Q3 2019 Earnings Call

Good afternoon, and welcome to the Kid Terra third quarter 2019 earnings Conference call.

Yes, that's albeit listen only mode should you need assistance. Please note conference specialist I pressing the star Keith followed by zero.

After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then too. Please note. This event is being recorded.

I would now like to turn the conference over to Moscow, Vice President Investor Relations and corporate development.

Scott. Please go ahead.

Thanks, Operator, welcome to get terrorists third quarter 2019 earnings Conference call. My name is Matt scholarships, you Terrace, Vice President of Investor Relations and corporate development and on the call today, we have Dave Mallory Jos Chief Executive Officer, Jason Richey, Chairman President after the prepared remarks, there will be a question.

And the answer session.

A discussion today includes forward looking statements. These forward looking statements reflect managements current forecast where 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.

Its nature dynamics and subject to change forward looking statements include among others statements regarding financial guidance plans to introduce new products regulatory approvals and productivity improvements, but what's it may identify forward looking statements. We encourage you to refer to the safe Harbor statement the old press release.

Earlier today.

Forward looking statements are subject to risks and uncertainties, including those risk factors described in the section entitled risk factors.

Our Form 10-K as filed with the FCC and updated in our Form 10-Q subsequently filed.

There are also cautions you not to place undue reliance on forward looking statements, which speak only as of the date. They're made you terror 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.

So 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 Q terrorists ongoing results of operations, particularly when comparing underlying results from.

Period to period, please refer to the reconciliation from GAAP to non-GAAP measures.

Earnings release, these non-GAAP financial measures should be considered along with but not as alternatives to the operating performance measures prescribed by gap with that I would like to turn the call overtures CEO Dave Mauer.

Thank you Matt Good afternoon, and thank you for joining us today as Matt mentioned I'm joined by Jason will provide additional details on the company's operational performance during the third quarter before I review our financial performance.

I would like to begin the call by congratulating the entire cutera team for delivering another quarter of strong results, reflecting ongoing execution against our key initiatives.

Since joining the company four months ago, I spent a considerable amount of time listening to and learning from various internal and external stakeholders, including our customers our employees and our investors.

This exercise has improved my understanding of the unmet needs within the energy based Stevick space and provided me with significant insight into the many opportunities to grow and differentiate you Terra in this dynamic market.

I would like to share some initial observations.

First as I previously shared I'm impressed by the depth of talent the team's commitment to the energy base to statics market and the collective passion to serve our customers here acute care.

Second we have an amazing cadre of respected and influential clinicians across multiple specialties, who are available and excited to provide insight and guidance to our business.

Third the remains a great opportunity to differentiate ourselves within the industry by providing targeted innovative and evidence based technologies as well as superior support and service.

We plan to lean on these strengths to establish get Europe as a leader within the energy based to statics market.

Well I'm confident in our ability to deliver long term shareholder value I also recognize the immediate tasks that lie ahead of our company.

We must remain focused on executing our current objectives, which will fuel our commercial growth and improve the overall operational efficiency of the business.

These vital few initiatives include.

Driving continued performance across our body sculpting portfolio through the introduction of innovative products like true scope flex that increase our market share as well as expand the existing customer base.

Leveraging bruises commercial team investments in key regions to deliver sustained above market international growth and then applying these learnings to other geographies.

Increasing cute here as recurring revenue through the expansion over installed base of platforms. The generate per procedure revenue well also directly engaging in supporting our customers drive increased patient flow on previously installed systems.

And reducing our material cost and supply chain expenses to enable gross margin expansion and improve profitability over the longer term.

Well none of these objectives will deliver immediate step function change to our performance our execution against these vital few initiatives will continued to deliver incremental albeit lumpy at times improvement over the next 18 to 24 months to both our top and bottom line performance.

In light of these ongoing effort like increased confidence in sustainability of our current performance and the cumulative impact of previous execution.

I used to notice that get your is raising its 2019 financial guidance.

We expect to deliver revenues in the range of $177 million to $179 million for full year 2019, compared to our previous guidance of 165 to 175 million.

I will provide greater detail later in the call, but I believe our new guidance accurately reflect reflects the organizations momentum and sets the proper tone as we begin planning for 2020 and beyond.

With that I'd like to turn the call over to our President Jason Ritchie.

Thanks, Dave I'd like to start off by expressing how proud I am of our entire team for delivering another quarter of above market growth.

Third quarter revenue grew 14% over prior year and was driven by the following factors.

First we continue to gain share in the growing 1 billion dollar body sculpting market.

