PhotoMedex's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 9.13 | About: PhotoMedex, Inc. (PHMD)

PhotoMedex Inc. (NASDAQ:PHMD)

Q2 2013 Earnings Call

August 7, 2013 11:00 AM ET

Executives

Kim Golodetz – IR

Dolev Rafaeli – CEO

Dennis McGrath – President and CFO

Analysts

Bill Plovanic - Canaccord

Jim Sidoti – Sidoti & Company

Anthony Vendetti – Maxim Group

Kay MacKay – Sindiant

Operator

Good day and welcome to the PhotoMedex Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Senior Vice President of LHA, Ms. Kim Golodetz. Please go ahead ma’am.

Kim Golodetz

Thank you, operator. And thank you all for participating in today’s call. Joining me this afternoon from PhotoMedex are Dr. Dolev Rafaeli, Chief Executive Officer and Dennis McGrath, President and Chief Financial Officer.

Earlier today PhotoMedex announced financial results for the second quarter of 2013. If you have not received this news release or if you would like to be added to the company’s distribution list, please call LHA in New York at 212-838-3777 and speak with Carolyn Curran.

Before we begin, I would like to caution that comments made during this conference call by management will contain forward-looking statements that involve risks and uncertainties regarding the operations and future results of PhotoMedex. I encourage you to review the company’s filings with the Securities and Exchange Commission including without limitation, the company’s Forms S3, S4, 10-Qs and 10-Ks, which can be accessed in the Investor session of the company’s website at photomedex.com.

These reports identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, August 7, 2013. PhotoMedex undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

With that, I’d like to turn the call over to Dr. Dolev Rafaeli.

Dolev Rafaeli

Thank you, Kim, and good morning, welcome to our second quarter 2013 earnings call. My name is Dolev Rafaeli, I’m the CEO of PhotoMedex.

Joining me today is Dennis McGrath, President and CFO. Before I turn it over to Dennis to provide with financial update, I would like to make a couple of comments.

I’m particularly pleased that our team delivered another profitable quarter. Specifically, our net income is up 68%. Our diluted EPS is up 70%. Our XTRAC recurring revenue is more than doubled during the – driving the gross margin from 50% last quarter to 59% this quarter and operating income of more than $800,000.

Our Neova skincare product sales on the consumer platform increased 10-fold since last year and the overall brand increased by 42%. And our gross margin expanded in all business units.

We are pleased that we have a solid core business that consistently delivers $55 million to $60 million in revenue and diluted EPS of more than $0.30 for quarter. We expect the third quarter revenue to be in line with what you see in the second quarter. We are building the next major phase of our growth which includes a number of initiatives across our business segments.

These are a major geographic expansion of the no!no! brand into Brazil. And early development of successful launch stage for the no!no! in Germany. Building the domestic XTRAC business to critical mass; developing the consumer channel for Neova and completing the launch plan for new breakthrough products until that time we have about $3 per share in cash and an annualized EPS of more than $1.30.

We are clearly confident in our continued future success as evidenced by the Board committing to an additional $30 million to our stock repurchase program on top of the $25 million committed last year.

I’m now going to turn it over to Dennis to provide more specific color on the quarter.

Dennis McGrath

Thanks Dolev. Good morning everyone.

Revenues for the second quarter 2013 were $58.1 million. Consumer revenues of $48.7 million where in line with the previous quarter although direct response consumer revenues of $30.3 million were limited in part from national news events as well as weather catastrophes during the quarter. These events converted tension away from the television channels where our advertisements were placed. The Boston bombing as we mentioned earlier on our last call and the Oklahoma City tornadoes, which happened after the call specifically muted nearly three weeks of committed media spend during the quarter delivering 2.88 U.S. MER for the quarter.

Furthermore, we were limited in increasing the spent to make up for these events partly because Q2 TV rates – ad rates are typically 5% to 15% higher than Q1 for two reasons. First, there is a heavy influx of new programming as new TV shows are launched and many shows broadcasted season finales in the second quarter which drives more media demand and leads to higher prices.

Moving on with discussion of revenue, distributor revenues of $8.5 million were up 20% year-over-year and 50% sequentially. Retail revenues of $9.9 million were up 2% year-over-year and sequentially we are off 18% against an unusually difficult comparison and included the initial distribution in Bed Bath & Beyond, as the distribution expanded from 100 to almost 1000 stores.

The consumer gross margin, up 85.3% and the operating margin of 29.8% increased by 150 basis points and 107 basis points respectively. The physician recurring business segment increased 38% year-over-year and 24% sequentially led by more than $4 million in XTRAC recurring revenue treatments representing 104% improvement over last year and a 57% increase over last quarter.

So let me highlight a couple of the key metrics of the XTRAC business. We made 45 more placements in the quarter bringing the recurring revenue installed base to 446 systems in the U.S. Included in the installed base are 74 placements that have taken advantage of our Comeback program including 22 in this last quarter.

