Cynosure, Inc. Q3 2008 Earnings Call Transcript

Oct.28.08 | About: Cynosure, Inc. (CYNO)

Cynosure, Inc. (NASDAQ:CYNO)

Q3 2008 Earnings Call Transcript

October 28, 2008, 9:00 am ET

Executives

Scott Solomon – VP, Sharon Merrill Associates

Mike Davin – Chairman, President and CEO

Tim Baker – EVP, CFO and Treasurer

Analysts

Yami Ogencoi [ph] – Citi

Dalton Chandler – Needham & Company

Isaac Ro – Leerink Swan

Anthony Vendetti – Maxim Group

Andy Schopick – Nutmeg Securities

Gregory Hummel [ph] – Quantum Asset Management

Peter Bye – Jefferies & Company

Sasha Castemdoven [ph] – Shaker Investments [ph]

Bill Deslam [ph] – Tiatin Capital

Operator

Good day, everyone and welcome to Cynosure's third-quarter 2008 conference call. Today's call is being recorded. There will be an opportunity for questions and comments after the prepared remarks. Today's question-and-answer session will be conducted electronically. After the presentation, if you'd like to ask question (Operator instructions) At this time, for opening remarks and introductions, I like turn the cola were to Mr. Scott Solomon, Vice President of Sharon Merrill Associates. Please go ahead sir.

Scott Solomon

Thank you, Claudia. Good morning, everyone. Really on today's call are Cynosure's President and Chief Executive Officer, Michael Davin; and Executive Vice President and Chief Financial Officer, Tim Baker. Will begin today's call with Mike providing highlights of Cynosure's third-quarter 2008 results in an overview of the companies growth strategy. Tim will take you through the financials after which management will take your questions.

Before we begin, please note that various remarks management makes on this conference call about Cynosure's future expectations, plans, and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties, and actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including those discussed in the Company's Annual Report filed with the SEC on Form 10-K for the year ended December 31, 2007 and subsequent reports filed with the SEC. These filings can be accessed via the Investor section of Cynosure's website at www.Cynosure.com.

In addition, any forward-looking statements represent the Company's views as of today, October 28, 2008. These statements should not be relied upon as representing the Company's views as of any subsequent date. While Cynosure may elect to update forward-looking statements at some point in the future, the Company specifically disclaims any obligation to do so.

With that, I'll turn the call over to Mike Davin. Mike?

Mike Davin

Thank you, Scott. Good morning everyone and thank you for joining us for our Q3 conference call. In light of the challenging economic environment, I'm especially pleased to report 21% revenue growth over Q3 of 2007 and our eighth consecutive quarter of profitability. As you have no doubt seen or heard from some of our peers, the aesthetic industry was not immune from economic downturn in the third quarter. But I believe that our focus on technology innovation and rapidly growing high-volume applications and on global direct distribution has benefited us in a difficult market as well as help position Cynosure as an industry leader over the long-term.

For the third quarter of 2008, we posted revenue of $38.2 million, compared with $31.5 million Q3 of ’07. We saw particularly strong demand for our Elite workstation for laser hair removal, our Affirm family of anti-aging workstations, and Smartlipo workstations for laser body sculpting. All three of these flagship systems delivered double digit percentage growth in the third quarter.

As we discussed in this morning's news release, we continue to gain significant traction in the third quarter from Smartlipo MPX, our powerful new 32 watt, dual wavelength system for laser lipolysis. We introduced MPX in North America in Q2 2008, and internationally in Q3. This system represents Cynosure's newest generation of advanced laser technology. MPX combines the 1064 and 1320 nanometer Nd:YAG wavelengths with SmartSense, the industry's first intelligent energy delivery system.

One of our goals for MPX is to work with industry luminaries to generate rapid and broad adoption of the product. And to accomplish this, we have initially targeted plastic surgeons to perform a high volume of liposuction procedures. To accelerate adoption and quickly build an installed base among key opinion leaders, we have aggressively priced the system which has contributed to a decrease in Q3 gross margin from Q2.

Also, from a cost perspective, MPX is the most expensive to produce of our six flagship products. We've been very successful in penetrating the target market as MPX has increased from 46% of total Smartlipo revenue in Q2 of 2008 to 73% of total Smartlipo how revenue in the third quarter. Consistent with what we have seen thus far, virtually all MPX customers are ordering the system equipped with optional SmartSense and hand piece.

We recently surveyed 30 physicians who have performed a combined total of 500 procedures with the Smartlipo MPX, and we are very pleased with the level of satisfaction among these customers. Among those who had previously used our 6-, 10-, or 18-watt Smartlipo, 94% said they noticed an improvement in efficacy. The average treatment time with MPX was reduced by 35%. Among other findings of note, 67% of respondents notice an improvement in hemostasis, while 86% saw an improvement in skin tightening. Skin tightening is an important application for us and one that you'll be hearing more about from a clinical perspective in the coming quarters.

Our training programs also received high marks. When after the training they received was adequate, 96% responded affirmatively with many characterizing the training as very good or excellent.

Q3 marked the rollout of MPX to our direct subsidiaries in France, Spain, Germany, and the United Kingdom, as well as selected international distributors. Part of our training involves sending industry luminaries from the US overseas to discuss their experiences with the product and answer questions from physicians. We plan to continue this highly successful approach as we expand MPX into additional select countries in the Middle East and in the Asia-Pacific region pending additional international regulatory approvals.

In terms of sales and marketing initiatives, in the third quarter of 2008, our worldwide direct distribution accounted for 81% of laser revenue in the third quarter, compared with 85% in the third quarter of 2007. In North America, we ended the quarter with 79 employees in our sales organization, including 23 surgical laser consultants focus exclusively on her Smartlipo product line.

