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Executives

Gerard E. Puorro - President, Chief Executive Officer

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

Analysts

[Marty Enbaum - Horizon Network]

Dalton Chandler - Needham & Company

[Daryl Tarter - Franchise Limited]

Chris Karavolas - Romeo & Juliet

Scott Wilensky - Private Investor

Jay Abella - Investment Partners

Matthew Buten - Catapult

[Al Lopez - FSR Investments]

Candela Corporation (CLZR) F4Q09 Earnings Call August 18, 2009 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Candela Corporation fourth quarter and year end results conference call. (Operator Instructions)

I would now like to introduce your host for today's program, Gerry Puorro. Please go ahead, sir.

Gerard E. Puorro

Thank you and good afternoon everyone. As always, thank you for calling into our quarterly earnings call.

Bob Quinn, our CFO, is here. He's going to review the requisite safe harbor statement and go over the financials. We have some brief comments, and then we'll be happy to take your questions.

Bob?

Robert E. Quinn

Good afternoon. In addition to historical information contained in this call, we'll discuss forward-looking statements within the meaning 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.

Results for the quarter were as follows: Revenue for the quarter was $31.4 million versus $37.4 million for the same quarter last year. This resulted in net income of $7.1 million or $0.31 per share compared to a net loss of $2.7 million or $0.12 per share for the same quarter last year.

The current quarter results include a gain from discontinued operations of $6.8 million or $0.29 per share. This gain is primarily related to the recognition of a tax benefit this quarter as we finalized our tax position relative to the closing of our Israeli operations. The closing occurred in Q2 of this fiscal year.

For the full year ended June 27, 2009, revenues were $116.6 million compared to $146.6 million in the prior year. This resulted in a net loss for the full year ended June 27, 2009 of $22.3 million or $0.98 per share compared to a net loss of $9.1 million or $0.40 per share for the same period last year. The current fiscal year includes a net loss of $11.7 million or $0.51 per share for discontinued operations.

The difficult economic environment has had a significant impact on our revenue year-over-year, but we are pleased that even in these troubled times we've been able to generate modest revenue increases in the last three quarters.

The revenue split this quarter geographically was 37% U.S. and 63% international compared to 32% U.S. and 68% international last year. The revenue split for the full year was 33% U.S. and 67% international compared to 38% U.S. and 62% international for the prior year.

The breakdown of core versus non-core customers was 68% core, 32% non-core for the quarter.

The product line split this quarter was 35% service and 65% laser-related compared to 33% service and 67% laser-related for the same quarter last year. The product line split for the full year was 36% service and 64% laser-related compared to 29% service and 71% laser-related for the prior year.

The revenue mix and erosion of ASPs resulted in an overall gross margin of approximately 38% this quarter compared to 41% a year earlier. This is broken down as product-related margins of 43% and service margins of 28% compared to last year's product line margin of 50% and service margins of 21%. The service margins this quarter are reflecting the work that has been performed to improve our product reliability that has been impacting our results in past quarters.

Gross margin for the full year was 38% compared to 45% last year. This is split as follows: Product line margins were 46% and service margins were 25% compared to product line margins of 53% and service margins of [inaudible] last year.

Legal expenses for this quarter were approximately $300,000 as compared to $3.7 million last year and $6.3 million for the year compared to $13.9 million for the comparable period last year.

As for our balance sheet, we maintain a strong cash position with approximately $29 million in cash. Our accounts receivable DSO was at 94 days and inventory levels are at 27.5 for this quarter.

Gerard E. Puorro

Thank you, Bob. As I said in our press release, this is the third consecutive quarter of modest top line growth. Clearly, our distribution channels and product portfolio are solid. Our expense infrastructure is and has been right sized. Both our inventory and accounts receivable have improved and, as Bob mentioned, we were cash positive for the quarter. On balance, given the worldwide recession, a good report.

Going forward, we continue to invest in research and development to bring additional products to the market and to our customers all over the world.

Turning to litigation, as you all know, in July the United States Patent Office issued a non-final office action confirming all but Claims 12 to 14 of Palomar's 844 patent. As a result, Palomar has asked the court in Massachusetts to lift the stay in our litigation. We have provided reasons to the court why we believe lifting the stay is premature and we await its decision.

On August 14th the Patent Office also confirmed a re-examination of claims of Palomar's 568 patent, although Palomar has expressed its intent to the court to drop all claims related to the 568 patent from the company's lawsuit with Palomar.

There are no other material updates at this time and therefore we will not discuss this matter during the question-and-answer session.

With that, [Jonathan], we're prepared to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Marty Enbaum - Horizon Network].

Marty Enbaum - Horizon Network

How does your company compare to an Israeli company called [Luminous]? Aren't they in the same arena as you are?

Gerard E. Puorro

We see them. I believe they're privately held. They were previously a public company that was taken private.

