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Cynosure, Inc. (NASDAQ:CYNO)

Q1 2009 Earnings Call

May 4, 2010 9:00 a.m. ET

Executives

Scott Solomon - VP, Sharon Merrill Associates

Michael Davin - President and CEO

Tim Baker - EVP and CFO

Analysts

Gary Nachman - Leerink Swann

Andy Schopick - Nutmeg Securities

Anthony Vendetti - Maxim Group

Anup Mehta - Canaccord Adams

Operator

Good day and welcome to Cynosure's first quarter 2010 conference call. (Operator Instructions) At this time, I'd like to turn the call over to Mr. Scott Solomon, Vice President for Sharon Merrill Associates.

Scott Solomon

With me on today's call are Cynosure President and Chief Executive Officer, Michael Davin; and Executive Vice President and Chief Financial Officer, Tim Baker. Mike will begin today's call with a discussion of Cynosure's first quarter 2010 results and a business overview. 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 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 Cynosure's Annual Report filed with the SEC on Form 10-K for the year ended December 31, 2009, and subsequent reports filed with the SEC. These filings can be accessed on the Investor Relations section of the company's website, www.cynosure.com.

In addition, any forward-looking statements represent the company's views as of today, May 4, 2010. 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 Michael Davin.

Michael Davin

Thank you, Scott. Good morning, everyone, and thank you for joining us on today's conference call. Stronger year-over-year sales in our international subsidiaries and distributors along with continued operating spend savings contributed to our improved first quarter results.

Total revenue grew 28% from Q1 in 2009, reflecting a solid increase in demand from our European and Asian customers. International laser production revenue increased 70% to $7.9 million from 4.6 million in the same period of 2009. Our North American laser revenue was up slightly year-over-year at 6.4 million from 6.3 million for the first quarter of 2009.

Just over a year ago, we re-organized our international sales organization, and have since enhanced our sales operations throughout Europe and the Asia-Pacific region, forging relationships with new distributors in Singapore, Taiwan, Australia, as well as expanding our direct presence in these territories.

Through this effort, revenue from products sold outside North America has increased to 56% of total product revenue in the first quarter 2010, compared with 43% for the same period a year earlier. For some time, we view the number of overseas markets as attractive long-term opportunities for Cynosure. As a result we've made considerable investments during the past several years to strengthen our presence internationally as part of our growth strategy.

Looking ahead, we continue to see the EU and Asia-Pacific regions becoming increasingly significant for the aesthetic industry and for Cynosure. Although North America first quarter product revenue was up just slightly year-over-year, we saw an encouraging 4% sequential increase from Q4, 2009.

Access to credit remains a gating factor for many US practitioners. We are however, seeing a gradual improvement in the lending environment, a conclusion that is supported by two indicators; first, a percentage of our customers that have successfully obtained financing as a result of the relationships we established with institutions such as Bank of America, has started to incrementally climb during the past few months.

The other indicator is resumption in lending by third-party financing sources. These sources had virtually disappeared over the past 15 months. So the fact that they appear to be making a slow comeback is a good indicator for the industry.

We are also encouraged by the response of attendees at the recent American Academy of Dermatology Annual Meeting and the American Society for Laser Medicine and Surgery Annual Conference. Our core customer base reports that demand for aesthetic procedures is improving as the US economy regains its footing.

And certainly the tone of both the AAD and ASLMS meetings was upbeat and stands in sharp contrast to the general mood we experienced at those two events in 2009. In fact, full traffic, sales demonstrations, sales leads and even lasers sold at these events were all up considerably from 12 months ago.

We view this as promising evidence of a rebuilding of overall demand in our industry. We experienced good initial traction from our new Smartlipo Triplex and Elite MPX workstations in the quarter. We are optimistic that order volumes of these products will accelerate as we move through the remainder of this year and into 2011.

We continue to diligently manage operating expenses in what we view as still a fragile economic climate. Through the headcount reductions and other cost control initiatives we implemented last year, we are in pace to achieve our targeted annualized operating spend savings of $5 million to $7 million in 2010.

At the same time, we are continuing to strategically invest in market expansion, product development and technology innovation as well as scientific research to support adoption of our lasers and intelligent delivery systems.

The publication of clinical data continues to play an integral part of our strategy. Last month, ASLMS Annual Conference in Phoenix included six podium presentations on studies evaluating our newest technology and applications, including skin tightening, fat removal and skin rejuvenation.

