Cynosure's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.12.14 | About: Cynosure, Inc. (CYNO)

Cynosure, Inc. (NASDAQ:CYNO)

Q4 2013 Earnings Conference Call

February 12, 2014 09:00 AM ET

Executives

Maureen Wolf - Sharon Merrill Associates

Michael Davin - CEO

Tim Baker - CFO and COO

Analysts

Difei Yang - RF Lafferty

Matthew Dodds - Citigroup

Zack Ajzenman - Griffin Securities

Anthony Vendetti - Maxim Group

James Sidoti - Sidoti & Company

Bill Plovanic - Canaccord

Andy Shopigo - Private Investor

Operator

Good day and welcome to Cynosure’s Fourth Quarter 2013 Conference Call. Today’s call is being recorded. There will be an opportunity for questions at the end of the call. [Operator Instructions] At this time, I would like to turn the call over to Ms. Maureen Wolf from Sharon Merrill Associates. Please go ahead Ms. Wolf.

Maureen Wolf

Thank you, Manny, and good morning, everyone. Thank you for joining this morning. With me on the call are Michael Davin, Cynosure’s Chairman, CEO and President; and Tim Baker, Executive Vice President, Chief Operating Officer and Chief Financial Officer.

Before we begin, please note that various remarks management makes on this conference call about forward 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. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including those discussed in Cynosure’s filings with the SEC.

In addition, any forward-looking statements represent the Company’s views as of today, February 12, 2014. 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.

To supplement its consolidated financial statements presented in accordance with Act, Cynosure uses non-GAAP gross profit, non-GAAP income from operations, non-GAAP net income and non-GAAP diluted earnings per share. These metrics are non-GAAP financial measures which the company believes helps investors gain a meaningful understanding of Cynosure’s results, exclusive of acquisition related expenses and also to help investors who wish to make comparisons between Cynosure and other companies on both a GAAP and a non-GAAP basis.

The presentation of this financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. For more information on these non-GAAP financial measures, please see the discussion and reconciliation table included in this morning’s earnings release. The table has more details on the GAAP financial measures that are most directly comparable to the non-GAAP financial measures and the related reconciliations between these financial statements.

With that, I will turn the call over to Michael Davin. Michael?

Michael Davin

Thank you, Maureen. Good morning, everyone and thank you for joining us for our fourth quarter conference call. Cynosure capped busy and successful 2013 with a strong fourth quarter that marked the Company’s return to GAAP profitability just six months after our $294 million acquisition of Palomar Medical Technologies.

Q4 revenues grew 75% to a record $74.5 million. This increase partially reflects the acquisition of Palomar, which we acquired in June of last year. Fourth quarter also includes $4 million in royalty revenues received as part of our recently announced settlement with Tria Beauty. Laser revenue was 67% to 61 million in the fourth quarter, reflecting strong product demand in North America and internationally. North American and international markets each posted double digit percentage growth in Laser revenue on a comparative basis. This growth is a testament to the speed and success of our integration of Palomar, which is now largely complete. We are not only on pace to achieve our expectation of $8 million to $10 million in deal synergies but more importantly we are extending our leadership position in the aesthetic laser and light based market. Sales for distributors across multiple aesthetic applications with particular demand in areas such as tattoo removal, skin resurfacing, wrinkle reduction, body contouring, hair removal and benign pigmented lesions.

The addition of Palomar’s pulse light, diode and fractional technology for our product portfolio is creating a high degree of interest and excitement in the market which is translating into effective cross selling opportunities. Our ability to bundle Cynosure and Palomar products provides customers with a complete light based aesthetic solution. We believe that our broad global reach and expanded product portfolio create a meaningful competitive advantage for us.

Average selling prices remain strong as both the Cynosure and former Palomar sales reps have done an outstanding job in conveying the unique value proposition and return on investment of the new products that they are marketing to their accounts. Physicians and consumers in North America and abroad continue to be impressed with the benefits of PicoSure, our recently introduced flagship laser system for the removal of tattoos and the benign pigmented lesions. We are pleased by the high level of satisfaction of PicoSure’s stability and the clinical setting and the results reported by our customers and their patients.