We see them in some parts of the globe. We think that they're still a reasonable-size company, I would guess someplace in the $80 to $90 million a year in revenues, perhaps a little more. So they are a competitor in certain geographic theaters.

Marty Enbaum - Horizon Network

Where do you see them as being competitive?

Gerard E. Puorro

Well, we see them in virtually - they are really a few major geographic theaters. Obviously, there's North America; we see them in North America. There's Asia; we see them in Asia. And, of course, there's the European -

Marty Enbaum - Horizon Network

Well, first of all, they are a public company. You've got the wrong information; they are a public company. And I think their sales are a lot more than that. And it sounds like they'd be a direct competitor.

Gerard E. Puorro

In some situations we see them, but we have a lot of competitors.

Marty Enbaum - Horizon Network

But they are a public company.

Gerard E. Puorro

Well, if you knew that, why did you ask? I mean, I'm not certain if their public or private status, nor am I certain of what their revenues are.

Marty Enbaum - Horizon Network

I asked if you knew the company; you said they weren't a public company.

Gerard E. Puorro

Okay. So you can clue me in - what are their revenues?

Marty Enbaum - Horizon Network

I don't know. I think they're maybe about $150 million. I don't know; something around that. I don't know.

We looked at that company. The stock's not trading at the moment, but they are a public company.

Gerard E. Puorro

That may be why it's the case, because I keep a portfolio of all the competitors and they're not in my portfolio.

Marty Enbaum - Horizon Network

Right. I think they used to be a $200 million company.

Gerard E. Puorro

Some years ago they were.

Marty Enbaum - Horizon Network

Right, right, right.

Now that lawsuit that you had, that you made a settlement, what actually happened on that lawsuit?

Gerard E. Puorro

Which one are you referring to?

Marty Enbaum - Horizon Network

The class action lawsuit.

Gerard E. Puorro

We were sued in a class action by a number of shareholders being represented by class action -

Marty Enbaum - Horizon Network

It was a derivative - yes, can you explain that to me, what happened there?

Gerard E. Puorro

Well, what happened was it was settled. The insurance company put up the money and we're no longer engaged in it.

Operator

Your next question comes from Dalton Chandler - Needham & Company.

Gerard E. Puorro

First of all, do you know what [Luminous] revenues are?

Dalton Chandler - Needham & Company

Actually, I can pull it up for you if you give me a minute.

Gerard E. Puorro

Go ahead. You had a question.

Dalton Chandler - Needham & Company

First of all, just a little housekeeping. I couldn't write quite as fast as you were going through the core and non-core U.S./O.U.S.

Robert E. Quinn

I can e-mail it to you, Dalton, if you'd like. Would you want me to do that?

Dalton Chandler - Needham & Company

Sure, that would be fine.

Robert E. Quinn

All right. And I can go through it again, too, if you'd like.

Gerard E. Puorro

Well, there's other people. Why don't we send you that stuff by e-mail right after the call?

Dalton Chandler - Needham & Company

Okay. So then, the discontinued operations - that was Inolase, is that right?

Gerard E. Puorro

That's correct.

Dalton Chandler - Needham & Company

And I guess my read of your press release when you talk about your expense structure's stable and you look for enhance factory margins, should I expect that that means the gross margin will continue to expand and that the operating expense should be about steady with where it is right now?

Gerard E. Puorro

Well, there's always in operating expenses some variable marketing programs from time to time, but we don't see any big pick up of magnitude in any of the coming quarters that we're planning for.

And in terms of the factory margins, we look at it in terms of basis points. We were thinking 300 or 400 basis points over the coming quarters, the margins would enhance.

Dalton Chandler - Needham & Company

The gross margin was down sequentially; that was, I think you said, ASP deterioration?

Robert E. Quinn

Correct, that was the case.

Dalton Chandler - Needham & Company

Where specifically were you seeing pressure there?

Robert E. Quinn

It was in all locations.

Dalton Chandler - Needham & Company

And also the R&D was down sequentially a fair amount. Is that a new base level for R&D or was it just something unusual in the quarter?

Gerard E. Puorro

Well, as you know, we had a number of programs under an umbrella called Fast Track that we were fixing some of the reliability problems we had and we also were coming out of some products that we had launched a year earlier.

I would not think that it would stay there, though, given some of the product launch plans we have in the future.

Dalton Chandler - Needham & Company

Okay. So that will ramp up again at some point?

Gerard E. Puorro

To some degree.

Dalton Chandler - Needham & Company

And then can you comment on new products, for example, how the QuadraLASE performed in the quarter and also any update on the fat product you've got in the pipeline?

Gerard E. Puorro

We're pleased with the QuadraLASE. It was where we thought it would be, without giving you specific numbers. But we're very pleased. Our guys sold it in a variety of geographic locations, so we feel positive about that.