We continue to make excellent progress with our multiyear partnership with Unilever to commercialize light-based aesthetic devices for home use, which thus far has achieved all of its internal targets and remains on track.

In summary, our overseas aesthetic business contributed meaningfully to our improved first quarter results. We're encouraged by the gradual improvement of the U.S. credit environment and optimistic that the aesthetic industry can begin to generate momentum so long as economic conditions continue to improve.

Our goals for this year remain to continue building market leadership in laser lipolysis through our Smartlipo MPX and Smartlipo Triplex workstations; having shipments of our new multi-application multi-wavelength, Elite MPX; pursuing regulatory approvals in key international markets; introducing for the latter part of 2010 a new workstation targeting a high-volume application that is not being adequately addressed by current technology; continuing to successfully advance our multiyear partnership with Unilever for its commercialization; and achieving our targeted operating expense reductions of $5 million to $7 million in 2010.

With that, I will turn the call over to Tim for his financial review. Tim?

Tim Baker

Thank you, Mike. Good morning everyone and thanks for joining us. As Mike noted earlier, revenue for the current quarter increased 28% to $18.9 million from $14.8 million for the same period in 2009.

On a GAAP basis, our first quarter net loss was $2.8 million or $0.22 per share compared with $4 million or $0.32 per share for the first quarter of 2009. The improved results reflect both the stronger top-line and a 17% reduction in operating expenses over last year's first quarter.

It is important to point out that the company's net loss for the first quarter of 2010 included an income tax provision or an increase to our loss of $0.2 million or $0.02, representing an effective tax rate of 7% compared with an income tax benefit; or a reduction to our loss of $2.9 million or $0.23 per share benefit, representing an effective tax rate of 42% recorded in the first quarter of 2009.

The change from a benefit to a provision in 2010 period is a result of the company's establishment of a valuation allowance in the fourth quarter of 2009 against the company's net domestic deferred tax to assets, and results from taxable income generated in foreign jurisdictions.

We expect to continue to record a quarterly tax provision for the balance of the year and expect our effective tax rate to range between 8% and 12% for the remainder of 2010.

The company's loss from operations narrowed by $4.6 million, or 64%, to $2.5 million in the first quarter of 2010 from $7.1 million for the same quarter a year ago.

On a non-GAAP basis, excluding stock-based compensation expense of $1.2 million, and using effective tax provision of approximately $100,000, the net loss for the first quarter was $1.5 million or $0.12 per share. This compared with a first quarter of 2009 net loss of $3.3 million, or $0.26 per share.

Results for Q1 of 2009 excluded stock-based compensation of $1.8 million, and used an effective tax benefit of $1.8 million. We used approximately $12.7 million weighted average shares outstanding in computing basic earnings per share for both quarters.

For more information on our non-GAAP financial measures, please see the table for reconciliation of GAAP results to non-GAAP measures included at the end of our earnings release. The table has more details on the GAAP financial measures that are most directly comparable to non-GAAP financial measures, and the related reconciliations between these financial measures.

Looking at our quarterly revenue in a bit more detail, laser product revenue accounted for $14.2 million or 75% of total revenue in Q1 2010, with the balance coming from parts, accessories, and service. This compared with laser product revenue of $10.9 million, or 74% of total revenue for the same period in 2009.

By territory, international markets accounted for 56% of laser revenue in the first quarter of 2010, up from 43% in the same period of last year. North American laser revenue decreased as a percentage of total product revenue to 44% in Q1 of 2010, from 57% in the first quarter of 2009, but increased slightly in real dollars.

Gross profit for the quarter was 57.2%, down about 3.7 percentage points from the same period in 2009, but up from adjusted Q4 of 2009 of 54.7%. The decrease from Q1 of '09 can be attributed to the higher percentage of revenue from international markets, which carry lower ASPs than products sold in North America.

Average selling prices in Q1 of 2010 remains stable from the fourth quarter of 2009.

Turning to expenses, total operating expenses in Q1 declined 17% to $13.3 million, from $16.2 million in the first quarter of '09. As Mike mentioned, for 2010, we still expect to generate annualized operating expense saving of between $5 million and $7 million over 2009.

Looking at operating expense by category, selling and marketing expenses decreased $2.1 million, or approximately 20% to $8.4 million in Q1 from $10.5 million in the year-ago quarter. The decrease in selling and marketing reflected reduced headcount and the elimination of some non-core marketing programs. Selling and marketing decreased as a percentage of revenue to approximately 44% from approximately 71% in Q1 of last year.

