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PhotoMedex, Inc. (NASDAQ:PHMD)

Q4 2013 Results Earnings Conference Call

March 13, 2014 11:00 AM ET

Executives

Kim Golodetz - LHA

Dr. Dolev Rafaeli - Chief Executive Officer

Dennis McGrath - President and CFO

Analysts

Kay MacKay - Sindiant Capital

Anthony Vendetti - Maxim

Jim Sidoti - Sidoti & Company

Kim Opiatowski - Vertical Group

John Curti - Singular Research

Waheed Khorsand - BWS Financial

Operator

Good day and welcome to the PhotoMedex Fourth Quarter and Annual Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Kim Golodetz. Please go ahead.

Kim Golodetz

Thank you, operator. This is Kim Sutton Golodetz with LHA. Thank you all for participating in today’s call. Joining me this morning 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 2013 fourth quarter and full year. 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 section 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, March 13, 2014. 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 will turn the call over to Dr. Dolev Rafaeli.

Dr. Dolev Rafaeli

Good morning and welcome to our fourth quarter 2013 earnings call. My name is Dolev Rafaeli, I’m the CEO of PhotoMedex. Joining me today is Dennis McGrath, President and CFO. Our press release was issued earlier today and Dennis will follow me and provide the details.

Our updated guidance for the fourth quarter of 2013 calls for revenue to exceed $60 million. Our actual revenue came in at a record of $63.5 million. We experienced record results in our direct to consumer channel particularly in the North American market. There were some weeks in December we were able to buy media in above our normal weekly run rate of $1 million, in one particular week we were able to purchase more than $2 million in media and with an MER of approximately 3.86. Even with this increased spend we were able to keep our consumer sales and marketing expenses as a percentage of sales consistent with our past experience.

We completed our first full quarter in Brazil selling no!no! Hair product and results met our very early expectations and the test media has begun. Kyrobak for lower back pain has launched. It is early but the initial results are yielding efficient advertisement with low return rates. You can see more details about the products at www.kyrobak.com.

Two very favorable clinical studies were recently published. The first study illuminates the efficiency and speed of clearance of our XTRAC for treatment of severe psoriasis used in combination with topical therapy and compared to that of the much more expensive for insurance companies and potentially harmful for patients’ biologics.

The study notes that similar efficacy and speed to clearance results are achieved without the systemic immune suppression or other potential harmful effects. The second study, the other study demonstrates that our Neova product containing DNA repair enzymes achieved the best indications for prevention of sun damage associated with skin aging and non-melanoma skin cancer among all other commercially available mostly physician dispensed topical discussed in that study.

Our XTRAC US, business annual recurring revenue nearly doubled with an 80% increase quarter-over-quarter and installed base continues to grow. Just to point out, we ended 2013 with 501 sites compared to 361 sites at the end of 2012 compared to 268 sites at the end of 2011 and if you measure same store sales, the same store sales are up over 30% on average site. Our Neova consumer business increased more than fivefold for the year. The gross margin is up over the last year in our two key business segments which represent 97% of our business.

With the $10 million we borrowed, last $12 million we used to purchase stock, cash effectively increased by $12 million. At the direction of our Board, we're going to suspense providing quarterly revenue guidance as we have done in the past. Particularly as the LCA shareholders will be voting on the transaction in the coming weeks, but also likely for the foreseeable future, because we have a number of moving parts during the next couple of quarters.

Absence of more specific revenue guidance and as we have noted in prior earning calls, it is reasonable to assume that we have a base business without Japan that is in the $50 million to $55 million quarterly revenue, quarterly revenue range which delivers pretty consistence annual cash flow of $25 million to $30 million.

Another interesting point about our business model and one of the primary reasons we prefer to be in control of our own distribution where possible by selling direct in the countries we operate is that we are insulated from the whim of distributors like we experienced in Japan last year.

The LCA transactions as well as other strategic initiatives we will discuss in the future are additional steps towards that end. We have a number of initiatives ongoing. As the upcoming year unfolds, we will be providing updates on our progress with the no!no! in Brazil and Germany and the continued launch of Kyrobak.

