Cutera (CUTR) Q2 2019 Earnings Call Transcript

Cutera (CUTR -0.51%)
Q2 2019 Earnings Call
Aug 08, 2019, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Cutera, Inc. second-quarter 2019 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.

Matthew Scalo, vice president, investor relations, and corporate development. Thank you. You may begin.

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

Thanks, operator, and welcome to Cutera's second-quarter 2019 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 executive officer, David Mowry; President 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 businesses, 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 Securities and Exchange Commission 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 President, Jason Richey.

Jason Richey -- President

Thanks, Matt. Good afternoon, and thank you for joining us today. Sandy and I will review second-quarter results and 2019 financial guidance, and then ask our recently appointed CEO Dave Mowry, to share his initial observations since joining the company in July. Cutera's financial performance year-to-date reflects our focus on delivering results, as well as, the personal commitment and dedication from individual team members to execute on our objectives.

Working together, we've made progress against our commercial and operational initiatives, and I'm encouraged by the results we are able to share with you today. For the second quarter, total revenue grew 12% over prior year, driven by three key factors. First, truSculpt, Cutera's unique body sculpting portfolio of products, continues to generate strong demand. Total truSculpt revenue, including truSculpt 3D and iD, as well as, contributions from the limited commercial release of our new muscle sculpting system, truSculpt flex, grew 44% over second quarter of 2018.

We're encouraged by physician interest in truSculpt flex, as well as the early results experienced by their patients. The truSculpt flex complements truSculpt iD's fat-reduction capabilities, and we believe these two systems in combination provide the clinician with the full suite of body sculpting capabilities that patients seek. truSculpt flex's customizable treatment modes and large coverage area, up to 2 times more than the competition, enhance the physician's ability to tone and sculpt the patient's target muscle group. In addition to strong system sales, second-quarter truSculpt procedure-related revenue grew triple digits over prior year, driven by the expanding installed base, as well as, increased system utilization.

Although it's still early, we're beginning to see the value of our investment in our product development management team. The second factor driving our top line growth was the renewed focus of our North American sales leadership team. We realized system pricing improvements in North America on legacy system products, including enlighten III. Additionally, legacy system pricing was less of a headwind this quarter.

These positive results reflect our team's strategic approach to competitive sales opportunities and improved pricing discipline. The third key factor energizing revenue in second-quarter 2019 was growth delivered by our international commercial team. As you may recall, we implemented specific plans to improve our positioning within key international markets during the second half of 2018. These plans included select upgrades to critical personnel aligned with the product introduction of truSculpt iD into the European and Asia Pacific regions.

Our second-quarter 2019 international results are beginning to demonstrate the value of these investments with strong performances in Japan, Europe and Australia throughout the quarter. While we are pleased with the results from our efforts thus far, we will continue to monitor each key market and make additional investments and adjustments to deliver on the promise of these important and expanding markets. To provide additional details on the quarter, as well as, guidance for the full year, I would like to turn the call over to Sandy Gardiner, our chief financial officer.

Sandy Gardiner -- Chief Financial Officer

Thank you, Jason. Second quarter revenue was $47.8 million, up 12% from the same period a year ago and constituting the highest quarterly revenue in the company's history despite this being only the second quarter of the year. International revenue grew 36% compared to the second-quarter 2018. As Jason mentioned earlier, Japan, Europe and Australia drove significant growth in the quarter.

Regarding channel mix, our direct sales efforts accounted for 45% of second-quarter international product revenue compared to 35% in the year ago period. U.S. revenue in the second quarter was flat year over year as continued demand for our truSculpt body sculpting portfolio, and Secret RF microneedling system was offset by diminished contribution from Juliet, our women's health system, as we have discussed over the past year. The truSculpt product portfolio remained strong and generated 44% worldwide revenue growth in the second-quarter 2019.

We continue to see strong demand for the truSculpt iD system and executed a limited launch of our truSculpt flex muscle sculpting system in June. Both systems generate procedure-related revenue consistent with our focus on increasing recurring revenue as a percent of total revenue. In the second quarter, recurring revenue, defined as consumable, service and skincare revenue, grew 41% over second-quarter 2018 and accounted for approximately 21% of total second-quarter revenue, up from 17% in the year ago period. Recurring revenue growth has shown positive momentum year-to-date with the continued expansion of installed systems with a per-procedure revenue stream and the utilization of those systems, as well as, our past investments in our Practice Development management and global service teams.

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 on the year-on-year changes in our second-quarter GAAP and non-GAAP results. Non-GAAP gross margin was 55% in the second quarter or approximately 190 basis points higher than the year ago period. The expansion in gross margin mainly reflects the combination of solid total revenue growth, product and channel mix, as well as, an incremental improvement in select system selling prices, enlighten III, for example.

