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Syneron Medical Ltd. (NASDAQ:ELOS)

Q4 2013 Earnings Conference Call

February 20, 2014 8:30 AM ET

Executives

Zack Kubow – The Ruth Group

Shimon Eckhouse – Chairman

Amit Meridor – Chief Executive Officer

Hugo Goldman – Chief Financial Officer

Analysts

Jeremy Feffer – Cantor Fitzgerald Securities

Richard Newitter – Leerink Swann

Anthony Vendetti – Maxim Group

Zack R. Ajzenman – Griffin Securities, Inc.

Operator

Good day, ladies and gentlemen and welcome to the Syneron Fourth Quarter 2013 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call being is recorded.

I would now like to introduce your host for today’s conference, Zack Kubow of Ruth Group. You may begin.

Zack Kubow

Thank you, operator. I’d like to welcome you to Syneron Medical’s fourth quarter and full year 2013 conference call. Statements on this call may be forward-looking within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, relating to the company’s future events or future performance, including statements with respect to Syneron’s expectations regarding, but not limited to prospects for the Iluminage Beauty joint venture and the Cooltouch acquisition, the financial forecast for 2014, the launch of new products, the expansion of the North American sales team, the anticipated timetable for clinical trials and approvals and the maintenance of a leadership position in core and non-core markets.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the company’s actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied in any forward-looking statements. These risks may include, but are not limited to the risk factors set forth under the heading Risk Factors in Syneron’s Annual Report on Form 20-F filed with the SEC.

These factors are updated from time-to-time through the filing of reports and registration statements with the Securities and Exchange Commission. These statements are only predictions and Syneron cannot guarantee that they will in fact occur. The company does not assume any obligation to update the forward-looking statements discussed in today’s conference call.

Finally, this presentation includes non-GAAP financial measures. Syneron provides reconciliation information at the end of the fourth quarter and the year-end 2013 results press release on the Investor Relations page at www.syneron.com.

Speaking on the call today are Syneron’s Chairman, Shimon Eckhouse; Syneron’s CEO, Amit Meridor and Syneron’s CFO, Hugo Goldman.

Now I’d like to turn the call over to Shimon.

Shimon Eckhouse

Thank you, Zack and good morning to everyone and welcome to Syneron’s fourth quarter and full year 2013 conference call. In 2013, we were focused on developing and implementing the strategic plan to reposition the company for improved growth and profitability. We made great progress with these efforts in the second half of the year with positive change in nearly every aspect of our business.

I will begin my remarks with a brief review of our pro forma financial results, both including and excluding Syneron Beauty, which will give you context for the fourth quarter results, and how we’ll measure our performance going forward. This would be followed by a business update. I’ll then turn the call over to Amit for a review of the changes we have been implementing in our phase and marketing activities, as well as our global operations. Hugo will then give you a detailed financial review, and then we will open the calls for your questions.

Reported revenue for the fourth quarter was $64.3 million, which included the partial quarter of Syneron Beauty results following its de-consolidation upon entering the joint venture with Unilever on December 8, 2013. In this period from December 8 to December 31, Syneron Beauty revenue as part of Iluminage Beauty, which has enabled the new joint venture was approximately $2.8 million, giving you an idea of what our pro forma revenue would have been if we had reported a full quarter of Syneron Beauty.

I will now switch to our financial results on a pro forma basis, excluding Syneron Beauty, which is how our results will be reported going forward. Pro-forma total revenue in the fourth quarter of 2013 was $59.9 million, which was down to 11% year-over-year.

Excluding the large multi-site customer order from the fourth quarter of 2013 that did not recur in 2013 revenue was up 2%. Encouragingly, this included a 22% growth in phase Syneron product in North America, a key focus for the company. Recurring revenue grew 8% including a 12% increase in procedure related consumable and accessories.

Non-GAAP margin was 55%, up from 53.7% in the fourth quarter of 2012. Non-GAAP operating income was $3.1 billion in the fourth quarter of 2013, representing an operating margin of 5.2% and non-GAAP net income was $5.8 million or $0.16 per share.

When you look at our results on a pro-forma basis excluding Syneron Beauty for the full-year 2013, the improved margin and profitability become evident. The full-year pro-forma non-GAAP operating income and net income doubled compared to the reported results after excluding Syneron Beauty.

Now I would like to review some of the key strategic adjusted initiatives that we focused on in the second half of 2013 and some of the main milestones we achieve in the fourth quarter of 2013. One of our key initiatives in the second half of 2013 was the deep focusing and extension of our North American sales force with the particular emphasis on improved coverage of the non-core market.

