Cutera (CUTR) Q1 2019 Earnings Call Transcript

Cutera (CUTR -17.17%)
Q1 2019 Earnings Call
May. 09, 2019, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to Cutera's first-quarter 2019 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your host, Mr. Matt Scalo.

Thank you. You may begin.

Matt Scalo -- Head of Investor Relations and Corporate Development

Thanks, operator, and welcome to Cutera's first-quarter 2019 earnings conference call. My name is Matt Scalo, Cutera's vice president of investor relations and corporate development. And on our 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 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 on 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're 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

Thanks, Matt. Good afternoon, and thank you for joining us today. I'm pleased to report 2019 has started off well as first-quarter revenue grew 6%. This positive revenue performance reflects a combination of factors.

First, we continue to drive strong demand for our unique body sculpting system, truSculpt iD. Total truSculpt revenue grew 29% over first quarter of 2018, and we achieved a major milestone, selling over 1,000 truSculpt systems to date. I'm also pleased to see total truSculpt procedure-related revenue grown was 300% in the first quarter as compared to the first quarter of 2018. This reflects our expanding install base and increased system utilization.

truSculpt iD's procedure-related revenue is a driving force behind one of the company's top priorities, which is to rapidly expand the company's high-margin consumable revenue. We don't anticipate providing a utilization figure moving forward, however, we are currently tracking to approximately $8,500 in annualized consumable revenue per truSculpt system. We are pleased with the growing utilization and expect it to expand steadily over the next year. Second, our North American commercial team did a good job executing on our key priorities in Q1, especially in the face of fourth quarter's unusual turnover and tough sales comps given the status of Juliet, a distributed women's health system.

We've discussed in past quarters how Juliet sales were impacted by an industrywide safety communication issued by the FDA last summer. As for system pricing in North America, Q1 saw pricing largely in line with fourth-quarter levels, a modest success considering recent industry headwinds. We continue to make progress implementing more robust pricing discipline in North America. We are well aware of the work in front of us as pricing has a significant impact on our gross margins.

Lastly, we saw promising growth in key international markets. As you recall, in the second half of 2018, we implemented plans to improve our positioning in select countries. This plan included personnel upgrades, as well as the launch of truSculpt iD in areas like Europe and Australia. While it's still early, we saw strong demand for truSculpt iD, as well as key legacy systems, including enlighten SR and xeo.

Regarding the company's ongoing operational improvement projects, we continue to make solid progress across the board. I would call out our recent improvements in inventory management as we have seen our inventory turns improve year over year. In addition, we have established two U.S.-based distribution centers to improve response in this and lower our overall transportation costs. I would now like to turn the call over to Sandy Gardiner, our chief financial officer.

Sandra Gardiner -- Chief Financial Officer

Thanks, Jason. First-quarter revenue was $36 million up 6% from the same period a year ago. U.S. revenue in the first quarter was down 3% year over year.

We continue to see strong demand for our truSculpt iD and Secret RF systems. However, this was offset by diminished contribution from Juliet, as well as legacy system pricing headwinds. International revenue grew 20% compared to the first-quarter 2018 as Japan and Australia drove significant growth in the quarter. Regarding channel mix, our direct sales efforts accounted for 59% of the first-quarter international product revenue, compared to 46% in the year-ago period.

The truSculpt product portfolio remains strong and generated 29% worldwide revenue growth in the first-quarter 2019. We're pleased to have sold over a 1,000 truSculpt systems to date, and our focus continues to be increasing consumable revenue as a percent of total revenue. Recurring revenue, defined as consumable, service and skincare revenue, grew 28% over the first-quarter 2018 and accounted for approximately 24% of the total first-quarter revenue at $8.8 million. Consumable revenue growth in 2019 has shown positive momentum demonstrating solid system utilization.

Consumable revenue grew over 150% compared to the first quarter of 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 first-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 49% in the first quarter or approximately 235 basis points lower than the year-ago period. The year-over-year decline mainly reflects compression of average selling prices across our legacy business as discussed on our fourth-quarter call. First-quarter 2019 ASPs are largely in line with fourth-quarter 2018 levels.