Research and development expenses were $1.7 million for the first quarter, roughly equivalent to the same period last year at approximately 9% of revenue in Q1, 2010, compared to 12% of revenue in Q1 of 2009.

General and administrative expenses for the quarter were $3.2 million or 17% of revenue, compared with $3.9 million, or 26% of revenue in Q1 of '09. The decrease in G&A expenses reflects cost reduction initiatives and reduced legal expenses.

We continue to maintain a strong balance sheet. Our cash and investment balance at March 31, 2010 totaled approximately $92 million, effectively unchanged from our year-end balance. We generated positive cash flow from operations for the fourth consecutive quarter, reflecting our effective balance sheet management and our cost reduction initiatives.

We continue to have no long-term debt, other than capitalized lease obligations.

Despite the increased contribution from international sales, DSOs continue to improve, and at the end of Q1 were 54 days compared with 108 days at March 31, 2009, and 56 days at year-end 2009.

With that, we are ready to open your call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from Gary Nachman with Leerink Swann.

Gary Nachman - Leerink Swann

First question, which countries overseas specifically were the strongest in the first quarter and is that sustainable, and which machines are doing particularly well there? That'll be helpful.

Tim Baker

As we mentioned Gary, Europe and the Far East performed strong in Q1. Pretty much the whole portfolio of technology did fairly well in those markets. In the Far East, our vascular lesion technologies, also our pigmented lesion technology, we have a higher prevalence of pigmented lesion in the Far East, did very well.

And in Europe, pretty much across the product portfolio, we have strong performance.

Gary Nachman - Leerink Swann

And do you have reasons to believe that it's sustainable in both of those regions, that there is continuing demand?

Michael Davin

Yes, we do believe it's sustainable. We've had a direct presence in Europe for over 10 years now. We're excited about what's going on the Far East because we just recently went direct in Korea and also opened our second office in China about 18 months ago and also Japan performed nicely. But we do believe it's definitely sustainable.

Gary Nachman - Leerink Swann

I guess for Tim, should gross margins continue to trend higher as volumes increase? How should we think about the make-up of international, particularly the contribution from the distributors, how it's going to play out over the course of the year?

Tim Baker

We mentioned in our last call that really we were expecting 2010 to be in this range of about 52 to 48% revenue coming from international business. I mean, this quarter was a little higher at 56%, coming internationally. With that we were able to improve our gross margin sequentially from 54.6 to the 57.2. So we kind of talked about gross margin last quarter that we would expect it to be in that 57 to 58% range for the year, given this type of geographic mix.

So I think we're still comfortable at that level.

Gary Nachman - Leerink Swann

And previously you guys talked about a breakthrough technology that you're expecting later this year. Is everything on track for that, and can you give us any sense what it's for, skin rejuvenation, laser lipolysis, just a clue?

Tim Baker

Gary, as of right now, today, we are on track to launch that technology sometime in the fourth quarter of 2010. And we're really not discussing right now what the technology would be focused on, but as we mentioned in the script, it will address a high volume aesthetic indication that is not currently being addressed by technology today.

Gary Nachman - Leerink Swann

And then last question. Do you guys see any real competitive stress from the non-invasive fat reduction technologies? Or was that a DNA with some buzz on cell peak and also Medicis' Liposonix? How do you see how those are going to fit into the whole marketplace? Thanks.

Michael Davin

Gary, as you know, our focus on removing fat is of an invasive nature with our Smartlipo technology and the recent reduction of the highest-powered multi-wavelength intelligent delivery system to market with the Triplex that we just launched in the end of the fourth quarter. We believe to get an immediate long-lasting result that the patients are looking for. Similar to traditional liposuction, you need to go under the skin and perform an invasive procedure.

Although, we do believe the non-invasive approach could be complimentary, and also there'll be a demand for these non-invasive approaches. At this time, there's really not a product that's been able to come to market that's been FDA-cleared when you look at the different, whether the ultrasound products, whether it be the Ultrashape or the Liposonix, they're working diligently in bring those products to markets through the regulatory process. It will be interesting to see how they perform once they're available to the consumer.

Operator

Our next question is coming from the line of Andy Schopick with Nutmeg Securities.