North America continues to be one of the largest and fastest growing aesthetic market, especially given the improved economic environment and corresponding the emergence of non-core market. In a higher margin Syneron product line is ideally suited to meet the needs of non-core professional and we are leveraging our expanded team to capitalize on this opportunity.

Meanwhile, the Candela product line will continue its solid performance as the goal standard enabling the field. We have balanced our investments in expanding the North American sales team and a new product development with the implementation of a company wise cost saving initiative. That result we have reduced our expense in R&G and G&A while maintaining a strong focus new product pipeline and corporate infrastructure that is position to support our long-term growth objective.

Second key strategic initiative. During the fourth quarter we closed the Iluminage Beauty joint venture with Unilever creating a great upside opportunity, while removing the financial burden of building a new home-use business enabling us to focus on our core professional business.

Our pro-forma Q4 2013 results have a good demonstration of the financial impact of the formation of the joint venture with Unilever. We are extremely pleased to have such a high quality experience partner and believe the new joint venture is position for success in the home-use market. It also gives us the opportunity to benefit from its growth as a 49% owner of the joint venture with Unilever.

Third strategic initiative. The second half of 2013 that was marked by a strong focus of the company on the tax reduction and body shaping opportunity, unlike any other fat treatment technology currently available in the market, UltraShape technology reflects that directly and selectively and offers the unique combination of faster reduction in body fat, no pain to the patient and no thermal injury.

Its complement our Vela technology with its global installed base of more than 7,000 units which is an excellent connective tissue treatment technology with the ability to treat cellulite, blue skin and circumference reduction as demonstrated by the VelaShape III of the experienced for abdominal circumference reduction received in the second half of 2013.

In the fourth quarter, we launched our VelaShape III with significantly improved performance and new features to better serve the market for body shaping and cellulite reduction. We also completed our UltraShape clinical study, which demonstrated excellent results and submitted our applications with FDA.

This positions us for potential FDA clearance in the first half of 2014, which will further enhance our product offering addressing the large and growing body shaping market. Our unique body shaping instruction and technology give us the opportunity to become a powerhouse in this very fast growing market and it is expected to be a very important component of our growth in 2016 with initial launch expected in the second half of this year.

Strategic initiative an another growth opportunity for Syneron is our elure Advanced Skin lightening product line. The major market opportunity for elure is fluorination [ph]. We have received regulatory approval for elure as a functional cosmetic product. We just completed the third-party clinical valuation of the elure in Korea with excellent pigment treatment results and the same outstanding phase II profile of the product on Korean population.

We are well advanced in developing our distribution channels in Korea as part of our planned launch of the product. On December 25, 2013 we received regulatory clearance for elure in Japan and we are working on pre-commercial market in clinical research to support the product launch later this year.

We are well advanced in our regulatory work in China and expect to receive our China clearance in 2014. In parallel to these efforts, we are evaluating various partnership opportunities for elure with consumer cosmetic companies with the strong presence in global and Asian skin lightening market.

I am pleased with the interest level from potential partners and we are in the progress we have made in elure in Asia. We look forward to providing further update as appropriate.

Fifth and not last also on the new product launch on today, we announced an agreement to acquire Cooltouch. This Cooltouch physicians provides entry into the new esthetic market and expands our current revenue business model. We view this acquisition as effective for several reasons.

A Cooltouch diversifies our product portfolio and broadens our customer base specifically it provides entry in to two new treatment categories within the core market. This include the laser system for treatment varicose veins, which is a minimally and rated endovascular procedure performed by vascular surgeons and neurologist as well as part of the core aesthetic physicians.

The endovascular treatment is also complementary to our non-invasive Candela vascular treatment, which are regarded as the growth thumbs up for this application. We escalated the endovascular market in the U.S. alone is $200 million and the procedure is the reimbursable procedure.

Cooltouch also has a minimally invasive laser-assisted biprotection system, the target of the aesthetic market, this technology is complementary for our VelaShape III and UltraShape, which are non-invasive further expanding our body shaping product offering.

B) The Cooltouch product has primarily been sold to the United States by a very small sales force along with some very limited international distributor activity. We believe we will be able to leverage our significant international sales infrastructure. We call that we sell in 90 countries in almost two thirds of our revenues outside of North America in order to drive table to Cooltouch system into our broad consumer customer deck.

C) Product within the Cooltouch product families include the laser control and associated single-use disposable hand piece and accessories. As we leverage our global phase channel to drive system placement, we expect this will in turn enhance our recurring revenue as customer used systems for minimally invasive endovascular and set policies application.