As I mentioned on our previous call, international expansion has been a priority for us in 2008 as we expand the installed base of Smartlipo MPX and introduce others new flagship products such as Affirm CO2, which marks our entry into the market for ablative skin therapy. We began shipping Affirm CO2 in North America in the third quarter and plan to launch the product internationally towards the second-half of next year.

Investments in our overseas sales and marketing infrastructure yielded measurable results in Q3 as international product revenues increased 29% from the same period in 2007. These initiatives continue as we further upgrade our international presence.

Recently we added senior sales and marketing personnel focusing on Latin and South America, China, Japan, France, and the United Kingdom. In this quarter, will open a direct office in Mexico, marking the seventh country in which we have a direct subsidiary.

As always, we are supporting our sales and marketing efforts with both scientific presentations and clinical research. As part of a hot topic session at the American Society for Plastic Surgery’s upcoming Plastic Surgery 2008 meeting in Chicago, Dr. Barry Di Bernardo will present the results from a blinded randomized bilateral study showing the difference between laser assisted lipolysis using Smartlipo MPX and liposuction alone.

As I noted on our Q2 call, we are involved in a number of ongoing clinical research studies that we expect to result in publication of several scientific articles in the coming quarters.

Let me close by saying this year we have continued to grow profitably through strategic innovation and targeted investment in our sales and marketing infrastructure. In 2008 alone, we have launched three new flagship products and two new delivery systems focused on high-volume, high growth applications without cannibalizing any of our existing flagship workstations. Highly successful products, such as the Smartlipo MPX, and delivery systems, such as SmartSense, give Cynosure a significant competitive advantage that we believe will benefit the company for years to come.

We continue to maintain a strong balance sheet with nearly $93 million in cash and investments at September 30th. Despite our continued strong growth and performance, we know the industry is not immune to what's happening in the general economy. However, we believe we are well positioned among our peers to weather this challenging period based on our suite of innovative products and the strength of our brand.

While the economic environment mandates that we adopt a cautious outlook in the near term, we believe the fundamentals of a business are robust and we remain very optimistic about the long-term outlook for Cynosure. Now, let me turn over the call over to Tim for the financial review.

Tim Baker

Thanks, Mike, and thanks everyone for joining us this morning. As Mike highlighted, despite the global downturn, we reported revenue of $38.2 million in Q3, 21% higher than the same period in 2007. Our growth is driven by strong contributions from our Elite, Affirm, and Smartlipo product groups. GAAP net income was $3.2 million, or $0.25 per diluted share, versus $4.4 million, or $0.34 per diluted share in 2007.

Change is attributable to a couple of factors, most notably higher operating expenses associated with the expansion of our international sales and marketing infrastructure. Results for Q3 this year also included an unrealized currency translation loss of about $379,000 compared with an unrealized currency translation gain of approximately $454,000 in the third quarter of 2007.

Laser systems accounted for approximately 89% of our total revenue in the third quarter of 2008, which was unchanged from the same period in 2007. The revenue contribution from Laser systems mainly reflects the growth in laser revenue driven by a recently introduced workstation.

Laser revenue increased 21% in the third quarter of 2008, to $34.2 million from $28.2 million in the comparable period in 2007. Laser revenue from North America rose 18% while international laser revenue increased 29%, reflecting our focus and investment in the international market opportunity.

Smartlipo MPX, which we introduced in North America in the second quarter of ‘08, and select international markets this quarter, accounted for 73% of revenue from our Smartlipo family of laser lipolysis workstations. As Mike mentioned, this is up from 46% in Q2 of this year.

Looking at our performance by region, North America accounted for 71% of total laser revenue in the third quarter of 2008, compared with 73% in the same period in 2007. International contribution was 29% of total laser revenue compared with 27% in the same period in 2007.

Gross profit for the third quarter of ‘08 was 64.9% compared with 65.0% for the third quarter of 2007. This reflects the reduced margin contribution from Smartlipo MPX, which Mike discussed earlier, as well as our decision to move some Elite demonstration units at a reduced price to better manage our inventory.

Turning to our operating expenses, selling and marketing expenses were $13.9 million, or 36% of revenue, compared with $10.3 million, or 33% of revenue, for the same period in 2007. As previously mentioned, we ended the quarter with a 79 person North American direct sales organization, up from 66 at the beginning of the year which is complemented by direct distribution in our subsidiaries in France, Germany, Spain, United Kingdom, China, and Japan.

We are continue to invest in sales and marketing to build our global brand and further capitalize on the significant market opportunities we feel are available. We expect selling and marketing to be in the range of 35% to 37% for the full year of 2008 which includes estimated stock-based compensation expense of $3.2 million.

Third-quarter research and development expenses were $2.0 million, or approximately 5% of revenue for the quarter, consistent in percentage of revenue with the third quarter of 2007. We expect R&D expenses to remain in the range of 4% to 6% in 2008 which includes estimated stock-based compensation of approximately $1.1 million.

General and administrative expenses for the third quarter were $4.0 million, or 10% of revenue, compared to $3.1 million, or 10% of revenue, in Q3 of 2007. In 2008, we continue to model G&A expenses in the range of 9% to 11%, which includes estimated stock-based compensation expense of $2.7 million.

Operating income $4.9 million, or approximately 13% of revenue, in the third quarter of 2008 compared to $5.6 million, or approximately 18% of revenue, for Q3 2007. This decrease reflects the higher operating expenses.

Operating results for the third quarter of 2008 included $2.1 million in stock-based compensation while results for Q3 2007 included approximately $1.4 million in stock-based compensation expense.

On a non-GAAP basis, excluding the effect of stock-based compensation of $2.1 million and $1.4 million respectively, income from operations was $7.0 million, or 18% of revenue, compared to $7 million, or 22% of revenue for the same period of 2007.

