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Thermage Inc. (THRM)

Q2 2008 Earnings Call

August 12, 2008 8:30 am ET

Executives

Doug Sherk – EVC Group

Steve Fanning – Chairman, CEO, President

Jack Glenn – CFO

Clint Carnell - COO

Analysts

Keay Nekae – Collins Stuart LLC

Anthony Vendetti – Maxim Group

Isaac Ro – Leerink Swann LLC

Dalton Chandler – Needham & Company

Scott Palmer – Paragon Associates

Hesham Shaaban – Maxim Group

Presentation

Operator

Good morning ladies and gentlemen, and thank you for standing by. Welcome to the Thermage second quarter 2008 results conference call. (Operator Instructions) I would now like to turn the conference over to Doug Sherk.

Doug Sherk

Thank you, operator, and good morning everyone. By now everyone should have access to the second quarter 2008 earnings release which was distributed yesterday afternoon after the market closed. The release is available on the investor relations section of Thermage's Website at www.thermage.com with our form 8-K filed with the SEC.

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 these non-GAAP numbers provide you with an insight to conduct a more meaningful and consistent comparison of our ongoing operating results and trends compared with historical results. [Inaudible] reconciling the GAAP and financial information to the non-GAAP information included in our earnings release.

Later in the call the company will also offer a slide presentation which includes information concerning the pending acquisition of Reliant Technology including financial results as disclosed in the form S-4 recently filed with the SEC. The slide presentation can be accessed from Thermage's Website at www.thermage.com. Please click on the link to the presentation at the lower left hand side of the Thermage home page just below the world map.

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

Steve Fanning

Thanks, Doug, and good morning everyone and to those of you out on the West Coast a very good early morning. Thank you again for joining us today for our second quarter 2008 conference call. With me today is Jack Glenn, our Chief Financial Officer and Clint Carnell, our Chief Operating Officer. The agenda for our conference call this morning will be to first review our results for the second quarter and then turn to a Webcast presentation and discussion on the pending acquisition of Reliant Technologies which we announced on July 7th. Finally, we will open the call for questions. Now, on to our second quarter results.

Yesterday afternoon we released our results for the second quarter that ended June 30, 2008. We reported revenue for the quarter of $17.9 million at the high end of our preliminary results that we announced on July 7th. This was a solid quarter for Thermage in what has been a difficult period for the aesthetics market. We grew both the top and bottom line, increased treatment tip and other consumable revenue by 15%, substantially improved our gross margin and sold the second largest number of system upgrades since the introduction of the ThermaCoolNXT last year.

In addition we announced a proposed acquisition that combines two of the market leaders in skin tightening and skin resurfacing. We believe this transaction has the potential to boost the growth opportunities and our earnings power. Now to begin I'd like to talk about some key financial highlights of the second quarter. We grew our revenue by 2% which was driven by sales of our tips and consumables. Treatment tip revenue in the quarter increased both domestically and internationally.

In the second quarter sales of our treatment tips and other consumable revenue represented 74% of revenue compared with 70% in the first quarter and 66% in last year's second quarter. We attribute the increase in tip revenue to continued high demand for our premium treatment tips including the STC Tip, the DC Tip or body shaping Tip and the ThermaCool CL for cellulite, all of which we introduced within the last 12 months.

Tip ASP is worth $337 in the second quarter compared with $300 in the second quarter of 2007. While sales of new systems were down in Q2 on a year-over-year basis we had the second highest quarter of system upgrade sales we introduced the NXT in February 2007. Our sales team placed 165 systems which included 89 system upgrades during the period.

Our second quarter revenue results confirm the high regard patients and clinicians hold for Thermage procedures. The success of our procedures and our differentiated business model that focuses on reoccurring revenue are the primary reasons we are generating modest revenue growth and profitability.

The bifurcation of our U.S. sales force is contributing to our success by separating the focus on servicing existing accounts in tip sales from sales of new systems we are able to build business with our loyal customers while devoting the attention and time required to generate leads, build new relationships and close new sales. While the economic climate is affecting our industry, our company did an excellent job of putting our heads down, focusing on our business and growing sales. I would like to thank our employees for this result. Our focus over the remainder of 2008 will be on increasing system sales especially in international markets, generating strong reoccurring revenue from the sale of treatment tips and closing the Reliant transaction.

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