEO.
While we accomplished a number of our objectives in 2018, we still have much work to do. My prepared comments today will focus on the company’s strategic direction and top operational objectives for 2019.
Cutera remains committed to providing best-in-class energy and light-based products that give medical professionals the ability to deliver the highest level of patient satisfaction. I’m confident this commitment along with Cutera’s dedicated employee base and enhanced operational processes will drive achievement of our long-term goals.
In 2019, Cutera is focused on the following revenue enhancing activities. First, the company will continue to deliver a full pipeline.
In 2018, we launched four new products which rapidly accounted for over 30% of the company’s full year revenue. Among the products launched in 2018 is our proprietary next-gen body sculpting system truSculpt iD.
This system set a company record at launch and continues to gain share in the $1 billion body shaping market. In 2019, we will continue to introduce exciting and differentiated products with predictable and manageable cadences.
In fact, we plan to unveil our next product at the upcoming American Academy of Dermatology conference in just a few weeks’ time. Secondly, we’ve optimized the company’s commercial structure.
In early 2019, Cutera expanded its North American regional sales leadership team by adding additional sales managers in better sizing regions. We plan to grow this group through the year.
Territories have been redrawn allowing for deeper penetrations in regions I would previously describe as underserved. Additionally, members of our new commercial management team were promoted from within ensuring continuity of our strong sales culture.
We expect this new structure to enhance our overall sales productivity, build out a more robust talent bench and provide the right environment to scale up the team. We plan to strategically expand both capital equipment and practice development sales teams in 2019.
In January, I attended both the North American and international sales meetings. I got to tell you I was impressed by the selling workshops, product training and the overall enthusiasm of these new and invigorated teams.
You may also be aware that during my career, I spent almost 10 years focused on international markets including five years living abroad. Since joining Cutera, we’ve made significant changes to our international commercial team, structure and its leadership.
We begin 2019 better positioned in key international markets required for us to execute our commercial plan. In 2019, we will bring multiple international product launches including the full commercial release of truSculpt iD in Australia and New Zealand, Japan, Korea, Brazil and other key European countries.
I really like the energy coming from this leadership and I feel we barely scratched the surface on our international potential. And finally, we plan to take better advantage of our comprehensive product portfolio.
Like other companies in our space, Cutera faced headwinds to certain laser systems in 2018. We’ve previously discussed the challenging pricing environment in this space and in particular for our picosecond laser market.
Despite enlighten’s clear clinical and technical superiority, these pricing pressures continue. In the fourth quarter, pricing across the portfolio of our legacy systems softened.
This can be attributed to multiple factors. In January, we initiated several measures aimed at improving our legacy systems overall financial performance.
These measures include implementing better pricing discipline in order to encourage sales force behavior and launching tiered programs that aid to provide customers with opportunities to expand their practice while supporting our overall corporate profitability strategy. Additionally, we are committed to refreshing and enhancing our key legacy systems, thereby adding utility, clinical advantages and value to our customers.
We understand that the energy and light-based aesthetic market is driven by innovation and new products. We feel these enhancements will extend the product lifecycle and allow premium pricing of our core platforms.
Along with these revenue enhancing objectives, Cutera continues to make progress with a number of ongoing operational improvement projects. These activities include procurement and inventory optimization processes such as the adding of automated inventory controls and processes, identification of multiple contract manufacturing partners that will enable us to drive down manufacturing costs and enhancing our IT platforms, including the implementation of a new CRM and ERP system this calendar year.
Now before I turn the call over to Sandy, I want to add color around the fourth quarter product remediation charge and the company’s 2019 financial guidance. You’ll notice the company incurred a charge of $5 million in the fourth quarter.
This charge relates to the remediation of key componentry in one of our legacy laser systems. This action is consistent with our mission to ensure Cutera systems are absolutely best-in-class.
As a result of rigorous focus on quality and best-in-class product performance, customers have come to trust the Cutera brand. We know great quality products lead to great business performance and this culture has a positive influence on the behavior of each employee at every level of our organization.
Now onto 2019 guidance. Cutera expects to grow revenue faster than the broader market.
In 2019, we expect to generate revenue between $165 million and $175 million representing annual growth of between 2% and 8%. We believe the upper end of our guidance range exceeds anticipated market growth in 2019.
We anticipate revenue in the first half of 2019 to be relatively flat compared to the same period last year. This is primarily due to ongoing challenges in the women’s health market where we’re forecasting modest sales.