And last but not least, we also believe our Cooltouch has developed some innovative technologies in its products and they have a strong intellectual property portfolio, which will both our R&D efforts in future products to benefit. While we expect the transaction to close in March, I’m pleased to welcome the Cooltouch employees and customers to Syneron.

We plan to maintain their Roseville, California manufacturing and business headquarters and will leverage their team to leaping on minimally invasive product things. Each of the items are just reviewed our important components of our strategy to improve our financial results and build shareholder value. When I took over the CEO position in April, my goal was to develop the strategy and drive it forward.

Initially, Amit Meridor joined as President of the company and has played an integral role in refining the strategy and bringing it to life. He has proven to be an effective leader and moving forward, I, along with the board believe it’s a good time for me to transition back to the position of effective Chairman with Amit taking over as COO to lead the ongoing implementation of our strategy. I would like to congratulate Amit on his new position and relay the confidence that the Board and Amit having.

Before turning over the call over to Amit, I would like to acknowledge the addition of two board members that we believe will have significant value to the company. First, we are pleased to welcome Dominick Arena back to the board following the short requirement. Second, I’m pleased to welcome, Steve Fanning, Former Chairman and COO of South America to the Syneron Board, Steve doesn’t make in the aesthetic device base stick for itself and we look forward to adding the perspective to our goals.

I’ll now turn the call over to Amit to provide more details update on our results and key initiatives. Amit?

Amit Meridor

Thank you, Shimon and good morning everyone. I’m very happy to be speaking to you today as the CEO of Syneron. I’m honored by disappointment of CEO and I’m well over of the challenges and our primitives to bring successful and profitable growth to Syneron. The Board and management team have put together a very strong vision for the company and I believe we are well on our way to position Syneron for improved growth and possibility.

Now I will provide an operational for the business, beginning with the North American sales force.

As Shimon mentioned, the expansion of this team is a key focus for the company and will be one of our primary growth drivers in 2014 and beyond. We believe there is a significant opportunity to leverage our unique technologies and product portfolio to be an important partner for customers in recovering non-core market.

According, the expansion of our North American team is focusing and adding junior level sales reps that can spend time, reaching out non-core customer and introduce the benefits of adding aesthetic product to their practice. We are pleased with the early performance of these junior reps and beginning to see traction from the first wave of new hires that have not beyond the six months tenure mark, which is typically the point when they have continued training and are beginning to be productive.

Since to begin this process in the middle of 2015, we have added 18 of these reps to our team and we expect to have a team of approximately 30 by the end of the first quarter. This should provide with us a broad coverage in the non-core markets. This team of 30 is addition to our existing team of 35 experienced senior reps that primarily focus on the core properties plastic surgery and their metallurgic market. In addition to the transitional core and non-core business in North America, we will focus in 2014 on building our body shaping and fat reduction business. We executed the North America launch of VelaShape III during the fourth quarter.

As a remainder, VelaShape III is our new non-invasive body shaping platform and is part of the VelaShape family of product that has installed base of more than 7,000 system worldwide. It has several new features and increased our delivering visible outcomes in the single or a small number of treatments. We have a positive start to the launch on the both core and non-core markets and expect sales to continue to ramp in 2014.

For UltraShape, we submitted our application to the FDA during the fourth quarter and remain on track for the potential FDA clearance in the first half of 2014. If it’s cleared by the FDA, we expect UltraShape will be a significant addition to our body shaping product offering along with VelaShape III and position Syneron as a powerhouse in the body shaping and non-invasive fat treatment market.

If cleared, we anticipate a gradual rollout in second half of 2014; focus on KOL and preparing in any infrastructure for a broader install base. We also expect an FDA clearance will be a catalyst for increased UltraShape sales in international markets where many customers are eagerly waiting for the FDA decision before committing to acquire a system.

In the international market, we implemented significant changes in leadership. EMEA, I’m happy to announce that Robert Phillips joined Syneron as the EMEA General Manager. Robert brings within 20 years of experience in a aesthetic medial devices, most recently as the EMEA Manager for Polymer. With Robert joining our EMEA management team, we also decided that the direct operation in Spain, France and the UK will offer our entire product array both Syneron and Candela and we stopped using distributors in those countries.

Asia-Pacific, we have also strengthened our management team in the Asia-Pacific region by nominating new country manager for Australia, Korea and Hong Kong. Latin America, we also announced the Latin America sales organization by adding a new Regional Manager located in Argentina to better manager this region.

