Here is some new information and my commentary, regarding: estimates of
PMTI's future earnings, revenue of its CTI subsidiary, outstanding
shares, and Epilaser revenue.
FY'98 Earnings Estimate Revised Significantly Downwards
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In the past 30 days, First Call updated the mean estimate for FY'98, as a
LOSS of $0.24 per share. Previously, it carried an older estimate of a
profit of $0.20 per share, which I believe pre-dated the Coherent
agreement and PMTI's restructuring. I do not place much trust in such
estimates, but I note that in the past, they have tended to be way too
optimistic vis-a-vis PMTI.
CTI Revenue Revealed!
---------------------
On 9 Jan 98, PMTI filed its second revision of its S-3 share registration
of 12 Dec 97. With each S-3 revision, PMTI has revealed a bit more detail
about CTI's revenues:
12 Dec 97
"CTI does not yet derive revenue from its operations."
18 Dec 97
"CTI's revenues from its operations are, to date, immaterial."
09 Jan 98
"CTI's revenues from its operations for the year ended December 31, 1997
were approximately $900,000."
And dare I ask about profits? Let's be charitable, and say that GP was
zero. Based on the Q3 10Q, I estimate CTI's General and Administrative
expenses at about $2.5 million for the first 3 quarters, and perhaps $3.5
million for the year. Kick in another $1 million for sales and marketing,
and CTI would have an operating loss of about $4.5 million, or about 600
percent of revenue. So CTI CEO Tom O'Brien's "exploding business" seems
to have fizzled. If I were an investor, I would want an explanation of
the huge discrepancy between his bullish statements in the Mar'97 and
May'97 conference calls and reality. For some quotable quotes, see my
report here on 15 Dec 97, in message 610.
More Dilution in December
-------------------------
PMTI's second revision of its S-3 share registration of 12 Dec 97, filed
9 Jan 98, reveals that as of 7 Jan, outstanding shares had grown to
45,081,273. Referring to the following table, there has been a 47 percent
increase in a little more than one year; 36 percent in just the past 5
months:
31 Dec 96 30,596,812
30 Jul 97 33,149,170
30 Sep 97 39,750,574
31 Oct 97 40,276,310
30 Nov 97 43,116,141
07 Jan 98 45,081,273
Reserved shares include at least 17 million attached to convertible
debentures and preferred stock, much of them likely to be converted
within the next year.
First 50 Epilasers Sold Under Coherent Deal
-------------------------------------------
A recent PR provided information on the first 50 Epilasers sold under the
Coherent deal:
<<LEXINGTON, Mass., Jan. 14 /PRNewswire/ -- Palomar Medical Technologies,
Inc. (Nasdaq: PMTI), one of the world's leading cosmetic laser companies,
today announced that it has received approximately $6 million in orders
for 50 EpiLaser(TM) hair removal systems since the partnership with
Coherent, Inc. (Nasdaq: COHR) began November 18, 1997. To date, 40 of
those 50 orders have been shipped, with the remaining units scheduled for
imminent shipment.>>
Taken at face value, the PR reports Epilaser sales of 25 per month in the
first 2 months of the COHR deal, but I question whether or not that is
realistic. Consider this statement in PMTI's Q3 earnings PR of 30 Oct 97:
"The third quarter revenue was significantly affected by an expected
delay in our medical group's EpiLaser(TM) sales, resulting from the
September announcement of the agreement in principle with Coherent, Inc.
(Nasdaq: COHR) to distribute Palomar's hair removal products," said L.P.
(Dan) Valente, Chairman and Chief Executive Officer of Palomar. "We
anticipate that the EpiLaser sales shortfall from the third quarter will
be recovered, and possibly surpassed, during the fourth quarter of 1997
and the first quarter of 1998 as we complete the transition to Coherent,
with whom we are in the process of drafting a definitive agreement."
If the COHR LOI, announced 18 Sep 97, was the cause of the drop in
Epilaser revenue during Q3 (ended 30 Sep), then we may assume that
revenue continued to be impaired for the 2 months before the COHR deal
was signed, on or shortly before 18 Nov 97. However, sales/orders are
another matter.
Palomar's sales force may well have had a number deals nearly ready to
sign prior to 18 Sep. There may well have been some unsolicited orders
during the 2 month Coherent negotiation period. Also, there were rumours
that COHR was selling Epilasers even before the deal was signed. So at
least some of the 50 lasers reported in the 14 Jan PR, may well have been
sold over about a 4 month period, implying a rate closer to the
pre-Coherent average of about 15 lasers per month.
There is also the issue of PMTI's revenue per laser:
The PR of 14 Jan reports that the 50 Epilasers were equivalent to an
order of about $6 million. That implies about $120,000 per laser. I have
learned that Coherent is indeed selling the Epilaser for about $120,000
to $130,000; however, Palomar cannot possibly be revenuing all of that.
As an OEM, I doubt it receives more than perhaps 50 percent of the
Epilaser's "street-price", or about $60,000.
That would account for this warning about gross profit in the S-3 share
registration, signed 24 Nov 97, and filed 12 Dec 97:
"The Company anticipates that Coherent, with its direct sales force
numbering over 200, will be able to sell the Company's products in
greater volume than the Company could in the past through its independent
sales representatives. However, the Company does not anticipate that its
gross margins will improve until it introduces its new ruby and diode
cosmetic lasers currently under development."
I believe that such a warning would not have been made lightly, and
investors ignore it at their own peril.
We will likely have to wait for the FY'97 Q4 and FY'98 Q1 SEC reports
before we can accurately assess the success of the Coherent deal. In the
meantime, I take the 14 Jan PR with a grain of salt. I see in it no more
than $10 to $18 million in annual revenue. I cannot imagine PMTI becoming
profitable at that revenue. Even if it could manage a modest profit on
that little revenue, I believe it would not be sufficient to justify the
present share price, especially since outstanding shares are likely to
grow to about 60 million.
Ted Molczan
molczan@fox.nstn.ca |