You may recall we had success with this product in the first and second quarters of 2018 prior to the FDA’s public safety communication. While we were not named in the FDA’s letter, we have experienced headwinds in this market.
We anticipate revenue growth will accelerate through the second half of the year as we steady our legacy business, take share in the body contouring market and benefit from the restructured and reinvigorated sales team. I want to emphasize that moving forward we will be more disciplined on our focus on growth and profitability.
We have implemented more rigor around our sales processes even if it means walking away from certain deals. Now I would like to turn the call over to Sandy Gardiner, our Chief Financial Officer.
Sandra Gardiner
Thanks, Jason. Consistent with the preannouncement of our preliminary results on January 7, 2019, actual fourth quarter revenue was 45.5 million, down 5% from the same period a year ago.
For the full year 2018, revenue was 162.7 million reflecting growth of 7%. U.S.
revenue in the fourth quarter was down 7% from the year-ago period as continued strong demand for our truSculpt body sculpting systems and Secret RF microneedling systems was offset by diminished contribution from the Juliet women’s health system and increased turnover of the sales force that impacted overall results, particularly in our legacy systems. International revenue grew 1% compared to the fourth quarter 2017, as general softness in Europe and Asia were offset marginally by continued growth in Japan and the Middle East.
Regarding channel mix, our direct sales efforts accounted for 48% of the fourth quarter international product revenue compared to 47% in the year-ago period returning closer to prior year levels. For the full year 2018, our direct sales efforts accounted for 43% of international product revenue compared to 51% in 2017.
The truSculpt product portfolio remains strong and generated 32% worldwide revenue growth in the full year 2018 versus 2017. Over 40% of new systems sold today produced a consumable revenue stream.
Our focus continues to be increasing recurring revenue as a percent of total revenue. In the fourth quarter, recurring revenue defined as consumable, service and skincare revenue grew 28% over the fourth quarter 2017 and accounted for approximately 19% of total fourth quarter revenue at $8.6 million.
Consumable revenue growth in 2018 continued at an elevated level demonstrating solid system utilization. Consumable revenue grew 85% over fourth quarter 2017 and 71% for the full year.
Consumable revenue was $4.2 million for the full year 2018. Revenue from consumables will become more meaningful over time as a growing percent of our systems sold have a consumable revenue stream.
As I move into the discussion of our gross margin and operating expenses, I’ll focus my comments on our adjusted or non-GAAP results to provide insights into the underlying trends in our business. Please refer to today’s press release for a detailed description of the year-on-year changes in our fourth quarter GAAP and non-GAAP results.
Non-GAAP financial measures are not intended to be considered in isolation from or as a substitute for the corresponding financial measures prepared in accordance with GAAP. Non-GAAP gross margin was 53% in the fourth quarter or approximately 500 basis points lower than the year-ago period.
The year-over-year decline mainly reflects compression of average selling price across our legacy business. While sales force turnover was a factor impacting fourth quarter ASPs, one of our key objectives in 2019 is to focus on profitable growth.
We plan to achieve this through a stronger and more disciplined sales effort that can press the advantages of our wide breadth of product offerings. With this focus along with the continued growth in our consumable revenue and benefits from our ongoing operational improvement initiatives, gross margin in 2019 are expected to improve.
In regards to the $5 million GAAP charge in the fourth quarter related to remediation of key componentry in one of our legacy laser systems, I would add to Jason’s previous comment that only one line of laser systems is affected representing a small fraction of total systems sold to date. This charge includes all component parts in service requirements.
Moving on to non-GAAP sales and marketing expense as a percent of revenue was 31% in the fourth quarter compared to the same 31% of revenue in the fourth quarter 2017. This reflects management’s focus on cost particularly in a quarter with total sales that fell below the prior year period.
Non-GAAP research and development expenses were $3.2 million in each of the fourth quarter of 2018 and 2017 and 7% of revenue in each period. We remain committed to investing in engineering and clinical research that drives new product innovation and existing product enhancements.
Non-GAAP general and administrative expense increased by approximately $800,000 to $4.3 million from $3.5 million in the fourth quarter of 2018 as compared to the same period of 2017. The increase in G&A expense from a year ago is primarily a result of additional personnel towards our continued investment in the scalability of our operations, increased professional fees primarily related to accounting, legal and tax and a provision for doubtful accounts.