In terms of the fat product, we had made statements that it would happen this calendar year. We're seeing some slippage. We'll know more on the next call, but we are seeing some slippage in terms of that product.

Dalton Chandler - Needham & Company

I think originally you were saying by the end of this calendar year?

Gerard E. Puorro

That's correct; we were.

Dalton Chandler - Needham & Company

And then just a last question generally on the business environment and the credit markets, I think most people are saying they're seeing small incremental improvements. Could you comment on what you're seeing there?

Gerard E. Puorro

I'm going to let Bob answer that. We're seeing some of it.

We do see that, although minor. I mean, the more and more we talk to different lease houses and so forth, they're saying it's freer although I'll believe it better next quarter, to be honest with you. But there is rumbling that it's getting a little bit better.

Dalton Chandler - Needham & Company

And, by the way, the [Luminous] revenue just from aesthetics is about $100 million.

Gerard E. Puorro

Thank you. That's about where I thought it was. I appreciate that, though.

Operator

Your next question comes from [Daryl Tarter - Franchise Limited].

Daryl Tarter - Franchise Limited

Do you anticipate at all - are you negotiating with Palomar on a settlement?

Gerard E. Puorro

We can't comment on that.

Operator

Your next question comes from Chris Karavolas - Romeo & Juliet.

Chris Karavolas - Romeo & Juliet

I have a question on the margins. I see your gross margin is 38% on products. Would you be able to give a split on that on the international and the domestic level? Basically, I'm trying to find out are your margins better internationally or domestic.

Gerard E. Puorro

We don't historically give that out, Chris.

Chris Karavolas - Romeo & Juliet

Okay. How are we doing on the certified laser program? I know you have some programs where you're taking old lasers back if people are upgrading. Is there some demand to that and how do you see that business going? Is it helping Candela, actually?

Gerard E. Puorro

Yes, we're actually seeing a little bit of that. There is a demand in the whole used market; the laser's been out there for so long, there's many coming off lease and so forth. So there is a demand. We're seeing the demand for it, so we expect that to be, for better or worse, more important over the coming quarters.

Operator

Your next question comes from Scott Wilensky - Private Investor.

Scott Wilensky - Private Investor

Can you update us regarding your existing credit line and your anticipated future credit requirements? I realize you have cash, and I'm just curious if the credit line has been changed at all and if you anticipate digging into it at all.

Gerard E. Puorro

No, we still have the current credit line of $10 million from Citizens. And at this point in time, based on where we're been - as you saw this quarter we generated approximately $3 million in cash - our projections are to be able to keep cash going at least neutral and positive over the course of the next year. So at this point in time we don't see a need to dip into any credit lines.

Scott Wilensky - Private Investor

And just one brief comment or a question, however you want to do. I'm just curious if you ever review messages on Yahoo!'s Candela message boards just out of curiosity - or you don't want to comment on that?

Gerard E. Puorro

I'd be happy to comment on it. I used to a few years back. There was one fellow who said I was a wizard and the next week he called me a sewer rat, and after that I stopped reading those myself.

Operator

Your next question comes from Jay Abella - Investment Partners.

Jay Abella - Investment Partners

That's funny. I was about ready to ask the same thing about the Yahoo! message board discussion.

I know that you can't comment on the lawsuit particularly, but I was just kind of wondering whether you can comment if in fact anybody's read, either Bob or Gerry, what you think possibility the credibility of the discussion is. Can you make a comment about that?

Gerard E. Puorro

I can only generally say that I think the credibility of message boards has no bearing.

Jay Abella - Investment Partners

From an operating standpoint then, I guess, next question: Do you think with your current headcount that you can get to the point of operating breakeven anytime soon?

Gerard E. Puorro

Yes.

Jay Abella - Investment Partners

Do you want to give guidance on that or do you plan to?

Gerard E. Puorro

No, we don't.

Operator

(Operator Instructions) Your next question comes from Matthew Buten - Catapult.

Matthew Buten - Catapult

Gerry, is a [Luminous] conference call?

Gerard E. Puorro

I don't know. You think?

Matthew Buten - Catapult

Just kidding. Can you talk a little bit about who's still buying, the access to capital, what applications are doing better? And then maybe this is the third quarter in a row you've seen some sequential growth; do you think that continues as you look forward into this next fiscal year?

Gerard E. Puorro

Well, going back, we do think we're going to continue to see growth, but your guess matters as good as mine in terms of the credit markets and the global economy in general.

More to your earlier questions, as you know - folks who are on the call don't know it, but Matt led our secondary offering some years ago - we've been in the core business very strongly globally for many years and during this recession it is boding well for us. The core physicians have relative strong practices even in a down economy and that's served us well the past several quarters. And we're hopeful that that'll continue.

Matthew Buten - Catapult

In terms of applications doing well?