On a non-GAAP basis, excluding stock-based compensation expense of $2.3 million and using an effective tax rate of 36%, net income for the third quarter was $4.7 million, or $0.37 per diluted share. This compares with $5.1 million, or $0.40 per diluted share, in the third quarter of 2007 which excluded approximately $1.4 million in stock-based compensation and also using an effective tax rate of 36%.

We used approximately $12.9 million and $12.8 million weighted average shares outstanding in computing earnings per diluted shares for the third quarters of 2008 and 2007 respectively. For more information on our non-GAAP financial measures, please view the table for reconciliation of GAAP results to non-GAAP measures included in the end of our earnings release. The table has more details of the GAAP financial measures that are most directly comparable to non-GAAP financial measures and the related reconciliations between these financial measures.

Turning to the balance sheet, our cash position remains strong and provides us with good financial flexibility going forward. As Mike mentioned, our cash, cash equivalents, marketable securities, and long- term investments at quarter end totaled $92.7 million, an increase of approximately $6.6 million from our year end balance of $86.1 million.

DSO for the quarter increased to 91 days. This reflected a general slowdown in the timeliness of customer payments as well as a percentage of revenue received in the last month of the quarter. We are proactively working their customers to identify and resolve payment issues and expect to bring our DSOs back in line with historical levels by the end of the year. We continue to have no other debt other than capitalized lease obligations.

That concludes our financial review. Mike and I will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question is coming from Matthew Dodds with Citi. Please state your question.

Yami Ogencoi – Citi

Hi, this actually Yami Ogencoi [ph] from there.

Mike Davin

Hi Yami. How are you doing?

Yami Ogencoi – Citi

I'm doing all right. I just have a couple of questions. First question is, I was wondering if you guys could comment on the pricing environment in North America. What are you seeing there specially beginning of this month? And my second question is, you guys have quite a bit of cash, I was just wondering where does acquisition fit in your strategy (inaudible)?

Tim Baker

Hi Onya [ph], this is Tim. In terms of the pricing environment, clearly we are seeing some pressure out there but as we mentioned in the quarter we did some deliberate pricing strategy in terms of penetrating with the MPX. But, in terms of overall pricing, as we mentioned, all of our flagship products, our main three products – the Elite, the Affirm, and the Smartlipo – were up double digit growth in the quarter and we are really not seeing pricing as a factor as we went into the end of the third quarter. Right now, we're are not really going to comment on the fourth-quarter, but right now we have not seeing pricing as a major impact on the business.

Mike Davin

Onya, this is Michael. Per your question on potential acquisitions, for competitive reasons we prefer not to discuss our activities as it relates to M&A opportunities. Certainly, as you pointed out, we have a significant amount of cash in the balance sheet with little – with no debt, so that certainly bodes an opportunity for us to make some moves on the M&A front, but at this time we prefer not to discuss that.

Yami Ogencoi – Citi

Okay. That's it for me. Thanks.

Operator

Our next question comes from the line of Dalton Chandler of Needham & Company. Please state your question.

Dalton Chandler – Needham & Company

Good morning.

Mike Davin

Good morning Dalton.

Dalton Chandler – Needham & Company

So you’ve mentioned a couple of times that you’re adopting a more cautious outlook, but could you put a little more color around that, what you think that means?

Mike Davin

Dalton, I think everybody is clearly aware of what's been happening in the market – the economy, and so are we and we are very pleased with our performance in Q3 of 21% growth year over year, especially in the light of what some of our competitors have recently reported. And as I've mentioned, in the long-term, we're very bullish on Cynosure's opportunities going forward. But it's unfair to us, as I'm sure it is to most executives who runs companies, on where things are going with the economy. We are hopeful that we’ll see things not be so volatile in the markets and settle down. Certainly, this volatility initiates anxiety with consumers as well as customers in general in all industries and so I think we're a little concerned, obviously, the way October started, the volatility continues in the markets. As I mentioned, we're hopeful that maybe after the election year things will calm down a little bit or after the election next Tuesday and we’ll start to see some stability in the markets and then all of us can breathe a sigh of relief and be able to really monitor going forward where things are going to play out in the economy over the next year or two.

Dalton Chandler – Needham & Company

Would it be fair to say that the – or at least the next few quarters, that 21% topline growth you put up might be a high water mark?

Mike Davin

I don't know that I would comment on that right now. As I mentioned, we are very pleased with our 21% growth as compared with our industry that's pretty much flat to negative. We’ll have to just see how things play out over the next couple of months.

Dalton Chandler – Needham & Company

Okay. And then, I guess we can have an earnings call these days without a question about the financing environment. What are you seeing there?

Tim Baker

Yes, Dalton. As, again, everyone is expecting and clearly things are getting tighter, things are getting a little tougher. We have been able to continue to provide financing alternatives to our customers in the quarter and again we didn't really see that as a significant detriment to the business. But clearly things are getting tighter but we have a number of good relationships with financing alternatives that we were able to provide to our customers and they are typically able to get financing. We also are focusing on doctors. Typically, we don't sell outside of the M.D. world and typically we’re dealing with doctors that are able to procure these things and are able to obtain the financing. So right now, things are still pretty good.

Dalton Chandler – Needham & Company

Do you have any business that may have slipped out of the quarter due to financing?

Tim Baker

Sure. Absolutely. Clearly, the bar keeps getting raised, included there are customers that were able to get credit a year ago, or even six months ago, who are having difficulties today. So, clearly, there is some cost there to business of customers that aren't able to get financing.

Dalton Chandler – Needham & Company

Okay. Then, just a last question on the – you mentioned some discounting on the MPX and also on the Elite. Should we expect that to continue into the current quarter or are you done with that and what are the implications there for gross margins going forward?