Due to revenue seasonality, first-quarter gross margins are historically the lowest of the year. We expect gross margins to improve throughout 2019 as revenue momentum builds and a more rigorous pricing strategy takes hold. We remain on track with our 2019 gross margin goals. Moving on to non-GAAP sales and marketing expense as a percent of revenue was 40% in the first quarter, compared to 35% of revenue in the first-quarter 2018.

This reflects the increase in commercial leadership and practice development managers from a year ago, as well as expansion of the North American regional sales leadership in the first quarter of 2019. Demonstration and promotional activities also increased year over year. Non-GAAP research and development expenses were $3.4 million in the each of the first quarter of 2019 and 2018 or 10% 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 remained largely flat at approximately $4.5 million in the first quarter of 2019 as compared to the same period of 2018 and reflects our focus on prudent investment in the scalability of our operations. General and administrative expense was 13% of revenue in each period. In addition to our customary noncash stock-based compensation and depreciation and amortization expenses, non-GAAP general and administrative expense also excludes CRM and ERP implementation costs, as well as a onetime charge at $614,000 in the first quarter related to the resignation of our former CEO in early January. Non-GAAP operating loss was $4.7 million in the quarter, compared to a loss of $2.4 million in the same period of 2018.

Non-GAAP net loss for the first quarter of 2019 was approximately $4.9 million or $0.35 per fully diluted share. Fully diluted weighted average shares outstanding used to compute non-GAAP EPS was 14 million shares. As mentioned on our fourth-quarter call, we have a full valuation allowance to offset our tax provision in future periods. Turning to the balance sheet and cash flow, net accounts receivable at the end of the first quarter of 2019 were $19.1 million, and our DSOs decreased by four days to 48 days from the prior-year quarter.

Inventories were $26.7 million at March 31, 2019, representing a decrease of approximately $4.3 million from the prior-year period or an inventory turns ratio of 2.8 times versus 2.2 times in the first quarter of 2018. As we continue to realize our investments and operational improvements, we also expect to continuous improvement in inventory turns. Cash used by operations was $7.9 million for the first quarter, compared to $10 million in the first quarter of 2018, reflecting enhanced credit and collection policies, as well as improved supply chain processes. Our cash position remains strong.

And as of March 31, 2019, we held cash and investments of $27.1 million with no debt and working capital of $30.9 million. Turning to our 2019 guidance, we reiterate our 2019 financial guidance. Total revenue will be in the range of $165 million to $175 million representing a 2% to 8% increase over 2018. We anticipate full-year 2019 gross margins to improve over the full-year non-GAAP level in 2018 as we continue to make progress with our overall pricing strategy and see further 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. I'm pleased with many aspects of our first-quarter results. We are beginning to see positive signs from the initiatives we implemented in 2018. We have a motivated commercial team with a focus on growth and profitability, we had a successful launch of our excel V+ vascular laser, and we continue to gain significant market share in the $1 billion body contouring market.

Recurring revenue's a priority. We're hyper-focused on driving adoption of systems with procedure-related revenue as our goal is for this to become a more meaningful part of the company's overall business. At Cutera, we believe in shaping the future of global aesthetics through the uncompromising pursuit of innovation. We will accomplish this by empowering our employees to challenge the status quo and creating an environment for them to flourish.

We're confident this strategy will enable us to achieve our long-term operational and financial objectives. And with that, I would now like to open up the call for questions. Operator?

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Chris Cooley with Stephens.

Chris Cooley -- Stephens Inc. -- Analyst

Maybe just two from me to start, and then I'll hop back in the queue. A lot of ground to cover here, and clearly, you guys made demonstrable progress during the 1Q when we look at operations. But maybe just to start and then I'll follow-up after this. When we think about the 1Q results, could you help us maybe parse out a little bit more the impact to the domestic sales and then obviously to margin from both pricing and the loss of Juliet in the quarter? Just trying to get to kind of an apples-to-apples type comparison there, both from a growth and a margin perspective? And then I've got one quick follow-up.

