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Executives

Gerard E. Puorro - President, Chief Executive Officer

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

Analysts

Anthony Vendetti - Maxim Group

Dalton Chandler - Needham & Company

Anup Mehta - Canaccord Adams

Candela Corporation (CLZR) Q1 2010 Earnings Call Transcript October 20, 2009 5:00 PM ET

Operator

Good day ladies and gentlemen and welcome to the Candela Corporation, first quarter fiscal results. (Operator Instructions). I would now like to introduce your host for today’s program Mr. Gerard Puorro, President and CEO.

Gerard Puorro

Thank you. Good evening everybody, as always we appreciate you calling in to our quarterly call. Here with me is Bob Quinn, the Company’s Senior Vice President of Finance, Chief Financial Officer and Treasurer.

Bob is going to review the requisite safe harbor statement then go over the financials of the quarter then I have some very, very brief comments, following which we will be happy to take your questions. Bob?

Bob Quinn

Good afternoon. In addition to historical information contained in this call, we will discuss forward-looking statements within the meetings 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 $26.2 million versus $26.7 million for the same quarter last year. This resulted in net loss of $3.6 million or $0.16 per share compared to a net loss of $4 million or $0.18 per share for the same quarter last year.

The revenue split this quarter geographically is 35% U.S. and 65% international compared to 33% U.S. and 67% international last year. The customer mix this quarter was 54% core and 36% non-core.

The product line split this quarter was 40% service and 60% laser-related compared to 36% service and 64% laser-related for the same period last year.

The revenue mix and erosion of ASPs resulted in an overall gross margin of approximately 35% this quarter compared to 39% a year earlier. This is broken down as product-related margins of 38% and service margins of 31% compared to last year's product line margin of 49% and service margins of 21%. The service margin improved again this quarter and has reflected through the work that has been performed to improve the product reliability and as I said earlier ASPs have decreased approximately 5% year-over-year.

Legal and related expenses this quarter were approximately $2.5 million compared to $3.1 million last year. The expense this quarter relay primarily to the pending merger activity while the expense last year related primarily to the Palomar litigation activity.

Key factors related to our balance sheet, we maintained a strong cash position with $26 million in cash. As for accounts receivable our DSO was at 107, which is higher than we would like but in line with the same quarter last year and inventory levels continue to come more in line with our expectations as we reduce the levels by approximately $1 million this quarter.

Gerard E. Puorro

Thank you, Bob. Well since we last spoke in August as you know we have an on-stock pending merger with Syneron. As we said at the time, we think the resulting company will be a leader in both product portfolio and distribution channels and capabilities. Further the combined R & D pipeline is rich with new products and applications. As the recession abates, we believe our combined shareholders will be rewarded as the upside value potential becomes apparent to investors.

Turning to Palomar litigation, there are no material updates with respect to same. Two shareholder lawsuits have been filed in the Massachusetts State Court against Candela and its board relating to the proposed merger with Syneron. The lawsuits claimed that the board breached its fiduciary duties because the price and process of the transaction are allegedly unfair and seek, among other things, to enjoying the merger and mandate disclosure of information, in connection with the shareholder’s hold of the transaction.

We will have no further comment on either the Palomar litigation or the shareholder lawsuits and with that, operator, we will take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Anthony Vendetti from Maxim Group.

Anthony Vendetti - Maxim Group

I want to, just get an update on the cellulite product. I know that that was pushed out a little bit. Do you have any update on that? Then if you could talk about just in very broad terms where you see the opportunities over the next couple of years in terms of the development pipeline?

Gerard Puorro

Well in terms of cellulite specifically as they relate to Candela, was if you remember we had pushed it out. We originally said like the end of the calendar year and we said, we saw some slips in there and pushed it into the earlier part of 2010. As part of the merger activities, we are going to all of the product positioning and product rationalization and we have been for the past five weeks of various integration teams. There were a number of products that the Syneron folks have, related to body shaping and so on.

So we need to position our cellulite product in that and in due course, we will be talking to people about the positioning. There is an awful lot of shows coming up, this AMCAS in January and EAD in March and [ASEM] in April. We will be telling people more about how we position, not only the products that are in the market together but the products that are in each other’s pipelines together and other than that, I do not want to talk about the specificity of the R & D pipelines right now, okay?

Anthony Vendetti - Maxim Group

Yes that is fair. Can you talk, Gerry, just a little bit about since you said you spent about five weeks in the integration process already, can you talk about how that is going? What you have learned in the integration process? Is it ahead of schedule? Is it moving as you expected? Any insights you can share will be great.

