Unfortunately for early ZLTQ investors, Zeltiq hasn’t panned out quite as well.
Zeltiq’s CoolSculpting System — which uses controlled cooling to helps to reduce people’s stubborn fat bulges through a natural process known as apoptosis — was a hit, and to further its growth, Zeltiq pulled off an IPO in October. On its first day of trading, the stock soared 19% and hit a high of $17.41.
After about a month, ZLTQ started a downward slope that turned into a plunge to below $6 this week. The primary culprit for the recent dip: its weak earnings report. In the latest quarter, Zeltiq posted a loss of $5.8 million, or 22 cents per share, compared to Wall Street expectations for a 9-cent loss.
The guidance for 2012 also was a huge disappointment, with Zeltiq revenues expected to range from $90 million to $94 million, again, under a consensus estimate for $113.9 million.
So how did things go so wrong so suddenly? Well, maybe it wasn’t so sudden. As it turns out, Zeltiq gave investors plenty of warnings in its S-1 filing:
Tough Customer Adoption
Zeltiq sells its machines to physicians, but to make the capital investment, they need to be convinced that there is substantial demand for the treatment. Keep in mind that a variety of available alternatives to Zeltiq’s process — such as minimally invasive or non-invasive aesthetic procedures — were mentioned in the “Risk Factors” of the S-1.
So Zeltiq has been aggressive with sales and marketing. For example, in February the company launched its “Let’s Get Naked” advertising campaign. But it still is in the experimental phase, and success is far from certain.
Zeltiq listed several rivals in its S-1, such as Erchonia and Solta Medical (NASDAQ:SLTM). Zeltiq’s solution has unique features; for instance, there is no need for a diet and the treatment is painless. But when it comes to actually racking up consumer interest, Zeltiq seemed to miss the ball on marketing these perks, including in its “Get Naked” commercial (which, while not containing actual nudity, might not be safe for work).
And on its earnings conference call, management indicated that competition — especially Solta Medical’s LipoSonix — was a key reason for the slowdown in revenues.
Zeltiq’s S-1 indicated that total losses amounted to $75.4 million, but more importantly, it said the losses likely would continue into the “foreseeable future.”
For 2012, the company expects operating expenses to account for 81% to 83% of total revenues. Of this, about 50% to 55% will be allocated to sales and marketing. And Zeltiq might have to ramp these expenditures even more as it tries to get better awareness for its treatment.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.