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Executives

Stacy Feit - Financial Relations Board

Gerard E. Puorro - President, Chief Executive Officer & Director

Robert E. Quinn - Acting Chief Financial Officer, Vice President, Finance, Treasurer & Controller

Analysts

[Frank Cabela – Investment Partners]

Dalton Candler – Needham & Company

[Ed Taquin – Investor]

[John McCormick – Western Security]

Candela Corporation (CLZR) F2Q09 Earnings Call January 20, 2009 5:00 PM ET

Operator

Welcome to the Candela corporation second quarter fiscal results conference call. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) I would now like to introduce your host for today’s program, Ms. Stacy Feit.

Stacy Feit

I’d like to thank you for dialing in for the call today and introduce Gerry Puorro, President and CEO of Candela.

Gerard E. Puorro

As always thanks for calling in for the quarterly earnings call. Bob Quinn, our Vice President, Finance and Treasurer. He needs to review the requisite Safe Harbor statement, go over the financial. I have some exceedingly brief comments and then we’re going to take your questions.

Robert E. Quinn

In addition to historical information contained in this call we will discuss forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995 including but not limited to statements relating to the future success of the business, marketing and technology strategies, future market opportunities and the future market acceptance of and demand for the Company's products.

The Company's future actual results could differ materially from the forward-looking statements discussed or implied because of risks or uncertainties including but not limited to those risks identified in the press release issued earlier today and those other factors discussed from time to time in the Company's periodic reports filed with the Securities and Exchange Commission.

The results for the quarter were as follows, revenue for the quarter was $28.8 million versus $35.7 million for the same quarter last year. This resulted in a net loss of $25.3 million including discontinued operations or $1.11 per share compared to net loss of $4.6 million or $0.20 per share for the same quarter last year.

Revenue for the six months ending December 27, 2008 was $55.4 million compared to $70.8 million for the comparable period last year. This resulted in a net loss of $29.3 million including discontinued operations or $1.29 per share compared to $4.4 million or $0.19 per share. as mentioned our results this quarter include a loss in discontinued operations which relates to the closing of our Israeli operation which was responsible for our PSF product Serenity.

The loss in discontinued operations this quarter was $18.2 million or $0.80 per share and for the six month period a loss from discontinued operations of $18.7 million or $0.82 per share. In addition to the charges related to discontinued operations we incurred approximately $3 million in charges relating to additional technology impairment, inventory and accounts receivable reserves.

These charges were deemed necessary due to the current uncertainty in our economic conditions. The current economic conditions and credit fears continue to have an impact on both domestic and international sales. The revenue split this quarter geographically is 30% and 70% international compared to 38% US and 62% international last year.

The customer mix this quarter was 62% core and 38% non-core and the product line split this quarter is 35% service and 65% laser compared to 30% service and 70% laser related the same period last year. This regional and product line mix continue to be a major contributor to our lower gross margin of approximately 35% this quarter compared to 46% a year earlier.

The other factor bringing our margins lower have been our product reliability problems that we have mentioned in our prior quarters. There were liability issues have had an impact on both our service margin and our product margins due to the need to increase warranty costs. Presently we have made significant progress in our reliability and we expect to begin to see improvements from our efforts in the upcoming quarters.

Legal expenses remained high this quarter as we incurred approximately $2.7 million compared to $3.8 million last year. Legal expenses for the six month period were approximately $5.9 million compared to $6.3 million last year. Key factors related to our balance sheet, we maintain a strong cash position with $27 million in cash. As far as accounts receivable go our DSO is at 93 days which is an improvement from last quarter.

The major contributor to the higher than desired level of accounts receivable continue to be our large percentage of international sales which typically have the longer payment terms than the US and also we are noticing that it is taking longer for our customers to finalize their financing arrangements. As far as inventory, inventory levels remain higher than we would like due primarily to our shortfall on revenue expectations.