Total true scope revenue, which includes our fat reduction systems, Trusculpt, three d. and I'd as well as our new muscle scoping system truthful flux grew 43% over third quarter of 2018.

The formal launch of the Trusculpt flux in North America in the third quarter was a great start for what we believed to be a truly differentiated platform.

Overall customer feedback has been extremely positive in many cases uses are now treating patients with a combination treatment using tricycle I'd first followed by Trusculpt flex with very encouraging early results.

These two systems in combination provides a coalition with an unmatched suite of body sculpting capabilities.

Second Crisco procedure related revenue grew triple digits over prior year third quarter as Dave mentioned earlier, we're focused on increasing our recurring revenue streams.

One of our objective is to launch systems that provide access to procedure related revenues like our true scope family of products and secret RF, which will advances towards this goal.

We estimate that approximately 18% of our current active installed base generates consumable revenues.

From 13% at the ended 2018, our commercial efforts in the third quarter further accelerated this installed base objective with over 50% of system sold in the quarter, providing access to longer term recurring revenue in the form of consumables.

Third factors, our North American sales leadership team, we continue to see significant progress in improved continuity is this team matures.

We now have the right leaders in a scalable structure in place and our financial performance. This quarter reflects these improvements.

As mentioned on our second quarter earnings call. There continue to see pricing stability across legacy products from this new leadership team, helping to deliver improved gross margins.

In addition to our investment in the sales leadership team. We've made investments in building out a practice development team, whose task is to partner with customers to ensure the early success and to assist with sustained improvement of patient flow.

These field based practice development managers are an essential component to our strategy of driving recurring procedure related revenues and while it's still early we're pleased with returns on this investment thus far.

A final factor I'd like to outline is our international commercial team, which has demonstrated the value of effective restructuring efforts within specific regions, we had targeted.

Third quarter results were especially strong in Japan, where a bifurcated salesforce continues to drive skin care revenues without distracting, our capital equipment and energy based acetic business.

We've taken steps to apply some of our learnings from Japan, and Australia, New Zealand to our European and Middle East regions shifting our direct and distributor management structures and strategies.

We remain bullish on our international opportunities as we continue to improve our global commercial team and layer in new products, such as true spoke flex, which we expect to launch during the first half of 2020.

We're also pleased with the expansion of our gross margins during the quarter, which improved to 57%.

This result reflects a combination of product mix within the systems revenue as well as an increasing percentage of revenue coming from our consumable revenue streams.

Additionally, we benefited by favorable geographic mix as a north American team continues to gain momentum and our direct international sales contributed at a higher percentage over prior periods.

In addition to the benefit from product and geographic mix. That's a minor contributions in cost improvement for our supply chain team in the period, making some progress on our key operational improvement initiatives.

Well, we're pleased with our efforts to date, we have a few more quarters before we'll see the full impact of our cost reduction efforts.

And now to provide additional details on the company's financials and outline or increased guidance I'd like to turn the call back over to Dave.

Thanks, Jason as stated earlier third quarter revenue was 46.1 million up 14% from the same period a year ago.

U.S. revenue in the third quarter grew 9% year over year, driven by continued share gains of our trusculpt body sculpting portfolio.

This portfolio now includes the Trusculpt flex, which moved into full commercial launch for North America in the third quarter.

In addition, we source solid performance from the secret RF micro needling system as well as our upgraded vascular laser system. The XLV plus launched earlier this year.

The truth scope portfolio remains strong and generated 43% worldwide revenue growth in the third quarter 2019.

In the third quarter recurring revenue defined as consumable service and skin care revenue grew 51% over third quarter 2018, and accounted for approximately 24% of total third quarter revenue up from 18% 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.

International revenue grew 21% compared to the third quarter 2018, as mentioned earlier, Japan, and Australia drove significant growth in the quarter regarding channel mix direct sales effort accounted for 55% of third quarter international product revenue compared to 45% in the second quarter and.

44% in the year ago period.

As I move into the discussion on our gross margin in operating expense 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 third quarter, GAAP and non-GAAP results.

non-GAAP gross margin was 58% in the third quarter or approximately 350 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 incremental cost improvements within supply chain and the increased stability in select system selling prices.

Moving on to operating expenses, non-GAAP sales and marketing expense as a percentage of revenue was 33% in the third quarter compared to the same 33% of revenue in the third quarter of 2018 on a nominal dollar basis third quarter sales and marketing spend increased approximately $2 million over the year ago.

Period, reflecting some of the investments in the leadership structure and practice development managers executed in the first quarter 2019, as well as the increased variable spend associated with the 14% year over year revenue growth.

non-GAAP research and development expenses were 3.2 million in the third quarter of 29 team.