I would also like to mention that we expect to record a one-time charge in the first quarter of 2019 related to the resignation of our former CEO in early January. Non-GAAP operating income was 2.2 million in the quarter compared to 6.3 million income in the same period of 2017.
Non-GAAP net loss in the fourth quarter of 2018 was approximately $1.6 million or $0.11 on a basic and fully diluted basis. Non-GAAP net income for the full year of 2018 was approximately 1.5 million or $0.11 on a fully diluted basis.
Weighted average shares outstanding used to compute non-GAAP EPS for the fourth quarter was 13.9 million and for the full year was 14.3 million. While excluded from non-GAAP net income, it is important to note that we recorded a valuation allowance of $16.9 million against certain U.S.
deferred tax assets. We determined this was necessary due to the GAAP net losses incurred in 2018.
As of December 31, 2018, it is uncertain as to whether all of our U.S. net deferred tax assets will be realized for federal and state jurisdictions.
Therefore, we reported a valuation allowance against certain U.S. deferred tax assets and continue to maintain a full valuation allowance against the net deferred tax assets related to the state of California.
The recording of the valuation allowance resulted in a GAAP income tax provision of $20.8 million in the fourth quarter of 2018. As we enter into 2019, we expect a combined effective tax rate for our worldwide operations to be minimal for the coming year.
Turning to the balance sheet and cash flow. Net accounts receivable at the end of our fourth quarter of 2018 was $19.6 million and our DSOs decreased by 17 days to 40 days from the prior quarter.
Inventories were $28 million at December 31, 2018 representing a decrease of approximately $3.3 million from September 30 or an inventory turns ratio of 3.2x versus 2.4x in the third quarter of 2018. Cash provided by operations was $8.4 million for the fourth quarter compared to $6.7 million in the fourth quarter of 2017.
Our operational and system improvements resulted in an overall reduction of our inventory, rebalancing of our supply chain, more accurate build forecasting, improved turns and cash collections. Our cash position remains strong and as of December 31, 2018, we held cash and investments of $35.6 million with no debt and working capital of approximately $40 million.
Turning to our 2019 guidance. We have streamlined our annual financial guidance emphasizing three key targets; revenue growth, gross margin and cash flow generation.
In 2019, we are targeting total revenue in the range of 165 million to 175 million representing a 2% to 8% increase over 2018. As Jason mentioned, growth in the second half of the year is expected to be higher than the first half due to a number of factors including the progression of new product releases, sales force expansion and prior year comps.
It is important to note that our 2019 revenue guidance incorporates minimal contribution from Juliet as we expect the market to remain slow through the year. We anticipate full year 2019 non-GAAP gross margin to improve over the full year 2018 level as we stabilize our legacy business, implement more rigorous pricing policies for our sales team and begin to see the benefits of our infrastructure investment.
Lastly, adjusted EBITDA is expected to be in the range of $2 million to $4 million. I would now like to turn the call over to Jason for his closing comments.
Jason Richey
Thanks, Sandy. Since its founding, Cutera has been an innovator and leading player in the energy and light-based aesthetics market.
We constantly strive to provide our customers with the most innovative products built at the highest level in quality. Combined with a premier level of service, this comprehensive offering enables clinicians to best serve their patients’ needs.
With the focus on people, products and processes, Cutera is motivated to achieve its long-term operational and financial objectives. We are implementing plans to reinvigorate our sales team and focus on growth and profitability.
We continue to strive for manufacturing and operational excellence, however, at this stage we understand execution matters more than promises. With that, I would like to now open the call for questions.
Operator?
Operator
At this time, we will be conducting a question-and-answer session. [Operator Instructions].
Our first question comes from the line of Chris Cooley with Stephens. Please proceed with your questions.
Chris Cooley
Good afternoon, Jason, Sandy and Matt. Thanks for taking the questions.
Jason Richey
Hi, Chris.
Chris Cooley
Hi. Maybe just two quickly from me, then I’ll hop back in the queue.
Understand you’re playing with some broader strokes as we started here into 2019, but just want to maybe press you a little bit more on the 2% to 8% guidance for the top line if you could maybe talk to us a little bit about components of getting to that. How much is coming from for example truSculpt?
Where do you see the legacy products hitting the floor at some point? Just some constructs around how you got 2% to 8% would be very helpful.
And then I have a follow up.
Jason Richey
Sure. I think when you look at the legacy products, one of the things that we’re doing right now is stabilizing that.