Mike Davin

Dalton, as for the MPX, I’ll let Tim comment on the Elite demo activity. As for the MPX, it’s part of our strategy, as we stated in the beginning of the call, to be able to offer this technology to the high-level thought leaders and luminaries. As you know, in the past, it's always been our approach to introduce new flagship technologies to be able to get the technology in the hands of the key thought leaders that control the podium, that are also engaged in driving our clinical studies, even more so with laser lipolysis because it is a new indication that we really pioneered into the market, back with our FDA clearance in December – November of 2006. So, we feel this is critical to the strategy to be able to position our technology with the key thought leaders around the world and we know that's going to bear excellent fruit going forward to grow our laser lipolysis business. As for the Elite activities, I'll defer to Tim on that.

Tim Baker

Dalton, the Elite program was a structured focused program in the quarter to move out demo inventory that obviously our sales reps carry around and we do that periodically. So, that was more of a one time event to really move some inventory out. These are the margin overall. Again, if you look at the quarter, like Mike said, we have a focused program on MPX, we have the demos, but we also had a higher contribution from our indirect distribution. As we mentioned in the script, 81% of our revenue came from direct distribution this quarter last year, year-over-year was 85%, so that shows again showing some of the increase of the international growth of 29% that we talked about. And this is something we talked about over the last couple of calls that as we continue to grow our international business, we may see some impact on the margin line but obviously, for the growth of the business and profitability, it's obviously all upside. So, given the mix and given where we are, we would expect probably stay around in this area in the margins.

Dalton Chandler – Needham & Company

Okay. Thanks a lot guys.

Mike Davin

Welcome.

Operator

Our next question is coming from Isaac Ro with Leerink Swan. Please state your question.

Isaac Ro – Leerink Swan

Hi guys. Thanks for taking the question.

Mike Davin

How are you doing?

Isaac Ro – Leerink Swan

Just first off, obviously, you guys are doing a good job in a tough environment growing the business, but given your P&L, which is already pretty lean, how much possibility do you think you have there if environment deteriorates further. Can you guys stay profitable with your current expense base? How do you guys manage that part of the business going forward?

Tim Baker

Sure. Clearly, we are kind of talking on two sides here. We want to continue invest in the business and grow the business and be the leader, we’re also conscious of the business environment today. So, when we look at our P&L, clearly we are investing, and if you look at our major increase in expenses for the quarter, it all revolves around sales and marketing which again, if you look at the cost infrastructure, is the most variable of all our costs. So we feel that we have the flexibility to adjust our P&L as we get more and more visibility into the economic environment going forward. So, our goal is to continue to drive the company be a healthy and strong company, as Mike said, to come out the other side of this economic situation. So, we'll continue to monitor that very closely and we do feel there is flexibility in our P&L to reflect that kind of volume indications.

Isaac Ro – Leerink Swan

Okay. In terms of customers failing that you mentioned you were looking to collect at the end of the quarter, can you give us a little color. Are those Medi Spas or are the individual docs or how confident are you that you can get those payments in the door?

Tim Baker

Yes. No, they're not Medi Spas. We did a very small percentage of our business, really, to quote unquote Medi Spas. They're mostly to individual doctors and again I don't think there's a big issue here. I think it's a question of a general slowdown. It's taking a little more effort to cajole these people to cut the checks. Like you said, we are in front of it, we are proactively involving our sales force, we're proactively, obviously, involving a greater number of people here to get ahead of the doctors once we know product is out and shipped. We don't think it's a big issue. We think will be able to get it back in line by the end of the quarter.

Isaac Ro – Leerink Swan

Okay. And then, on the currency, I've seen in the press release looks like about $400,000 hitting – is that on the bottom line and how should we think about currency point forward? I know it's been a headwind for a lot of companies.

Tim Baker

I wish I knew how to think about currency going forward. It is a hit. It goes through our other income and expense line and I think that the thing we're trying to draw is that last year, this quarter, we had a $454,000 gain. This year we have a $379,000 loss. So, it all relates to our intercompany receivables with our foreign subs. So, again, it's not a big number becomes impactive on the swing. So, going forward, honestly I don't know where the currency’s going and I’ll take any advice if you have it.

Isaac Ro – Leerink Swan

Yeah, right. Okay. And then just lastly on Smartlipo, I know it's been out over a year now and there's more competition. Do you feel like at this stage of penetration for the technology, is price a bigger factor for customers than it was maybe six or 12 months ago given that some of these other competitors are using that as a bigger weapon? How do you think about the market penetration and the types of customers you're trying to get today versus last year?

Mike Davin

Isaac, actually, this is Michael. They technology is actually – Smartlipo, in terms of – from the day of its FDA clearance, it's celebrating its two year anniversary next month, November. And to be honest with you, as you know, we've gone 6 W to 10 W two and 18 W, and introduced SmartSense, the world's first intelligent delivery system, now a new platform with MPX, a total power of 32W with multiplex. We keep driving the prices higher. We do not feel at all, first of all, the penetration rate we still believe is single-digit as we look at the addressable market. There's a secondary market out there that we believe we're going to begin to establish and cultivate and be able to also extract significant business out of and we think to the contrary. We believe because our technology is a true value-added proposition for the physician, has an excellent performa on return on investment, the physicians are looking for a premium product that give them a premium clinical outcome and the MPX does exactly that, as well as are other Smartlipo technology. So, we are not seeing price at all being an issue and we believe the market still has very, very long legs.

Isaac Ro – Leerink Swan

Thanks. Thanks so much guys.

Operator

Our next question is coming from the line of Anthony Vendetti with Maxim Group. Please state your question.

Anthony Vendetti – Maxim Group

Sure, thanks. Good morning guys.

Tim Baker

Good morning, Anthony.