As they launch we will update as we have every year on newer versions of the no!no! Hair targeting new market segments and introducing new technologies making the product even more consumer friendly as well as launch of new Neova products. We’ve just set up corporate subsidiaries in India and in Columbia to be used as launch platforms for these countries. We will update you in time on what this means for medical and consumer business.

We look forward to completing the acquisition of LCA-Vision and implementing our XTRAC strategy in dedicated clinics as part of our growth initiatives. You are likely aware, that the 30 day go shop provision of the definitive agreement ends this weekend.

With that, I'm going to turn it over to Dennis to provide you with more specific color on the quarter ending. Dennis please.

Dennis McGrath

Thank you Dolev. Good morning everyone. I'm going to provide you just some basic metrics that seem to be asked on each call. And later happy to provide as much color as you would like in the Q&A portion of our call.

As you may recall, in early January, we increased our revenue guidance for the fourth quarter, to more than $60 million. Actual revenues were $63.5 million and represent a 16% increase over the same period last year.

We also achieved record revenues for the year at $224.7 million. There are no consumer revenues from Japan in the quarter or for that matter the second half of the year. In comparison, we recorded approximately $10 million in Japan revenues in the second half of 2012.

We generated cash flow from operations of $14 million for the quarter and earnings of $0.16 per fully diluted share and adjusted EBITDA of $0.37 per diluted share.

We purchased $12 million of our common stock in the quarter to facilitate the timing of these U.S. purchases versus the collection of our revenues. We typically have some temporary advances from our international subsidiaries which is okay for tax purposes as long as they’re repaid by the end of each quarter.

As you can see in the fourth quarter we spent a lot early in the quarter to buy stock to ensure there were adequate cash balances in the right subsidiaries to optimize our tax positions given the timing of payments by our customers versus the payout for purchasing stock. We put a $15 million line of credit in place and advanced $10 million against that line, which we promptly repaid after the end of the year out of cash flow. There are no outstanding balances on the line of credit at this time. Cash per diluted share is $3.04 or $2.53 on a pro forma basis net of the repaid line of credit.

Couples of noteworthy items isolating certain expenses amounting to approximately $3.2 million in additional charges to the fourth quarter P&L are as follows. One, sales and marketing costs for the consumer segment were 63% versus 60% for the year. Many of the fulfillment houses from ship our products to the consumers were closed the Monday and Tuesday before New Year’s day, which means we incurred approximately $1.4 million in cost for media running Friday, Saturday, Sunday, Monday and Tuesday before New Year’s with the sales generated during that extended weekend not being shipped until the after January 1st.

Adjusting for this expense, sales and marketing expense for the quarter would have been inline for the year as Dolev said earlier. We incurred approximately 800,000 in litigation cost to pursue our company and [fringing] upon our no!no! patent.

Furthermore we downsized and relocated our corporate headquarters incurring approximately $400,000 in cost for severance, moving expense and inventory allowances connected to the move.

Lastly we recorded approximately $600,000 in inventory reserves for surgical and skin care obsoleted SKUs. Without these charges diluted EPS was approximately $0.28 for the quarter and $1.01 for the year.

With regard to our consumer revenues, there is a table as we usually present in the press release that provides you the detailed revenue split by business segment and by consumer channel for year-over-year comparisons for the quarter and for the full year. Consumer revenues, which represent $53.6 million of the $63.5 million for the fourth quarter, increased 16% compared with the prior year. Of the fourth quarter consumer revenues, direct response of $39.3 million increased 31% over last year and 34% sequentially.

Retail and home shopping revenue of $13.6 million increased 10% over last year and 115% sequentially. Of course distributable revenues were down reflecting Japan. Gross profit for the consumer segment of $46.2 million represents a 43% increased sequentially to 17% increase over last year.

In addition, the gross margin increased 80 basis points from 85.5% last year to 86.3% this year. Our media spend was approximately $21 million for the quarter and the North American MER was 3.18 with a one week high of 3.86.

XTRAC; the XTRAC treatment revenues for the fourth quarter increased 80% compared with the prior year and 12% sequentially. There were 21 new placements in the quarter bringing the installed base to 501 units at December 31st. Media spend for the quarter for the XTRAC was 704,000, resulting in a cost per lead of a $118.