You recall that these practice are coming back to the recurring revenue program versus continuing to operate the equipment they previously purchased from us. The driver here is the desire for this practice to get their share of the new patient flow created from our media campaign. You’ll recall also that we run pilot local cable TV advertising for psoriasis patients in three cities last year expanded that to nine cities in the first quarter and added some additional cities in the beginning of the second quarter.

We mentioned in our last call that we were also testing national cable TV advertising. During the quarter, we switched over almost all of our XTRAC advertising to national cable TV for several reasons mainly broader geographic reach, lower cost per minute for advertising and more leads. So, coupled with our ever expanding installed base, this makes a great deal of sense.

We spent $520,000 during the quarter on XTRAC media campaigns and are continuing to spend about $40,000 per week. It’s about double what we spent in the first quarter. The cost per lead has dropped from approximately $133 per lead in the first quarter, $217 in the second quarter.

As a reminder, our revenue opportunity per patient is approximately $1,800 per year, providing a significant operational scalability given the untapped patient population and the incremental profitability of each new patient entering the program. These are sum total – the sum total of all these improvements are largely responsible for the gross margin and the physician recurring business segment improving by more than 830 basis points both year-over-year and sequentially to 59.1%. Operating profit in this segment improved by approximately $1.3 million from a loss of $474,000 in last year’s second quarter to a profit of $812,000 this quarter.

Following on in the Neova area, following on from the 10 new product additions to Neova line in 2012, the new line extension February called Illuminating Eye Therapy which combats the science of under eye dark circles caused by four micro circulation. Our newest product Silc Sheer 2.0 is a sunscreen and was launched during the quarter (inaudible) 2.

DNA damaged control every day, another one of our Neova products has been named the best sunscreen for anti-aging on cosmopolitan.com, a website run by Cosmopolitan magazine. We continue to enjoy success in cross-selling the Neova product line to our other customers. In fact, we’re selling more than 30% of our inbound no!no! Brand buyers into Neova skincare products. This represents an increase of 50% over the previous quarter.

Consumer revenues for the Neova products were just over a $1 million for the quarter, or an increase, a 45% increase sequentially and a 10-fold increase over last year. So, the following steps are year-over-year overall comparisons of the company performance.

Our gross margin improved 79 basis points increasing to 80.4% from 79%. Operating expenses decreased as a percentage of revenue to 64.7% from 69.7%. Pretax income increased 77%, representing 15.5% of revenue, up from 8.6%. The effective tax rate was 21.1%. Earnings per diluted share increased 70% to $0.34 from $0.20. Included in the press release is a table that highlight the EBITDA components net of stock-based compensation expense. As you can see from that table the second quarter is pretty straight forward with the $11.8 million of adjusted EBITDA which translates the $0.56 per diluted share, up from $0.39 last year.

Cash flow from operations for the first half of 2013 increased by $9.5 million but if adjusted for the $9.5 million increased in accounts receivable which is largely represented by three accounts approximating $10.5 million and basically timing differences of shipments made in June to three of our top customers and collected after the quarter end, then the cash flow for operations would have been $19 million.

We still have $8.8 million remaining under the share repurchase program announced last August, which we expect to spend prior to the anniversary date and hence the reason why the Board added another $30 million to the program for the following year. In the quarter, we purchased 325,000 shares on the open market at an average price of $16.53 per share spending $5.4 million.

From a balance sheet perspective, we have $62.5 million in cash or $2.97 per share. Accounts receivable increased $4.3 million sequentially, so previously mentioned included in the balance are three accounts totaling $10.5 million to HSN, QVC and (inaudible) for shipments made in June not collected after the end of the quarter.

Total liabilities represented less than a $200,000 change from March 31. Our quarterly report on Form 10-Q would be filed with the SEC on Friday August 9. So, with that operator if you open up the lines for questions, I’ll happy to take questions from our audience.

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll take our first question from Bill Plovanic from Canaccord. Go ahead. Your line is open.

Dolev Rafaeli

Bill, good morning.

Bill Plovanic - Canaccord

Great, thanks, good morning. With hurricane queuing into, clicking into ask you question. So, I think we hit star zero and said star one to get on, so just the folks know. As you at look this, just trying to get a feel for – you’re kind of hitting this investment mode where we’re waiting for those new investments and the consumer to pay off, what kind of clarity or outlook do you have and when is Germany really start hitting and contributing and then when should we expect Brazil in terms of contribution for the no!no! Brand?

Dennis McGrath

Sounds great, thanks Bill. The first off, to your opening remark, the direct channel has been more than 30 million for the last six quarters which just clearly indicates when we took that step up from $18 million, $19 million at the tail-end of 2011 and really optimized our direct channel. It continues to churn out that $30 million plus.

And the two next phases of the consumer channel are tied to our geographic expansion as well as Dolev as mentioned briefly for other new products from the channel. We’re not going to speak directly to them and their impact but specifically Germany in the quarter delivered about a $1 million of revenue. It’s in the early stages. It’s going to go through our normal process that we follow. That process could be three months. It could be 12 months. I can give you a plenty of examples, the U.K. being one of them.