R&D expenses in this business can be a bit lumpy due to the timing a certain development activities clinical studies and new product introductions. The company remains committed to investing in engineering and clinical research at the current rate.

non-GAAP general and administrative expense increased to 5.9 million in third quarter of 2019 compared to 4.4 million in the same period of 2018.

Contributors to the sequential change in DNA expense in the third quarter include increased personnel related expenses.

Including recruitment costs legal fees credit card fees and allowances for doubtful accounts due to higher revenue leverage levels from a year ago.

In addition to customary stock based compensation depreciation and amortization expenses non-GAAP expense also excludes our CRM and ERP implementation costs.

non-GAAP operating income was 2.4 million in the quarter compared to 1.4 million in the same period of 2018.

non-GAAP net income for the third quarter of 2019 was approximately 2.2 million or 15 cents per fully diluted share.

Fully diluted weighted average shares outstanding used to compute non-GAAP EPS was 14.8 million shares as mentioned on previous calls we have a full valuation allowance to offset our tax provisions in future periods.

Turning to the balance sheet and cash flow net accounts receivable at the end of third quarter 2019 were 323.2 million and our Dsos decreased by one day to 46 days from second quarter 2019.

Inventories were $34 million at September Thirtyth, 2019, representing an increase of approximately 2.7 million.

From the prior year period, the key driver of our inventory change is related to the increased levels of finished good.

This reflects our efforts to get out in front of demand for the recently launched new products to level load our production plants in advance of our historical strongest demand period.

And the activation of the additional regional distribution center, enabling sustained lower freight expense.

Cash used in our operating activities was 2.3 million in the third quarter of 2019 compared to 1.6 million in third quarter of 2018, reflecting increased inventory levels, partially offset by streamline supply chain processes and enhanced credit and collections policies.

Our cash position remained strong and as of September Thirtyth 2019, we held cash in investments of approximately 29.3 million with no debt and with working capital of 35.9 million.

Now turning to our 2019 guidance.

We remain focused on continuing to execute our commercial and operational initiatives, which are reflected in our third quarter performance considering our overall performance year to date, we are raising our 2019 financial guidance to reflect our continued progress against these initiatives total revenue will be in the range of 177.

To 179 million or growth of approximately 9% to 10% or 2018.

We anticipate full year non-GAAP 2019, gross margins to improve over full year non-GAAP level in 2018, as we stabilize our legacy business and begin to see the early benefits of the infrastructure investments.

Lastly, 2019, adjusted EBITDA will now be estimated in the range of 3.5 million to 4.5 million up from prior guidance of $2 million to $4 million.

I would be remiss in not reiterating my many thanks to the INTECH your tier a team for their efforts and commitment to delivering results that were reflected in these third quarter performance numbers. It was truly a team effort.

Before I open the call to your questions I'd like to take a minute to thanks, Sandy gardener, our CFO for her leadership and support over my first quarter with two Tara.

As many of you know Sandy has decided to move on for personal reasons and we respect her decision.

During her tenure at Cutera Sandy helped deliver improvements across many internal processes appointed CFO in December of 2017, Sandy's focus has been on strengthening the organization and enhancing our processes.

I am thankful for the period of overlap that we did share and wish to thank her for her contributions and wish are great success in future endeavors.

And now let's open the call for questions operator.

Thank you we will now begin the question and answer session.

Last question you May Press Star then one on your Touchtone phone.

You're using a speakerphone please pick up your handset before pressing the key to.

Two questions. Please press Star then too.

The first question today comes from Chris Cooley with Stephens. Please go ahead.

Good afternoon, and thank you for taking my questions. Congratulations on the continued progress there.

Great. Thanks. Thanks.

Hi, My name were Oh, just 'cause it we're looking forward to see and you guys next week at your conference and I. Appreciate your question.

Look for doesn't you as well just two for me I'll get back in Q.

Oh, I guess first from just a topline perspective.

Really encouraged by what you were.

Realizing so far today to the body sculpting alright.

Segment as a whole could you just talk about plans for the continued rollout of flux here in United States, maybe help us trying to parse.

The related growth a little bit more there how much of this is a real expansion of the total installed base versus maybe.

Leveraging the existing installed base with now with flex as well and I have a quick follow up. Thank you yeah. It's it's a great question, Jason maybe you want just talk a little bit about the Trusculpt flexing your plant sure as it right now Chris said good to hear your your question right. Now we are in full market release within North America. We are really encouraged by what we've seen.