Andy Schopick - Nutmeg Securities

A few questions if I may. I really wanted to ask you about the seasonal aspects to the international business now. Traditionally, many companies, certainly in this space, have seen a marked slowdown over the summer months. I wonder if you're anticipating anything like that, given the current international geographies that you're participating in.

And any comments about Latin America? Brazil recently affected a change in its tax laws, making liposuction, for example, tax deductible. Are you seeing anything down there?

Michael Davin

Andy, it's Michael. Your first question, it's very typical in the third quarter, especially in Europe. In the month of August, we see a significant pullback in activity due to basically their summer shutdown. That quarter historically is a hockey stick start to quarter where a good percentage of the business, especially in Europe will come in, in September. So we don't expect that to be any different this year than it has been for decades.

The Far East where our business continues to get stronger, especially in Korea, China and also in Japan, we don't quite have as negative seasonality impact in our business there. So I think we'll probably be the strongest in that region than we've ever been. That should maybe help us offset a little bit the European pullback, especially in the month of August.

A slower start in Latin America, we originally announced going direct in Mexico. We are focused on getting regulatory clearances throughout that region, and we'll be announcing those clearances once they're received. It's a significant area of focus for us, but currently we do not generate a lot of business from that area.

We are aware of the recent tax decision, I guess, against cosmetic procedures, in particular liposuction, in Brazil. That just was recently announced. We're not sure how that will affect us. Currently, we aren't doing a lot of business there. But certainly with the invasive nature of our technology with Smartlipo, it's an exciting opportunity for us.

Andy Schopick - Nutmeg Securities

One follow-up on that. In how many countries are you anticipating receiving regulatory clearances this year where you do not have them?

Michael Davin

Well, we had several filings in place. I would say we probably have somewhere around eight to 10 different countries where we're filed right now. Some of them we have products that are approved. Others we're awaiting other products from our portfolio to get approval. So, we are very active on that front. We probably have more activity on regulatory clearances in the international market than we ever have had. But I can't speak to exactly how many different registrations are in place right now.

Operator

Our next question is coming from Matthew Dodds from Citigroup.

Unidentified Analyst

Hi guys this is Jimmy actually calling for Matt. First question, in terms of your operating introduction looks like for this quarter, you are down $3 million. But you guys are still five to seven. So I was just wondering if you could comment on what keeps the savings within that $5 million to $7 million range.

Tim Baker

Yes, this is Tim. I mean, if you look at the year-to-year savings, we obviously put in lot of a cost saving initiatives at the beginning of 2009, giving the uncertainty in the economy. So, what we'll see of the benefits coming through, and we'll see a bigger year-to-year savings in the first half of the year than we will in the second half of the year, as we see these cost structuring programs come through the P&L. So initially, we will see some much bigger savings in Q1 versus Q2, and then getting more of a steady state in the second half of this year.

Unidentified Analyst

And the second question is, just wondering if you could just put a little bit more color on what you saw at AED that gives you more confidence that you'll pick up business throughout the year?

Michael Davin

Sure, Jimmy, this is Michael. Just a general tone of the physicians, the mood of the meeting was significantly enhanced compared to the meeting of last year 2009. Then we look at boots activity, our lead generation at the 2010 AED was probably 8x of what we generated in the 2009 meeting.

We generated good quality leads; demonstrations were scheduled and secured from the meeting. And then also we sold some technology on the floor, which we did not sell any technology on the floor in 2009. So, I’d say, I have mentioned a number of different metrics that we would look at, all of which were considerably favorable over the 2009 meeting. And this is a core group of about 12,000 dermatologists attend worldwide.

And the overall individual conversations that I even had with the some of the doctors, just speaking about the strong interest coming back to their practices of the consumer to inquire about aesthetic applications, to start to schedule, their schedules are being pushed further out that they were in 2009. So this is the overall tone, and the energy of the meeting was significantly better than 2009.

Unidentified Analyst

Okay. And my last question is, the products from the Unilever partnerships, is the commercialization more of a late 2010 event or is more of a 2011?

Michael Davin

No, and we'd said at the two or three year development program, it's probably more like 12 and 13.

Operator

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

Anthony Vendetti - Maxim Group

On the (technical difficulty) breakdown through the expense line, and then I got a couple of other follow-ups.

Tim Baker

Sure. So for Q1, sales and marketing was about $579,000, R&D was about $177,000, G&A was about $377,000, and about $86,000 went through COGS. So in total about $1.2 million.