I mentioned that I just came from the sales meetings of both international and North America where we basically got back in the queue on retraining how to leverage that portfolio. I think it’s just going to take a little bit of time to get some momentum on that which is why we’re more back half loaded from the legacy perspective.
In addition, I think when you look at the comparables we don’t have nearly as much strength coming out of our women’s health portfolio. So that’s a little bit tougher for the first half of the year.
However, going into the second half of the year I see a lot of things really becoming tailwinds for us which include more time in the saddle for our sales force leadership, really seeing our body sculpting start to take form and also enhancing some of the legacy systems and results that we’ve had historically with those. We may even have a little bit of momentum coming from some of the product launch that we’ll be initiating throughout the year.
So I think that’s really how we came up with the formula in order to see that trend over the course of the year.
Chris Cooley
Okay. Thank you.
That’s helpful. And then maybe just lastly for me and I’ll hop back in the queue to the margins and more specifically adjusted EBITDA.
Should we assume that the sales force is now stable and outside of the one-time charge in 1Q there are no additional maybe one-time items that we should be aware of, so just in terms of kind of working down to that estimate or there are additional costs that we should be contemplating as we walk through the calendar year? Thanks so much.
Sandra Gardiner
So, Chris, if I’m understanding your question correctly, in terms of the one-time charges to get to the adjusted EBITDA, so as I mentioned we are expecting a one-time charge in the first quarter related to the CEO’s resignation. We are also – in the normal course to get to adjusted EBITDA, we would have the stock-based compensation, the depreciation.
But additionally, as you know, this year we are implementing the CRM and ERP systems and those would be adjusted out for adjusted EBITDA purposes.
Chris Cooley
Could you quantify those costs for us on the CRM piece? I guess that’s supposedly what I was getting at there and kind of how we’d allocate that to the year?
Sandra Gardiner
Well, we have – it’s more backend loaded because we actually are doing that over the course of 2019. And in the fourth quarter you’ll see that we actually had $200,000, so a smaller amount.
In totality, we are – the entire system may be somewhere in the neighborhood of $3 million to $4 million but only a fraction of that is expected to run through the P&L. But we don’t quite have an exact handle on what will come through the P&L versus capitalized.
But in general, most of it gets capitalized.
Chris Cooley
Understood. Thank you so much.
Operator
Our next question comes from the line of Jon Block with Stifel. Please proceed with your questions.
Jonathan Block
Good afternoon. I’ll try to stick to a small handful.
The first one is just the long-term plan that you guys have with Juliet. Is it still your intention to work with your partner to generate long-term clinical data and then get more aggressive in the market in 2020 or 2021, maybe if you can just talk to those long-term intentions around Juliet?
Jason Richey
Yes, actually it’s good timing. We actually have a call with them on Monday of next week.
But that’s exactly it. We like the women’s healthcare space and we like the technology.
Right now it’s just working with our partner to determine what the clinicals will look like, what the funding on those clinicals look like and what the timing is in order to maximize the opportunity there. But I see this as a space that there’s going to probably go from multiple players down to probably a handful and I think that there’s a lot of potential in this arena.
It’s just a matter for us right now is really mapping out our strategy with them in terms of what the process looks like.
Jonathan Block
Okay. That’s helpful.
And then, Jason, maybe just to turnover to noninvasive body contouring, what are your very important products? And there seems to be a lot of different dynamics going on in the marketplace, CoolSculpting in the U.S.
is seemingly slow and the sculptures had some issues. It seems like there’s a new [indiscernible] in the market and then obviously you guys have done well with IP to date.
So can you sort of un-package some of those moving parts and what’s going on from a marketplace perspective with noninvasive body contouring and you guys feel comfortable that there’s still a long runway ahead of you?
Jason Richey
Yes, I think there’s still a long runway for us. I actually just came from the IMCAS meeting in Paris and there’s a lot of attention around noninvasive body sculpting.
Seeing some of the challenges that some of our competition are facing are interesting to us, but from our perspective we’re seeing robust growth at this point in time in this space. And I think a lot of that goes back to the clinical data that we have behind the technology as well as the procedure times and convenience for the clinician and for the patient.
And I think when you have that and you have a 15-minute procedure that’s anatomically agnostic, simple for the patient, painless for the patient and easy for the clinician, it probably explains why we’re having some nice tailwinds in this space at this point in time. In terms of the future of it, I really like it and I think we’re continuing to look and explore opportunities to find additional ways to play in this space.