In 2011, we did $4 million plus in the U.K. and the following year, we did $22 million. It took us eight, nine months before we were satisfied to optimize that, that media campaign. And in all markets, our philosophy is chase the endpoint where you have this incremental jump in the pricing of the media. And we don’t know where that points going to be in any particular market but that’s all part of the optimization plan and process we go through.

Germany, all the early signs gives us a lot of reason to be optimistic about that. In Brazil, the news that we published so far in the quarter included finalizing the acquisition of the company down there that gives us presence in the local market. The comment we made earlier that we are expecting launch in the second half with pushing for the third quarter but definitely in the fourth quarter, we’re still on that pathway.

The demographics for Brazil, I think, most people on this call understand from the two previous calls why we’re optimistic about that. It’s a big market sensitive to beauty treatments. The demographics are very similar in terms of the people have the money and desire to buy the product similar to the U.S. The price point tends to be higher. We have unique advantages from importing from our subsidiary in Brazil or in Israel that limits the terror inbound cost. There are all favorite items. We’re busy in the process of setting up our media campaigns negotiating with all of the vendors that processes been well underway.

So, the guidance we’ve given about Brazil remains intact, will that be a huge amount for the fourth quarter. It’s still remains to be seen. The process that as I mentioned we’re going to go through as we have gone through with every territory is that a three month or 12 month, it would unfold or continue to report upon that about all the demographics as we are doing our work and our team is down their working on this, remains to – I heard continues to affirm our optimism in that market.

Bill Plovanic - Canaccord

And that’s really helpful. And then on, it typically, you provide MER stat for the quarter?

Dennis McGrath

I gave that in my prepared remarks that in the U.S. which we have given for the last couple of quarters. The U.S. MER was 2.88 and it was muted by the three weeks of media that we had committed to spend but had attention from the audience diverted from the channels we advertise on to the news events both in Boston and Oklahoma, tornado, weather events that occurred about 2.88.

Bill Plovanic - Canaccord

Sorry, I missed that. And then in my final question just the XTRAC was very impressive, that’s ramping up obviously small component in the business, as you increase the spend there, do you expect that to have an impact on the P&L or do you think from an operating expense standpoint and a margin standpoint, we’re finally kind of a normalized levels here.

Dolev Rafaeli

Bill, it’s Dolev, good morning.

Bill Plovanic - Canaccord

Good morning, Dol.

Dolev Rafaeli

If you compare Q1 or Q2 to Q1, what you’ll see is that we had growth in the top line of about $1.4 million and about $800,000 of that made its way to operational margin. The difference is mostly advertising. Now, that you said and it’s on top of how we explain this business. This business is based on the number of franchisees, the number of procedures; each one of them does in the price. And I will goal is the reverse order. We raise the price in the middle of the first quarter. It applies to most of these locations. We are increasing the number of procedures in each location and that increase is consistent and we’ve increased the number of franchisees. We went from – we increased the over 40 new locations this quarter.

If you take a perspective of where we started from, this business was delivering $1.6 million a quarter, kind of flat. Now, it is in a growth mode and that growth mode is only slightly driven by the direct-to-consumer business. That direct-to-consumer business is only at its early stages. If you look at the amount of money spend, which is about $40,000 per week, you divided by the cost per lead that we have. You’ll see that we are driving a very small fraction of that business currently by direct-to-consumer.

So, very similar to our consumer market approach, we are optimizing the direct-to-consumer channel and only then we will expand the spend. Dennis has reiterated the size of the business. There are 10 million patients in the U.S. market alone. We are hardly treating in the range of 20,000 to 30,000 of the them and get into a bigger market share means that we have to bring up awareness which we do with the advertisement and be able to provide service within a small distance of patients and a small distance in Manhattan means a few blocks and we have almost 30 franchise is in Manhattan alone. And it might mean 10 miles in Boston and it might mean 30 to 40 miles out in other places, but we have to cover the country, this is what we are struggling to do now, we are trying to expand the store base and make sure each one of them when they start to hit the ground running, so we don’t have a lower average procedure per account, if we increase accounts – the accounts number of the accounts.

Dennis McGrath

Bill, let me add to that just briefly, so, we said a new patient in the doors by $1800 revenue on a yearly basis, and we have got 10 million U.S. patients between psoriasis and vitiligo. And we are clearly under 20,000 without giving specifics to number, but so there is a lot of room to improve, but the micro P&L of that patient walking in the door $1,800, the incremental margin on that because we are only consuming a, de minimus amount of gas in the laser, is a 90% contribution margin.

Now, you have got some advertising associated with that incremental patient, if every new patient at the door is directly tied our advertising. We told you that the cost per lead is $117 in the last quarter, that’s a mix of the early month of the quarter where we were still doing localized cable and then expanded the national last two months. So we expect that number to go down, the conversion rate at 30% plus, talks, converts to above $400 dollars per patient walk in the door, if you do that math, the margin is 90% and overall the margin for the quarter was 59% in the recurring revenue.