International direct sales of PicoSure have continued to increase throughout Europe and in the most recent quarter Australia. In addition we recently received clearances to market the device in Korea and Taiwan and have begun an initiative to introduce PicoSure to our third party international distributors this year. We continue to work towards additional international registrations.

We began shifting focus on new disposable lens array for PicoSure in Q4. The high density focused technology enables doctors to deliver PicoSure’s unique laser energy in a combination of high and low treatment zones to address a broad range of potential indications while simulating collagen production and remodeling. We are pursuing additional regulatory clearances for PicoSure in areas including acne scaring, skin rejuvenation and skin toning.

Now we bring you up to date on the Palomar integration. Since completing the acquisition in June, we have integrated all key functional areas including sales, marketing, compliance, quality assurance, clinical, customer service, engineering and research, finance, legal and IT. We have met our aggressive internal objective to substantially complete the integration by the end of 2013. It’s difficult to overstate the skill, energy and commitment invested in this process by our integration teams, and I want to thank them publicly for their efforts.

One of the key integration steps completed in Q4 was the sale of the former Palomar headquarters’ building. After transaction costs, the sale of the building generated proceeds to Cynosure of just over $25 million, which further enhances our liquidity and capital resources. As that part of our agreement with the buyer, we are occupying the building on a cash free basis while we complete the expansion of our offices here in Westford. We expect the Westford expansion and relocation to be finished by the end of June.

Our North American field sales force totaled 76 reps and managers at year end, and we expect that number to be north of 85% by the end of the second quarter. Internationally we continue to streamline our international direct sales force with the further consolidation of our offices in Europe and the Asia-Pacific region. Worldwide headcount stood at approximately 575 at year end, 12% lower than at the end of the second quarter.

Now let me update you on a couple of noteworthy events since the third quarter call. In addition to the recent marketing authorizations I mentioned for PicoSure in Australia, Korea and Taiwan, other regulatory approvals in the past few months include Smartlipo Triplex in Korea, and Smartlipo MPX in China.

In December, we announced a successful $10 million settlement of the patent infringement litigation that Palomar had initiated against Tria Beauty. Tim will give you more details about the settlement agreement shortly. But suffice to say that we believe the payment to Cynosure plus future royalties fully values our related intellectual property rights and it eliminates the need for any future legal expenses to enforce these patents against Tria Beauty.

Looking ahead, we are very excited about the upcoming American Academy of Dermatology Annual Conference in mid-March as well as the American Society for Laser Medicine and Surgery 2014 Annual Conference taking place in early April. The ASLMS meeting is expected to include a number of abstracts, podium presentations and posters from physicians describing their clinical experience with PicoSure and other Cynosure products.

In summary, we begin the New Year on strong footing after a transformational and successful 2013. We are substantially complete with the Palomar integration and have multiple R&D projects in process, including flagship products, energy delivery systems and technology enhancements staled for introduction over the next two years. We anticipate the launch of our first home use aesthetic product jointly developed with Unilever in the first half of this year for the treatment of facial wrinkles. Adding to this momentum, we have a strong balance sheet and we are well on our way towards achieving the targeted synergies from the Palomar acquisition this year.

With that, I will turn the call over to Tim. Tim?

Tim Baker

Thanks Mike. Good morning everyone. As we go through the numbers, please keep in mind that results for the fourth quarter of 2013 fully incorporate the Palomar acquisition, which closed on June 24th, our results for the comparable period of 2012 unless otherwise noted are for Cynosure on a standalone basis.

Total revenues for the fourth quarter of 2013 were $74.5 million, an increase of 75% from $42.7 million in the same period of 2012. As Mike mentioned, fourth quarter 2013 revenue includes $4 million in royalty revenue received as part of our recently announced patent infringement settlement with Tria Beauty. Laser product revenue was up 67% to $61 million, which represented 82% of revenue in the 2013 period, compared with 36.5% or 85% of revenue in the fourth quarter of 2012.