Anthony Vendetti – Maxim Group

Just a couple of questions on Smartlipo. It was priced at 130 – the MPX was priced 135 to 160 originally. So, you said that there's a little bit of discount there. Where are you pricing in right now?

Mike Davin

I'm not going to comment on actual pricing, Anthony. And as I mentioned, it's not in discounting, it's strategic pricing to penetrate the thought leader and luminary physicians and it's a strategic business decision, not one in which we plan on keeping in place for much longer. But the fact that these physicians are actually buying the technology compared to some other disciplines we dealt with in the past that are looking for you to give them the technology for free, we are pleased that the fact that we're able to establish an attractive price for these high volume liposuction physicians that also have excellent visibility in their discipline in terms of helping us to drive the business going forward. So, this is I would call it specialized pricing for these types of physician candidates.

Anthony Vendetti – Maxim Group

Okay. So, it's just discounts for the luminaries and then some decrease in price for the Elite demo units – just some old demo units that you have around and that overall pricing is still pretty stable.

Mike Davin

Yes. As you were, Anthony, that the Elite’s been out there for four years – I think it's also important to note that – I know we talked about Smartlipo quite a bit, but the fact the three key high-volume indication products or areas for us which is laser lipolysis, as well as, anti-aging, and hair removal, all three of those indications had double-digit rethought was extremely impressive in the light, especially with the Elite being out for four years. But, with that being said, pretty much our complete sales force has an Elite demo unit, so it's not unusual for us to look at that inventory and then Tim really decides when we need to start moving some of that inventory. That’s what we call, demo type pricing.

Anthony Vendetti – Maxim Group

Okay. So, when you're talking about the growth, I just want to get the gross numbers down. International was up 29%, domestic was up how much?

Tim Baker

18%, I think.

Anthony Vendetti – Maxim Group

18. That's what I thought. Okay. So, what was the breakout between total revs [ph] between domestic and international?

Tim Baker

71.

Mike Davin

Yes. 71-29.

Anthony Vendetti – Maxim Group

71-29?

Mike Davin

71-29.

Anthony Vendetti – Maxim Group

Okay. And, in terms of the cash on your balance sheet obviously that's grown to 92.7, is that all cash equivalent to marketable securities or any auction rate securities there?

Tim Baker

No. There is – we include long-term investments in that number. There is 19.7 in long-term investments which are the auction rate securities.

Anthony Vendetti – Maxim Group

Okay. Have you had any impairment on that or are you just going to hold them until –

Tim Baker

No. We've had – any impairment’s been through the balance sheet in marked to market that we’ve done in the past and there's really been no change this quarter. We did have about $1.5 million of the securities come be redeemed at full par. And obviously these, (inaudible) obviously, all these securities are held if UBS. We are part of the UBS settlement, so based on that settlement you would expect to sign that in the next two weeks which then gives us a put right to really realize this auction rate securities by a July 2010 at 100% par. So we do plan to hold these through to that date and at that point in time there'll be no impairment.

Anthony Vendetti – Maxim Group

Okay. And what were your capital lease obligations at the end of the quarter total? You'd mentioned you had some –

Tim Baker

$422,000

Anthony Vendetti – Maxim Group

Oh, it’s not – okay. And the guidance that you gave on sales and marketing R&D and G&A in terms of the percentages, was that – I know it was including 123-R, was that for the fourth quarter or for the full year?

Tim Baker

For the full year.

Anthony Vendetti – Maxim Group

For full year?

Tim Baker

Yes.

Anthony Vendetti – Maxim Group

Okay. And, anything else you could tell us about in terms of Smartlipo MPX now that you have some competitors out there. The difference between that and some of the competitors and how you feel – how your sales force feels in the market place with the new MPX out there and you're selling internationally, what they're hearing regarding the competition?

Mike Davin

Everything has been extremely positive, as I've mentioned, with that recent survey we did even though the installed base in the US has only been out there since May. We are very pleased with the response from our customers in terms of, as I’ve mentioned, in terms of efficacy, in terms of hemostasis, as well as in terms of tightening. Honestly, Anthony, we don't believe we have a competitor for the MPX. There is no other dual wavelength system out there with intelligent delivery system and the ability to sequentially fire two wavelengths at one time. And we do believe that all of these features optimize the clinical outcome and that's exactly what we're hearing from our very young installed base realizing the first systems have not shipped in the US until May, and internationally, we just began shipping technology in September. We are really looking forward to how that product will perform in Q4, specially the performance of the technology as we head into 2009. The good news is all of our direct offices are trained, they are establishing luminary sites, their establishing training sites, we have clinical activity going on across the world with the technology and so far the responses have been phenomenal.

Anthony Vendetti – Maxim Group

Okay. And the sales force is appropriately sized right now? Any expected changes there?

Tim Baker

You know, we are sitting, as I've mentioned in the script, we are sitting at 79 in the US including management. I would not say that that's the end of the expansion for 2008. As you know, we monitor it closely with our sales management team and really defer to them if they feel there should be additional expansion. The Smartlipo surgical reps is at 23, that's part of the 79. We’ll also be reviewing that specialty sales force to see if additional expansion should take place this year and also point to next year.

Anthony Vendetti – Maxim Group

And just last question. Is laser lipolysis, as far as you can tell, built this single digit penetration?

Mike Davin

Absolutely. In our opinion, absolutely.

Anthony Vendetti – Maxim Group

Okay. Great. All right, thanks guys.

Mike Davin

Welcome.

Operator

Our next question is coming from Andy Schopick with Nutmeg Securities. Please state your question.

Andy Schopick – Nutmeg Securities

Thank you. Good morning. Couple of questions – financial questions, Tim, first for you. I just want to be sure I understand the foreign exchange related loss. This is an unrealized FX loss, correct?

Tim Baker

That’s correct.