Anthony Vendetti - Maxim Group

Okay. And I know you said, Mike, in the press release that there is a slight pickup in U.S. demand and obviously revenues did increase slightly sequentially. Can you say if there is any particular reason in the U.S. that you're seeing a pickup or is it just general things are starting to look a little bit better in North America?

Michael Davin

I think it's across the board, Anthony. And we've really started to see some momentum in the quarter in March. January typically is very slow regardless of the economic climate. February was still pretty slow than March. We really started to see things pick up. And I'm pleased to say that that momentum has carried into the second quarter in North America.

So as I mentioned, lending seems to be freeing up a little bit. The third-party lending source is getting back into the industry, which as I mentioned we have not seen for five quarters. We're starting to see activity in that front. They were major providers of financing to our physicians prior to the economic downturn. The relationship with Bank of America has excellent traction, and also there are other banks that we are working with that are offering financing to our doctors. So we're seeing a freeing up the financing.

Our critical meetings, as you know, Anthony, are the AAD and the ASLMS. We just came up with the ASLMS in the first week in April. That was also a very encouraging meeting, much like the AAD, where the activity was good, traffic was good, the tone of the physicians was very positive. They themselves were also speaking about the strong interest of their customer base coming back to their practices. There schedules are out further. So overall in North America, the tone is more positive than it's been in, say, 15 months.

Anthony Vendetti - Maxim Group

And then in terms of the new product that's coming out at the end of the year, I know it's a new platform, but is it replacing an existing one that you have or is it a completely new platform that you haven't had an application for in the past?

Michael Davin

It will not be cannibalistic to our current flagship technology. It's a high-volume indication that you'll be well aware of when we announce its presence in the fourth quarter, and it is an indication in which we are currently not addressing it with any of our technology in the manner of which we're going to address it.

Anthony Vendetti - Maxim Group

And are you seeing a pick up a little bit in overall procedure volume? If you all look across your product line, I know you don't give a breakout exactly in terms of sales across your product line. But if you have to say what seems to be picking up the most in terms of demand, what product categories or applications would that be in?

Michael Davin

Surprisingly hair removal is still our number one selling technology across the globe. As I mentioned, with our Accolade and with our Cynergy technology and our stronger presence now in the Far East, both of those products are seeing good demand. The Accolade focuses on benign pigmented lesions, so there's a high prevalence of that condition in the Far East markets. And then the Cynergy focuses on the vascular lesion indications, and there's also a strong prevalence also in Europe for that indication.

But hair removal is very strong across the border and very strong in relative terms obviously. They're not the numbers that we reported in 2007 and the first half of 2008. But across the portfolio of our flagship technology, we are seeing good interest returning to those platforms.

Anthony Vendetti - Maxim Group

And last question on ASPs. Have they remained relatively stable, or are you being a little more competitive with the pricing at this point?

Tim Baker

We are seeing actually fairly stable pricing, particularly in North America. So we didn't see any significant change from Q4 into Q1 in terms of our pricing levels.

Operator

Our next question is coming from Anup Mehta with Canaccord Adams.

Anup Mehta - Canaccord Adams

A few questions left. Any update on the Smartlipo patent protection efforts that you guys mentioned at the end of last year?

Michael Davin

We mentioned obviously, we announced at our year-end call that we successfully upheld our IP with our CoolTouch litigation that we had ongoing. We have also notified a number of other parties in the industry in terms of our feeling of their infringement. And still we're working through their responses to our notifications.

Anup Mehta - Canaccord Adams

So were there any legal expenses that you call out in the quarter?

Michael Davin

There was no initiation of any litigation regarding the IP.

Anup Mehta - Canaccord Adams

Next question is, has there been any shift in the parts and service element of the business, or are those kind of moving on with the same trend that we've seen in the past?

Michael Davin

Actually there is a shift, and we continue to focus on our service business. I mean our service business is actually up 21% year-over-year, and that's really a result of a focused effort from our organization to focus on our customer base as an opportunity. So we continue to see good growth there. It continues to be a key initiative for us at the company.

So we think that continuing to grow has been a meaningful part of our business.

Anup Mehta - Canaccord Adams

And then can you give a breakout of core to non-core in the quarter?

Tim Baker

We actually saw a little shift this quarter; we saw core at about 51%, North America only, because again, we can only really capture the data accurately in North America. We have 51% core, 49% non-core, which is the first time in a long time that we have seen core to be more than non-core in terms of total doctors.