Looking at revenues on a combined basis, as if we own Palomar in Q4 of 2012, total Laser revenue was up 13% year-over-year in the fourth quarter. By region, North American Laser revenue totaled 33 million or 54% of Laser revenue in the fourth quarter of this year, which would have represented a year-over-year increase of 12% had we owned the Palomar business in Q4 of 2012. International Laser revenue was $28.1 million or 46% of Laser revenue in Q4 of this year, up 15% over last year on a combined basis.

Service and parts revenue was $9.3 million, up from $6.2 million in the fourth quarter of 2012, royalty revenue increased to $4.2 million. We continue to see strong average selling prices in the quarter, while the lending environment for aesthetic capital equipment remained favorable. Regarding the Tria settlement, Cynosure received $10 million payment plus future royalties.

The settlement consists of two agreements. The first agreement grants Tria a nonexclusive worldwide license to certain hair removal patents in the consumer field for which Tria has agreed to pay us $8.5 million. We’re already received an initial payment of $3.4 million. The remaining $5.1 million is expected to be paid by September 15, 2014. In addition, Cynosure is granted a royalty free license to certain Tria patents outside of the consumer field.

The second agreement grants Tria a nonexclusive royalty bearing worldwide license to certain Palomar patents in the consumer hair removal field for which Tria has agreed to pay $1.5 million in back of royalties. We received an initial $600,000 payment. The remaining $900,000 payment is expected by the end of 2014. In addition, under the agreement Cynosure will receive a 3% royalty on U.S. sales made through 2021 and potential and beyond based on certain conditions. Massachusetts General Hospital will receive approximately $1.8 million of the Tria settlement payments.

Fourth quarter 2013 GAAP net income was $7.3 million, or $0.33 per diluted share using an effective tax rate at 9.7%. On an adjusted basis, excluding acquisition related cost and using an effective tax rate of 28%, net income for the fourth quarter was $8.7 million or $0.39 per diluted share, compared with net income of $4 million or $0.27 per diluted share for the same period one year earlier.

Please see this morning’s new release for a reconciliation of fourth quarter 2013 non-GAAP results to the most directly comparable GAAP results. Gross margin on a GAAP basis for the quarter is 59.9%. Gross margin on an adjusted basis which excludes noncash charges related to the Palomar acquisition with 60.4% compared with 58.1% for the same period of 2012. In the fourth quarter, we complemented our revenue growth with operating leverage and margin enhancements that began to reflect the long term value we anticipate in the Palomar acquisition. Excluding acquisition related cost, operating expenses decreased as percentage of revenue to 43.9% from 48.2% in the fourth quarter of last year and from 46.9% in the sequential third quarter. Adjusted operating margin for the fourth quarter of 2013 was 16.4%.

We expect cost savings to be further strengthened by the facility expansion here in Westford and a transition of manufacturing Palomar’s product lines to our contract manufacturing model. We expect to move the Palomar portfolio to contract manufacturing by the end of June. In the fourth quarter, we incurred acquisition related expenses of approximately $4 million. We expect to incur an additional $1.5 million in acquisition related expense in the first half of 2014.

For Q4 2013, we incurred approximately $700,000 in noncash charges associated with the Palomar acquisition related to the amortization of intangibles. We are finalizing our valuation work on the acquisition, and for 2014 we currently expect approximately $6 million to $7 million in noncash charges related to the amortization of intangibles associated with the Palomar acquisition.

Turning to the balance sheet, we ended 2013 with cash and marketable securities of approximately $129 million. During the quarter, we spent approximately $15.4 million to repurchase approximately 650,000 shares of stock under our authorized $25 million buyback program. Day sales outstanding were 48 days at the end of the quarter, down from the 62 days at the end of Q3, primarily reflecting more evenly distributed sales during the fourth quarter of 2013.

Before going to Q&A, let me note that we have several investor events scheduled for February including presentations at the Leerink Swann 2014 Global Healthcare Conference tomorrow February 13, 2014, and the Citi 2014 Global Healthcare Conference on February 25th. We look forward to seeing many of you there.

With that, we are ready to take you questions. Operator.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from Difei Yang of RF Lafferty. Please go ahead.