And thus far muscle sculpting is pretty hot right now, but it's still early for us in terms of what that looks like long term a the plan is to rollout flex to rest of world in particular Europe .

Australia, New Zealand in the Middle East in the first half of 2020 were still waiting to go through the regulatory process, there, but you.

Right now we're in full go in North America. So.

It's early but so far the.

Response from clinicians that has been incredibly encouraging and one of the things that we didnt totally expect was the fact that many of the physicians that have purchased a trusculpt IDR also utilizing trusculpt flex with the idea and.

The preliminary results are quite strong. So we don't have a clinical protocol on that or anything but you know, it's just anecdotal information, but but really encouraging and we'll just we'll just keep pressing the a pressing forward and see where we land, but so far so good I think we have a nice product I think its differentiated from other products in the market and.

You know there seems to be quite a bit a buzz around at this point in time.

No agreed agreed there was definitely a pause that plastic surgery meeting earlier this year about pumping, though I guess my just my other quick follow up here. It was all I'm pleased to see the progress on recurring revenue.

Has defined continuing to increase as a percentage of total sales I know you don't have guidance yet for 2020, but I can obviously always ask anyway. So I talked a little bit about what you think you know we can see there in terms of continued progress as a percentage of sales.

I would assume that would continue to build momentum. That's I think you said in greater than 50% of the system sold during the quarter had a consumable component.

With it but just help me think about one.

How that mix looks over time, and then to what you think that does to the overall operating profile of the company maybe from a bigger better perspective. Thank you and that's a great question. Thanks for that Chris.

I'd like to answered first of all by stating listen I think everyone recognizes that.

Body sculpting in particular is is a big lever for this company in something that we continue to invest in and drive and I think it isn't by mistake or by accident that we find ourselves in the situation. We're in this is a very thoughtful and I'm very focused execution plan that we thought.

Inc. has many legs left or much legs left in it.

That said you know, we think that the recurring revenue streams, specifically those of consumable.

Thank you help buoy, this company and and and a inoculated against some of that the economic cycles that typically had been presented so as a result, it's been a a focus for us to continue to move forward, a and b aggressive in <unk>, presenting and Ah. If you will promoting those products that have the can.

Civils. So the results are all kind of expected now we also know that there's a lag between our installed unit and when we start to see consumables and and that ranges depending upon the customers usage in speed and how fast they ramp, but we recognize that the installed base that we've put in place this year.

We are probably hasn't really generate a lot of consumables in this year.

And so we're very excited and hopeful that that will continue to pay big dividends in the future specifically around those consumable products of Trusculpt flex Trusculpt, I'd and secret RF, which are really some of the leading platforms that a than we've seen this year.

Thank you.

Next question comes from Jon Block with Stifel. Please go ahead.

Thank you and good afternoon guys.

The first one you mentioned good pricing trends, it's helping with gross margins were occurring as a percentage of sales also increasing and gross margins, which are really a solid number in the quarter. So just at a high level. How do we think about gross margins longer term you know at the analyst a year or so ago. There really were a lot of compelling initiatives that you guys talked about laid out.

A rail GM, which I think procurement et cetera. So are those opportunities day, but they still there and we think about gross margin increasing going forward.

Yeah, Great Great question, John So first of all I think the long term gross margin is to get into the low to mid Sixtys. I think this is not an immediate thing we're not going to get there in in the next 12 18 months, but but we think that as we don't believe it to be Aspirationally. We believe it to be an execution story of what we can work through.

Historically, I'd say the supply chain the investments in supply chain, specifically supplier management and component cost controls haven't really delivered a lot of value here. So you've had a lot of hustling and shuffling of things in order to offset the out the pricing pressures on the legacy products. We think we can.

In front of that we've made some recent investments in some some staff we brought in some folks I think can help move the needle quickly and aggressively in how we position a the products and how we manage our vendor [laughter], there's a lot of legs and that improvement that being said you know there is a constant pricing pressure that we.

We're gonna have to outpace and you do that not only by cost controls et cetera, but you also do by launching new products and shifting mix and we are benefited by the mix. We saw specifically in the quarter being more heavily driven by some of the newer technologies that we can command price number one but have also been designed.

A little bit more thoughtfulness around cost.

Got it very helpful and Jason what might be for you I'm just no. It's early but curious what you're seeing in the field for I'd in Florida, and what I mean by that.

From a consumer standpoint is it the same consumer fat reduction in muscle joining or a different consumer and maybe more important from a practice standpoint are there some practices moving forward with flex that previously just weren't interested about reduction because maybe they thought they relate to the game I would love your thoughts there.