Gerard Puorro

Well it is very, very positive. M&A transactions historically are really, really hard to do and difficult and I am sure there are skeptics out there, given that one firm is Israeli and the other is a U.S. based firm. You know Shimon Eckhouse and I have been in this industry over two decades together, we have known each other and we are trying--and Louis P. Scafuri as well was in the industry for years.

So the leadership is trying to permeate down to the organization’s attitude of working together towards all the same goals that we at the top have established, but what we would like us to look like in a couple of years and we put together a number of integration teams every single discipline and they are working all together. In fact they are here in Massachusetts for two days this week, for what we are calling readiness reports by each of the teams to see how ready they are for all of our timelines.

I will share with you a little bit of our interesting data, we brought in Price Waterhouse to help us facilitate this process and we had them do a study on about 3,000 customers in the field and what we found with the 3,000 customers there were only 181 who both had a Candela and a Syneron. That did not surprise us, it just confirmed what we thought we already knew and that was, when I looked at our last report, we never saw Syneron, it went a little bit, his last report, he never saw Candela, that is because we have been addressing the core, and they have been addressing the non-core.

Well that is very heartening that there is going to be any vastimization of product lines. In fact, it is going to be some terrific complimentary and cross selling opportunities as we go forward. So, in general, I would say that this is everything we thought it would be. It is on schedule. We are all very excited about the product portfolio, the R & D pipeline and as you know already, the distribution channel combination is pretty compelling.

Anthony Vendetti - Maxim Group

Yes, just quickly on the market situation right now, for the quarter. I know this is the most difficult quarter seasonally, the weakest quarter of the industry and this is your fiscal first quarter which exacerbates that to some extent, but can you talk just about what you are seeing in the market in terms of demand and then if you could talk about the credit markets, whether you are seeing that stabilize at all or loosen up at all at this point?

Gerard Puorro

Well, the three quarters prior to the ones we announced today, as you know, we saw an incremental, modest and incremental growth at the top line. The quarter we announced today is actually flat to last year they are both $26 million in change. So we think at least, from where we see Candela that it has bottomed out and it is on its way back yet in a modest sense. As for the credit markets, it is not much better, quite frankly. There is still difficulty getting credit. You know us and the competition, all the different plans, to help overcome that but it is still tough.

I have not seen it from Candela and I know what a couple of other companies that I invested in the other industries. It does not appear as though the credit markets have really loosened up in any measure of substance.

Operator

Thank you, our next questions comes from Dalton Chandler from Needham & Company.

Dalton Chandler - Needham & Company

Alright, good afternoon, I am sorry, could you just repeat the split between core and non-core and equipment and service?

Gerard Puorro

Between core and non-core is 64% core.

Dalton Chandler - Needham & Company

Okay.

Gerard Puorro

Then service was 65%, 40% service.

Dalton Chandler - Needham & Company

Okay.

Gerard Puorro

That is a lot of service component.

Dalton Chandler - Needham & Company

Yes it is. So, with regard to the pricing pressure, you said you are saying, it is across the board or is it, in particular, product categories or applications?

Gerard Puorro

It is across the board basically.

Dalton Chandler - Needham & Company

Year-over-year is 5%?

Gerard Puorro

Right, approximately 5% year-over-year. The good news is we have not seen, in the last few quarters, it has tailed off. We are not seeing dramatic changes in quarter-to-quarter concession points that is.

Dalton Chandler - Needham & Company

Alright, are you saying it internationally as well as domestically?

Gerard Puorro

We are seeing some impact internationally, yes.

Operator

Thank you, our next question comes from Anup Mehta from Canaccord Adams. Anup your line might be muted-I want to take your phone on mute?

Anup Mehta - Canaccord Adams

Sorry about that, thanks for taking the question. I was just wondering is there any change in the sales force internationally over the last quarter or any change in, I guess in the message since the merger was announced.

Gerard Puorro

No, not at all, as you know, I know you decided following some of the companies in this space. We have had very strong distribution channels and a large footprint internationally for a while, that has not change.

Operator

Thank you, (Operator Instructions).

Gerard Puorro

Alright, operator.

Operator

I am not showing any further questions.

Gerard Puorro

Alright, thank you. Thank you all for calling in. We will keep you apprised as we progressed towards closing the transaction with Syneron. Thank you again.

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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