Difei Yang - RF Lafferty

Just a couple. So would give us educate us with regards to the seasonalities of revenue both in the U.S. market as well as ex-U.S. market? And with regards to cross selling activities it seems like there is -- it’s been very well. Could you breakdown a little bit with regards to the market dynamics both in the U.S. and ex-U.S.?

Michael Davin

Yes, sure, this is Michael and thank you for your comments on the quarter. Q4 historically is our industry’s strongest quarter. It’s probably one of the more linear quarters. Q2 and Q4 are the strongest but your comment on the cross-selling realizing that we closed transaction just seven months ago, we are very pleased with the ability of both the North American distribution and the international distribution to really leverage this broad product line in the cross-selling opportunities globally. So, it’s still early in the acquisition but overall we would give an A plus report card to our distribution on how well they were able to integrate and how well they were able to cross-sell and leverage the broader portfolio of products to the global markets.

Difei Yang - RF Lafferty

Thank you for that additional color. Just a quick follow-up with regards to the stock repurchase program and would you give us a quick update on what’s left in the program or are you - and the future plans for additional repurchase?

Tim Baker

Sure, this is Tim. So, we spent in the quarter $15 million against the authorized $25 million buyback. So there is $10 million still authorized in the buyback which we will be evaluating based on market conditions.

Operator

Thank you. The next question is from Matthew Dodds of Citigroup. Please go ahead.

Matthew Dodds - Citigroup

Tim, first for you, with the royalty, if you back it out, I’m coming up with about $0.12 in earnings and a 58% gross margin. That in the ballpark?

Tim Baker

Yes.

Matthew Dodds - Citigroup

Okay. And then how about the RFID roll-out, no comments on that in the front. How is that going so far and in terms of timing, when is that fully implemented with all the inventory kind of cleared through from the prior disposables?

Michael Davin

Hey Matt, it’s Michael. So, we’re starting to see, because people had inventory obviously when we launched the RFID. So we are starting to see some pick-up in the disposable sterile fibers. And then now also with the launch of Focus for the Pico, we are starting to see initial, we do supply the physician with the initial order of the system, a starter kit of three focus lenses but we are already starting to see some revenue coming in as it relates to the repurchasing of that. But we are starting now to see the shift over to the sterile one-time use fiber for the minimally invasive technology.

Matthew Dodds - Citigroup

For Focus, what’s the rough pricing of that and how many uses do you get for each one?

Michael Davin

I think its $1,500 for a package of three. So its $500 a Focus lens and right now if you just focus on the facial area, although there will be some papers presented in ASLMS on physicians using this in other anatomical areas. Right now if we just focus on the facial area, to get 8 to 10 treatments per lens array.

Matthew Dodds - Citigroup

Possibly less outside the face, is that what you are implying?

Michael Davin

Starting to treat the declate, the neck area because we have seen advantages there as well. Keep in mind really we just started shipping the Focus with this unique pulse format in October. And doctors who buy the laser get a starter kit of three but we do see them start to take it to the hands for treating pigment on the hands, then also facial area and then the chest and the neck area. So if that continues, we would see the amount of usage per lens per patient to go down.

Matthew Dodds - Citigroup

Okay, then just one last question. On Palomar, the contract manufacturing change around midyear, is that part of the $8 million to $10 million or is that additive?

Michael Davin

That’s not part of the $8 million to $10 million. So that would be additional opportunity that we see as we move to the contract manufacturing model.

Matthew Dodds - Citigroup

I guess any framework on what kind of opportunity that is relative to $8 million to $10 million?

Tim Baker

No, we haven’t quantified that. Obviously that will be on the margin side but we do think there is upside to the margin based on going to contract manufacturing.

Operator

Thank you. The next question is from Zack Ajzenman of Griffin Securities. Please go ahead.

Zack Ajzenman - Griffin Securities

A couple of questions, just trying to get a better understanding on some PicoSure trends, at this point what proportion of PicoSure sales are going to new customers versus existing customers?

Tim Baker

Pretty much all. I mean as far as -- you mean existing customers that own Cynosure products?