Yeah, you know, we're seeing a little bit everything John you know I would say that most of the customers that are adopting flex earlier customers that also got into the game either with some form of cryolipolysis device or with Trusculpt I'd. You know both have been very open to the flex technologies is because it's a nice complement to the to the vertical. If you will you know they have something that can treat fab.

No they have something that stimulates muscle and it gives them a more comprehensive approach to drive for patients desired outcome. You know in terms of of where we go with this we've been going obviously door installed base, which is which has been very open to this technology, but we also also been going into brand new customers that we haven't been in before and I think going.

And then there with the technology, that's I would say dramatically differentiated from the competition in terms of what we can provide reflects its really open the door to quite a few customers that we didnt have access to before and I would say that the majority well at least 60% of the transactions that we've done our flex or with customers that we've not sold due before yes. The one thing I would add by the way that's.

Greetings and Jason I think it's very clear that this is a a differentiated technology that people are clamoring for we just got back from the Q Terra University clinical Forum, which is a a meeting that we conduct for customers. We had about 400 or so a little bit more than 400 customers.

Together and we put on a forum where are.

Some of our faculty members or key opinion leaders.

And present their cases, what was really telling to me John was the fact that one of the plastic surgeons that are panelists somebody that we don't talk too often but it was a panelists was was.

Basically promoting the the benefit of this paired treatment mentality of using I'd with flex in the same procedure setting. So in other words you'd come in you'd get I'd and then you'd get flex before you went home and the intent was that was not only do you get the benefit of the idea and the the Bennett.

Is it that that creates real fat reduction, but you get the metabolic rise from flex that would help accelerate further fat reduction and accelerate the result, and no. There's no clinical evidence. It's been produced are presented at this point, but I could tell you that the photos that he was sharing were pretty compelling and very exciting.

So it's something we're going to want to continue to explore.

Then potentially a further promote.

Great. Thank you.

[noise] again, if you have a question. Please press Star then one the next question comes from Jim Sidoti with Sidoti and company. Please go ahead.

Good afternoon, a quick question on.

Your fourth quarter guidance I'm, just looking at the parent a few years.

Revenue between Q3 Q4, it without at least 5 million or even a little bit more.

If you take the high end of the guidance you provided today looking for about 3 million dollar rate increase from Q3, I can you give us a little color as to why that is.

Well look at Jim for personal thanks for the question you know I think you you know by now that we're being very thoughtful around not yet not getting too far out in front of ourselves remember, we just had to launch a flex and we knew that was going to be a big launch and we knew that that was going to hit in the third quarter. So as we think about that launch and we think about.

The timing in the Lumpiness of capital sales, we wanted to be very thoughtful and prudent about what may or may not take place in the fourth quarter. Knowing that we went so aggressively with that product in the third quarter that being said, Jason I think are both very I'm excited about what this product means on a longer term basis, but listen.

In capital business, it's a lot more to do with the timing of launches and availability of product than it is you know period over period. So we will we wanted to be thoughtful around that Jim and not get too far out in front of ourselves.

But we're bullish on the portfolio, we're bullish on the the things that Jason mentioned in terms of the North American sales team and the international launches that will be coming as well. So I'm just trying to be thoughtful.

Okay, Yeah, no kids looking at the the inventory increase.

Definitely seems youre expecting a pick up in Q4, So I was just a little bit confused about regarding the other question.

I'm, sorry, I just want to if I could you just want to make sure I address that that that comment because part of that inventory is about getting it out into the regional distribution centers that we have established to lower long term freight costs.

And you know when you forward stock inventory you have to build in advance in place it which we have taken the advantage of doing in the third quarter, two will allow us to better level load our production facilities and not stress them in a fourth quarter demand or surge.

Okay, All right and then RG for my question for me Juliet was that a significant and on a year ago period, and I assume it wasn't real material in 2019.

Yeah, I think you're thinking about that the right way. We you know we had we definitely had much better sales same quarter previous year. This last quarter is where it was not material.

Can you give us some sense on what the headwind was moving over a couple million or not that much.

I think you're probably a little bit off on the magnitude there yet, but the less okay.

Okay. Thank you.

Yep. Thank you.

This concludes our question and answer session.

Now I turn conference back over to Dave Mowing for any closing remarks.

Well. Thank you operator I just wanted to thank everyone that was on the call today for their continued interest in Q Terra we certainly appreciate your attention and we look forward to providing you with an update on our fourth quarter and full year results. In early 2020. Thank you for your participation have a level today.

This conference has now concluded. Thank you for attending today's presentation you may now disconnect.