Jonathan Block
Okay, great. And last one from me and then I’ll take the rest offline as well.
But, Sandy, actually first just clarification, what was the adjusted EBITDA in 2018? I couldn’t find it.
Was it 2 million-ish in '18?
Sandra Gardiner
Yes. In '18, it was roughly 2 million.
Jonathan Block
Okay. So the question then goes to the moving parts.
When I look at your guidance, the revenue guidance is up about 5% at the midpoint year-over-year. You alluded to gross margins improving year-over-year but adjusted EBITDA is only up 1 million, call it 3 versus 2 again if I go into midpoint.
So can you just talk to the moving parts behind this and does it sort of imply a heightened level of OpEx spend in '19 versus '18? Thanks, guys.
Sandra Gardiner
So I think we do expect to get some leverage on the operating expense line on a non-GAAP basis going into 2019, some slight improvement there. I think for us we want to of course be able to be prudent and conservative in our estimates and really focus on execution.
And so therefore our modeling leaves the gross margin at some improvement but certainly not in great detail. I think that that really comes in 2020 and beyond.
So much more stability in the gross margin and stability in the OpEx gives us to where we’re getting to on the adjusted EBITDA line.
Jonathan Block
Okay, very helpful. Thanks for your time, guys.
Jason Richey
Thank you.
Operator
Our next question comes from the line of Anthony Vendetti with Maxim Group. Please proceed with your questions.
Anthony Vendetti
Thanks. I was just wondering if we could talk a little bit about the sales force turnover.
Sandy, you mentioned that there was increased turnover and that led to lower ASPs. Can you talk about what that increased turnover looked like in terms of percentage versus baseline?
And then how did that have an impact on ASPs? Thanks.
Jason Richey
Anthony, what I’d tell you is I think when you look at the turnover of our sales force, we run our guys pretty hard and I’ll be the first to admit it. And I think many of them left whether it be for quality of life or for other reasons, but because we run them pretty hard I think that’s why we faced that challenge in Q4.
In terms of what it is as a percentage, I haven’t broken it down that way but we’d be happy to do that. In terms of what we’re doing to remediate it I think is the key in that historically we didn’t have very deep benches in terms of how we were going to build out the talent pool moving forward.
So we spent a lot of time with the new structure. We spent a lot of time with training of the new people in order to make sure that we have this robust infrastructure behind our commercial organization so that we’re more durable long term and less susceptible to these types of things.
So that’s really where we’ve spent a lot of time and I’ve got a lot of confidence in the energy behind this new team. I feel good about where they are and I actually had a visit with several of them just yesterday.
And historically for me when you take some of your top performers and you move them into positions of leadership, make the right investments in them to give them the tools to be productive, at least in my experience historically that’s been a really nice return on our investment. So that’s the plan here in order to do that and build out some of the durability and talent bench behind that, so that we don’t find ourselves susceptible to this type of thing in the future.
Anthony Vendetti
Jason, just the second part of the question on the ASP, the sales people that were left, did they have to offer discounts? Is that why ASPs were impacted more than expected in the quarter?
Jason Richey
Yes, pretty much.
Anthony Vendetti
Okay. And then lastly on the product, I was wondering if you could talk about it.
Was it the xeo product or how did this come about in – a $5 million charge is a pretty large charge. What was the issue with that particular product line?
Sandra Gardiner
So it is one of our legacy platforms, however, we will not be naming the exact platform. So we were able to identify a remediation issue and Cutera is well known obviously for its quality.
So in a very short period of time we were able to put a fence around this, identify what the issue was and come up with a plan. So this $5 million charge, as I said, first of all, it’s just a fraction of our total systems out there but this includes both the actual component replacement and then the service required to replace and repair these units.
So out of the $5 million charge that we took in the fourth quarter, we utilized 1.1 million of that. So there is about 3.9 million that is sitting on our balance sheet as a liability for us to utilize over the course of the coming months to be able to go and remediate the issue.
Anthony Vendetti
Okay. That’s helpful.
And then lastly, I think Jason you alluded to new products and new product launch. Is there a plan to launch a new product sometime in 2019 or what did you mean by new product launch?
Jason Richey
Yes, I’m a big fan of innovation. It’s part of the reason why I came to Cutera is because when I looked at the DNA of this company, it had such a robust innovative spirit.
