Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Cutera Inc  (NASDAQ:CUTR)
Q4 2018 Earnings Conference Call
Feb. 20, 2019, 4:30 p.m. ET

Contents:

Prepared Remarks:

Operator

Greetings and welcome to Cutera's Fourth Quarter 2018 Earnings Conference Call. (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 -- Vice President, Investor Relations & Corporate Development

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 -- Chief Operating Officer and Interim Chief Executive Officer

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. Our 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 life-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 to better-sizing regions. We plan to grow this group through the year. Territories have been redrawn, aligned 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've 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 positioning 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. And I really like the energy coming from this leadership team 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 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 and in improving our legacy systems' overall financial performance. These measures include, implementing better pricing discipline in order to increase sales force behavior and launching tier programs that aid to provide customers with opportunities to expand their practices, 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 life-based aesthetic market is driven by innovation and new products. We feel these enhancements will extend the product life cycle 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 the new CRE -- CRM and ERP systems this calendar year.

And 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 will 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's 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 on to 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 are 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've 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 A. Gardiner -- Executive Vice President and Chief Financial Officer

Thanks Jason. Consistent with the pre-announcement 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%. US 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 micro-needling 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 of 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 the prior-year level. 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 remained 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 of 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 draft of product offerings. With this focus, along with a 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 comments 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 and 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 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 toward our continued investment and 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 US deferred tax assets. We determine 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 US net deferred tax assets will be realized for federal and state jurisdictions. Therefore, we recorded a valuation allowance against certain US 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 the 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 the 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 3.2 times versus 2.4 times 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 remained 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 of 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 investments. 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 -- Chief Operating Officer and Interim Chief Executive Officer

Thanks, Sandy. Since it's time, Cutera has been an innovator and leading player in the energy and life-based aesthetics market. We constantly strive to provide our customers with the most innovative products at the highest level of 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 still focus on growth and profitability. We continue to strive for manufacturing and operational excellence. However, at this stage, we understand execution matters most than promises.

With that, I would like to now open the call for questions. Operator?

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from the line of Chris Cooley with Stephens. Please proceed with your question.

Chris Cooley -- Stephens, Inc. -- Analyst

Good afternoon Jason, Sandy and Matt. Thanks for taking the questions.

Matthew Scalo -- Vice President, Investor Relations & Corporate Development

Hi, Chris.

Jason Richey -- Chief Operating Officer and Interim Chief Executive Officer

Hi, Chris.

Chris Cooley -- Stephens, Inc. -- Analyst

Hi. Maybe just two quickly from me, and then I'll hop back in queue. I understand you're playing with some broader strokes as we start to head into 2019, but just want to maybe press you a little bit more on the 2% to 8% guidance in term of -- for the top line, if you could maybe talk to us a little about the components of getting to that. How much is coming from, for example, truSculpt? Where do you see the legacy products or are we 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 -- Chief Operating Officer and Interim Chief Executive Officer

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 get back into queue on retraining how to leverage that portfolio. I think it's just going to take a little bit of time to get the momentum on that, which is why we are 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 had historically with those. We may even have a little bit of momentum coming from some of the product launch that we will 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 -- Stephens, Inc. -- Analyst

Okay. Thank you. That's helpful. And then, maybe just lastly from me and I'll hop back in 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 are there additional costs that we should be contemplating as we walk through the calendar year? Thanks so much.

Sandra A. Gardiner -- Executive Vice President and Chief Financial Officer

So Chris, if I am understanding your question correctly, in terms of the one-time charges to get to the adjusted EBITDA, excuse me, 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 and to get to adjusted EBITDA, we would have the stock-based compensation and the depreciation. But additionally, as you know this year, we are implementing the CRM and ERP system and those would be adjusted out for adjusted EBITDA purposes.

Chris Cooley -- Stephens, Inc. -- Analyst

Could you quantify those costs for us though, on the CRMs? I guess that's what I was really getting out there and kind of how we'd allocate that to the year?

Sandra A. Gardiner -- Executive Vice President and Chief Financial Officer

Well, we have -- it's more back-end 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 -- Stephens, Inc. -- Analyst

Understood. Thank you so much.

Operator

Our next question comes from the line of Jon Block with Stifel. Please proceed with your question.

Jonathan Block -- Stifel, Nicolaus & Company -- Analyst

Thanks guys. 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 -- Chief Operating Officer and Interim Chief Executive Officer

Yeah. 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 in those clinicals look like, and what the timing is in order to maximize the opportunity there. But I see this as a space that it'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 of really mapping out our strategy with them in terms of what the process looks like.

Jonathan Block -- Stifel, Nicolaus & Company -- Analyst

Okay. Surely very helpful. And then, Jason maybe if you just turn over to non-invasive body contouring, what are your very important products and it seems to be a lot of different dynamics going on in the marketplace, truSculpt in the US is (inaudible) have some issues. It seems like there is a new (inaudible) we had scoped in the market and then obviously you guys have done well with iD (ph) to-date. So can you sort of unpackage some of those moving parts and what's going on from a marketplace perspective with non-invasive body contouring that you guys feel comfortable that there is still long runway ahead of you?

Jason Richey -- Chief Operating Officer and Interim Chief Executive Officer

Yeah. I think there's still a long runway for us. I actually just came from the IMCAS meeting in Paris and there is a lot of attention around non-invasive body sculpting. Seeing some of the challenges that some of our competition are facing are interesting to us, but from our perspective, we are seeing robust growth at this point in time in this space. 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 -- Stifel, Nicolaus & Company -- Analyst

Okay. Great. And last one from me, and then I'll take the rest offline as well. But Sandy, actually first this clarification, what was the adjusted EBITDA in 2018? I couldn't find it, was it $2 million-ish in '18?