So as we grow utilization on our equipment those margins will go up as we start to see in this last quarter. And even if you look at net-net contribution from an operating margin stand point, we are talking about 1,800, 90% margins on an incremental basis $400 dollars of advertising cost and that’s a round number which we expect to go down. We are talking about almost 70% on an operating margin basis, that’s why we are pursuing this plan, and that’s why we will continue to drive in our mind incremental profitability.

Bill Plovanic - Canaccord

Great, thanks. And then Dennis, the past couple of quarters you have added about 40 boxes per quarter, is that the pace that we should look forward as just over the next couple of years.

Dennis McGrath

I think, 30 to 50 is probably arranged in the last couple of months, it’s been in the higher range of that and so I think that’s a reasonable expectation for the foreseeable future.

Dolev Rafaeli

And then to add on top of this Bill, when we started this initiative after the merger which is 6 quarters ago. We had in the market just over 400 lasers that were sold by PhotoMedex in the previous 5 to 6 years. Of these 400s, we have already taken back about 70 to the consigned way of doing business, and they represent about a third of the 30 to 50 that Dennis mentioned. So, they hit the ground running just by mere fact that they were doing this business before we have converted them back into consignment. And the other two-thirds , we have to ramp up, and this is in the sense is what dictates our growth rate of 30-50, there is much more of them that are at the door trying to get in.

Bill Plovanic - Canaccord

Great, thank you.

Dolev Rafaeli

Thanks Bill.

Operator

And we will take our next question from Jim Sidoti with Sidoti & Company. Go ahead your line is open.

Jim Sidoti – Sidoti & Company

Good morning, can you hear me?

Dennis McGrath

Yes, we can thanks.

Jim Sidoti – Sidoti & Company

Great. Can you tell us what was the impact of currency in the quarter?

Dennis McGrath

Marginal. You will see that in the cash flow statement that we published on Wednesday but it was immaterial.

Jim Sidoti – Sidoti & Company

So I assume you sell to your distributor in Japan are in dollars?

Dennis McGrath

Yes, that’s correct.

Jim Sidoti – Sidoti & Company

Okay. So are not hurt by the weakening of the Yen although it might hurt his margins.

Dennis McGrath

That’s correct. The only functional currency that we have outside the U.S. dollars in the UK at the present moment, our operations in the UK are done in British pounds.

Jim Sidoti – Sidoti & Company

Okay. And the tax rate, bounces around a couple of points per quarter, what influence is that?

Dennis McGrath

The last quarter was impacted by throwing up the final filing of the 2012 returns, utilizations that’s one factor, utilization of the UK NOL that we finalized in the early part of last quarter and adjusted our tax information for that. I think it’s safe that it’s still in the 25% long-term. We did spend in the quarters, if you look at the G&A probably $250,000 on various tax related planning issues and some of that was for the UK., finalization of utilizing the £10 million NOL, so there are some of the influential factors.

Jim Sidoti – Sidoti & Company

Okay. And then as far as the expected increase in demand for the XTRAC goes, how are you situated in terms of your sales personality. You think you have enough people on at this point or do you need to add people and when will that happen? Will it happen after you start to see a pick up or are you doing it now?

Dennis McGrath

I think first of, we have an exceptional sales force, we do have some capacity still in the sales force, we will increase that as we see the need to do so. But to your question, in terms of, is there are throughput limitation here. It’s more in our back office operations that we are building out and aggressively building out that’s in our insurance reimbursements authorization and our media control customer service department which we are continuing to expand as probably in the last 6-9 months expanded by the double or triple, and that’s where we are focusing, that’s where our capacity will continue to prove our ability to answer the call from the media campaigns to get them through their insurance reimbursement approval, get them scheduled into a doctor’s office and perfect that operational process that’s more than a factor than the number of sales people in the industry.

Jim Sidoti – Sidoti & Company

Okay. Now, those folks direct employees?

Dennis McGrath

They are, yes.

Jim Sidoti – Sidoti & Company

And so you have had a couple of very good quarters so far, have you started to add to that capacity?

Dennis McGrath

We have been adding all along.

Jim Sidoti – Sidoti & Company

Okay. And then finally you mentioned that media rates are high in the second quarter for a variety of reasons, what should we expect for the third and the fourth quarters.

Dennis McGrath

Third and fourth will merely more like the first quarter.

Jim Sidoti – Sidoti & Company

Okay, all right. Thank you.

Dennis McGrath

Thanks Jim.

Operator

And we will go next to (inaudible) with PWF Financial. Go ahead. Your line is open.

Unidentified Analyst

Hi, just a few questions here, first of on the guidance that you gave in line with Q2 for the whole company. I am just trying to understand if the no!no! was supposed to get better with more advertising and return on that advertising investment and the growth in XTRACT. And under the expansions in Germany and Brazil lies in revenue higher in Q13.

