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Obagi Medical Products, Inc. (OMPI)

Q2 2010 Earnings Call

August 5, 2010 4:30 pm ET

Executives

Ina McGuinness - Integrated Corporate Relations

Steve Carlson - President and CEO

Preston Romm - CFO and EVP of Finance, Operations, and Administration

Analysts

Annabel Samimy - Stifel Nicolaus

Irina Rivkind - Duncan Williams

Scott Henry - ROTH Capital Partners

Cathy Tong - Sparta Asset Management

Presentation

Operator

Greetings and welcome to the Obagi Medical Products second quarter 2010 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Ina McGuinness of Integrated Corporate Relations.

Ina McGuinness

Thank you, operator. Earlier this afternoon Obagi Medical Products released its financial results for the second quarter ended June 30, 2010. If you have not received press release it's available on the investor relation section of the Obagi Medical Products website at www.obagi.com.

This call is being webcast and a replay will be available on the company's website for 30 days. Before we begin, we would like to remind you that today's remarks contain forward-looking statements within the meaning of federal securities laws. These statements do not guarantee future performance, and therefore, undue reliance should not be placed on them. We refer you to the risk factors contained in Obagi Medical Products' SEC filings for more details and discussions of the factors that could cause actual results to differ materially from those projected in any forward-looking statements.

All information provided on today's call is as of the date of the live broadcast, Thursday, August 5, 2010, and Obagi Medical Products assumes no obligation to update any such information.

Participating in today's call from the company are President and Chief Executive Officer, Steve Carlson; and Chief Financial Officer and EVP of Finance, Operations, and Administration, Preston Romm.

And with that, I'd like to turn the call over to Steve Carlson. Steve?

Steve Carlson

Thank you, Ina. Good afternoon and welcome to our call. We are very pleased with our double-digit topline growth during the quarter, especially given the current economy. Our revenue increased 11.6% year-over-year to $28.9 million, fueled by growth within the majority of our product lines, especially our Nu-Derm and our Vitamin C product segments.

In spite of some of the higher than expected extraordinary expenses, that Preston will discuss in more detail later, we achieved solid profitability of $3.1 million or $0.14 per diluted share. During the quarter we also made good progress in enhancing and implementing marketing strategies for our current product lines as well as continuing to invest in new product initiatives.

As a result while consumer confidence continues to fluctuate, most of our product lines performed well and we believe that our product quality efficacy and price points compared to alterative esthetic procedures will continue to drive demand.

Now, let me review our second quarter performance by geographies and product lines. Sales from our U.S. business increased 16.3% to $24.4 million year-over-year, while opening 270 new domestic accounts. This account level is down from our prior quarter largely due to our decision to reorganize our 25 person Derm specialty sales force.

We've expanded the physician specialties covered by this sales team to also include emerging growth opportunities with non-Derm physicians, such as ob-gyn and internal medicine. As a result of these sales, people spend a meaningful portion of the quarter developing relationships with existing accounts within these other specialties that were reassigned to them and had less available time to pursue new account openings.

As of June 30, we had 6,350 active accounts, a 7% increase from a year ago, but essentially flat to Q1, as our lower account openings was matched by corresponding level of churn. While our new account adds were lower, with the shifted focus of our sales force, we saw great sales success.

We had a meaningful contribution from our new and improved O-C Rx systems, resulting in our vitamin C product segment up 38.5% year-over-year. During the quarter we initiated an "Obagi for Life" new account seed program, where 220 potentially interested physician practices committed to having the doctors, staff and select patients trying experience Obagi results for themselves prior to becoming an active account.

We anticipate this program will produce strong account growth in the third quarter. We also re-launched the patient education program called Inner Circle, adding nearly 10,000 members and building Obagi's database of end-users of our products to nearly 60,000 patients.

The Inner Circle program is a way for us to reach out to our physician's patients with more information on education about skin care, and the increased patient loyalty to both, their physicians and Obagi products. We believe this program has a lot of future potential and look forward to discussing this in more detail in next quarter's call.

Regarding international, international revenues declined 8.6% year-over-year to $4.5 million. As you know, we're dealing with a lot of small numbers and international orders tend to experience timing shifts. Licensing fees for the quarter were down about 17% to $1 million as a result of Lodo's lower than expected Derma Force sales and a slow Japanese economy.

However, we continue to explore ways to build our international business with a particular focus on growing existing international distributors, such as Canada and the U.K., where we see solid growth and market share gains. As well as capitalizing on emerging opportunities in Korea, China, India and Brazil. As everyone hopefully appreciates, building international relationships, and picking the right partners takes time and patience.

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