Zack Ajzenman - Griffin Securities

Yes.

Tim Baker

I am sorry. I thought you said -- own a PicoSure. Yes so, I would say the majority of our PicoSure sales are to the core market which is defined as dermatologists and plastic surgeons. And there is good percentage of what we call KOLs about the technology because they are very excited about the unique nature of this technology what we will offer in their practice. But probably if I were to guess and then the tattoo arena is kind of new for us. Those would be primarily new customers as they are buying them for mainly tattoo removal. And it’s maybe 50-50, 50% of existing customers and 50% of new customers but I don’t have the exact data on that.

Zack Ajzenman - Griffin Securities

Okay. And maybe what you were thinking along the lines earlier, those customers that have owned your Q switched nano products, what percent have moved sort of the penetration within that base have moved to PicoSure.

Michael Davin

Well, keep in mind when we acquired Palomar -- we probably can’t [ph] buy back in 2011, 85% of their revenue was coming from outside the United States. The majority of our Pico sales have been in North America. That’s starting to shift now that we’ve received additional regulatory clearances. We’re very excited about the recent clearance in Korea and in Taiwan. So I would say knowing that the majority of that installed base of ConBio was in Asia and in international, we’re just starting to get Pico introduced to those markets. So I would say probably 20% or less are customers that own our nanosecond technology. But once again that’s a guesstimate. I don’t have the actual number.

Operator

Thank you. The next question is from Anthony Vendetti of Maxim Group. Please go ahead.

Anthony Vendetti - Maxim Group

Just wanted to ask a couple more questions about the royalty. So the $4 million that you recognized, it looks like it was sort of two different tranches, one back royalty as well as a payment as the settlement, so $4 million in total. What was -- for this quarter, what was the gross margin on that $4 million?

Tim Baker

About 74.5% Anthony.

Anthony Vendetti - Maxim Group

74.5, okay. And so you agreed that it was approximately about $0.12. So that would….

Tim Baker

Yes. On a GAAP basis if you exclude the royalties it’s a $0.12 impact.

Anthony Vendetti - Maxim Group

$0.12 impact, so the number would have been, you would have on an operating basis, if we strip that out completely you would have been about $0.21?

Tim Baker

$0.21 GAAP, $0.29 non-GAAP.

Anthony Vendetti - Maxim Group

Perfect. Okay. And then on the organic growth and I know that’s tough because there is combined sales force now. But did you say if Palomar were in the fourth quarter of 2012 it would be about 13% growth year-over-year?

Tim Baker

Yes. So actually if Palomar in fourth quarter of last year it would be 15% total revenue growth, 15% apples-to-apples, 13% Laser growth.

Anthony Vendetti - Maxim Group

13% Laser got it. And then -- and that’s 13% Laser growth. So that just strips out the royalty revenue, correct?

Tim Baker

And service.

Anthony Vendetti - Maxim Group

Royalty and service, okay. And then in the release Michael you said on the revenue side you saw a strong demand for bundled systems and you pointed out the strength in PicoSure as well as the Palomar, Vectus and Icon Systems. You didn’t mention cellulite. Is there an update on that or is cellulite or Smartlipo, were they not as strong this quarter as PicoSure, Icon and Vectus?

Michael Davin

No, no minimally invasive, this still is a very strong franchise for us, Anthony. But they really wasn’t a cross-selling opportunity there that we saw with the Icon and the Vectus as it related to our other flagship products on the non-invasive side. As you know with Palomar they did have the Slimlipo, really was their only product in the minimally invasive arena. And the sales there prior to buying the company, we would say were not that strong. And I do believe on the surgical side, because of the versatility of our Triplex and now that device being able to address cellulite, with the addition of Precision TX now be able to do the face and neck areas and hyperhidrosis that the surgical sales force really has gravitated over towards our portfolio of product. So the cross-selling there, there wasn’t the opportunity obviously because they had one product with the Slimlipo and that really wasn’t a significant -- it was a de- minimis revenue producer for Palomar. So the minimally invasive business is strong. Precision TX had an excellent quarter. It further diversifies the portfolio, the actual workstation and doctors are very excited about the versatility of that workstation. That would all be additional indications they can treat.