Dennis McGrath

So, Germany, we were forecasting, we will marginally increase. We haven’t tuned the gas on full board. We are still optimizing the campaign we launched in the last week of March, we have one quarter under our belt. As I explained earlier our process, I know where it’s laborious, it’s methodical but it works. And the fact of the matter is that you look at the direct campaign through 2011, we were in that $17 million to $19 million, it took a step up to $31 million as we perfected the DR campaigns in a variety of our geographies. That process works, that continues pay – those place continue to spend at a $30 million plus of quarter and we chase the optimum amount of advertising we can buy without increasing dramatically the incremental cost for advertising, so could we double our advertising and knock it out of the park on the top line? Yes, that’s true but our (inaudible) large would suffer and therefore profitability. And as we have explained the philosophy of the board of management, which I think is pretty well aligned with our shareholders, yes, we are going to grow the top line and not scarifies the profitability of the bottom line. So our goal in our media spend is, spend as much as we can with driving that MER to a point where we know we will be profitable without taking that next step up and driving our unit cost – some multiple that we know is going to be hazardous to us.

There is plenty of opportunity in the market, yet last year we saw 799,000 units in the U.S. grew 0.4% penetrated. There is still plenty of opportunity there, but we are going to do it in a very in a very profitable way. So, if you hit that wall in terms of the incremental cost. You have two choices, you either spend it have the top line go up but you haven’t negligible gain on the bottom line or you spent it to the max you can drive the profitability and continue to expand your market and distribution channels which we are dealing and look for other things to put on that marketing platform, which we are doing, as well as, create the media awareness and campaign in your other business segments which we are doing and that’s the approach we are taking.

Dolev Rafaeli

And (Amar), this Dolev. And if you add to this things that we were discussing about in previous quarters when the merger happened which is 6 quarters ago we had one very stable business of direct to consumer which was $17 million to $18 billion. That business was driven up to $30 million. It’s on the verge of going to two very big geographies, Germany and Brazil. Germany is already active, Brazil is on its way to be active and that’s going to take it to the next stage and we want to make it a stable business not just growth for the sake of growth.

At that time we were talking about two other businesses Neova business and the XTRAC business. If you look at the XRACT business as a standalone in 2011 the whole year the top line was similar to the top line we had in the first half of 2013. That business alone runs now at double the pace which delivers profit to the bottom-line and this is what we are trying to do. We are trying to build sustainable growth in every segment of the business that we have. Same thing with Neova, Neova in 2013 first half is similar to the whole year of 2011. That delivers very high margins 70% to 80% to the bottom line. It happens in a combination of the B2B and B2C approach we have.

It is built upon utilizing advertising to bring up awareness bringing more customers or patients to the office or to us to buy and thus increasing the sales and adding more products to the platform. So, we are very consistent in the approach that the important thing is to build a platform and continue with that platform and then build another layer upon that platform.

Unidentified Analyst

I understand that what I am looking at is, what 2013 was supposed to be a growth year and it’s now looking like it’s going to be a flattish revenue kind of performance and so all those frustration here, the stock it hasn’t performed at all. And I am just trying to figure out if there was a misstep at all on your end as far as assuming what kind of expectations we should have?

Dennis McGrath

I think if you track back through the beginning of the year, the Brazil discussion started early part of the year and I want to bring you back to our discussion over the last two earnings calls where we were initially approaching that market on a JV basis and as we continued to do the due diligence it made better sense for us to control that in a more definitive way and decided to acquire that entity. Now that added a quarter to the discussion at least.

At the end of the day that made a great deal of sense and if this business moves sideways for a quarter or two before it takes the next major jump up that is our history. I mean if you look at 2011 they were all $33 million, $34 million quarters and then took a major jump in 2012 that’s the way this business is built upon layers whether the distribution channels or direct response channels or geographic expansion or changes in the business segment, that’s how this is being built, and we are going to do the right things. If it takes us an extra 3 or 4 months to make sure that we do the right things in Germany, the right things in Brazil and not rush doing other markets like Korea or Hong Kong or Singapore until we are ready to make sure it’s done right it’s the approach we are going to take. It delivers the profitability and that’s where our focus is going to be.

And at the end of the day, if you look at the profitability year-on-year, it’s sizably up and we think that is the right way to do the right things to ensure the long-term sustainability and growth of this business.

Unidentified Analyst

Okay. And the other frustration that I want to share is Dolev, you have been selling a lot of stock lately and so I am just trying to understand your reasoning for that and how (in mind) your expectations are with the company shareholders?

Dolev Rafaeli

I am not sure how deep you would like me to go into this but this is a 10b51 plan that was filed in June of 2012. I am not selling the shares, the trustee does and I am sure they do this according to the plan.