Furthermore, we’re adding a new position to our sales management team that will be in charge of managing our important distributor channels worldwide. This role will be responsible to work closely with our valuable distributed partners and build a strong leadership position within each country. We have implemented all of these changing in order to strengthen the sales management worldwide, aiming to increase our market share in both North America and all of our other regions.

On the operation side of our business, during Q4, we built a strong sales operation function to better manage our sales cycle from leads to opportunities to orders. We are also monitoring and managing our pricing policy better throughout the different regions. We continue to be focused on efficient growth. We are benefiting from the cost-saving initiative we implemented during the second quarter and we believe we have achieved an appropriate level of G&A and R&D infrastructure.

We believe we have focused our R&D pipeline to fill two new product opportunities that give us the best opportunity to bring meaningful technology’s advantages to our customer with a good pattern of plenty production over the next several years, including new Candela and Syneron products.

We will have a temporary increase in our expenses related to Cooltouch acquisition and integration. However, we believe there is a room for cost synergies, plus we plan to accelerate the revenue, trajectory and leverage our existing infrastructure.

In closing, I would like to take the opportunity to thank all of Syneron employees, the management team, the Board and our new team at Cooltouch for their hard work and dedication to our business. I’m fortune to be working with a highly talented group and I believe we are positioning the company for improved results.

In 2014, we expect to drive growth in North America with expansion by our sales force and the introduction of new products led by VelaShape III and the UltraShape and the new Cooltouch portfolio. We are also seeing return to modest growth in some markets in Europe. So we’re still in the fact that phase of macroeconomic and regulatory challenges in certain markets, particularly in Asia-Pacific and South America.

Despite this, we believe we can achieve pro-forma revenue growth and margin expansion. This was further highlighted by the transaction of Syneron Beauty into our joint venture with Unilever, which eliminate further investment on margin pressure from that business on our financial results.

Long-term, if we execute our plan for 2015, we believe we will be well positioned in 2015 and beyond to achieve above market, double-digit revenue growth and operating leverage.

I will now turn the call over to Hugo for his financial overview. Hugo?

Hugo Goldman

Thank you, Amit and good morning everyone. I will begin by providing a quick overview of our reported results, then transition into a more detailed discussion of our pro-forma results, excluding Syneron Beauty.

Our total revenues in the fourth quarter of 2013 were $64.3 million, down 12% compared to $72.8 million in the fourth quarter of 2012. The main driver of the decline was a large single customer multi-site order in the fourth quarter of 2012 that did not recur in 2013, along with recording only a partial quarter of revenue from Syneron Beauty, which was $4.4 million from October 1 to December 8t, due to our joint venture with Unilever.

On comparing to the fourth quarter of 2012, we should add $2.8 million of revenues at Syneron Beauty as part of the Iluminage Beauty, the JV for the last three weeks of the year.

Fourth quarter 2014 revenue was also negatively impacted by $0.9 million due to the decrease in the value of the Japanese Yen against the US Dollar compared to the fourth quarter of 2012.

Fourth quarter of 2013 net income was $9.7 million or $0.27 per share compared to $5.2 million or $0.15 per share in the fourth quarter of 2012. On a non-GAAP basis fourth quarter 2013 net income was $4 million or $.11 per share compared to $4.1 million or $0.11 per share in the fourth quarter of 2012.

Now I will transition to our pro-forma review excluding Syneron Beauty, we believe this is the best way to evaluate the business going forward as this is how our results will be reported beginning in 2014. We have provided our historical table as our pro-forma 2013 results excluding Syneron Beauty in our press release to help you with your modeling.

In general, when analyzing the pro-forma results it is clear that the majority of EBU revenue and operating expenses were related to Syneron Beauty, which will have a positive benefit on our overall profitability going forward. Syneron’s 49% share of the global joint venture with Unilever valued at $24.7 million at the end of December 31, the company established a fair value measures to measure its investments in the joint venture, subsequent changes in the fair value of the joint venture will be recorded in our segments of operations on a GAAP basis.

Fourth quarter of 2013 pro-forma revenue with Syneron Beauty was $69.9 million down 11% year-over-year, but up 2% when excluding that large multi-site customer that I have previously mentioned. North America revenue was with our GAAP order in Q4 number was up 9% or $21.5 million, and international revenue was 2% or $38.4 million. This corresponds to 36% of pro forma fourth quarter 2013 revenue in North America and 64% in international market. The 2% year-over-year revenue increase excluding the one-time order was driven by growth in North America and Europe offset by lower results initiated by 52% in Latin America.