Neova; Neova skin care products sold on the consumer platform increased 184% over last year and increased 21% sequentially. The physician recurring gross profit of $4.1 million increased 69% compared with the prior year and was about even with the preceding quarter. The physician recurring gross margin was 51.6% compared to 41.2% without the one-time of about 435,000 impacting this segment [roughly] inventory related to discontinued surgical and skin care SKUs, the margin would have been 62%, which is very impressive increase year-over-year.

The operating expenses for the year, the increase in media expenses reflect the heavier weight mix towards direct response for distributor revenues. In addition there was more than $2 million in advertising for XTRAC and Neova, as well as the initial start-up cost for Brazil and Kyrobak.

The annual sum total for G&A and R&D got them together, about even with 2012. However, the increase in the fourth quarter G&A reflects inflect my earlier comments about isolated expenses impacting the fourth quarter and also detailed in the press release.

The balance sheet; other than the comments I’ve already made provided on cash namely the 12 million in share repurchased and the line of credit, the increase in accounts receivable from last quarter represents approximately $5 million in December shipments to Bed, Bath & Beyond and additional shipments to home shopping network which were collected after the end of the quarter.

Our annual report in Form 10-K will be filed with the SEC on Monday, March 17th for the next earnings call scheduled for Thursday May 8th in the first quarter.

Operator you can open up the lines for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We’ll go first to Kay MacKay with Sindiant Capital.

Dr. Dolev Rafaeli

Good morning Kay.

Kay MacKay - Sindiant Capital

Hi, good morning, couple of questions. First, the situation in Japan, can you give us an update on where you’re at there in terms of trying to restart sale?

Dennis McGrath

We're still in the process; Kay there is no update to give publicly. Obviously, we're pushing that agenda. And we’ll update the market once we have something further to tell.

Kay MacKay - Sindiant Capital

Okay. My second question relates to Kyrobak, I did see the first commercial in my market in the bay area maybe a week ago or so. So wondering, first of all in how many markets are you launching that type of media and what types of spending should we be thinking about here in the next quarter or two?

Dr. Dolev Rafaeli

Kyrobak is advertised to -- good morning, Kay. This is Dolev. Kyrobak is advertised to several advertising channels. The one I assume you have seen is TV and this is National TV, so it's in all market. As with any other product we run with test media, which is small numbers. And we will increase that as we see efficiency coming along.

We started in the end of the fourth quarter with print media, which provided substantial good results and we expanded that into the first quarter and into the second quarter. We started with TV advertising in the middle of the first quarter and I assume this is what you have seen. And when results come in and we optimize then we will scale up the media.

Kay MacKay - Sindiant Capital

Okay. So safe to say it's still a fairly low expense right now?

Dennis McGrath

Yes. It would be considered immaterial at this point in time, very typical of how we launch any new project there, any new territory. It's not going to be significant to our P&L at this point in time until we start ramping it up. And we'll do so once we feel pretty confident of the messaging is the right messaging.

Kay MacKay - Sindiant Capital

Okay. And then just final question on Brazil, if you can give us any indication of what type of sales you might hope to achieve there this year?

Dennis McGrath

I appreciate the form of the question to try and get a little bit more specific guidance, but still as said in the prepared remarks, we’re going to abandon or suspend that for now. I can tell you that we’re still in the early stages. As you recall, we launched in around October 1st, September 30th, I guess was the first shipments that went out. For the quarter in the fourth quarter, it was under $500,000 of revenue, again testing the messages, starting with the retailers, launch some initial messages; it’s going to be slow in the beginning till we are absolutely sure we have the right messaging in the local language. And once we have more visibility later in the year, we will give a further update as to when we think that faucet is going to be turned on for work.

We’re still optimistic about the market, consistent with our past comments as the size of the market, the demographics, the buying power, the ability to charge higher price than we have in the U.S.; all of those elements are still in play, and nothing we’ve learned so far changes are optimism about that market.

Kay Mackay - Sindiant Capital

Okay. Thanks. I’ll get back in queue.

Dennis McGrath

Okay. Thanks, Kay.

Operator

We’ll go next to Anthony Vendetti with Maxim.

Dennis McGrath

Anthony, good morning.