Dennis McGrath

And at the end of the plan it will still be the largest shareholders. So in terms of the implication of is there long-term sentiments they are different than what the balance of the company. There should be no read into that in this case, still the largest shareholder when it’s done and the management and the board will start to look at either collectively or individually. There is still a lot of investment that management and board has in this company which I think is a vote of confidence on where we are heading. These are purely a state planning issues on the part of our CEO, the balance of the board and management continue to have a significant amount of holdings.

Unidentified Analyst

Okay. That’s it for me. Thank you.

Operator

We will take our next question from Anthony Vendetti with Maxim Group. Go ahead.

Dennis McGrath

Anthony, good morning.

Anthony Vendetti – Maxim Group

Hey, good morning. On the share repurchase you have like is that a 48 hour black out period, so if you wanted to start buying you could start on Friday is that correct?

Dennis McGrath

It’s 2 days yet we file our Qs anticipated to be filed on Friday afternoon, so two days after I think it’s Wednesday of next week.

Anthony Vendetti – Maxim Group

Got it, got it. And then in terms of the North American consumer segment, is there anything in particular that you think cause the slight decrease year-over-year and sequentially, I mean, is it waiting for new products to come out. I know you said there is a pipeline on that. What do you think other than if it was somewhat attributable to the Boston Marathon bombing and the tornados in Oklahoma. Can you quantify that in any way?

Dennis McGrath

Yes, sure thanks. So let me give you a more granularity in terms of those three weeks that we specifically mentioned in our prepared remarks. We spend a $1 million a week in advertising in the U.S. market. And the gross revenues are let’s just say $3 million a week. If you have 3 weeks that are muted by you spent the money, you committed the money and didn’t quite get the results and I think that’s reflective in what the overall MER, its first time is under 3.

The week before we made the commitments we couldn’t anticipate how either A) the Boston bombing or the length it would distract from the channels we advertise on. And same with the Oklahoma City, it went on for better part of a week and if you look at our MER for those weeks they certainly were muted.

Now if you have got $3 million a week plus that are jeopardized by those uncontrollable events and factor in, I think that creates a different reflection on where we stand from performance stand point.

Anthony Vendetti – Maxim Group

Okay. As we move into the third quarter based on the guidance doesn’t seem like it will be much pick up in the consumer segment in the third quarter, is that because we are still waiting for the ramp in Germany and then even if Brazil comes online, it looks like it won’t have a material impact here in the third quarter. But anything barring any unforeseen events like what happened in the second quarter, is there anything you are going to do differently to try to ignite consumer growth in the third quarter specifically? And I know third quarter is a tough quarter in general but I just wonder any actions you have taken differently in the third quarter to try to reignite growth?

Dennis McGrath

Okay. Let me clarify one point you made, I think you made in terms of third quarter being a difficult quarter that is a statement that typically is tied to the physician area. And the DR may not be as impacted by and then go back to earlier comments, what we attempt to do as buy as much media as we can in a week to drive the MER and the results. And there is only so much you can buy before that unit cost changes. And in the second quarter, we looked at ways of making up for those three weeks by spending more money and we ran into cost issues for a couple of reasons. Now, in the third quarter, this is part of a normal process.

On Thursday afternoon at 2 O’clock we go through 50 different metrics and 3000 buying decision about where we are going to spend advertising for the next week or the next two weeks and we would continue to follow that process of pushing the media to the point where we can buy as much as we can.

Our media buyers are given certain instructions, they are given instructions that are aggressive instructions and understand where those price points are of – if they spend too much, to have a price. They know it’s going to hurt them in terms of their allocation for next week.

So, the system is perfectly aligned to drive as much as you can get at the highest profitability without simply going for growth of the top line for the sake of not being a (good steward) about our bottom line and at the approach. So, hopefully that answered your question, Anthony.

Anthony Vendetti – Maxim Group

Yes, it does. Just a quick follow up and then I’ll jump off. In the last July fourth, I know you guys had a big campaign that seemed to be very successful. Did you do something similar this third quarter around the July fourth holiday?

Dolev Rafaeli

Anthony, I think you’re talking about the HSN show that was on the July 4 weekend?

Anthony Vendetti – Maxim Group

Yes.

Dolev Rafaeli

Okay. We had three similar shows this year. And the year is not over yet.

Dennis McGrath

We had to and there is one more, right?

Dolev Rafaeli

Yes. But it wasn’t, it was not on the July fourth weekend. I don’t know if I answered your question.

Anthony Vendetti – Maxim Group

Okay. I know that’s fine. That’s good, thanks guys.

Dolev Rafaeli

This fall under the distributors and home shopping channels part of the reporting and I think as Dennis mentioned there was a big delivery done to HSN in June that materialized in the show that happened in July, it was not in the July fourth weekend but it was very successful, yes, about 27,000 units.

Anthony Vendetti – Maxim Group

Okay, thanks.

Dennis McGrath

Thanks, Anthony.

Operator

And we’ll take our next question from Kay MacKay with Sindiant. Please go ahead.