Fourth quarter 2013 pro-forma product revenue was $32.3 million. Recurring revenue which includes service and consumables was $17.6 million representing 30% of that segment sales. This compares to 25% in the fourth quarter of last year which included that large and 30.6% in the third quarter 2013.

Pro forma again without Syneron Beauty non-GAAP gross margin for the fourth quarter of 2013 was 65% excluding stock based compensation, amortization of acquired intangible assets and other non recurring cost, compared to 53.7% in the fourth quarter of 2012.

The year-over-year increase in pro-forma non-GAAP gross margin was mainly driven by product and sales channels mix, the pro forma non-GAAP gross margin of 55% that goes favorably to the reported non-GAAP gross margin of 53.7% which includes Syneron Beauty.

Pro-forma non-GAAP operating income in the first quarter of 2014 was $3.1 million or an operating margin of 5.2%, compared to $7.1 million of an operating margin of 10.6% in the fourth quarter of 2012. The prior year results included relative of that large order as mentioned. Excluding the fourth quarter of 2012 pro-forma, non-GAAP operating income was $3.2 million or an operating margin of 5.5%, which is relatively flat compared to the fourth quarter of 2013. This was a result of one hand of our cost reduction initiatives offset by our investors in expanding over the American sales team on the other hand.

The pro-forma non-GAAP operating margin of 5.2% compare favorably to the reported non-GAAP operating margin of just 2.2%, which includes Syneron Beauty. Pro-forma non-GAAP net income for the fourth quarter of 2013 was $5.8 billion or $0.16 per share, compared to $5.5 million or $0.15 per share in the fourth quarter of 2012, excluding the [indiscernible] pro-forma non-GAAP net income for the fourth quarter of 2012 was $2.7 or $0.13 per share.

On non-GAAP basis, fourth quarter net income and net earnings per share benefited from the tax assessments and settlement today’s with tax authorities. Net of other tax liabilities, which amounted to $4.8 million or a net benefit of approximately $0.13 per share, which resulted in a one-time payment of approximately $4 million that freed up $63.7 million in trapped profits.

And then on a non-GAAP basis, the net benefit was approximately $0.09 per share. This tax assessment and tax settlement resulted in the conclusion of our Israeli tax audits for the years 2007 to 2011. In addition our GAAP results include $3.0 million of other one-time tax items mainly related to U.S. entity consolidation that we implemented during the fourth quarter of 2013.

Turning to the balance sheet. Our DSO were 82 days in the fourth quarter of 2013 compared to 63 days in the fourth quarter of 2012 and 83 days in the third quarter of 2013. Excluding this one large quarter, the DSOs were 67 days in Q4 last year.

During the quarter, we have a decrease in cash and cash equivalents, including short term bank deposits and the investments in marketable securities were $1.8 million, which includes the $4 million paid to the Israeli tax authorities to free up $63.7 million trapped profits.

The decrease in cash was primarily related to our investments in Syneron Beauty for our partial quarter. At December 31, 2013, cash and cash equivalents including short-term bank deposits and investments in marketable securities were $108.5 million, including the cash to be used during the first quarter 2014 for the acquisition of Cooltouch, we continue to have a very strong balance sheet with no debt.

With that, I will now turn the call over to the operator to answer any question you might have. Operator please.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Jeremy Feffer of Cantor Fitzgerald. Your line is open.

Jeremy Feffer – Cantor Fitzgerald Securities

Hi, good morning. Thanks for taking my questions and Amit congratulations on the promotion.

Amit Meridor

Thank you.

Jeremy Feffer – Cantor Fitzgerald Securities

I guess first wanted to start on the Cooltouch. First of all I know you haven’t closed yet, but it is the plan to keep most of their sales reps, how many do they have and how did that factor in to your planned sales force additions.

Amit Meridor

Cooltouch has relatively small sales force, most of them actually being independent reps. We plan to maintain those channels. And really add to it with the our existing sales force in North America as well as dedicated additional sales people that in the longer range – in the longer run should significantly enhance revenue of our Cooltouch.

Jeremy Feffer – Cantor Fitzgerald Securities

Okay. And over the $9 million or so that we did in revenues last year, what was the split between varicose veins and lipolysis?

Unidentified Company Representative

We would say most of it was in varicose vein.

Jeremy Feffer – Cantor Fitzgerald Securities

Okay, so then is – how will you be positioning this product as you are assuming you get UltraShape and you have Vela. How did you position this with your core customers?