Anthony Vendetti - Maxim

Hey, good morning guys. Just wondering, if we could talk a little bit more about the LCAV a little bit here since the date is coming up March 15th. Are you aware of any other bids or interest? And if not, when do you expect to have the shareholder meeting where LCAV will go down on the deal?

Dr. Dolev Rafaeli

Anthony, good morning. This is Dolev. Thank you for the question. We are following the process probably as close as you are. It is being run by their board and their management. They are in the process of go shop which is going to end March 15th. We are only notified on interested parties, there were interested parties. And once they filed the proxy, I am sure that everybody will see that our approach to the company has been very lengthy and it was very well negotiated. So, we hope that it would end up favorably to us.

Anthony Vendetti - Maxim

Okay. And then just a follow up on that, I know you’ve held the conference call regarding the strategy and so forth and how you rolled this out. You mentioned that in your prepared comments Dolev that this would be accretive in 2014. Can you talk about how you would get to that, how you would get it to be accretive? And then a little bit more about how long you think it would take to roll out XTRAC into the LCA-Vision centers and getting that message out there and strategy there.

Dennis McGrath

Anthony, this is Dennis. So, I appreciate your questions. And we have to abide by kind of the guidelines during this voting period. So, we can’t provide any more details and updates from what we did on the call announcing the deal. As far as our view point at the date we signed and then nothing is changed since in terms of being accretive to our cash EPS in 2014. We identified some low hanging fruit. They have got a business that’s north of 90 million in revenue, breakeven is a generalized statement. They’ve got some public company expense; obviously would be eliminated if the transaction is finalized. We believe that there are some synergies in their media spend which is substantial. It’s in the $20 million plus range, we spent $71 million last year. We believe that our platform affords us some volume, price discounts that certainly can be parlayed there. And if that number is 15%, you’re quickly adding up the public company expense of say $1.5 million in that the media expense of $5 million.

Obviously, we think that there is more than that. That’s the low hanging fruit we’re pretty certain, given this is an acquisition, using cash and debt, and the amortization expenses are fairly low in terms of the intangibles, plus the synergies. We think it’s accretive on a cash basis for 2014 pretty easily. As far as the speed of rolling out the strategic initiatives with the XTRAC, I will repeat some of the comments that we made at that call.

Production will not be a limiting issue, they have 62 facilities, 47 of which are fix site facilities that are likely candidates for the XTRAC, similar to the methodology cited earlier and we are very consistent on evaluating monitoring on a test basis. We will likely put a few locations together with the right branding and start to advertise and bring patients in and make sure that the operational flow is exactly right. And once those operational stats both inside the clinic as well as the recruiting of patients is optimized, then we’ll turn that faucet on.

As far as putting XTRACs in all of the clinics and finishing out what little we believe is required for each location in terms of capital improvements, we quoted in that earnings call that we think that the cost about fitting each of the location is about 50 grand, half of that is just the equipment, the other half is for the dual branding. That will occur in time and we’ll report on that. All those comments are consistent with what we said before. And I’m not going to beyond that simply because of the shareholder vote that’s about to occurring in the coming weeks.

Anthony Vendetti - Maxim

Sure. I totally understand. In terms of Japan, I know you commented on this, nothing new there, but is it safe to assume you are having negotiations with other distributors to replace the Ya-Man or Ya-Man, and if -- are you trying to set up a similar relationship with the different distributor or you are going to try to use the roadmap you had in Brazil and where you acquired your distributor?

Dr. Dolev Rafaeli

It is - Anthony this is Dolev. It is safe to assume that as I have updated before, we are looking at all possible routes, distribution, JV or our own operation in Japan. We are having progress in that in these avenues and we will update when this happens. I can also update that sales in Japan in the market for the product is continuing inventories of Ya-Man are going down as we expect to them to be. So, everything is on plan. And we will update once we have something more material in hand.

Anthony Vendetti - Maxim

Okay, guys. Thanks.

Dennis McGrath

Thanks Anthony.

Operator

We’ll go next to Jim Sidoti with Sidoti & Company.

Dennis McGrath

Good morning Jim.