Anthony Vendetti - Maxim Group

Okay, great. And then just lastly on some other quick financials. So the rest of the royalties for Tria, it sounds like is in a rollout towards the end of the year right. There is the payment due by September and then another one by end of the year?

Tim Baker

That’s correct. Yes. And that’s the $6 million remaining of the $10 million.

Anthony Vendetti - Maxim Group

Okay, okay. And then, and have you made all the payments yet to Mass General or that’s going to rollout as these payments come in?

Tim Baker

I’m sorry Anthony one more time.

Anthony Vendetti - Maxim Group

Oh, did you make all the payments to Mass General or is that going to rollout -- the rest of the payments to Mass General are going to rollout throughout the year?

Tim Baker

It will rollout when we receive the balance of the $6 million.

Anthony Vendetti - Maxim Group

Got it, and then this quarter it looked like almost $4 million in integration expenses. Is that about $0.18 or so this quarter in integration expenses?

Tim Baker

Yes, integration expenses were about $4 million.

Anthony Vendetti - Maxim Group

$4 million, okay. And then lastly, Tim, if you could just give the breakout of stock based comp in the categories?

Tim Baker

Sure. So sales and marketing is $328,000, R&D is $170,000, and G&A is $566,000 and $64,000 in COGS. So it’s $1.1 million in total.

Operator

Thank you. The next question is from James Sidoti of Sidoti & Company. Please go ahead.

James Sidoti - Sidoti & Company

I just wanted to be clear on the -- the $8 million to $10 million in synergies that you’re expecting that does not include about $6 million of amortization expense. Is that correct?

Tim Baker

That’s correct.

James Sidoti - Sidoti & Company

Okay, so it’s net like about $4 million.

Tim Baker

Yes, on a noncash basis, yes.

James Sidoti - Sidoti & Company

Okay. And then can you give me some guidance for tax rate for 2014?

Tim Baker

Sure, so we’ve - that was nonmoving [ph] pieces in our tax rate. We also have a full valuation allowance obviously on the books for right now and we’ll obviously be evaluating that as we go into 2014. I guess for planning purposes, we’re assuming about a 30% tax rate. So anywhere between 28% and 32%. As we rollout our NOLs, again which are based on limitations we’ll see where that turns out but for modeling we’re using 28% to 32%.

Operator

Thank you. [Operator Instructions] The next question is from Bill Plovanic of Canaccord. Please go ahead.

Bill Plovanic - Canaccord

A couple of questions. Just first, if you could help us out on the Tria settlement, what is the exact timing, dollars you expect for Q2, Q3, Q4 from those royalty payments just so we can model this out?

Tim Baker

So, as we mentioned, the 3% ongoing royalty for U.S. sales home use, that number obviously is 100% depending on their revenue which obviously we can’t forecast. In terms of the settlement itself, the $10 million settlement, we the received 4 million, obviously in Q4. We’ll be receiving the balance really, September 15th there is the second payment and then the balance will come in before the end of Q4.

Bill Plovanic - Canaccord

So how much of that is Q3 and how much of that is Q4?

Tim Baker

It will depend, if the - of the balance of the $6 million we’re basically getting - $300,000 will come in by Q3 and balance will come in Q4. And just to note that 3% royalty on a go forward basis is 100% royalty to us where there isn’t a Mass General payment associated with that. So the $1.8 million that goes to Mass General is just against the $10 million settlement. And going forward, there won’t be any Mass General payment.

Bill Plovanic - Canaccord

And based on historical just revenue run that they had to pay the catch-up settlement -- I mean, what’s the minimum for where they are running now in terms of a quarter roughly for the 3%?

Tim Baker

So we can’t comment on that because there is really no guarantee that what their sales are going to do. So we really can’t comment on that.

Bill Plovanic - Canaccord

Okay so just in summary, we’ve got the 3%. We don’t know exactly what that is. Q2 nothing; Q3, $300,000 and Q4 $about 6 million?