Dennis McGrath

Kay, good morning, how are you?

Kay MacKay – Sindiant

Questions here, and the first one has to do with Bed Bath & Beyond obviously you had a tough sequential quarterly comp, but what kind of follow through are we seeing now?

Dennis McGrath

First off, Kay, we’re reluctant because of our customer business partners they give out specific revenue numbers but they continue to perform satisfactorily for us. It’s a great customer name that have associated with our product. I think they do a very good job. We see month, after month, they continued to improve on their performance, I’m giving a general sentiments in terms of our view of how they are behaving as partner of ours without giving the specific information because of certain restrictions we have with them.

Kay MacKay – Sindiant

Okay. Moving on to Brazil, in terms of the – when you do to launch there and the specific types of (inaudible), how confident are you that you’ve got that nail down?

Dennis McGrath

You want to comment on the media development?

Dolev Rafaeli

Sure. We are in the process of creating the advertisements. We filmed advertisements two weeks ago, it takes time until these are ready to be broadcasted only when the broadcasted we can see the response. They’re going to be driving both to direct sales as well as to retail. That entails us to have the retail engagements in place which we are finalizing and it also entails us to have inventory in the country which we could only have after we finalize the acquisition of the company because only then we could import and that happened roughly two weeks ago.

So, we are step-by-step, we’re getting the inventory into the country. We’re getting the retailers lined up and we have the advertisement and the advertising plan for that advertisement to be ready for as Dennis mentioned sometime either towards the end of the third quarter or the fourth quarter of this year.

Kay MacKay – Sindiant

Okay. Moving on to Neova, I know obviously, you have a good product historically it’s been sold in very limited channel if you will, you’re now starting to cross sale it through your inbound cost for no!no! but thinking about this more broadly, can you share any plans you have for increasing both the advertising spend and the channel distribution of that product?

Dolev Rafaeli

Yes. And for Neova a commercial was shot last year, at the end of last year. It is a – it is testing on TV, we also have launched Neova with the home shopping channel and the U.S. HSN. And we are working with them on making this a successful launch.

In addition to that Neova is gaining presence in retail outlooks in different places. These are all in process, we’ve announced the home shopping launch. We’ve announced or we discussed this in the previous earnings call the commercial launch and as with any other platform, once we have satisfactory MERs or satisfactory response, we will expand in addition to what was discussed before, I can share that we’re doing similar things in print as well as in each period.

So, it’s a – advertisement it goes directly to your house versus TV and we are also looking to do the similar things with radios, very similar to the approach we have with other products, the Neova is different in its propositions, it’s different in its messaging and this is being worked on every day.

If you open, if you take a flight and you open the (Skymore) magazine, you’ll see Neova advertised there, it’s in many different advertising outlets but it’s in, it is done so with limited spend and that spend is going to be increased as we see the return in the right place. We are not targeting for top line growth, we are targeting for consistent profitability of the line. Having said that the line – the brand is a brand grew year-over-year 45% and it’s so because of the introduction to the consumer channel.

Kay MacKay – Sindiant

Okay. And then just a final question on no!no! as it relates to product integration specifically in the DTC advertising, is the no!no! Pro, is that pretty much exclusively what you’re showing and what’s the mix of your ads relative to the no!no! Pro model now?

Dolev Rafaeli

I’m not going to give you a direct answer to the mix of advertisement because I don’t think this is the right venue for that. But as I shared in the previous call, the no!no! Pro launch was much more successful than what we expected and we were very conservative when we approached this as you might recall no!no! Pro is sold at a higher ASP than the no!no! 8800, which is the current, running workhorse. We expected it to be – to take a smaller portion of the sales, as we launched, we run out of inventory.

We had to expand the – amount of inventory or getting into the market, we had to delay launch in other markets so it’s hardly there are only two worldwide markets where this is available, it’s available in a limited quantity in Japan and it’s available in limited channels in the U.S. Specifically in the direct-consumer market, it represents about a quarter of the sales and that quarter is limited because we don’t have enough inventory. And we’re ramping it up. We expect to be out of that inventory shortage towards the end of the third quarter which would allow us to divert more media towards that.

At that time, it would be also available in other retail channels because we could not offer it in other retail channels because of lack of inventory. In terms of diversity, I will provide two answers, one, we in the last 12 months, we’ve launched in different markets, 13 different new advertisements. The no!no! Pro advertisement is only two of the 13, of the 13, most of them are very successful and there is a diversity of advertisement media in the English speaking markets. The markets, the retail markets has an assortment of other product.

So, for example the Bed Bath & Beyond channel has a product called no!no! Plus which is not sold directly to consumers. It’s only sold on in Bed Bath & Beyond and they have two flavors of that product. They currently do not carry 8800 which is – the product sold directly to consumers for reasons of not wanting to compete with our sales. And we assume that towards the end of this year, this assortment with the retailer is going to change once we have more availability of the Pro and other products that are being tested currently.