Anup Mehta - Canaccord Adams

Can you remind us what it was in the fourth quarter?

Tim Baker

It was 34% core in the fourth quarter.

Anup Mehta - Canaccord Adams

Would you say that currently are you seeing more plastics or more derms coming through, getting financing or making purchases?

Michael Davin

Once again, because of the invasive nature of our business, and now the recent introduction of the Triplex, there's a good demand from the plastic surgeons in that technologies on the upgrade front or buying full systems. And the dermatologist, there's a strong interest in our Elite MPX platform that we just launched, primarily is focused on hair removal but also for multiple application platform.

And the second part of your question is, they're more accessible to credit and also they seem to be finding it easier to get credit approval from the banks. I mean 100% of their business is being the provider, treating aesthetic indications. And they seem to not have as great an issue of getting credit, compared to the non-core physicians.

Anup Mehta - Canaccord Adams

Who would you say is (the heavier), it's derms versus plastics or are they fairly even?

Michael Davin

I think they are fairly even. In terms of, you mean credit accessibility?

Anup Mehta - Canaccord Adams

Or just in terms of the customers that you're seeing come through.

Michael Davin

We're currently seeing the highest level of plastic surgery purchasing than we've ever seen in the company. I really believe that's because of the broad portfolio of technology we have for Laser Lipolysis.

Anup Mehta - Canaccord Adams

Last question and I don't know if you'll answer it or not. But is the new product that you'd be launching at the end of year, is that also invasive in nature? You guys just seem to kind of have a stronghold on that element of the business.

Michael Davin

You were right on the first part of your question.

Operator

Our next question is coming from (Bill Dezellem of Titan Capital Management).

Unidentified Analyst

First of all, I'd like to start circling back to the question about South American regulatory approvals. I don't think that I caught the timing at which you think it takes to get regulatory approvals down there. Is that a multi-month or a multi-year process?

Michael Davin

Bill, I believe it's a multi-month, but it could be greater than a year. It's a rigorous process and we are engaged in it, and as I mentioned along with other regulatory (clinics as) we're seeking in another parts of the world. But we really can't comment, for no other reason than we're not far enough along yet in the process to be able to state whether it's imminent. I believe its several months.

Unidentified Analyst

That's helpful. And then secondarily, just to the Unilever relationship, what if any cost was there in the quarter that you incurred?

Tim Baker

As we mentioned before, this is a funded development program, milestone based. So effectively the R&D development is being funded with a minimal net cost to Cynosure.

Unidentified Analyst

And then the final question is that Europe is normally from an economic standpoint a lager to the US, and it's as though you're seeing strength in Europe that is in front of and greater than the US. Would you please give us your perception as to what's different in Europe versus the US and why they seem to be leading?

Tim Baker

I'm not sure that they are leading. I guess we should clarify it wasn't just Europe sells to the Middle East. One of our biggest distributors is out in the Middle East, and they had a very strong quarter in Q1. And then, as you know, we're direct in Europe where some other companies are not, with being direct in Spain, Germany, France and the UK. And France performed very well. And then we have some new distributors that we brought in, Bill, under our new international management. They came on board in the last 12 to 9 months and they're really getting traction as new providers of our technology into those markets.

So, the combination of strong Middle East, the strong Europe, and new distributors that really started to become active and started contributing in this quarter.

Operator

Our next question is coming from the line of Andy Schopick from Nutmeg Securities.

Andy Schopick - Nutmeg Securities

The sales force, currently what is the size of the direct sales force?

Tim Baker

At the end of the quarter, Andy, it was 30.

Andy Schopick - Nutmeg Securities

30?

Tim Baker

Yes. That's North America.

Andy Schopick - Nutmeg Securities

And are there any plans to expand or add to sales, or are you just waiting to see any further indications as to the strength of the anticipated recovery in North America?

Michael Davin

It's a great question; we are pleased by the strength that we saw in March, and certainly the momentum heading into this quarter in North America. My belief is if that continues then we will look at additional feet on the street. We will differ, as we always, due to our senior management in North America. They are on the frontlines and let us know what they are seeing, but one time we were as large as seventy sales people and managers, and we are less than half of that now. So it makes sense.

If we see good traction, and I would like to see it consistent per couple of quarters before we would make that decision. But we'll watch it closely and if we do see this momentum continuing, and it looks like it has legs, we will add additional distribution.

