Last year, aesthetic laser manufacturer Candela (Nasdaq: CLZR) promised us "white hot" sales. It hinted at maintaining sales growth in excess of 30% year over year. It said the introduction of its new laser, the Gentle YAG, was the start of a "watershed event."
Perhaps it's time to take Candela out to the woodshed instead.
The maker of lasers used in cosmetic procedures -- such as the removal of unwanted hair and tattoos, vascular or pigmented lesions, wrinkles, acne, and surgical scars -- reported second-quarter profits that missed its own estimates, let alone analyst projections. In November, Candela said it expected earnings from continuing operations to be $0.12 to $0.14 for this quarter, but the reality was 33% to 43% lower at $0.08 per share. Revenues, though within the range set by the company, were still at the bottom rung of the ladder at $28.2 million.
The Gentle YAG has not been enough to carry the company forward. While Candela is the leading cosmetic laser manufacturer, it now says that it has been operating at a disadvantage to other laser companies: It didn't have a pulsed light system -- a technology to treat sun-damaged skin -- which most of the other ones were offering to their customers. Oh, now you tell us.
To shore up this apparent deficiency, Candela now has a licensing agreement with Denmark-based Danish Dermatologic Development to distribute its patented Ellipse intense pulsed light system. However, the product is still pending before the Food and Drug Administration, so it probably won't contribute to revenues next quarter. This is a shame, because Candela seems to need the help.
Despite veiled suggestions that it could do in the future what it was doing in the past in terms of growth, that hasn't turned out to be the case. Revenue growth has been steadily declining, from 35% in the first quarter of 2003 to 18% this quarter and a projected 15% at most for next quarter, based on Candela's estimates. Here are its revenue growth numbers:
| As a percentage |
2004 |
2003 |
| First quarter |
19.8 |
35.5 |
| Second quarter |
18.0 |
28.5 |
| Third quarter |
15.0e |
25.9 |
| Fourth quarter |
n/a |
29.5 |
| In millions |
2004 |
2003 |
2002 |
| First quarter |
22.4 |
18.7 |
13.8 |
| Second quarter |
28.2 |
23.9 |
18.6 |
| Third quarter |
32.0e |
27.7 |
22.0 |
| Fourth quarter |
n/a |
34.2 |
26.4 |
e = estimated
This is not a good prognosis for a company I once thought had potential as a Motley Fool Hidden Gem. Now it is putting the Ellipse I2PL device in the same unenviable position the Gentle YAG was in last year: the defining product of the moment.
Yet it's facing stiff competition in segment leaders Lumenis and Palomar Medical Technologies (Nasdaq: PMTI), which offer similar products. Certainly the device will expand the product line, once it receives FDA approval, but there's no guarantee Candela will achieve any appreciable market penetration any time soon.
The conference call included other tidbits of disappointment: falling margins, very high levels of days sales outstanding, and no plans for a share buyback even as the stock was pounded again for a 20% loss.
Candela very much appears to be adrift and not exhibiting any of the focus of one of its lasers.
Home in on the laser industry here:
Want to learn more about Candela and cosmetic laser systems? Check out the Fool's Candela discussion board.
Fool contributor Rich Duprey has been taken to the woodshed on many occasions. He owns shares in Candela but does not own any of the other stocks mentioned in this article.
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