Jim Sidoti - Sidoti & Company

Good morning. Just a follow-up on Japan. I guess do you expect that you will be back in the Japanese market by the end of 2014?

Dennis McGrath

Again, I’m going to limit the comment to no guidance, Jim. We have said in the past that we believe that the Japan market is a key market for us that we believe we ran into a distributor issue and not a market issue. And we are taking several steps to execute it against that belief. So, limiting the fact that we are not going to provide any guidance, I’m going to also not make any further comments in terms of our expectations for Japan in 2014.

Jim Sidoti - Sidoti & Company

But it does sound like all options are on the table including possibly going direct in that market. Is that correct?

Dennis McGrath

All options are on the table. We would like to find the right partner to do the sales that we expect there and safe to assume that we are in substantial discussions on all fronts.

Jim Sidoti - Sidoti & Company

Okay. And then can you just tell me the list price for the (inaudible) product?

Dr. Dolev Rafaeli

The list price is $300. And it’s obviously being, once you buy that, you are being absolutely cross sold to other products.

Jim Sidoti - Sidoti & Company

Okay. Thank you

Dennis McGrath

Thanks Jim.

Operator

We’ll go next to Kim Opiatowski with Vertical Group.

Dennis McGrath

Good morning, Kim.

Kim Opiatowski - Vertical Group

Good morning, gentlemen. One question with regards to the increase in XTRAC. Could you give us a little more color on the increase in utilization rate and existing franchisees for the quarter versus historical quarters? And the install rate of new doctors’ offices?

Dennis McGrath

Yes. So the installed rate was -- we placed 21 new placements in the fourth quarter to bring the grand total to 501. And same store sales continued increase. If you look at last year versus this year, just a generalized statement, the same store sales are about are up over 30%. So we think that there is continued room for improvement, obviously the 10 million patients in United States that have psoriasis (inaudible) in probably under 20,000 total patients in the therapy and having the safest, the most effective therapy. We believe there is a lot of room for increase. As you can tell from the media spend in the fourth quarter of north of $700,000 we increased the media spend; previous quarters we are in the $525,000 range, we’re continuing to push that envelop. It’s $700,000 in media [for quarters for price] would have what we spend in media on a weekly basis for no!no!. So we’re going to continue to expand that, but the results so far have been pretty impressive.

Dr. Dolev Rafaeli

So…

Kim Opiatowski - Vertical Group

Thank you very much.

Dr. Dolev Rafaeli

Kim this is Dolev. Just to provide a little bit more color, for those that were not following us. When the two companies merged at the end of 2011 we had 268 sites, this is up to 361 by the end of ‘12 and up to 501 by the end of ‘13. As important as it maybe if you follow the same store sales at the end of 2011 we were at about $4,000 per quarter same store sale and compared to roughly $9,700 at the end of Q4. So we are 250% growth same store sales compared to the time we merged the companies, on a quarter-over-quarter it’s just over 30% growth. We drive that growth through in a sense three different approaches. The most obvious approach is we advertise, we deliver the patients, they treat the patients thus we deliver business to the doctors and we bring up the awareness of the solution to the patients out there, that’s the most obvious approach.

The two other less obvious approaches are we have relaunched almost every single clinic we had in the market by teaching them how much of a business generator that is for them and going into their internal processes and seeing how efficient they are in the process from getting the patient in the door through receptionist into the treatment room, treating them for the first time, following up on them and making sure they come back in order for them to get good results because in some of the clinics in the past, this was not the case, it was another treatment and not a treatment that delivers both revenue and solution for the patients.

And the third approach and I covered this slightly with discussing the clinical studies. As you might appreciate we are operating in the market where patients are classified into severe moderate or three levels of disease. In the severe market we were considered to be a non-player because of the time it takes to treat these treatments and studies done by UCSF, University of California, San Francisco and other facilities that were just published so that not only we get same clearance levels and same speed as biologics, we do that without the side effects. So not only we are a player in that market, we are very significant player in that market, because we offer something that is amazingly economic for the insurance companies, amazingly economic for the doctors because they make money versus injections where they don’t make money and as patient [advocate] it’s amazingly well for the patients because they get results without the very severe side effects potential.