Andy Schopick - Nutmeg Securities

Mike, if you'll allow me another minute or so. I was extremely concerned with the depth of the cutbacks that I saw the company take. And certainly you weren't the only ones to react in a very strong manner to the recession that developed over the course of 2008 and 2009. But I am wondering at this point whether you feel at all are potentially exposed in the sense of not being able to react perhaps strongly enough to an anticipated recovery?

We're seeing many signs of it in the general economy. Whether this is an issue or concern that you have in terms of being able to beep up to a proper staff level to support what could be a very robust recovery at some point in terms of your revenues?

Michael Davin

Once again a great question. As you know, we staggered the reduction; it wasn't a sweeping cut in North America. And we started to see the economy pull back in October of 2008. We made minimal cuts, and then as that continued to a very dismal first quarter in 2009, we made additional cuts. Even though we ended the quarter at 30, we are targeted to be somewhere around a 34 to 35 person sales force including management. So we are in the process of getting back to that level anyway. And some of that's just attrition why we weren't at that level at the end of the quarter.

In the bigger picture in terms of where do we go to distribution moving forward, assuming that the traction of the economy that we are seeing is fairly recent, although I would agree with you, the markets behave nicely, but we don't go by the market, we go more by the activity and the consumer confidence and the demand to our physicians and discretionary income. All those things seem to be getting stronger, although unemployment is still pretty much in double-digits.

We think we can move quickly; we tried ourselves on being able to create an excellent consultative distribution, we have kind of tentacles out there in terms of keeping a close eye on talent, so if we're ready to make a move, we can get talent fairly quickly. We have an excellent training program here. We have an excellent ability to bring people up very quickly in terms of understanding our technology, and being effective, and contributing in short order.

So we've done this several times, and we hope we have to do it again because that means our business is picking up significantly in North America. And we're ready as a management team to engage in that process and add to the distribution, if it makes sense.

Andy Schopick - Nutmeg Securities

Well I hope so, and I hope you're right too, because I certainly think that the competitive landscape has only become more challenging for you in many respects that you'll have to react to as well.

One final question if I may on the competitive situation. To what extent are you seeing Palomar gaining some traction with their Aspire platform in the laser lipolysis market?

Michael Davin

I don't really comment on individual competitors, but in terms of the laser lipolysis market itself, we are the leader in the industry. We believe technology will lead the industry, not marketing. And yes, we recently introduced the Triplex platform which is upgradeable to the Smartlipo MPX platform. It is the only three-wavelength, highest-powered multiplex, which is proprietary to us. It allows the physician to blend the wavelength and then have intelligent delivery systems that monitor temperature and motion.

So we think our technology is positioned perfectly as leader in the industry, and we're seeing that being validated through the physicians that are acquiring the technology and also upgrading the current technology they have from us.

Operator

And next question is coming from the line of Anup Mehta with Canaccord Adams.

Anup Mehta - Canaccord Adams

Could you just give us a reminder, when did you go direct in Mexico? And then the distributors you mentioned in Singapore, Taiwan, and Australia, when did they actually sign on? And have there been any new distributors that came onboard in the fourth quarter or first quarter?

Michael Davin

Yes, as far as the distributors in the Far East, they came onboard just prior to the end of the second quarter of 2009. We actually had distributor training in July, I think in Singapore in July of 2009. It's not untypical Anup, for them to take a good three to six months to get traction, understanding the technology, to start driving demos, etcetera.

So that's (perhaps) the timeframe, and they contributed nicely in the first quarter.

Tim Baker

We actually established a subsidiary in Mexico at the beginning of 2009, end of 2008. But we're still going through the regulatory process there. So we had minimal impact from Mexico in terms of actual product sales at this point.

Anup Mehta - Canaccord Adams

And then have there been any new distributors that came online in the fourth or first quarter?

Tim Baker

I think we probably added one or two, but I'm not 100% confident on that.

Anup Mehta - Canaccord Adams

Do you know maybe in what geography did you do that?

Tim Baker

In the Far East, we have added a few, Thailand and a couple of other areas. But again, as Mike said, it typically takes about six months for these guys to get up to speed.

Anup Mehta - Canaccord Adams

But they could be contributing as we get to the back half of this year?

Tim Baker

Yes; exactly.

Operator

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

Michael Davin

Thank you, operator. Thank you, everyone, and we look forward to keeping you updated on our progress. Have a great day.

Operator

Ladies and gentlemen, this does conclude our conference call. Thank you for joining us today.

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