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

Yes. Chris, thanks for the question. Couple things. We're continuing to implement better pricing discipline across the North American portfolio and across the new leadership team.

And I wouldn't say that I was perfect with that yet. We're working on it, and we've got our heads down, and we're implementing processes in order to make it a longer, more scalable and more sustainable process. I think that's one of the influences that we had. Secondly, we were relatively flat in North America, and we had robust international sales, we had 20% growth internationally, and so we're getting in lower ASP once we go outside of the United States, and I think that that probably provided a little bit of that as well.

Sandy, anything you want to --

Sandra Gardiner -- Chief Financial Officer

Yes. And I would just say, obviously, the first quarter is the lowest revenue quarter. So as we build momentum throughout the year in the revenue and, as well as implement these robust pricing strategy as Jason is talking about, that will improve our gross margin as we go throughout the year.

Chris Cooley -- Stephens Inc. -- Analyst

Understood. Appreciate that additional color. And then maybe a bit premature at this point, but again, making progress and if I think back to the Investor Day, back in October of last year, you were thinking about longer term getting to closer to -- just take the top line off the table for now, but margin structure, gross margins in the 60% and op margins in excess of 15%. Clearly, not trying to state that's the bogie for this year, obviously not at all for next.

But do you think just with the type of progress that you're seeing, with the savings that are being realized through the P&L in the organization and the industry backdrop there, from a long-term perspective, if those objectives are still semi-realistic or has anything changed structurally that would maybe preclude you from getting to that type of a margin profile in the longer run, not again trying to say that it's this year or next?

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

Right. No, I think we're still focused that way. Looking at this year, Q1's always is our toughest quarter from the revenue perspective and that picks up as we go through the balance of the year. And that's going to give us more runway in terms of our pricing rigor across the portfolio as well.

I also think that more time in the saddle for our commercial team, we have a brand-new management team as we talked about, we have many new sales reps and giving them more time in the saddle will also help from our pricing strategy. But then when you look operationally, when you go back to our meeting in October, we talked about several key things around improving the facility layout, looking at optimizing inventory, look to contract manufacturing opportunities and regional distribution. I think that that's still the plan. It's just some of these things take a little bit of time in order to gain momentum, but we're certainly haven't lost sight of that.

Chris Cooley -- Stephens Inc. -- Analyst

Understood. And if I could just maybe just one clarification on Juliet. Any update there in regards to just the U.S. market thoughts there on time to returning that offering here to the states? Then I'll get back to the queue.

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

Yes. Regarding the women's health device, we have called Juliet, we still really like this space. We obviously have encountered pretty robust headwinds as a result of the letter from the FDA. Although we weren't mentioned, we still have received some of the pressure there.

However, we are working very closely with the manufacturer of this device because we really like this space, and I think that ultimately, it will come down to much fewer players, and so believe it or not, we actually have a pre-submeeting with the FDA next month, middle of the month, and we should have a better idea or a better line of sight in terms of what that looks like long term.

Operator

Our next question comes from Jon Block with Stifel.

Jon Block -- Stifel Financial Corp. -- Analyst

And maybe two or three from me. So Jason, just some specific numbers that I'm looking for, I guess. Where are you with the North American sales force? So specifically in the number of reps as the turnover stabilized, and what are the hiring plans for the balance of the year being 2019?

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

All right. let me walk you through the structure a little bit. So first of all, let me address turnover first. We didn't experience any unnormal turnover in Q1.

I think hopefully that has stabilized, and I'm feeling good about it. We've got three new directors managing the North American sales force, along with five new sales managers that are doing a great job. These are some of our top performers, historically, that have moved into positions to take on more responsibility and to -- I think they've really done a great job in accelerating their progress and getting comfortable in those positions. In terms of the infrastructure below that, from a capital perspective, we're hovering in the 70s in terms of capital equipment reps and around 12 practice development managers.