Gerard E. Puorro

There is a great many topics to discuss in the press release and so we’re going to go very quickly to questions, but before we do that, I want to state that we will not respond to specific questions related to the analysis of strategic alternatives. With that, Jonathan, we’ll take questions.

Question-And-Answer Session

Operator

(Operator Instructions) Our first question comes from Frank Cabela – Investment Partners.

Frank Cabela – Investment Partners

I guess if you’re not going to take questions, I think I’d like to make a statement about the strategic alternative process if I may. I here to say that if Houlihan Lokey couldn’t convince a suitor of the value of $1 of a share in cash and $1.25 per share in accounts receivable and $1 per share in inventory, then I guess it’s incumbent upon you guys to find somebody, a representative that actually can.

As shareholders, even though the press release states that the company is going to stay independent, I think it’s ultimately up to us as to whether Candela remains independent. The company can’t support a $30 million half year SG&A expense on $20 million of gross profits without significantly damaging the long term value for all stakeholders, in our opinions.

The redundancy that the industry functions with is kind of amazing in the current and likely future environment. The potential cost savings alone [inaudible] make a mockery of Candela’s current valuation in our opinion. If any of these comments are off base in any way, I’d like you to consider supplying us with the level of detail or authority to Houlihan Lokey during its strategic alternatives process.

If you would care to comment at all, I would greatly appreciate it.

Gerard E. Puorro

I appreciate your input buy I’m not going to comment. Thank you.

Operator

Our next question comes from Dalton Chandler – Needham & Company.

Dalton Chandler – Needham & Company

Just I guess some clarifications on the discontinued operations, are you continuing to sell the Serenity product?

Gerard E. Puorro

No.

Dalton Chandler – Needham & Company

On the new cost structure, can you give us some sense of what sort of cost structure we should expect going forward from here?

Gerard E. Puorro

Dalton, as you know we’re not and haven’t been for quite a while been giving guidance except to say in the most recent quarter in September and the quarter before that, that it was our plan to return to profitability by mid-calendar 2009, that’s still our plan.

Dalton Chandler – Needham & Company

I certainly understand the difficulty with giving guidance on revenue and especially in this kind of an environment, but with regard to expenses you know what your cost structure is going to be.

Gerard E. Puorro

As you can imagine, it’s certainly going to change based on that top line change. We have to make certain assumptions and now we’re into a whole game of giving guidance top down. I’m not being flippant when I say they’re obviously totally related.

Dalton Chandler – Needham & Company

With regard to the headcount reduction, how many sales reps do you have currently?

Gerard E. Puorro

Do you have that number?

Robert E. Quinn

Approximately 30 US.

Gerard E. Puorro

We didn’t take any headcount reductions in sales specifically.

Dalton Chandler – Needham & Company

So 30 US and what is 10 OUS? I thought you had 40 last quarter in total.

Gerard E. Puorro

International includes approximately 10 more, yes.

Dalton Chandler – Needham & Company

We have AAD coming up in the next month or so, might you have any new products to show at AAD or ASLMS and do you remain on target with the fab product for the second half of the year?

Gerard E. Puorro

You can expect to hear something in the coming days and weeks about a product launch that’s aimed right at AAD, so the answer there is yes. As we said in the last two quarters, we’re looking towards a body shaping cellulite product at the end of calendar 2009. Right now that’s still the plan.

Operator

Our next question comes from Ed Taquin – Investor.

Ed Taquin – Investor

Since you decided to remain independent, I guess one of the things that the shareholders would like to know is what actions you’ll take to support the stock price? I used to be an officer in a medical device company like this and I remember an investor calling one day when the stock price was similarly battered and said, so the stock is good enough for me to buy but not good enough for you to buy, you being the company.

So now that you’re staying independent and the legal restrictions would seem to be lifted, will the company start buying some of the stock on the open market?

Gerard E. Puorro

I think it’s fair to suggest that the legal restrictions have inhibited buying in the open market and certainly while the company I can tell you will not be in the market, it may very well be that some of its senior managers will be in the market when we’re allowed, which is about 48 hours from now, approximately.

