Whew! I just finished a great workout, and I didn't even have to go to the gym to break a sweat. Instead, I sat down to listen to the latest earnings conference call of aesthetic laser manufacturer Candela (NASDAQ:CLZR). My brain got plenty of exercise trying to follow the mental and linguistic gymnastics the company performed to satisfy its claims of major business growth.
As an innovative leader in the aesthetic laser market -- using lasers to banish unwanted hair, unsightly spider veins, acne, and sagging skin -- Candela had benefited from business and investor interest in its broad line of products. Yet the company seemed to stagnate last year, right after the CEO promised "white-hot" sales, which never seemed to materialize.
Where Candela has put in workmanlike growth of 15% or so, competitors like Palomar Medical Technologies (NASDAQ:PMTI) and Cutera (NASDAQ:CUTR) have been growing revenues by 30% to 50% a year. Sure, they've started from somewhat smaller bases, but growth is growth, and these companies stand not too far from where Candela was a year ago.
This is where Candela's workout kicks into overdrive. Its press release headline trumpets:
"Candela Corporation Reports Record Revenues, Solid Profits and Increase in Market Share"
Wow! Not only did it chalk up "record revenues," but also "solid profits" to boot. Provided you forget the conventional definitions of "record" and "solid."
Revenues only grew 13% this fourth quarter. That's less than half of the 29% growth Candela notched last year. Every single quarter for the past two years, it has reported steadily decreasing rates of growth. Its past performance may have been a yellow flag, but this greater-than-50% dropoff in sales growth is a bright red neon sign to me.
And those profits? They totaled $0.14 a share, in contrast to last year's, um, $0.19 a share. Of all the adjectives that spring to mind to describe Candela's profits, "solid" isn't one of them.
OK, let's forgive management for trying to put a smiley face on a tough situation. The company recently lost a court case over royalty payments, and it's facing higher costs. Candela's expenses rose 24% this quarter, even as its tax burden fell, so we can cut the company some slack here.
Yet the third part of the headline, the "Increase in Market Share" bit, really cramped my brain. A company that grew sales 19% for the year, in a market that by Candela's own calculations grew 40%, strains credulity in saying that it's capturing market share.
Candela's CEO laid out his rationale: The company added up the revenues of its sector's publicly traded companies four quarters ago and determined what percentage of the pie each owned. Then it did the same thing for this quarter. Candela's math breaks down the market as follows:
| Company | Then | Now |
|---|---|---|
| Palomar | 13% | 12% |
| Cutera | 14% | 14% |
| Syneron (NASDAQ:ELOS) | 17% | 16% |
| Laserscope (NASDAQ:LSCP) | 10% | 17% |
| Lumenis (Pink Sheets: LUME) | 21% | 20% |
| Candela | 25% | 31% |
| Total | 100% | 110% |
Even as its sales grow incrementally, Candela is supposedly still pulling away from the pack.
Apparently, I wasn't the only one having difficulty grasping its proof. Several analysts on the call tried to hold Candela's managers to the numbers, but they wouldn't elaborate. Instead, they advised would-be fact-checkers to contact the company directly to get its math in writing. Guys, if you're going to highlight a fact in your earnings release, you might want to have some data available during the call to back it up. Furthermore, let's not forget that the entire market currently adds up to more than 100%, according to Candela. Talk about fuzzy math!
The company also broke down revenues according to laser types. Hair removal equaled 45%; vascular treatment was 27%; skin rejuvenation, 5%; and so forth. It reminded me of a prior call, when an analyst asked just how Candela was able to determine what a laser was used for, since they often had multiple uses. Management admitted they couldn't be certain, so they just assigned percentages to the various segments. Nothing odd about that, right? Right?
The press release also mentioned Candela's new partnership with distributor McKesson (NYSE:MCK), which promises to target Candela's "non-core" market of general practitioners, obstetricians, and gynecologists -- and reduce the company's margins. Even so, Candela said it expected gross margins to rise above 50% again by the end of the next fiscal year. We'll see. (Maybe it'll just assign a percentage to margins.)
Candela also boasted that it had cut its royalty payments to the Regents of the University of California, to whom it had lost the earlier lawsuit. However, even this wasn't entirely accurate. Candela did renegotiate its royalty agreement, halving the percentage to be paid from 6% to 3%. But the previous royalty was paid on the lower list price, while the new percentage is based on the higher selling price. It's a reduction, to be sure, but not as large as the company would have you imagine. In addition, Candela paid the $3 million royalty all at once, a sum it plans to amortize through cost of sales over the decade-long agreement.
With each succeeding quarter, I become more disillusioned with Candela's management. It overpromises and underdelivers -- not exactly the hallmarks of a Foolish investment. Every three months seems to bring the promise of great future progress, but that future keeps getting delayed. In the past, it was the Gentle YAG laser, then the intense pulsed light laser. Now we're suggestively told that Candela is considering entering the cellulite market.
Perhaps it ought to trim the fat off its verbiage instead and spare investors any more unneeded workouts.
Feel the burn with related Foolishness:
- Candela Brightens on Sales Growth
- Candela's Lasers Offer Dim View
- Candela Does a Slow Burn
- Will Candela Burn Investors Again?
Fool contributor Rich Duprey owns shares of Candela but does not own any of the other stocks mentioned in this article. The Motley Fool has a disclosure policy.