We remain on track with our 2019 gross margin goals. Moving on to operating expenses. Non-GAAP sales and marketing expense as a percent of revenue was 32% in the second quarter compared to 33% of revenue in the second quarter of 2018, primarily as a result of 12% revenue growth from a year ago. On a nominal dollar basis, second quarter sales and marketing spend increased approximately $800,000 over the year ago period due to the overall investment in commercial leadership and practice development managers, as well as, the expansion of the North American regional sales leadership in the first quarter of 2019.

Non-GAAP research and development expenses were $2.9 million in the second quarter of 2019, down approximately $900,000 from the same period in 2018 due to timing of development activities in support of new product introductions into the market. We remain committed to investing in engineering and clinical research. Non-GAAP general and administrative expense was essentially flat at $4 million in the second quarter of 2019 compared to the same period in 2018. We remain focused on prudent investment in the scalability of our operations.

In addition to customary stock-based compensation, depreciation and amortization expenses, non-GAAP expense also excludes CRM and ERP implementation costs. Non-GAAP operating income was $4.4 million in the quarter compared to $800,000 in the same period in 2018. Non-GAAP net income for the second quarter of 2019 was approximately $4.4 million or $0.31 per fully diluted share. Fully diluted weighted average shares outstanding used to compute non-GAAP EPS was 14.4 million shares.

As mentioned on previous calls, we have a full valuation allowance to offset our tax provision in future periods. Turning to the balance sheet and cash flow. Net accounts receivables at the end of the second quarter of 2019 were $24.9 million and our DSO decreased by 1 day to 47 days from the first quarter of 2019. Inventories were $26.9 million at June 30, 2019, representing a decrease of approximately $3 million from the prior year period or an inventory turns ratio of 3.3 times versus 2.7 times in the second quarter of 2018.

Cash generated by operations was $4 million for the second quarter compared to $3.5 million in the second quarter of 2018, reflecting enhanced credit and collection policies, as well as, improved supply chain processes from a year ago. Our cash position remained strong, and as of June 30, 2019, we held cash and investments of approximately $32 million with no debt and working capital of $35 million. Turning to our 2019 guidance. While we are pleased with our performance in the second quarter, we remain focused on executing our commercial and operational initiatives.

We believe our 2019 financial guidance reflects prudent assumptions as to our progress against these initiatives. Therefore, 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 stabilize our legacy business 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 our new CEO, David Mowry, for his initial observations since joining Cutera last month.

David Mowry -- Chief Executive Officer

Thank you, Sandy. It's a pleasure to speak with all of you today. Let me start by congratulating both Jason and Sandy, as well as, the entire Cutera team for delivering strong second-quarter financial results. I would also like to thank the team for their warm welcome, as well as, their support in effectively onboarding me over the last 30 days.

I joined Cutera for many of the same reasons our shareholders have chosen to invest in Cutera. In addition to the rich history and strong brand identity associated with Cutera, this is a business with both the capability and capacity to shape the future of the global aesthetics market while delivering excellent shareholder value. At Cutera, we have a unique balance combining a laser focus on the aesthetics market with the appropriate scale to design, develop and distribute a broad portfolio of solutions addressing the breadth of conditions in these markets. While I am new to the company in this market segment and will need some time to come up to speed, I'm encouraged by many of my early findings.

I look forward to providing more details as we evolve our strategy, advance the critical initiatives and execute our near-term plans for the second half of 2019. With that, I'd like to now turn the call over for questions. Operator?

Questions & Answers:

Operator

[Operator instructions] Our first question is coming from Chris Cooley of Stephens. Please go ahead.

Chris Cooley -- Stephens Inc. -- Analyst

Questions, and David, welcome to Cutera. Just maybe two quick ones for me, and I'll get back in the queue. First, maybe for Sandy. Impressive continuation of the growth there, but I'd really like to see the growth we saw there in the consumables and the recurring element -- component there.

Talk to us a little bit about maybe what that contributed to margin lift in the quarter, and how you continue to think about that playing out. And then additionally, I would love to hear some additional color regarding the rollout of truSculpt portfolio. Still early days here now, but as we think about the body contouring aspects, just kind of seeing what type of accounts you're seeing from an adoption perspective early on and how, if at all, this is changing utilization? Thanks so much.

Sandy Gardiner -- Chief Financial Officer

Thanks, Chris. So I will address the gross margin question that you have. So as you know, there are several elements that go into the gross margin component. So I think, first, certainly, the pricing discipline that we talked.

We saw less of the headwinds and that certainly contributed. Additionally, the -- both the volume and the mix contributed to the gross margin accretion because we were also able to recognize some additional manufacturing absorption that comes with that. And then additionally, and lastly, really all elements of the recurring revenue. So we certainly have the consumable revenue that we have been very pleased with on a year over year.