Unidentified Company Representative

Well as you know although the tendency in the world is to vote more and more for non-invasive procedures. There are telling our patients and doctors that perform more invasive procedure or what we call laser assisted lipo suction. Cooltouch is an excellent product for this application that has never been promoted seriously and is really a nice submission of what we do in the body shaping area with VelaShape III today and UltraShape once we get the there.

So its been complementary to what we do there. It’s mostly the type of product that plastic surgeons love. And its not – I wouldn’t view it as adramatic increase in our body shaping trend, but it can have a significant impact. And of course as I said, as far as we see it and the endovascular laser product is the most interesting one because this is serving a $200 million market just to North America or in the United States.

Jeremy Feffer – Cantor Fitzgerald Securities

Okay, And then the last one from me and I’ll jump back in queue. So with Cooltouch and with related portfolio is shape-up this year with UltraShape. How do you see the mix between systems and consumables? Performing here than over the long-term, what is the long-term goal getting – where do you want that consumables mix to get to?

Unidentified Company Representative

Well right now it’s as Hugo mentioned, around 30/70, we believe that over the next two to three years this can grow to at least 50/50.

Jeremy Feffer – Cantor Fitzgerald Securities

How long do you think that takes?

Unidentified Company Representative

Well as I said, this is a process that will probably take two years.

Jeremy Feffer – Cantor Fitzgerald Securities

Okay, thank you very much. I appreciate it.

Unidentified Company Representative

Thank you, thank you Jeremy

Operator

Thank you and our next question comes from, Richard Newitter of Leerink Swann. Your line is now open.

Richard Newitter – Leerink Swann

Hi, thanks for taking my question. Did you hear me okay?

Unidentified Company Representative

Yes.

Unidentified Company Representative

Yes.

Unidentified Company Representative

All right.

Richard Newitter – Leerink Swann

Great. Maybe I can just start off, it looks like the EBU on a pro forma basis as the EBU comes out of the P&L, you are exiting the year I think you said with the 5.2% operating margin. Can you – going forward in 2014, I appreciate that we’ll see presumably a lift to the margin profile as we saw in the fourth quarter, but it also sounds like you’ve got a number of initiatives ahead of you including, you still got some sales rep hiring in the first quarter as part of your kind of strategy, which began midyear in 2013 to target the non-core and you also have some exciting new products, you’ve got UltraShape, you’ve now got Cooltouch. and I’m just wondering how should we think about any incremental investments that are necessary and how much are those incremental investments, if they are there going to observe some of the natural margin unless you would get just by removing the dilutive EBU from the business.

Hugo Goldman

Hi, Rich, it’s Hugo here. So basically, all the investments other than Cooltouch, it’s all in our plans for the year. and as Amit said in the Cooltouch, there will be an initial investment, which is easily observed by our plans and over time as we go away, and will be regular smooth operations. So we don’t expect any dramatic increase from the plan that we have already.

Richard Newitter – Leerink Swann

Okay. Should we be thinking about operating margin in 2014, expanding from the 5% level and where should we think about this ultimately going, once you start – once you move fast maybe kind of the Cooltouch integration to this, the base business likely, the goalpost a high margin operating margin, is it potentially 10% or above, how do we think about that?

Hugo Goldman

I would say that in light of all the investments, including the plan, we should expect at least 2% improvement from that 5%, 2% that you mentioned another two point – 2% more from this level including the investment.

Richard Newitter – Leerink Swann

In 2014?

Hugo Goldman

Okay.

Richard Newitter – Leerink Swann

Okay. And then can you, you might have answered this when Jeremy asked. but did you say what percentage of sales of recurring revenue currently from Cooltouch of the $9 million?

Hugo Goldman

Approximately half of it has recurred.

Richard Newitter – Leerink Swann

Okay. so roughly 50% recurring revenue model there. and then just on elure, I think that your patent approval, congratulations on that, but that was something that sounded new. can you maybe – few pretty big countries in Asia for skin-lightening markets approved, what’s the launch strategy, how our talks with potential partners progressing and Shimon, now that you’re not stepping down to the CEO seat, how is your role going to change? What are you going to be focused on?

Shimon Eckhouse

Well, mainly on fishing but other than that, as for an answer to your first question on elure, first and then answer the second one. Regarding the elure, we got KFDA or Korean clearance last year, and immediately after that started some work with key opinion leaders, as well as a study, which we learned is critical to do on the Korean patients that was carried out by a highly respected third-party that did it for us. the results, which were actually I would say a little bit better than what we have seen in the past in our studies in terms of efficacy on treatment of pigmentation, as well as the safety profile of the product, which is an excellent one.