Kay MacKay – Sindiant

All right. Thanks for that.

Operator

And we’ll take a follow up question from Anthony Vendetti with Maxim Group.

Anthony Vendetti – Maxim Group

Just a quick, quick one Dennis, so the three shipments to the top three customers that were around $10 million, that was collected, that’s being collected, correct?

Dennis McGrath

That’s correct.

Anthony Vendetti – Maxim Group

And if your accounts receivable went up a little over $4 million or so from the first quarter to second quarter sequentially had those $10 million been, had that $10 million being collected before June 30, or by June 30, your accounts receivable would have actually went down, correct?

Dennis McGrath

That, that’s correct. So, on a cash basis, you’ve got that plus the $6 million in the stock we bought back, we are talking about $16 million funneling into this quarter that the cash balance would have reflected. So, yes.

Anthony Vendetti – Maxim Group

Okay, great. Thank you.

Operator

And we’ll take our final question from (inaudible) with CL Investments. Go ahead.

Dennis McGrath

(Ori), good evening I guess for you.

Unidentified Analyst

No, actually I’m in lovely New Jersey, so good morning or good afternoon to you guys. On the buyback, did you guys by anything since the quarter end no, right?

Dennis McGrath

No, so, the last purchase was on June 14, last two weeks of the quarter, is a black out period, we’ll open up again two days after we filed the Q.

Dolev Rafaeli

And (Ori) just an add on to this and this is Dolev, in Dennis’ prepared notes he mentioned that by the anniversary which is the middle of August, we expect to be done with the $25 million in hindsight and retrospect, you might see that when the Board authorize the 25 million repurchase, the Board was doing this on certain expectations for cash flow during the year coming from mid-August last year to mid-August this year. And if you look at our cash flow that materialized during that year was more than $25 million and similarly when the Board approves the repurchase of $30 million that might reflect on the assumptions on cash flow moving forward.

Unidentified Analyst

Got you. Thank you, great. And now because the problem is if you need to finish it by August 15 and the window only opens in a week and you have the daily limitations, could be a bit of problem unless you –

Dennis McGrath

We don’t have to finish it by – in that weeks’ time but fully expect we will.

Unidentified Analyst

Okay. Great.

Dennis McGrath

So, there is $30 million is on top of the$ 25 million, it’s not in place of it. So, if it takes an extra day or two to complete the first $25 million tranche so be it, we’re not on any restrictions and then $30 million will be added on top of it.

Unidentified Analyst

Got you, great. And on the Japan and the yen, how much did the yen weakness impact the results, so would you be fair to say since Japan was about $30 million business last year and the yen weakened about 20%, which was about the $1.5 million in business for a quarter?

Dennis McGrath

So, first we do business with our partner in Japan in U.S. dollars. So, there is no exchange impact but underlying your question is the demand for the product muted because of the exchange rate. And we got to believe that influences all buying habits in Japan and it’s hard to quantify exactly what that represents due to that change in the yen. So, we’re monitoring that as we go forward because of the buying value of the yen that – our audience over there has.

Unidentified Analyst

And in terms of the XTRAC, what kind of seasonality do you see for the XTRAC, so you mentioned that physician business is usually weak in the third quarter, should we expect some relative weakness there versus the second quarter?

Dennis McGrath

So, let me kind of fill in the blanks here and give you how we’re seeing things. In the physician area, a lot of peers that people associate with us tend to have a weaker demand in the months of July and August largely related to vacations both from patients and derms. And then I see it dramatically in Europe, we don’t have a recurring revenue program going on in Europe, so it’s strictly a U.S. market.

Now, we are not carving back on our media intensity and think that because of the early stages we are at, we will offset any of that seasonality. The seasonality you tend to see is 10% to 12% in the third quarter because July and August are tend to be lighter followed by the best month of the year in September. We’ve had the best July; we’ve ever had in the history of the company in our recurring revenue model.

Unidentified Analyst

And finally, in terms of expanding the XTRAC not just through organically but through possible acquisition, you mentioned before you are actively seeking such opportunities, is that a process in place?

Dennis McGrath

The board and Dolev and I are continually on a look out for opportunities that make sense to accelerate our business. M&A is one of those tools that we examine and we’ll continue to be opportunistic about that. Obviously, a lot of activities occur on this front over the last six to nine months and expected that that territory will continue to be pretty fertile. Our philosophy there is, we’re not going to do anything just dilutive only if we can do something that’s going to accelerate our business on a accretive basis where we have a great deal of interest. So, we continued to examine that as a tool, we’ll report back, it is something develops there.

Unidentified Analyst

Great, thanks a lot guys.

Dennis McGrath

Thanks (Ori).

Dennis McGrath

Operator, it looks like, it is our last question. And so thank you everyone for participating today. We’ll be reporting back to you in November for our third quarter results which we expect to report on November 6. Thank you very much. You have a great day.

Operator

This concludes your program for the day. Thank you for your participation. You may now disconnect at any time.

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