This is the group that goes out and helps the facilities whether it's a physician or a spot whoever with their marketing initiatives in order to drive patients into the funnel. So I think when we look at where we're going to move, we'll likely be looking to add another regional manager at some point in time, so we'll go from five to six. This is up from four from the year prior. And then when we look at adding heads, we'll likely be looking at adding people more in the PDM space or at the territory manager level, which from a return on investment should be a really positive thing for us through the balance of the year.

Jon Block -- Stifel Financial Corp. -- Analyst

OK. Great. That's very helpful color. Maybe just to pivot over the noninvasive body contouring market, certainly, tough numbers from CoolSculpting and sculpture.

You guys seem to fair much, much better, and you called out 29% growth for truSculpt. Can you just talk to the overall noninvasive body contouring market? And what you are seeing out there on both the capital and consumables? And are you able to derive close to full list price for truSculpt despite what looks like some pricing pressures just from the other competitors?

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

That's a good question. I would tell you that the space is fiercely competitive. I think we've done a pretty good job of sustaining price. We've not been able to charge full list price, but I would say, we're outpricing the competition by a good 20% to 30%.

One of the challenges that we have is that we're implementing a premium pricing strategy. In order to do that, we need to continue to make sure that we innovate and have products that command that. So with this technology, I feel like we do in such that it's painless, it's a 15-minute procedure, it's hands-free, it's anatomically agnostic, and it's best-in-class in terms of lipolysis. So in that regard, I think there is a lot of momentum around this technology and a lot of enthusiasm around it as based on those unique features as compared to the competition, but it's a challenging place for us to be, and I'm really proud of what the commercial team has done to not only move these systems into the market, but also to hold the prices that we have because we're up against some pretty stiff competition, in some cases competition offering buy one get one frees.

And so I think we're doing a pretty good job of holding the line based on the unique features and benefits of our technology.

Jon Block -- Stifel Financial Corp. -- Analyst

OK. Great. And one more maybe just sort of a clarification. Sandy, on the gross margin, so down roughly 360 bps sequentially, but I want to make sure I've got this right.

So it's stable pricing on a quarter over quarter or sequential basis, so arguably all that sequential gross margin pressure is just a fact now you've got the lower revenue base, is that correct?

Sandra Gardiner -- Chief Financial Officer

Yes. You're exactly correct. We were able to hold largely all the ASPs from Q4 to Q1. It's the year-over-year ASP legacy of pricing that affected the gross margins.

Jon Block -- Stifel Financial Corp. -- Analyst

OK. And the first release read a little bit differently, but per your comments, you're still expecting non-GAAP gross margins to be up 19% versus 18%? And if true, you think you can get these 54% to 55% on average for the next nine months versus the 49% and change in 1Q?

Sandra Gardiner -- Chief Financial Officer

Yes. I mean, it's -- quite frankly, we have one quarter behind us and it's prudent for us to evaluate everything come midyear. But as this point in time, what we see with our pricing, the strategy that we have going in and some of our other operational improvements and things that are starting to read through, at this point in time, yes, we're reiterating that that our non-GAAP gross margin we will improve over that versus 2018.

Operator

[Operator instructions] There are no further questions. At this time, I'd like to turn the call back to Jason Richey for closing comments.

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

Very well. Everybody, we've got one quarter behind us now. I can tell you that as a team we've got our heads down, and we're really focused on delivering on our initiatives that we outlined at the beginning of the year. With that being said, I'd like to thank you all for participating in the call today and for your continued interest in Cutera, and we look forward to updating you throughout the year.

Take care. Bye.

Operator

[Operator signoff]

Duration: 26 minutes

Call participants:

Matt Scalo -- Head of Investor Relations and Corporate Development

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

Sandra Gardiner -- Chief Financial Officer

Chris Cooley -- Stephens Inc. -- Analyst

Jon Block -- Stifel Financial Corp. -- Analyst

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