As this is rolled out and as more clinics come into like SOP and the way they administer the treatment, there is going to be growth in the number of patients that are being referred to this and there is going to be growth in the -- there is going to be improvement in the results they get thus where the most is going to expedite the awareness of the brand.

Kim Opiatowski - Vertical Group

Great, thank you very much.

Dr. Dolev Rafaeli

Thanks.

Operator

We will go next to John Curti with Singular Research.

Dr. Dolev Rafaeli

John good morning.

John Curti - Singular Research

Good morning. On the one-time charges that you listed, can you give us a breakdown between how they sell in terms of SG&A and cost of goods sold?

Dennis McGrath

Yes. And just bear with me one second, John. So the cost of goods sold was 850,000, sales and marketing was $1.4 million, G&A was $890,000, $900,000.

John Curti - Singular Research

Are there any shares left to repurchase under the share repurchase program?

Dennis McGrath

There is, we spent quite a bit last year, but with the acquisition we won’t be buying shares back for the foreseeable future, our focus will be on liquidating the debt.

John Curti - Singular Research

Can you give us metrics in terms of how many XTRAC treatments occurred or were performed in the fourth quarter and for the year?

Dennis McGrath

I don’t have that data, John. You’re happy to follow-up afterwards; we don’t report that as a matter of course in our public filings, this is revenue…

John Curti - Singular Research

That’s what I guess; I used to see that in the Qs.

Dennis McGrath

In times past before the Radiancy merger, but it’s a pretty simple calculation total revenues, treatment revenues divided by an average price. Our average price is in the 70s, our typical price is $78 or and goes up from there. There are some pricing points that are below, but I don’t have that data handy.

John Curti - Singular Research

This is kind of a question that goes back to LCA merger, your present model is pretty variable expense base, you are able to kind of move levers pretty quickly and respond to things. With the LCA merger, you are picking up some fixed costs in terms of leases and locations et cetera. Just talk maybe a little bit about how this is a little bit of a change in philosophy, or…?

Dennis McGrath

Well, I wouldn’t agree with that assessment. Let me provide you a few thoughts as to how we look at it. Your assessment in terms of the variable business model in the consumer side is absolutely right, we outsource the fulfillment centers, the call centers, the media buying and the contract manufacturing. So, you are absolutely right, it's a purely variable cost, no leverage to be gained in your margin, because of the increased revenue. Although it's pretty high margin today, it's 85% to 86%.

On the XTRAC side, this recurring side, this is where there is a lot of similarity with the LCA model. Now I'll give micro and macro view. So, on a micro view, I place a laser in a physician's office cost me 25 grand, $2,000 a year in maintenance cost. And that's the burden I have to overcome before I start to generate some profitability.

Now there is a high margin on that next patient in the door. The patient in the door for us, our view financially is annuity, a lifetime value of that patient is significant because you're not curing the disease, you are putting in for a long-term remission and the handful of treatment.

So, you can pick the number $1,500 to $2,000 in our current pricing with our partner physicians. It's higher than that [could have], the retail ASP versus the wholesale ASP, if you're doing it in your own clinics. But in any case, if a high margin business for that patient in the door and the game is how many patients can I get through the door at that fixed cost that are incurred? And even you have seen this in our financials over the last several quarters that that margin is increasing because our utilizations are going up, but our fixed cost is staying flat, except for the new placements.

The similarity with the LCA model is, yes they have a fixed cost with the facility there. And utilization is the same game; the contribution margin for that next patient in the door is significant. And where we think we can strategically help in that business, it's two-fold. One, we lay our business on top of that with a high margin area that utilizes, leverages their fixed cost, plus we think we can help them in the capture of patients both from a pricing standpoint and from a model standpoint.

We think we're pretty good at our marketing, capturing and keeping patients and capturing keeping the consumers. And we think that that expertise will be very synergistic for the LCA model. So, the model is very similar to the recurring revenue model, it’s what are my fixed costs, how many patients can I get in the door and have them come back and buy something else and stay in my stable of services. So in that regard, we think they’re very similar.

Dr. Dolev Rafaeli

And John this is Dolev just to add on to this and to put a little bit more color. If you follow the story for a long time when we merge the two companies for the medicine Radiancy, the PhotoMedex business in technology was the same business. But on the skin care side it was reaching only through a B2B channel, no exposure to consumers. And on the XTRAC side it was reaching only through the physicians with no control over the messaging of the company.

