Q2 2019 Earnings Call
Greetings and welcome to the Q Tessera Inc. second quarter 2019 earnings Conference call.
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A question and answer session will follow the formal presentation.
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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.
Thanks, operator, and welcome to future second quarter 2019 earnings Conference call. My name is Matt scholars Futures, Vice President of Investor Relations and corporate development and on the call todays Q Tears, Chief Executive Officer, David Mallory, President, Jason Ritchie, and Chief Financial Officer, Sandra gardener. 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 statements 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.
You tear 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 Q terrors 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 Rich.
Thanks, Matt Good afternoon, and thank you for joining us today.
Sandy and I will review second quarter results in 2019 financial guidance and then ask our recently appointed CEO , Dave Mary to share. His initial observations since joining the company in July .
'cause there'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 true sculpt cutera as unique body sculpting portfolio products continues to generate strong demand.
Total truth scope revenue, including Trusculpt, three D and I'd as well as contributions from the limited commercial release of our new muscle sculpting system to scope flex grew 44% over second quarter of 2018.
We are encouraged by physician interest in through scope flex as well as the early results experienced by their patients. The trusculpt flex complements true scope. These fat reduction capabilities that we believe these two systems in combination provide the clinician with the full suite of body sculpting capabilities their patients seek.
Trusculpt flexes customizable treatment modes, and large coverage area up to two times more than the competition enhance the physician's ability to tone in scope to patients 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 topline growth was the renewed focus of our North American sales leadership team.
We realize system pricing improvements in North America on legacy system products, including enlighten three 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 I'd 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 Gardner, our Chief Financial Officer.
Thank you Jason second quarter revenue was $47.8 million at 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.
You asked revenue in the second quarter was flat year over year as continued demand for our troops call body sculpting portfolio and secret RF micro needling system was offset by diminished contribution from Juliet our women's health system as we have discussed over the past year.
Fit curious scope product portfolio remains strong and generated 44% worldwide revenue growth in the second quarter 2019, we continue to see strong demand for the Trusculpt Ivy 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 skin care 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 the 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 Global service teams.
As I move into the discussion of our gross margin and operating expenses ill 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 three 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 $800000 over the year ago period due to the overall investment and 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 $900000 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 $800000 in the same period in 2018.
non-GAAP net income for the second quarter of 2019 was approximately $4.4 million or 31 cents 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 Dsos decreased by one day to 47 days from the first quarter of 2019.
Inventories were $26.9 million at June Thirtyth, 2019, representing a decrease of approximately $3 million from the prior year period Whoring 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 remains strong and as of June 32019, 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 remained 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 are 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 our new CEO , David Mowery for his initial observations since joining cutera last month.
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 and effectively Onboarding me over the last 30 days.
I joined care for many of the same reasons, our shareholders have chosen to invest thank you Tara.
In addition to the rich history and strong brand identity associated with acute care. This is a business with both the capability and capacity to shape the future of the global obstetrics market, while delivering excellent shareholder value.
Thank you Tara 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 am encouraged by many of my early findings.
I look forward to providing more details as we evolve our strategy advanced 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.
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Our first question is coming from Chris Cooley of Stephens. Please go ahead.
Washington.
David Welcome all to Cheryl.
Just maybe two quick ones from me and I'll get back in the queue.
One.
For Sandy impressive continuation of the growth.
But we would like to see the the growth we saw there and consumables on the recurring element component to talk to us a little about maybe what that contributed to margin lift in the quarter.
On the Hot you continue to think about.
Playing out.
Okay, and then additionally, I would love to hear some additional color regarding the rollout of the true scope portfolio.
It's still early days for now, but as we think about the body called for in House books, just coasting what type of counter you're seeing from an adoption perspective early on and how if at all this is true engine utilization. Thanks, so much.
Thanks, Chris So I will address.
Gross margin question that you have 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 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 the second consecutive quarter, where we've had 150% growth.
In that area.
But additionally, both skin care 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.
Well go ahead and take the question Chris on Flex this is Jason.
I still like the body sculpting space I still think Theres a lot of runway in this space and I am excited to introduce through scope 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're interested in the body sculpting space is an area, where we still have a lot of interest in so I still think there is a nice runway there I think drew scope flex gives us the ability to penetrate some competitive accounts I think gives us runway to expand with our current I'd users and the way that will sort of track that over the course of time is how much market share we're able to gain with this this.
Beefing up of one of the verticals that we feel like we have quite a bit of momentum and so what we did in Q2 was a limited commercial release.
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 train 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 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 them, but their muscle stimulation device.
Yes, Chris This is Dave just to go over the top I allude 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 and.
Responsible manner.
And make sure that.
We're building the infrastructure needed to support this on a long term basis. So.
Just want to make sure that you realize we're in early innings, although we're very encouraged.
Understood Congrats on the results.
Thank you.
Thank you once again Thats star one if youd like to register a question at this time. Our next question is coming from Jon Block of Stifel. Please go ahead.
Hi, This is Trevor on for John Thanks for the question.
The first one.
You had really strong revenue results this quarter and I'm just curious.
What kind of keeping you from raising guidance at this point.
Looking historically.
Second half sales been a little bit heavier than the first half.
I think that.
The implication from the first half results so far with.
I would point to something a little bit higher than what you're guiding for it so far.
Hey, Travis as Dave and thanks for the question.
I think you're asking the obvious question, but the frankly I've been here for 30 days.
And you get comfortable with what we're going to do and how we're going to get there I think everyone. On this on the call and investors know the story well enough to know that you know 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 complete effectively and execute on in the back half of the year.
Our ability to do the commercial launch of the limited commercial launch on true flex is great, but the uptake 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 on the long term.
That said I think we have opportunities.
To lever and get ahead of ours 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.
Okay, Great and maybe just another one on Trusculpt specifically.
So how how is flexing position in the marketplace. Some money are you going to be bundling it with Trusculpt I'd are going be sold separately.
We have the opportunity to do both really and I think one of the nice things about having flux is that again, it beefs up the portfolio and being able to go into the aesthetic space with the portfolio as comprehensive as ours I think puts us in a good spot.
We have an opportunity with new users to to put sell a package deal around I'd and flex, which I think really drives the greatest.
Patient result, but we also have a nice install base of three d. and I'd users that will certainly be a visiting with to gain their insight and hopefully.
Encourage them to incorporate that as part of their portfolio.
Great. Thank you.
Okay. Thank you once again, ladies and gentlemen that is star one if you would like to ask a question today one moment, please only pull for additional questions.
Again that is star one if youd like to ask a question.
We're showing no further no additional questions in queue at this time I would like to turn it back to management for any additional or closing comments.
Great. Thanks, operator, I really appreciate that and I'd like to thank everyone, who participated on the call today for your continued interest in Q Tara.
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.
Ladies and gentlemen, thank you for your participation. This concludes todays event you may disconnect your lines at this time.