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Syneron Medical Ltd. (NASDAQ:ELOS)

Q1 2014 Earnings Conference Call

May 14, 2014 8:30 AM ET

Executives

Zack Kubow – The Ruth Group

Amit Meridor – Chief Executive Officer

Shimon Eckhouse – Chairman

Hugo Goldman – Chief Financial Officer

Analysts

Rich S. Newitter – Leerink Partners LLC

Jeremy Feffer – Cantor Fitzgerald Securities

Anthony V. Vendetti – Maxim Group LLC

Zack R. Ajzenman – Griffin Securities, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Syneron Medical First Quarter 2014 Results 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 be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

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

Zack Kubow

Thank you, operator. I’d like to welcome you to Syneron Medical’s first quarter 2014 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 first quarter 2014 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 Amit.

Amit Meridor

Thank you, Zack, and good morning everyone. Welcome to Syneron first quarter 2014 conference call. Since I took over as CEO in mid-February, we have made very good progress and repositioning the company to achieve a sustainable growth. This includes the FDA clearance of UltraShape System and the promotion of Body Shaping Business Group, the ongoing expansion of our non-American salesforce, the acquisition of CoolTouch, and the continued advancement of our new product pipeline.

I will begin my remarks with a brief review of our financial results followed by a business update. Shimon will provide some insight on UltraShape and CoolTouch products. I will then return the call over to Hugo, who will give you a detailed financial review, after which we will open the call for your questions.

Total revenue in the first quarter 2014 was $56.8 million up 2% year-over-year compared to the first quarter 2013 pro forma results, which excluding Syneron Beauty. As a reminder, in December we entered into joint venture with Unilever that included the Syneron Beauty business, and we will not be including the results from the joint venture in our financial results.

International revenue was up 6% on increased sales from Asia-Pacific, Europe and Middle East. North America sales were down 6% as a result of what market weaknesses and extreme weather condition and a strong fourth quarter. We believe North America represents significant market opportunity, and we are committed to expand our non-core salesforce, will reposition us to drive sales of our Syneron product line in attractive non-core market once our team is fully trained and ramped up.

Recurring revenue in the first quarter 2014 grew 9%, including an 8% increase in procedure-related consumable and accessories. Non-GAAP margin was 53.5% compared to 55.9% in the first quarter 2013, primarily, due to the lower North American sales of higher-margin skin products and a higher mix of low-margin indirect international sales.

Non-GAAP operating income was $1.9 million in the first quarter of 2014, representing an operating margin of 3.3%. And non-GAAP net income was $9.3 million, or $0.04 per share. Before getting into this update, I would like to ask Shimon to provide an update on UltraShape and the CoolTouch product family. Shimon?

Shimon Eckhouse

Thank you, Amit and good morning everyone. As we outlined in our conference call discussing the FDA clearance, we believe UltraShape’s innovative focused pulse ultrasound technology is uniquely positioned in the noninvasive fat destruction market. Because it will allow practitioners to offer patients selective, and very effective, and very, very safe fat cell destruction with fast results.

It utilizes mechanical energy as opposed to thermal energy, be it heat or cold, that invariably impacts surrounding tissue and not just fat, leading to potential pain and discomfort to patients. Combined with the treatment flexibility and the ability to deliver results in as little as two weeks, the UltraShape System has a very unique and exciting value proposition. The fast response to treatment, resulting in visible fat reduction, is extremely important both to patients and to doctors and makes the marketing experience of the doctor much more attractive.

In addition, the physician is easy to learn, adding another very important component to the business model for this device. The treatment is quick; it takes about one hour to perform a typical treatment. This unique combination of factors of comfort of patients, high degree of safety, and easy learning for the doctor gives Syneron a great opportunity to position UltraShape as the leading fat-destruction and body-shaping technology in the market.

Overall, we believe all these factors position UltraShape to take a significant share in the noninvasive fat-destruction market, and we are making investments, which Amit will cover, to maximize the opportunity for Syneron.