Andy Schopick – Nutmeg Securities

And in the P&L, I see that the overall other income expense was -425 of which the currency was 379. What's that other 50 – about $50,000?

Tim Baker

It's really related to a legal settlement that is related to a past issue that we had in the past that we were able to settle this quarter.

Andy Schopick – Nutmeg Securities

Okay. So, that's basically any one time item.

Tim Baker

Yes. Correct.

Andy Schopick – Nutmeg Securities

And, if I heard you correctly, you are estimating that full year stock comp expense will be about $7 million for the full year?

Tim Baker

That’s correct. About $7.5 million.

Andy Schopick – Nutmeg Securities

Okay. What was cash flow from operations in the quarter?

Tim Baker

About $900,000

Andy Schopick – Nutmeg Securities

Okay. That was down a little bit from prior quarters.

Tim Baker

Yes.

Andy Schopick – Nutmeg Securities

And are you anticipating that you remain cash flow positive in the fourth quarter even if revenues do dip a little bit more?

Tim Baker

Yes, we do. And I think some of that will be the improvement in the DSOs that we talked about and again the ability to manage our business. So, we do think we'll continue to be cash flow positive.

Andy Schopick – Nutmeg Securities

Okay. And last thing is just about the overall tax rate. I see that the GAAP tax rate actually rose to about 37.3%, up from 33.5% a year ago. I think I heard you say the non-GAAP around 36% and I suspect that that's what you want us to model it to.

Tim Baker

Right.

Andy Schopick – Nutmeg Securities

But, what's happening with the overall GAAP tax rate there?

Tim Baker

It's actually gone uphill. For the quarter, it was 32.8 in the first quarter, went to 36, went to 37. For the full year, year to date, we are about 35.26 and the estimate for the full year we'll be right about 36%, which is what you've been performing throughout the year.

Andy Schopick – Nutmeg Securities

Both on a GAAP and non-GAAP basis?

Tim Baker

Correct.

Andy Schopick – Nutmeg Securities

Okay. That’s great. Mike, in response to the MPX, do I understand that the strategic pricing that you’ve initiated here to penetrate some of these luminary markets is not in response to anything you’ve seen from either Palomar or Syneron or anything going on in the marketplace competitively?

Mike Davin

That is correct. Absolutely, Andy.

Andy Schopick – Nutmeg Securities

Okay. And it doesn't appear to me that the overall margin impact was that great quarter. Just looking at these numbers on the surface, do you expect a bigger impact in the fourth quarter from this more aggressive pricing on the MPX.

Mike Davin

No, we do not.

Andy Schopick – Nutmeg Securities

Okay. Thanks.

Mike Davin

Thank you, Andy.

Operator

Our next question is coming from the line Gregory Hummel [ph] with Quantum Asset Management. Please state your question.

Gregory Hummel – Quantum Asset Management

Good morning gentlemen..

Mike Davin

Good morning.

Gregory Hummel – Quantum Asset Management

Has your customers been canceling orders due to them feeling their customer business is decreasing?

Mike Davin

Could you restate that question. I'm sorry, you're breaking up a little bit.

Gregory Hummel – Quantum Asset Management

Have you had any customers cancel orders due to their business slowing down?

Mike Davin

Not that we're aware of, no.

Gregory Hummel – Quantum Asset Management

Okay. Thank you.

Operator

our next question is coming from Peter Bye with Jefferies & Company. Please take your question.

Peter Bye – Jefferies & Company

Hey guys. Just a couple of quick ones. I might have missed it but on its stock-based comp reconciliation, you got 2.096 in adjustment to operating income but you got 2.3 to net income. Where's the other –?

Tim Baker

That's in the other income expense line. That relates to the settlement of again a former litigation matter.

Peter Bye – Jefferies & Company

Okay. On the front, DSOs – there is collections in the front, what do you consider the new baseline because there were up pretty big in Q2 as well, I know bit less in revenue but on a sequential basis, pretty big. What's a return to baseline?

Mike Davin

I would like to get back to that 65 to 70 days. Historically, we've been around 65 to 71 to 78 last quarter, we’d like to get it back into that 70 range.

Peter Bye – Jefferies & Company

To 70 range. Okay. And then, just more expand on that, you guys are trading at 0.3 times EV to revenue. Some of your comps are at 0.1 times EV to revenue. This sort of nondisclosure about what the underlying performance of your drivers of your business are. Usually when companies get crushed, they open up the window a little bit more to the drivers and the specifics and just curious why yourselves, and perhaps why your peers of this industry is not doing that despite a collapse in multiples and obviously a lack of confidence partly driven by a lack of visibility from future earnings and revenue drivers.

Mike Davin

Peter, I don't believe that our lack of visibility is the reason why we are getting crushed. I think that's just market dynamics and I think if you look at our performance eight consecutive quarters profitability, revenue growth of 30% for the year. I think the number speaks for themselves. I think the issue is not Cynosure related, the issue is market related and I don't believe guidance is going to change the dynamics of this market which is pretty much unprecedented from what I've seen in my 50 years of being around. So, I don't think that would – us giving more visibility is going to make one bit of difference.

Peter Bye – Jefferies & Company

Alright. I guess you are talking to different shareholders than I am but that's fine. I appreciate the perspective on that and it was obviously a pretty solid performance relatively speaking (inaudible). Thanks.-

Mike Davin

Thank you

Operator

Our next question is coming from Sasha Castemdoven [ph] from Shaker Investments [ph]. Please state your question.

Sasha Castemdoven – Shaker Investments

Hi guys. Thanks a lot. First of all, I would echo the comments of the prior speaker. You're a small company and the more input that we insight, the better. The first question relates to your receivables. Could you give me a little more granularity on what the issues you're seeing there are?