Changing these two things, reaching out to consumers on the skin care side through our consumer channel and reaching out to the patients and to the market and creating the brand awareness has generated this growth in same-store sales of 250% in XTRAC has generated that five-fold growth in the Neova consumer sales.

With LCA bringing on board not only their existing $90 million of business, but a market in need for eye surgery and hundreds of thousands of consumer contacts a year, where up until the time we merge, their business model is I want to convert as many of them to do surgery, but once I catch them I release them because there is no ongoing business relationship with them.

So LCA is very good at catching, it is very good at providing great customer service but then unfortunately they release because they have nothing else to offer the same patient even though the patient had good customer experience. What we offer to the same patients that come into LCA those that’s convert and do the surgery and those that do not convert and do not do the surgery once they become part of that consumer database that reached out we offer them other things and past experience shows that 26% of the people that call into buy no!no! Hair end up buying Neova and I can elaborate on this, but every time we get another customer database which is alive and thriving and coming in, the business expand.

At the same time since we touch several million consumers a year to our other initiatives essentially for free, we can mention the laser treatment essentially for free, we can offer the business proposals that LCA does which in a way expense the media reach or the market reach of LCA.

So on the same platform on the one hand we gained from consumer reach that LCA has for our existing business on the other hand they gain from consumer reach that we have on our existing business into their business all of that was not modeled into the numbers when we presented the deal it is modeled into our day to day how we do business and it is exemplified in how we took PhotoMedex from a money losing business in 2011 to a breakeven business in 2012 to a money making business in ‘13.

John Curti - Singular Research

And my last question, the professional business, very, very small, but the revenue has been down kind of year-over-year each quarter, have we kind of reached a bottom in this $7 million to $8 million range, should that creep up back towards [TAM], is there anything going on there?

Dr. Dolev Rafaeli

The professional business has two parts. There is the traditional part that came through Radiancy acquisition or the merger with the Radiancy. Radiancy essentially did not develop that channel, since we focus -- we turned our focus towards the consumer market in 2006. And there have been [Technical Difficulty] sales in that channel and it has been many, many years.

On the PhotoMedex side, we stopped selling XTRAC in the U.S. So these two combined answer your question. It’s a very small part of the business. And I assume that answers the question.

John Curti - Singular Research

It does. And then I think Dennis in the past, you basically said; I think that the gross profits kind of from the professional side of the business basically paid for the sales force. Is it still the case?

Dennis McGrath

It is and the other portions of our business are 97% of other revenue and profitability. And there are some things in the professional area that we have planned. But the time we have here is probably not worth going through those initiatives given that it’s 3% of our business.

John Curti - Singular Research

Okay. Thank you very much.

Dennis McGrath

Thanks, John.

Operator

We will go next to Waheed Khorsand with BWS Financial.

Waheed Khorsand - BWS Financial

Hi. Are you guys planning anything on QVC this year, for this quarter?

Dr. Dolev Rafaeli

We are not selling in QVC in the U.S.; I assume you’re asking about QVC in the U.S. About QVC in the UK, we’ve been on QVC in the UK since 2008 and we sell in every quarter, specifically this quarter, I think I believe tomorrow we have a big hearing but it’s in the UK. So, and we also sell QVC in Germany, if that completes the answer.

Waheed Khorsand - BWS Financial

And the Germany one, is that ongoing this quarter as well?

Dr. Dolev Rafaeli

Yes, it is ongoing this quarter. In the U.S., our home shopping channel is HSN. And we have been with HSN on a major hearing, just three weeks ago and there are several planned for this year.

Waheed Khorsand - BWS Financial

Okay. And can you provide any sales trend on the XTRAC?

Dennis McGrath

I’m sorry could you repeat the question?

Waheed Khorsand - BWS Financial

Can you provide any sales trends so far this quarter on the XTRAC?

Dennis McGrath

On the first quarter?

Waheed Khorsand - BWS Financial

Yes.