Tim Baker

Actually, I will give you exact, Q3 is $900,000 based on the one royalty and $5.1 million will be in Q4.

Bill Plovanic - Canaccord

$5.1 million, that’s what I was looking for, great. And then, as we get into ASLMS and AAD, do you have any major new product systems that you expect to commercialize at either of those meetings?

Michael Davin

Bill, its Michael. I wouldn’t call major new. I know we are going to have a very successful ASLMS. We’ve already received the program for the meeting and a number of papers have been accepted on Cynosure technology with a strong focus on Pico. We will be announcing some enhancements and we do have some product launches but they will be in the second half of the year.

Bill Plovanic - Canaccord

Will you be showing those at the shows, though?

Michael Davin

We haven’t made that decision yet. It’s all based on where we’re on the innovation and more importantly that innovation translating over to production and having those products available to market within a timeframe that we feel is acceptable for when you launch.

Bill Plovanic - Canaccord

Okay and would those be major new systems, the ones you launched?

Michael Davin

I wouldn’t call them major new systems. We are working on several exciting new flagship products but I would not anticipate those to be available in the first half of the year. And once again, we’ll decide -- there will be some presentations on our technology at the ASLMS. That does not mean that we’ll be ready to show the technology at the booth. Normally, we do not unveil the technology at a Congress unless we know we can ship it within 90 days of unveiling it and showing it to market.

Bill Plovanic - Canaccord

So then and remind me, so you’ve started commercializing PicoSure; was it last year at AAD or what was that the prior year?

Michael Davin

No, no, you’re right. We’ve launched it at AAD. We had de- minimis shipment in March. Where we would really see the products, first calendar year will be like April of this year.

Bill Plovanic - Canaccord

Okay. So, really.

Michael Davin

And as you know we have enhanced the device since the launch, with the launch of obviously the Focus Lens Array, which we’re getting great clinical feedback on as doctors are utilizing that. Once again, it wasn’t available till October and there will be some other enhancements to Pico that will become available. And then of course with the all the registrations that we are very excited about, especially as we start impetrate the Asia-Pacific opportunity where we believe this device will do extremely well.

Bill Plovanic - Canaccord

Okay. And then as I think about Vectus, so with Pico maybe in the U.S. we’re somewhere in the fourth, fifth inning but you have the Focus Lens Array which kind of gets a little boost to that and then we’re adding on the Asia-Pac. And then as Vectus, I know that Palomar had launched it. I think that was two years ago but I don’t think it really started getting momentum till maybe about a year ago. Is that correct?

Michael Davin

So, they had a staggered launch. They actually launched in Spain and Germany two years ago. It was kind of like a beta test when they launched the product. They really didn’t launch in the U.S. market until the fall. So, really they just had their one year anniversary of that product being on the market. And as we mentioned the product had some issues with the large tip. The good news is we have been able to resolve all those issues and it was transparent to the customer. So I think it had a birthing, it had probably a one year birthing experience before really it became available in all markets and today it’s available on all markets and the product is doing extremely well for us.

And if you look at Icon as well, Icon is very similar in terms of its roll-out with more strategic geographical areas at first and now that product is available in all markets. And I would say in those two products we had excellent results with cross-selling, the Icon and the Vectus.

Bill Plovanic - Canaccord

And you say to characterize kind of Vectus in the launch. This is a major hair system that’s kind of replacing or updating all the boxes from some competitors out in the field. Where do you think you are, if you had to use baseball analogy in terms of the commercialization of that product cycle?

Michael Davin

Yeah, first of all, I want to go back to the baseball analogy with your Pico comment. I would not say we’re in the fifth inning. I’d say we’re in the first inning of a 20 inning game. So we are very early in the game as it relates to not only the opportunity we believe for revenues. As you know that was a very cautious launch. We wanted to make sure stability was in place and we’re thrilled that almost year out now to report to the device is extremely stable. And normally we don’t talk about stability with our technology but the effort that went into this box and how unique this technology is, stability is something we really feel we need to assure customers went with a reliable platform.

