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Thermage Inc. (THRM)

Q3 2008 Earnings Call

November 10, 2008 4:30 pm ET

Executives

Doug Sherk - EVC Group

Steve Fanning - Chairman, President and CEO

Dan Ferrari - Vice President, Business and Financial Planning

Clint Carnell - Chief Operating Officer

Analysts

Keay Nakae - Collins Stewart, LLC

Dalton Chandler - Needham & company

Anthony Vendetti - Maxim Group

Jody Dai - Leerink Swann, LLC

Chris Cooley - FTN Midwest Securities

Hesham Shaaban - Maxim Group

Presentation

Operator

Good afternoon, ladies and gentlemen, thank you so much for standing by. Welcome to the Thermage third quarter 2008 earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions)

As a reminder, this conference is being recorded today on Monday the 10th of November, 2008. I will now turn the conference over to Mr. Doug Sherk of the EVC Group.

Doug Sherk

Good afternoon. By now everyone should have access to the third quarter of 2008 earnings release which was distributed this afternoon after the market closed. The release is available on the Investor Relations section of Thermage's website at www.thermage.com and with our Form 8-K filed with the SEC. In addition, you can call our office at 415-896-6820 and we will get one to you immediately if you don't have access to the Internet.

Before we get started, during the course of this conference call the company will make projections and may make other statements about the company's business that are forward-looking and are subject to many risks and uncertainties that could cause actual results to differ materially from expectations. A detailed discussion of the risks and uncertainties that affect our business is contained in the company's SEC filings, particularly under the heading Risk Factors. Copies of these filings are available online from the SEC or on the Thermage website.

The company's projections and forward-looking statements are based on factors that are subject to change, and therefore these statements speak only as of the date they are given. The company does not undertake to update any projection or forward-looking statement.

In addition, to supplement the GAAP numbers, we have provided non-GAAP net income and non-GAAP diluted income per share information that excludes the impact of the stock-based compensation. We believe that these non-GAAP numbers provide you with insight to conduct a more meaningful and consistent comparison of our ongoing operating results and trends compared with historical results. A table reconciling the GAAP financial information to the non-GAAP information is included in our earnings release.

With that, I would like to turn the call over to Steve Fanning, Chairman, President, and CEO of Thermage.

Steve Fanning

Good afternoon. Thank you for joining us for our third quarter 2008 conference call. Jack Glenn, our Chief Financial Officer, had to begin jury duty this afternoon, so Dan Ferrari, our Vice President of Business and Financial Planning, will be sitting in for Jack. Also with me today is Clint Carnell, our Chief Operating Officer.

This afternoon we released our financial results for the third quarter that ended September 30, 2008. We also announced the operating results of Reliant Technologies. While this was a very challenging quarter for the aesthetics industry, we believe our results, especially when combined on a pro forma basis with those of Reliant, demonstrate the strength of our business model and the strong strategic rationale for the Reliant acquisition.

Turning first to Thermage operations; our revenue fell 6% in the third quarter from the prior year, reflecting a decline in sales on both systems and treatment tips. While average selling prices of new systems were at the same level as last year and ASP on treatment tips increased compared with the prior year, unit volumes were down. The decrease was a reflection of the difficult market environment.

The credit squeeze has also slowed spending on capital equipment, which has affected some of our customer base. In addition, consumer demand for procedures has also declined.

However, we feel that Thermage and Fraxel have several advantages in this environment, and we are meeting the challenges better than many of our competitors. One major benefit for both companies is a strong recurring revenue business model. In Q3, treatment tips and other consumables represented 77% of Thermage's product revenue and 23% of Fraxel’s product revenue. Thermage's partner plan continues to be a driver for treatment tips sales. Under the plan, we offer doctors a set number of monthly treatment tips and consumable products at a fixed monthly price. The majority of our tips and consumables in Q3 were sold through the partner plan. Following the close of the acquisition of Reliant, we expect to implement a partner plan for Fraxel tips.

Finally, we believe our bifurcated sales force has been a benefit in this market. We have one sales force focused on selling new systems. A second team sells upgrades, tips, and other consumables. During the quarter, we sold 111 systems including 55 upgrades. Post acquisition of Reliant, we plan to apply this model to the Fraxel product line as well.

Our gross profit remained high at over 75%. Treatment tips' ASPs increased to $363 in the recent third quarter compared with $316 a year earlier. Expense management is crucial during economic slowdowns, and we have focused very hard on controlling our costs. During the third quarter operating expenses declined by approximately $400,000 from the prior-year period. Importantly, we also generated $1.4 million in cash from operations during the quarter. Our solid gross margin, good expense control, and cash generation during a difficult quarter continues to demonstrate the strength of our business model, and the proposed Reliant acquisition will further enhance our position.

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