In total with that, we started working with a few potential distributors that will sell their products in Korea. and I would say that over the next two to three months, we should be able to finalize the deal with the three ones or even two of them, each of them addressing on a different section of the mark. In Japan we got our Japanese clearance or registration just at the end of 20113. With that in our hands we started a similar process to what we are doing in Korea because again, we cannot do any clinical trials without registered product, and again I – we plan to be able to have at least one distribution on the ground in Japan over the next three months.

And last but not least. In China we as I mentioned we are expecting to get a clearance in 2014 and I wouldn’t be surprised if it happens in the first half of 2014. So this is what we are doing directly within work. You also asked about our discussion with potential strategic partner. This is actually continuing at a very good pace. We have high levels of interest as well as some evaluations going on as we speak. And as I mentioned before we believe that in the first half of 2014 we should be able to be much more specific on where we are going with this initiative which essentially focused on the consumer market.

And regarding your last question on my role is, I am sure you and many others our investors in trends know, I had been involved in Syneron in the past. I plan to be involved in the Syneron in the future as well, as active Chairman, most of my time and energy will be really on strategic directions on business development work and I can say that although nobody is paying for that part I also serve as the CTO of the company.

Richard Newitter – Leerink Swann

Thank you very much.

Unidentified Company Representative

Thank you

Operator

(Operator Instruction) Our next question comes from Anthony Vendetti of Maxim Group. Sir your line is now open.

Anthony Vendetti – Maxim Group

Thanks. Vendetti, but anyway, just a follow-up Shimon on Cooltouch, you said 50%, when you said 50%, did you mean 50% of their $8.9 million in revenue in 2013 was from consumables or is that consumable plus service?

Shimon Eckhouse

They have a very limited service business, most of it is consumables.

Anthony Vendetti – Maxim Group

Okay. And when you were talking about the 30/70 split with Syneron right now, right now most of that 30% plus is services and the goals to move services plus consumables over the next two year to be about 50% of the business is that accurate?

Shimon Eckhouse

More or less yes. More or less, I mean it – there are few initiatives that we there, right now, the business model of Cooltouch is very effective for us, but the estimate number is still having very small impact on our business and the real idea there is to take advantage of this business model in the market which is much-much larger than what they are doing, leveraging the both on building a better and more focused sales force as well as using our infrastructure both in the United States and internationally.

Bear in mind that in a $200 million market, Cooltouch in the U.S. has just a few percentage point market share and from all evaluation that we have done, we believe they have very superior product for this endovascular procedure.

Anthony Vendetti – Maxim Group

Okay. And most of their two main products, is there anything else in their portfolio other than the endovascular product and the laser-assisted lipolysis product that’s meaningful right now or is it mostly in product development that adds additional value.

Amit Meridor

No, there is one more product that I believe we mentioned in the press release, I didn’t elaborate too much on it. Cooltouch has an OEM agreement with AMS, American Medical System, which is one of the larger players in the urology market for Holmium laser, which they already selling there is an OEM product. But they have now a new concept for new product, which is almost fully developed. That in the future it can play a significant role as an OEM business concept, where with the advantage of course that there are no investments in marketing.

And we do adjusted the first step with enabling us to leverage on this and enter into additional surgical market which we are not thoroughly, but we want to do directly as a distributor, but we would be more than happy to cooperate with companies such as AMS. So, this urology laser market is quite a nice and growing market.

Anthony Vendetti – Maxim Group

Okay. And then just lastly on the sales front and then a just of couple of quick financial questions for Hugo. You have 35 conditional sales people and the 18 new that you added, they are the ones that are focused on the non-core and the goal to add another 12 of those. Is that correct?

Amit Meridor

Yes, you are correct.

Hugo Goldman

Yes, yes.

Anthony Vendetti – Maxim Group

Okay.

Amit Meridor

Actually the plan was to have 20 by the end of the year, but it took us a little bit longer to get there is right one in the job. That takes a lot to train them, but we are very happy with what we see there.

Anthony Vendetti – Maxim Group

Okay. And the other 12 you are hoping to get by what time frame?

Amit Meridor

By the end of this quarter.

Anthony Vendetti – Maxim Group

End of first quarter. Okay.

Amit Meridor

Yes

Anthony Vendetti – Maxim Group

Okay. And then Hugo just on the earn out for Cooltouch, its another $4 million, is that all in keen cash and then what are the metrics to get there?

Hugo Goldman

Yes, there are certain metrics. The one in 2014 and the other one in the end of 2015. So, altogether at the maximum will be the $4 million.