Ed Taquin – Investor

Just out of curiosity, why would the company not buy at these values?

Gerard E. Puorro

I understand and it’s a really good question to ask except if you take a hard look at our operations and how internationally diverse they’re spread, the needs for operating cash and the needs to invest in both a new product launch now and another product we’re hoping in calendar 2009, we’re going to keep our cash close.

Operator

Our next question is a follow up from Frank Cabela – Investment Partners.

Frank Bella – Investment Partners

I just wanted to see whether you all have issued yourself stock options under the new plan?

Gerard E. Puorro

Not at this time.

Operator

Our next question comes from John McCormick – Western Security.

John McCormick – Western Security

You just made a comment that you want to keep your cash close, is that correct?

Gerard E. Puorro

Yes, I did.

John McCormick – Western Security

What do you anticipate your legal expenses to be and what have they been in the past 24 months?

Robert E. Quinn

We expect them to drop considerably, John. As I mentioned, this past quarter was approximately $2.7 million. We are expecting approximately a $2 million, in that area, drop in legal expenses going forward.

John McCormick – Western Security

If my math is correct, $2 million would buy back 25% of the outstanding. So I understand you apparently are going to pursue this litigation with Palomar and you have no problem spending $10 million or more a year for legal expenses, but you won’t buy back 25% of the company for $2 million. Do you have a comment on that?

Gerard E. Puorro

Only that the litigation with Palomar has been stayed by the court and it’s in the Patent Office. So there’s no direct spending at this moment in that litigation.

John McCormick – Western Security

At this moment, but isn’t the intention to still proceed with the litigation? Are we going to settle that or are we going to proceed with it?

Gerard E. Puorro

We’re going to look for the outcome which is according to Patent Office statistics as much as two years away before they rule on the patentability of the claims at issue here. That will determine next steps.

Before we take the next question, Operator, I want to qualify an answer. A few minutes ago someone asked me if we had issued stock options against the new plan and I answered incorrectly. It’s not stock options. The plan was SARS and we did in fact issue SARS and Form 4s to that effect will be filed in the next couple of days to qualify that.

If I misled anyone, that was not my intention. Operator, go ahead.

Operator

Our next question comes Frank Cabela – Investment Partners.

Frank Cabela – Investment Partners

I’m tying to understand what I just heard. The company is not in a position where it can buy back stock, but yet senior management of the company is going to avail itself of the opportunity to buy stock at a price which, if the prior caller is anywhere near right, could buy as much $2 million worth of the company’s stock back for 25%. I consider that a clear breach of your fiduciary duty.

I don’t know if anybody else is paying attention to this but, gentlemen, issuing, whether they be stock options, SARS or whatever, and then availing yourself of the opportunity, not only is it taking advantage of the situation, it probably is a clear breach and probably should have to be reviewed under that circumstance.

Would you care to comment?

Gerard E. Puorro

First of all again I want to qualify that they were SARS and the SARS in question are over a couple of year vesting period. In terms of breaching our fiduciary responsibilities in any way, obviously we don’t think we’re doing that and such matters have all been put under the microscope and viewed at.

Frank Cabela – Investment Partners

With the stock price at the position that it’s in if the management buys shares knowing full well that it is so significantly undervalued but yet has passed as far as the company is concerned, I don’t think that passes the business judgment test. I think it has more to do with confiscation and almost borderline fraud and I don’t know another way to say it, fellows.

This is not good posture for you to take, not with these valuations.

Gerard E. Puorro

Obviously using such terms I’m not going to comment.

Operator

I’m not showing any further questions or comments in the queue at this time.

Gerard E. Puorro

Thank you all for calling in. We’ll keep you updated on our progress as we go forward.

Operator

Thank you ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect.

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Source: Candela Corporation F2Q09 (Qtr End 12/27/08) Earnings Call Transcript
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