Gerard E. Puorro

Across the board our applications, our portfolio is pretty solid. You're pretty familiar with it, but it's vascular and it's hair and now it's the QuadraLASE and pigmentation; a variety of applications are serving us well.

Matthew Buten - Catapult

And just in general, we're hearing access to capital is improving. What's your perspective on that?

Gerard E. Puorro

Someone asked that a few minutes ago. We're seeing a little bit of that, but it's not something I'd jump on and ride home with. It's slightly encouraging. We thought we had a decent quarter. We're still down 19% year-over-year. Others are down substantively more than that. But 19% is still a lot and for us to get back to where we want to be we're going to have to see a lot more in the credit markets than we're currently seeing.

Matthew Buten - Catapult

Do you think it's the credit markets or is it sort of unemployment and consumer spending that's really - I mean, I'm sure both are playing a role.

Gerard E. Puorro

They are playing a role but, as I alluded to, the core physicians can in fact get credit. And the other things that inhibit that somewhat, some is uncertainty, others is their customers falling off to a certain degree or they're deferring some treatments that they can wait for. It's a combination of those things. So we haven't seen sufficient information that tells us that that's changing in any dramatic way.

Operator

Your next question comes from [Al Lopez - FSR Investments].

Al Lopez - FSR Investments

I'm quite familiar with your products and I really think that you probably have the best products for the application. I have a comment and a question.

My comment is: Have you recently reviewed your service strategy? I see a lot of opportunity for service. You particularly are difficult to deal with in terms of service and there are a lot of third-party servicers that are taking up that space.

So do you have a strategy there as far as expanding your availability of service, not only service contracts but the ability to sell spare parts and so on?

That's a comment. As far as Question 2, looking forward, with likes the [Synachor] and [Alma] and so on, where do you see your primary competitive advantage looking forward?

Gerard E. Puorro

In terms of service being difficult to deal with, as you can imagine, when you have 15,000 units installed you get a lot of input from a lot of people. We get significantly more favorable input, but any time we hear difficult to deal with we'd like to know more.

But in terms of strategy, there are very specific metrics that we look at and measure service with. And almost daily our CTO and our Senior VP, our VP of Service, talk about those metrics and how they can make them better, all the time metrics and mean time between failure metrics and how quickly people get there and so on. So we measure that very carefully and try to get better every day.

And your other question was related to the competition. Would you mind asking that again?

Al Lopez - FSR Investments

Yes, the question was: Where do you see your competitive advantage with respect to the other major players that you are up against?

Gerard E. Puorro

Well, it's different with every company in every different geography. There's a matrix of products and pros and cons that is quite extensive. And I would have to answer the question differently for each company and different for that company in each geography, and different in terms of what applications we're specifically talking about.

We do look at all of that, as you can imagine, and the basic tenant that we rely on is that our products do what we say they're going to do and they are safe and efficacious.

Al Lopez - FSR Investments

No, I understand that and I think I prefaced that by saying that I believe that your products are the best in terms of doing what they do because I use them, okay?

Now my question was about your competitors are getting very, very aggressive in pricing, in terms of their sales channels, in terms of their offerings. Durability is one competitive advantage that you have that I know. Effectiveness of the treatments is a competitive advantage that you have.

I'm just looking down the road as an investor now. How is that going to look a year from now?

Gerard E. Puorro

Well, I don't know if those positives that you indicated are going to change at all. What you're talking about is how is the market going to change. I think that's what you're talking about. And I think that goes back to a discussion I had with Matt Buten a few minutes ago as it relates to it - I'm referring to the credit markets.

When that changes you're likely to see more than just a core concentration and you'll not have to have products that may or may not be totally core focused. So to that end we need to be prepared whether it's one year, two years or three years as a company to address the entire market turning back to the heydays of 20% and 30% growth we saw a few years ago and we need to have the appropriate products positioned in the appropriate market segments at that time.

Operator

Your next question comes from Scott Wilensky - Private Investor.

Scott Wilensky - Private Investor

It's a fact that the Palomar patents, the re-examinations were not successful and Palomar - the patents still stand. Do you have any comments about the quality of work that you believe your legal representatives are doing?

Gerard E. Puorro

You know I would never comment on that.

Scott Wilensky - Private Investor

All right. But it doesn't look like they're being very successful. That's my comment.

Operator

(Operator Instructions) I'm not showing any further questions in the queue at this time.

Gerard E. Puorro

That's fine.

Folks, thank you all for calling in. We believe we're making some progress, as we said - three quarters of modest top line growth and essentially a couple of cents, breakeven or a couple of cents in operating EPS. We're going to continue to work hard to continue that progress, and we'll be reporting back to you in 90 days. Thanks very much.

Operator

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

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Source: Candela Corporation F4Q09 (Qtr End 6/27/09) Earnings Call Transcript
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