Tim Baker

Again, as I said, I don't think there's a major issue there. I think what we're seeing is a general slowdown in payments where again in the past they maybe perhaps they pay their bills when it came due and the check will be in the mail. Now we need to make a call, we need to make to calls to get the money and I think it just reflects the general slowdown overall.

Sasha Castemdoven – Shaker Investments

Can you give me some numbers around that? Do you have 30 days, 60 days, 90 days past due numbers?

Tim Baker

Not that we disclose, no.

Sasha Castemdoven – Shaker Investments

See, that's the kind of thing I'd like to hear. The other issue that I'd like to air out there is I've got you guys may be earning $17 million this year and to have $7.5 million in stock-based compensation expense, that's out of line in my view. That’s obviously not helping the picture. Question on the SG&A line. How do you guys plan your – first of all, what did you end the quarter with sales rep? How many sales reps to do you have?

Mike Davin

well, we said 79 in terms of total bodies in North America, of that, six are management. So, 73 sales reps. Of the 73 reps, 23 are Smartlipo.

Sasha Castemdoven – Shaker Investments

Do you currently have any plans to add to your sales force in the fourth quarter?

Mike Davin

As I've mentioned with another caller, we’ll review it. At this time, I'm not sure whether we'll be adding additional headcount in Q4 and certainly we’ll report that at the end of the year.

Sasha Castemdoven – Shaker Investments

Okay. So, I hope you're right in your sentiment that after the elections people take their minds off of the garbage that's being spewed all over the place and both parties (inaudible) down. But, is there any flexibility in your fixed cost because obviously there is – with a drop in your gross margin and the increase in your SG&A, that's not a good combination.

Mike Davin

Again, as we've mentioned earlier, there is flexibility there but again we’re not going to react on a 30 day basis in terms of the strengths and growth prospects that we still feel are very sound with the business. So, we are committed. Again, we talked about majority of that increase related to building our international infrastructure which was up 29% for the quarter. So, we are continuing to look at how to grow the business. But there is flexibility in there, as I've mentioned, our biggest piece of SG&A is sales and marketing and that's obviously the most discretionary spend in the P&L, so it's something we will monitor very closely and are monitoring very closely to make sure that we continue to grow the business, continue to remain profitable, to continue to generate cash, and continue to position ourselves as a leader in the industry so when the economy comes back we'll be far ahead in front.

Sasha Castemdoven – Shaker Investments

Okay. Well, help us understand what it is that you're seeing that's making you feel positive about your business. I understand that there are big macro concerns out there which are out of your control but we still need to deal with that and what is it that you're seeing that's making you feel positive with your sales reps being decidedly positive. There was a big decline in your sales and growth rate and your receivables are up, your gross margins are down. Every indicator on your business is pointing down.

Tim Baker

I think when you look at the growth rate you had to look at that in terms of the year-over-year growth we had in 2007 and looking at the different product mixes there. Again, 21% growth is still obviously very good growth and again you're not comparing to the same baseline from a year ago so that factors that a little.

Mike Davin

But, I will tell you, we just recently had our international distribution management team and the headquarters as well as our North American sales management team headquarters and the sentiment is positive. I think it's important to note that we've grown 21%, which is still a significant growth rate, in a space that's pretty much negative right now, if you look at the publicly traded peers.

Sasha Castemdoven – Shaker Investments

Your bottom line didn't grow 21%.

Tim Baker

No.

Sasha Castemdoven – Shaker Investments

Let's not congratulate ourselves. This was not a good quarter, your stock is trading at a ridiculously low (inaudible).

Mike Davin

I don't believe our stock trading price is any reflection of the performance of the company. The stock trading price has been there before the release of this quarter so let's not get too up far ahead of ourselves either.

Sasha Castemdoven – Shaker Investments

I respectfully disagree.

Mike Davin

Thank you.

Operator

(Operator instructions) Our next question is coming from Bill Deslam [ph] with Tiatin Capital. Please state your question.

Bill Deslam – Tiatin Capital

Thank you. It’s Tiatin Capital Management. Couple of questions. First of all, relative to the Smartlipo MPX and the luminary channel, where are you at in your process of, I guess I'll use the term, filling that luminary channel?

Mike Davin

Well, there's a two prong approach. Certainly the North American luminary base which I think we have made some impact in that area in the first – in this past quarter. Realizing that it's not – did not start shipping the technology in May. And I think we've been fairly effective in North America as far as OUS, we've really just begun that process.

Bill Deslam – Tiatin Capital

And then, circling back to the tax rate, you described, Tim, on where you thought it would end up for the year and but, this is my ignorance, I'm confused as to why the tax rate is increasing and why it's higher this quarter than it was last quarter and a year ago Q3.

Tim Baker

It basically fluctuates based on where the income contribution comes from relatives to our foreign subsidiaries. So depending on where the actual income contribution is, whether there's NOLs in that country or not, goes into the overall consolidated tax rate. Again, we fluctuated based to one percentage point different from Q2. It's right about there we expect it again as for the year leave 35.2, expect that to basically end the year at 36 as we've been performing for the full year.

Bill Deslam – Tiatin Capital

Given that the individual countries tax rates or the NOLs are the issue, it’s pretty difficult then would you agree for us on the outside to be able to predict that without your guidance and we recognize that you're giving guidance.

Mike Davin

Yes, and that's actually why we're giving that guidance on the tax rate.

Bill Deslam – Tiatin Capital

Okay, that’s helpful. And then, lastly for now, the hair removal market, since it’s actually the oldest market in this space, how would you characterize that market in terms of saturation and how would you characterize that market in terms of its response to the economics/market turmoil that's out here now?