So, we think we’re very early and as far as international, the device has only been available really in Europe this year and now we start to move into the Asia-Pacific markets and especially we have a pending clearance in China that we hope to see in the coming quarters. Overall, we are very early in the game, not only with getting that product into the markets but also on the innovation side. As it relates to Vectus, to your point the way we look at the hair removal market, people are, certain geographical areas of the world specific to an energy source or wavelength. And there are a lot of strong diode customers out there and they are really looking at Vectus as that next generation of diode technology.

There are 1000s of diode lasers out there for hair removal. May are O U.S., so not necessarily strong domestically and the doctors that are replacing the older diode technology with Vectus are thrilled with what the device provides to them for throughput, having that very large tip delivery system which now is in the great place from the standpoint of reliability, allows them to treat large cosmetic areas quickly and get excellent clinical results. It’s a very versatile platform; it’s a solid state platform. So, we are going after the install base out there which is large but also folks that really like diode as an energy source for hair removal, believe that this is the next state-of-the-art flagship technology to come to market, which the market really hasn’t seen a new high powered diode of this nature in maybe five or six years.

Operator

Thank you. The next question is from Andy Shopigo, a Private Investor. Please go ahead.

Andy Shopigo - Private Investor

Thank you. 20 inning game. That means it’s tight for half the time.

Michael Davin

21 innings Andy.

Andy Shopigo - Private Investor

Okay. Most of my questions have been answered but I do want to clarify one thing here Tim. The $1.8 million to $2 million that is due Mass Gen, will that be due upon your receipt of the full $10 million settlement or will it be portions of it that you will be paying to them over the course of this year?

Tim Baker

Sure. Of the $5.1 million that’s left of the $8.5 million settlement, we will pay them $1.1 million at the time we receive the $5.1 million and then of the $900,000 that is the balance on the other settlement, we will pay them $370,000 at the time we receive our $900,000.

Andy Shopigo - Private Investor

So, you have not paid them anything with respect to the $4 million that’s been received?

Tim Baker

$250,000.

Andy Shopigo - Private Investor

$250,000, okay, all right. So, that $4 million is not net of the $250,000?

Tim Baker

That’s correct, $4 million gross of which we pay $250,000to MGH.

Andy Shopigo - Private Investor

Okay. So they have already received $250,000 and I think I am clear on this. All right. If I have any follow up questions I’ll contact you later. Thank you.

Operator

Thank you. The next question is a follow up from Zach Ajzenman of Griffin Securities. Please go ahead.

Zach Ajzenman - Griffin Securities

Just one follow up from me. Looking at the balance sheet, about $130 million in cash now should start generating cash going forward. What are some of -- I know you spoke about some are your internal projects rolling on as we go forward. What else can you comment on areas of capital deployment? Anything else on the M&A radar? Any color would be appreciated?

Michael Davin

Yes, it’s a great question. So, as I mentioned we have several exciting projects going on in research and development right now because to be honest with you all of our organic activities are really being driven by the P&L. So we are sitting at about $130 million in cash today with no borrowing. Our strategy since 2011 has been one of a parallel path of organic development which will stand somewhere around north of $20 million on research and development in 2014 but will also be in a parallel path looking at opportunities from an M&A perspective.

Of course right now we just want to make sure our focus is to complete the integration. We’re very, very pleased with where we are. We have an aggressive plan and we execute it beautifully and can’t thank the management team enough for the execution through the process. And we are keeping our radar and looking at M&A opportunities. So we are actively still pursuing, using and leveraging our very healthy balance sheet to continue to grow the company from a non-organic fashion, at the same time invest about 7% of our revenues in organic development. So we think we’re in a great place on the innovation side which we all know is very important to continue to grow a company like ours in an industry we’re in. So, we’re active in both of those areas.

Operator

Thank you. We have no further question in queue at this time. I would like to turn the floor back over to management for any closing remarks.

Michael Davin

Thank you, operator. Thank you for joining us this morning. We look forward to keeping you up-to-date on our progress. Have a great day.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Cynosure, Inc. (CYNO): Q4 EPS of $0.39 beats by $0.14. Revenue of $74.5M (+74.5% Y/Y) beats by $11.41M.