In looking at what we do through 2019 and beyond, I’m a big believer in having some structured product releases so that we really double down on them and maximize the penetration of that launch, because at the end of the day you only have one chance to really launch a product. So what we’d like to do and, yes, we will be launching products in 2019 and 2020 and so forth and so on, but what I want to make sure that we do is that we really focus on maximizing that opportunity.
So rather than launching six or seven products, I’d really like to see us hammer that down to a couple. In a perfect world if you could launch one in the first half and launch one in the second half and then make sure that you have a robust plan around that to maximize the opportunity, I think it’s probably the best way.
The challenge for us is that we have our R&D pipeline but you’re also working with the FDA and making sure that we follow a timeline that’s consistent with them as well. So I think we do have some dependents on that, but in a perfect world we’d be launching a product in the first half of the year and another product in the second half of the year.
And that’s really what I’d like to see us be able to get up to that sort of click.
Anthony Vendetti
Okay, great. Thanks.
Operator
Our next question comes from the line of Jim Sidoti with Sidoti & Company. Please proceed with your question.
Jim Sidoti
Good afternoon. Can you hear me?
Jason Richey
Yes.
Jim Sidoti
Great. Sandy, can you just give us quantities for what you’re assuming for D&A and operating expense in the 2019 adjusted EBITDA guidance?
Sandra Gardiner
So we’re not giving line item detail. That’s why we wanted to really focus our guidance on a top level which is directional improvement in the gross margin and then adjusted EBITDA for – in the range of $2 million to $4 million.
But as I had said to Jon that we are looking at obviously a slight improvement in the gross margin and slight leveraging in the operating expense line. So very similar to what the percentages were in 2018.
Jim Sidoti
Okay. And that goes to the operating expense and depreciation and amortization as well?
Sandra Gardiner
Yes. The only one I would say for stock-based compensation is that as you look back several years, it does increase about $2 million per year and I would expect that it would increase at a similar rate in 2019.
Jim Sidoti
Okay. And if you break out the $5 million charge, you said that gross margin was about 53% for the full year 2018?
Is that correct?
Sandra Gardiner
That’s correct.
Jim Sidoti
And you think the gross margin should expand slightly in 2019?
Sandra Gardiner
Yes.
Jim Sidoti
All right. And then new products, I know you don’t want to get into too much detail but can you comment – are these going to be totally new markets or are these going to be enhancements to products that you have already?
Jason Richey
I think with what we’re looking at, we want to keep these sort of within the verticals that we currently operate. What I’d like to be able to do on an annual basis is come out with some product that complements our existing portfolio as a new technology and then potentially having another product that just sort of bolsters the portfolio that we have today so that we can continue to maintain price premiums over the competition.
So I think what’s safe to say is that if you look on an annual basis from an innovation perspective, we’re really focused on trying to drive those key elements. So some will be line extensions, some will be adjacencies and then ultimately as we look down long term, I would like to start working on – well, actually we are working on several transformational R&D initiatives as well.
Those just take longer.
Jim Sidoti
Okay. Thank you.
Jason Richey
Yes.
Operator
[Operator Instructions]. Our next question comes from the line of Samantha Doxie with Walthausen & Company.
Please proceed with your questions.
Samantha Doxie
Hi, guys. Thanks for taking the question.
I was just hoping you could expand and remind us of the competitive trends that impact your legacy systems?
Jason Richey
I think what’s happening when you look at some of the legacy systems is that we historically have been quite strong across the portfolio of our legacy products. As you look at companies that are trying to get into this space, there are companies that are trying to come in and make claims that aren’t necessarily consistent with what the technology does compared to us.
But that does cause some buyer pause, if you will. And in many cases it’s forcing us to go in and get competitive where necessary.
What we’re doing in order to mitigate that is to continue to reinforce this legacy portfolio by adding additional features and benefits such that enable to put us in a position to where we can continue to deliver best-in-class technology and long term be able to command pricing premiums over our competition.
Samantha Doxie
Okay, awesome. Thank you.
Jason Richey
Yes, you bet.
Operator
Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Jason Richey for closing remarks.
Jason Richey
Listen, I would like to thank you all for participating in the call today. It was a pleasure to get a chance to speak with each of you.
And I also want to thank you for your continued interest in Cutera. And we look forward to the forthcoming investor calls to continue to visit and update you on our progress.
With that, thank you so much for participating today and we’ll talk soon.
Operator
This concludes today’s conference. You may disconnect your lines at this time and have a wonderful day.