Mike Davin

As we've mentioned, we saw a double digit growth in our hair removal business primarily centered around our Elite flagship workstation. We believe there is still strong demand specially in the non-core market. In terms of the core market, dermatologists and plastic surgeons, we would estimate, and I really would defer to third-party analysts than myself, but somewhere may be about a 50% penetration in the derma plastic market, especially the derm market. In terms of the non-core, the OB/GYN family practice and internal medicine, we believe that that is a very low double digits, maybe. Maybe high single low double. We don't really have that data in our fingertips but realizing the sheer numbers of those disciplines combined exceeding several hundred thousand doctors compared to, say, 14,000 dermatologists in the US and 5500 plastic surgeons. So, looking at the number differential, we would estimate somewhere maybe in the low double-digit penetration rate in terms of hair removal technology placements in the non-core markets.

OUS, it's mainly been a core market and now we're starting to see significant interests from the non-core physicians in the international markets for having an interest in getting into cosmetic applications. But we really don't have any data that we could give you as it relates to penetration in those markets in the hair removal installed base.

Bill Deslam – Tiatin Capital

And in relative to their buying patterns or behavior since the early adopters have clearly done their thing in the market, at least with the products that are currently available. The reason I'm asking the question is that it seems as though, given that it is maybe not a mature market but it is the most mature in this industry, that they might be an indication – give a better indication of what's going on in the broad market space.

Mike Davin

So, the question is?

Bill Deslam – Tiatin Capital

The question is, how would you characterize their buying patterns with the economic headlines that we’re seeing. Sorry for not making that more clear.

Mike Davin

In terms of the core market physicians?

Bill Deslam – Tiatin Capital

Yes.

Mike Davin

As you mentioned, they are the early adopters so I think we are their focus is on high volume new indications, where light-based technology will address them from a more optimal clinical outcome. So, anti-aging for example, there are two areas – there's a non-ablative as well as the micro ablative – which are fairly new product introductions of the market over the past couple of years. We are seeing a strong interest in demand on those products as it relates to Affirm, as well to Affirm CO2, which we just launched this quarter. Laser lipolysis, once again, the core physicians, 85% of plastic surgeons, performed liposuction and are very interested in bringing laser lipolysis into their practice and we also have a large percentage of dermatologists that perform a traditional or tumescent liposuction that are also very interested in bringing laser lipolysis into their practice. So, to answer your question, new indications or the new light-based technology to address high volume new indications that are currently not addressed today with the current light-based technology, there's a strong interest from the core markets to bring those technologies into their practice.

Bill Deslam – Tiatin Capital

Thank you. Actually, I do want to ask one more question that I've forgotten and that's the CO2 introduction. With you share with us where you're at, how it went and your initial reactions please?

Mike Davin

Sure. As we mentioned, we launched a product called Affirm CO2, it's a micro ablative approach to addressing what we would call more significant aging conditions such as maybe age 50 to, say, 70, where you have deeper creases, deeper wrinkles,, and more skin discoloration and overall just a more aggressive approach to treat these more mature aging conditions. We launched a product to our North American sales force over the summer, really towards the latter part of July and August. We did see some revenue contribution in this quarter from the product in September. We have excellent clinical response in the technology. The sales force is very excited about having this new technology in their bag and we do believe it will be impactive going forward.

Bill Deslam – Tiatin Capital

Thank you.

Mike Davin

Your welcome.

Operator

Our next question is coming from Andy Schopick with Nutmeg Securities. Please state your question.

Andy Schopick – Nutmeg Securities

Thank you. I'm just going to make a comment to some of the questions that I kind of heard. While I would agree, Mike, that the stock price does not necessarily reflect the health of the company, there is an issue of valuation here and what's causing such deep discounts really throughout the entire group. You are by far outperforming every public sector company in this industry by any and every financial measure. (inaudible) trends are clearly pointing down, which I think reflects more of a macro economic concern than anything specific to the company right now. But you do have a current market cap with stock price under 11 of about $140 million. You're probably going to have revenues closer to $145 to $150 million this year. What concerns do you have about the distressed valuation and what you might like to do, whether it be stock buybacks or anything else, and to defend its support stock.

Mike Davin

Andy, your points are valid and I think many boardrooms are having discussions around the valuation and comp environment than many industries are in and I will tell you in our most recent board meeting we spend a fair amount of time discussing exactly what you’ve just brought up. I guess one of our concerns is this has happened just so rapidly. If you look at – I won't be exactly right, but if you look at two months ago, six weeks ago our stock was trading at $25 a share and today it's – I don't know what it's trading at, I guess it was $11 share.

Andy Schopick – Nutmeg Securities

$10.65 last.

Mike Davin

So, you know, if we believe – and this is something, again, in the past we have been of the opinion, meaning the board and the executive team, to not give guidance. We've seen competitors of ours give guidance in this industry and it yielded very little benefit at all to the performance of their equity and I'm not saying that that's the right or wrong approach. It's just something at this point in time, under the irrational movements of the market and the expeditious manner in which they are moving, it's very hard to think rational and what's going to be the right long-term communication to the street. So, I don't want people to think we're not discussing it, we are. I don't want people to think that we are ignorant to it, we are not. It's just coming up with a long-term plan that will be both beneficial to our shareholders as well as to our company.

Andy Schopick – Nutmeg Securities

Okay. Thanks, Mike. I have less of an issue with what she had just said than maybe some others do but you're right in that you're trying to make guidance in an environment like this is probably going to cause you more trouble than its worth.

Mike Davin

Thank you, Andy.

Andy Schopick – Nutmeg Securities

Bye.

Mike Davin

Bye.

Operator

At this time, we've reached the end of the Q&A session. I will now turn the conference back over to management for any closing or additional remarks.

Mike Davin

Thank you, everyone. We enjoyed speaking to you this morning. We look forward to keeping updated on a progress. Have a nice day.

Operator

And that concludes our conference call. Thank you for joining us today.

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