Sandra A. Gardiner -- Executive Vice President and Chief Financial Officer

Yes, yes. In '18 it was roughly $2 million.

Jonathan Block -- Stifel, Nicolaus & Company -- Analyst

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 million versus $2 million, again if I go with the midpoint. So can you just talk to the moving parts behind this and does it sort of imply a high level of OpEx spend in '19 versus '18? Thanks guys.

Sandra A. Gardiner -- Executive Vice President and Chief Financial Officer

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, we use 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 -- Stifel, Nicolaus & Company -- Analyst

Okay. Very helpful. Thanks for your time, in this.

Jason Richey -- Chief Operating Officer and Interim Chief Executive Officer

Thank you.

Operator

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

Anthony V. Vendetti -- Maxim Group, LLC -- Analyst

Thanks. Yeah, I was just wondering if you 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 -- Chief Operating Officer and Interim Chief Executive Officer

Yeah. 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, unless 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. Some of them -- 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, and that historically, we didn't have very deep benches us 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 are more durable long-term and less susceptible to these types of things.

So that's really where spend a lot of time and I've got a lot of confidence in maybe energy behind this new team. I feel good about where they are. Actually I 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 yourself susceptible to this type of thing in the future.

Anthony V. Vendetti -- Maxim Group, LLC -- Analyst

Jason, just the second part of your question on ASP, was -- did the sales people -- the sales people had (inaudible) that they have to offer discounts. Is that why ASPs were impacted more than expected in the quarter?

Jason Richey -- Chief Operating Officer and Interim Chief Executive Officer

Yeah, pretty much.

Anthony V. Vendetti -- Maxim Group, LLC -- Analyst

Okay. And then lastly on the product, I was wondering if you could talk about, was the xeo -- was it xeo product or how did this come about in -- a $5 million charge is pretty large charge. What was the issue with that particular product line?

Sandra A. Gardiner -- Executive Vice President and Chief Financial Officer

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, is 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 V. Vendetti -- Maxim Group, LLC -- Analyst

Okay. That is 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 -- Chief Operating Officer and Interim Chief Executive Officer

Yeah, I'm a big fan of innovation. I mean 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 would 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 FDA and making sure that we follow a timeline that's consistent with them as well. So I think we do have -- we do have some dependents on that but in a perfect world we would 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 V. Vendetti -- Maxim Group, LLC -- Analyst

Okay. Great. Thanks.

Operator

Our next question comes from the line of Jim Sidoti with Sidoti & Company. Please proceed with your question.

Jim Sidoti -- Sidoti & Company, LLC -- Analyst

Good afternoon. Can you hear me?

Jason Richey -- Chief Operating Officer and Interim Chief Executive Officer

Yes.

Jim Sidoti -- Sidoti & Company, LLC -- Analyst

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 A. Gardiner -- Executive Vice President and Chief Financial Officer

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 said to John 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 -- Sidoti & Company, LLC -- Analyst

Okay. And that goes to the operating expense and depreciation and amortization as well?

Sandra A. Gardiner -- Executive Vice President and Chief Financial Officer

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 -- Sidoti & Company, LLC -- Analyst

Okay. And if you break out the $5 million charge you said the gross margin was about 53% for the full year 2018? Is that correct?

Sandra A. Gardiner -- Executive Vice President and Chief Financial Officer

That's correct.

Jim Sidoti -- Sidoti & Company, LLC -- Analyst

And you think the gross margin should expand slightly in 2019?

Sandra A. Gardiner -- Executive Vice President and Chief Financial Officer

Yes.

Jim Sidoti -- Sidoti & Company, LLC -- Analyst

Right. And then new products, I know you don't want to get into too much detail but can you -- 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 -- Chief Operating Officer and Interim Chief Executive Officer

I think with what we are 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 products 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 are 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 -- actually we are working on several transformational R&D initiatives as well. Those just take longer.

Jim Sidoti -- Sidoti & Company, LLC -- Analyst

Okay. Thank you.

Jason Richey -- Chief Operating Officer and Interim Chief Executive Officer

Yep.

Operator

(Operator Instructions) Our next question comes from the line of Samantha Taksi (ph) with Wealth Health & Company (ph). Please proceed with your question.

Samantha Taksi -- Wealth Health & Company -- Analyst

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 -- Chief Operating Officer and Interim Chief Executive Officer

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 bio 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 Taksi -- Wealth Health & Company -- Analyst

Okay. Awesome. Thank you.

Jason Richey -- Chief Operating Officer and Interim Chief Executive Officer

Yeah, you bet.

Operator

Ladies and gentlemen, we have reached the end of question-and-answer session. And I would like to turn the call back to Jason Richey for closing remarks.

Jason Richey -- Chief Operating Officer and Interim Chief Executive Officer

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 will talk soon.

Operator

This concludes today's conference. You may disconnect your lines at this time and have a wonderful day.

Duration: 41 minutes

Call participants:

Matthew Scalo -- Vice President, Investor Relations & Corporate Development

Jason Richey -- Chief Operating Officer and Interim Chief Executive Officer

Sandra A. Gardiner -- Executive Vice President and Chief Financial Officer

Chris Cooley -- Stephens, Inc. -- Analyst

Jonathan Block -- Stifel, Nicolaus & Company -- Analyst

Anthony V. Vendetti -- Maxim Group, LLC -- Analyst

Jim Sidoti -- Sidoti & Company, LLC -- Analyst

Samantha Taksi -- Wealth Health & Company -- Analyst

More CUTR analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.