It's a second consecutive quarter where we've had 150% growth in that area, but additionally, both skincare and service. So all elements of the recurring revenue contributed. So they all really came together to provide that gross margin accretion, and that's why we feel very confident that we remain on track for our full-year guidance.

Jason Richey -- President

I'll go ahead and take the question, Chris, on flex. This is Jason. I still like the body sculpting space. I still think that there's a lot of runway in this space.

And I'm excited to introduce truSculpt flex to the market because, as we talked about earlier in the year, we were looking at innovating around our traditional -- our legacy portfolio and -- but also trying to find ways to innovate around verticals where we were interested in. The body sculpting space is an area where we still have a lot of interest in. So I still think there's a nice runway there. I think truSculpt flex gives us the ability to penetrate some competitive accounts.

I think it gives us runway to expand with our current ID users. And the way that we'll sort of track that over the course of the time is how much market share we're able to gain with this beefing up of one of the verticals that we feel like we have quite a bit of movement in. So what we did in Q2 was a limited commercial release. The idea there is to get this out in the hands of some of our key opinion leaders, get some final feedback before we go into the production phase, and then training the sales force and do a full commercial release this quarter.

So that's sort of where we are at this point, but I do want to reiterate the fact that we're seeing some positive momentum in the body sculpting space, and I'm really excited to be able to beef up that vertical with our muscle stimulation device.

David Mowry -- Chief Executive Officer

Yeah. Chris, this is Dave. Just to close it, I've only been here 30 days, but I think this is an exciting space for us. I just want to make sure that everyone understands that we are still kind of in that limited commercial release, and we're gathering insight.

And while we're encouraged by it, we have some work to do still in front of us as we launch this and make sure that we're doing it in a thoughtful and responsible manner and making sure that we're building the infrastructure needed to support this on a long-term basis. So I just wanted to make sure that you realize we're in the early innings, although we're very encouraged.

Chris Cooley -- Stephens Inc. -- Analyst

Understood. Congrats on the results.

David Mowry -- Chief Executive Officer

Thank you.

Operator

[Operator instructions] Our next question is coming from Jon Block of Stifel. Please go ahead.

Unknown speaker

Hi, this is Trevor on for Jon. Thanks for the question. So first one, you had really strong revenue results this quarter, and I'm just curious what's kind of keeping you from raising guidance at this point. Looking historically, second half sales has been a little bit heavier than the first half.

I think that the implication from the first half results so far would point to something a little bit higher than what you're guiding so far.

David Mowry -- Chief Executive Officer

Hey, Trevor, this is Dave, and thanks for the question. Look, I think you're asking the obvious question, but, frankly, I've been here for 30 days, and we need to get comfortable with what we're going to do and how we're going to get there. I think everyone on this call and investors know the story well enough to know that we've got to build some credibility and we've got to be prudent in how we provide guidance. And I think until I get myself comfortable, we want to be very thoughtful of how we do that.

That being said, while there's a lot of tailwinds from the first half of the year, there's still a lot of things that we have to challenge ourselves to compete effectively and execute on in the back half of the year. Our ability to do the commercial launch -- the limited commercial launch on tru flex is great, but the uptick on that is not going to be immediate because we're still gathering some feedback from the field and understanding how to better position that product in the long term. That said, I think we have opportunities to lever and get ahead of where we've been, but we've got to execute to make sure that those happen. And frankly, I think we need some time to build that credibility, and I need to get comfortable with it before we're willing to raise that guidance.

Unknown speaker

OK. Great. And maybe just another one on truSculpt, specifically. So how is flex being positioned in the marketplace? Are you going to be bundling it with truSculpt iD? Or is it going to be sold separately?

Jason Richey -- President

We have the opportunity to do both, really, and I think one of the nice things about having flex is that, again, it beefs up the portfolio and being able to go into the aesthetics base with the portfolio as comprehensive as ours, I think, puts us in a good spot. We have an opportunity with new users to sell a package deal around iD and flex, which I think really drives the greatest patient result. But we also have a nice installed base of 3D and iD users that we'll certainly be visiting with to gain their insight and, hopefully, encourage them to incorporate that as part of their portfolio.

Unknown speaker

Great. Thank you.

Jason Richey -- President

OK.

Operator

[Operator instructions] I'm showing no additional questions in queue at this time. I would like to turn it back to management for any additional or closing comments.

David Mowry -- Chief Executive Officer

Thanks, operator. Really appreciate that. And I'd like to thank everyone who participated on the call today for your continued interest in Cutera. We have plenty of work in front of us, and we look forward to providing you with updates as we move through the back half of this year.

So thank you very much for your interest. We look forward to those conversations. Thank you. Operator?

Operator

[Operator signoff]

Duration: 30 minutes

Call participants:

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

Jason Richey -- President

Sandy Gardiner -- Chief Financial Officer

David Mowry -- Chief Executive Officer

Chris Cooley -- Stephens Inc. -- Analyst

Unknown speaker

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