Anthony Vendetti – Maxim Group

Okay. And then what is your after this acquisition, what’s your cash position right now?

Hugo Goldman

Well assuming everything is static. The 108.5 you have to reduce in 11 regardless of any other activity in the company.

Anthony Vendetti – Maxim Group

Okay. That’s it, right now. Okay. Okay, perfect. And then lastly just the $1.2 million is stock-based comp by line item please.

Hugo Goldman

It is cost is $73,000, R&D $188,000, sales and marketing $310,000 and G&A is $612,000.

Anthony Vendetti – Maxim Group

Perfect. I’ll hop back in the queue. Thanks guys.

Hugo Goldman

Thank you.

Amit Meridor

Thank you

Operator

Thank you. Our next question comes from the line of Zack Ajzenman of Griffin Securities. Your line is open.

Zack R. Ajzenman – Griffin Securities, Inc.

Thanks and welcome Amit. First question more of a clarification. Early in the call did you mention was there a mention of an increase in procedure-consumed goals of 12%.

Shimon Eckhouse

Yes.

Zack R. Ajzenman – Griffin Securities, Inc.

And is that the U.S. market or you touched across reported…

Shimon Eckhouse

Both totals, that represents as part of the overall services in consumables there, all our – the recurring revenue that it’s 30% of our revenues. That is the piece of the consumables grew 12%.

Zack R. Ajzenman – Griffin Securities, Inc.

Okay. And sort of coming back to the question about growing the recurring revenue component, the goal of 50-50 give or take, what would comprise the consumables portion of that recurring number?

Shimon Eckhouse

Well, again in greater rough numbers and this is a little bit more complicated to this in detail, because the service part of it depends on how the installed base grows both in North America and to some extent, in our direct operations into a more limited expense into our distributors, but just to give a feel for it, I would say that out of the 50 in two years, we would expect to have at least 30% coming from consumables and 20% coming from service. And this 30% will be a combination of many of the initiatives that we started in the third quarter of 2013, including our ATC sales force, which is more focused on relationship sales receptive visiting them more than once to get the order.

some of the initiatives that we are planning to do in the body market where there is quite a well established consumable business level where a doctor pays significant amount to some of our competitors on each patient that they treat. We planned to do the same, especially taking into account superior technology of UltraShape and this is really what will build together with the Cooltouch acquisition or consumable model.

Zack R. Ajzenman – Griffin Securities, Inc.

Okay. And also 20% plus growth of Syneron products in North America, is it fair to model gross going forward of – around that rate?

Hugo Goldman

Look, we are growing definitely; we should see growth and keeping in mind, it will get a full effect of the additional junior sales force, plus the additional ones that we are going to add. So it’s reasonable to expect the growth to continue.

Zack R. Ajzenman – Griffin Securities, Inc.

On the…

Shimon Eckhouse

North America on the Syneron side…

Zack R. Ajzenman – Griffin Securities, Inc.

Got you. And two last ones, the core versus non-core split in North America or U.S., what…

Hugo Goldman

It’s a 49% core, 51% non-core.

Zack R. Ajzenman – Griffin Securities, Inc.

Okay. And lastly, on Cooltouch, you gave a forecast or the vascular – and the vascular market of about $200 million in the U.S., you care to comment what you think of the market on the laser-assisted lipolysis side [indiscernible]…

Shimon Eckhouse

First of all, the number is significantly smaller than that. And there is – there are various ways of looking at it, because actually I’ll call the power is to light reflection consist of in a variety of metals including the use of ultrasound just passing light reflection as well as laser with light reflection. If you take the full family of method that are used to do effect light reflection I would say that this market should be in the range of between $40 million to $70 million and this is a very wild guess I will be happy to kind of look more detail in to it and give you more accurate number.

So, it’s much, much smaller than the rationale market, but still a significant market and as I mentioned the nice thing about it, is that it’s very complementary to what we do non-invasive use.

Zack R. Ajzenman – Griffin Securities, Inc.

Great, thank you.

Amit Meridor

Thank you.

Operator

Thank you. I am not showing any further questions in the queue. I’d like to turn the call back over to Shimon Eckhouse for any further remarks.

Shimon Eckhouse

Well, I’d like to thank everybody for being with us in this call and for being with us as shareholders, our investors and analyst. As you can see we have our hands full with lots of activities, but we are very bullish about what we do and we believe that the changes and initiatives that we implemented will have significant impact on the value of Syneron in years to come. Thank you very much.

Amit Meridor

Thank you.

Hugo Goldman

Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Have a great day everyone.

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