Dennis McGrath

Yes. We’re not going to provide any update. It starts to speak of the guidance, which we’ve been asked not to provide, particularly with the ongoing vote for LCA and the other moving parts. So we’ll be reporting on the first quarter in May.

Waheed Khorsand - BWS Financial

Okay. Thanks.

Operator

And we’ll go back to Kay MacKay with Sindiant Capital.

Dennis McGrath

Hello again, Kay.

Kay Mackay - Sindiant Capital

Thanks for the question. Dolev, with respect to XTRAC, can you help us understand how you are able to manage the relationship with your physician partner with respect to the patient you are spending over and trying to prioritize for lack of a better word, where that patient sits in their queue so that that patient has a good experience and doesn’t have to sit around in the waiting room too long, perhaps he can get an appointment, get in, get out and then hopefully has a good experience and wants to come back?

Dr. Dolev Rafaeli

So, our physician base over 500 of these are all over the country, they are in all markets. And when a call comes in, we by zip codes or if you call in, we will look you up by zip code, we will know which physician is closest to you, we will get the list of these physicians. These are prioritized in our system according to their ability to treat you. And this is being done continuously. So we look at their ability to take -- to intake the patients and keep them in treatment.

We follow up at both ends of the fence. So we send in a 100 patients and we check to see how many of them were taken into treatment and how many of them were kept in treatment. If you are very good at that, you will be at a top of the list. We will be referring more patients to you. If you are not very good at that, you will be at the bottom of the list, which means you’re going to be getting less patients from us.

We will be visiting you frequently and we will be giving you a kind of a report card that says this is what we have done for you. We have advertised, we’ve sent you a 100 patients, we’ve helped you out with clinical trainings, we’ve helped you out with local marketing initiatives, we’ve helped you out with making sure that your platform is up to date. So, depends on the clinic, we have several levels, XTRAC is not one device. There are several different devices depending on the volume of treatment that the clinic conducts, the type of treatment. So, we have updated your platform. We gave you other types of support in the form of rebate for the co-pays and some other things. So that’s going to be on the, call at the right hand side of the report card.

On the left hand side, we’re going to report to you as the physician, how many of these patients that we sent in have been treated by you. We are also going to report to you and then this is worth mentioning, every single one of these over 500 sites are using us as an insurance reporting and support tool.

So, we’re the ones that go between them and the insurance company to get the patients pre-clear for treatment. So, we’re going to report to you how many charts you have opened. In essence, we’re going to tell you, we’ve helped you with so many charts, so many patient charts with the insurance company. And we’re going to tell you out of these charts how many patients ended up in treatment. So, you as a physician is the owner of the clinic, you’re going to have the full visibility into your own internal process to understand how good you are.

We’re going to also tell you, not with names, how good are the other physicians in your territory. So, we’re going to tell you that if you are converting the patients at 70% rate and your territory is converting at 85%, then there is a lot to aspire to. And if you’re the best in the territory, we’re going to tell you, you are at the top of the list and you’re getting most of the patients.

That is the big change from how PhotoMedex was performing in 2011. And that change drives the physicians to cooperate with us and to tell us about their own business initiatives. What are the new clinics they are opening up? What is the new trends they want to do? Do they want to double up on the number of patients they can take? How else can we help them with advertisement? How can we better present them? So it’s a two way street of us communicating with the physicians and providing them information.

We have great visibility into the demand because we advertise both nationally and locally and we get the leads, if you want to visualize this, we get the leads on a map. We know exactly where people are coming from and we know exactly in the city where you operate in, we know exactly where you want to open your new clinic. We know how we could fill up that clinic and we know how we can push more patients there because it’s a very, very scientific process.

Kay Mackay - Sindiant Capital

Okay, thanks for that information. It’s pretty insightful.

Dennis McGrath

Thanks Kay. Operator that appears to be our last question. So just a final comment here I want to mention that we will be presenting in New York next week at the Sidoti Emerging Growth Research and Institutional Investor Forum on Monday 17th. Our presentation is at 10.40 in the morning. Hope to see some of you at the conference. We look forward to reporting back to you in May for our first quarter results which we expect to report on May 8th. Thank you everyone for joining today. Have a great day.

Operator

This does conclude today’s conference. Thank you for your participation.

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