Turning to CoolTouch, we closed the acquisition in March and are excited to have their team and innovative technology as part of Syneron. The addition provides entry into new aesthetic markets and extends our recurring revenue business model. The key new products include CoolTouch’s laser system for treatment of varicose veins, which is a minimally invasive endovascular procedure performed by vascular surgeons, radiologists, as well as part of our core aesthetic physicians. It is complementary to our noninvasive Candela vascular treatment, which is regarded as the gold standard for this application. We estimate that the endovascular market in the U.S. alone is $200 million, and the procedure is reimbursable.

CoolTouch also has minimally invasive laser-assisted liposuction system, the CoolLipo, that targets core aesthetic market and is complementary to UltraShape and VelaShape III, which are the core products of our Body Shaping Business Group. As Amit will discuss, the integration has begun, and we expect to leverage our strong sales channels to increase sales of CoolTouch product line, including the single-use disposable handpieces and accessories, enhancing our recurring revenue potential. Both UltraShape and CoolTouch product lines will strengthen our position in the core market as well as in the non-core market.

In addition to that, our Candela exciting pipeline is another important addition to our core dermatology and plastic surgery market in the U.S. and internationally.

With all of that, I would like to turn the call back to Amit. Amit?

Amit Meridor

Thank you, Shimon. Now I would like to provide a business update on the five key strategic initiatives that Shimon outlined on our last call. Beginning with the recent FDA clearance of the UltraShape, which was a significant milestone for Syneron and our Body Contouring Business, combined with VelaShape and CoolLipo, we have the broadest range of body-shaping products on the market and a significant established customer base, with approximately 7000 VelaShape system installed worldwide.

At the American Academy of Dermatology Annual Meeting, we introduced several new features for the VelaShape III, including the new VelaSmooth applicator for temporary reduction in the appearance of cellulite; a small tip of the VContour applicator designed for the effective treatment of small body areas; and a uniquely designed large, flat electrode uniform heating tip, that enables significant circumferential reduction in a single treatment. We also highlighted the CoolLipo minimally invasive laser lipolysis system at the AAD. I am very pleased with the feedback we receive on our body-shaping products.

We are investing the time and resources to ensure we maximize the potential of our body-shaping product portfolio in the large, growing body-shaping market. Our goal is to reach market share of 20% to 30% of this market within three years driven by the creation of dedicated Body Shaping Business Group. This group will include teams of 15 dedicated sales representatives and ten Practice Development Partners, or PDPs, focused on system sales, driving recurring revenue by partnering with customers to drive patient volume.

The PDPs are important component of our strategy, as they will be the face of our customer partnerships. They will focus on educating physicians and their staff on the UltraShape technology and system. Along with the VelaShape and the CoolLipo, they will also provide practice marketing support to help attract new and existing patients to our product offering. The ultimate goal of the PDP is to drive utilization of FTZ, or focal treatment zones, the consumable component of the UltraShape System. Since receiving the FDA clearance of the UltraShape in mid-April, we have made very good progress in the initial hiring of our capital equipment reps and PDP and have hired seven PDPs. We have begun to train these reps on the UltraShape technology, business model and our global body-shaping product portfolio.

At the end of the month, we will host the first of a series of planned body-shaping business events that will provide our customers opportunity to not only learn about our product, but also how to partner with Syneron to implement body-shaping into their businesses, attract patients, and maximize the return on their investment. This larger event will be complemented by 40 to 50 local customer workshops or dinner per quarter, which will also allow us to raise awareness of the UltraShape and strengthen our customer partnerships.

Overall, we are on track to begin a controlled launch of the UltraShape System in the second quarter. We plan to limit ourselves to key opinion leaders and other high-end doctors, in order to ensure customer to receive excellent support of high practice satisfaction and targeted financial outcomes, which in our mind will prepare us for a broader success when we expand the launch in early 2016.

Our second key initiative for 2014 is the expansion of our North American salesforce focused on our products outside of the Body Shaping Business Group. As a reminder, we begin this process in the middle of 2013 and ended the year with 18 new junior sales reps, whose primary objective will be to reach out to non-core customers and to introduce the benefit of adding Syneron's aesthetic higher-margin product to their practice. Our target for this group is to reach 30 senior-level reps and we made a lot of progress in hiring and ongoing training process during the first quarter.

We are on track to complete the hiring phase by the end of the second quarter and are investing in training program for these new hires to bring them up to speed on our product selling techniques. This will position us to begin benefiting from an increased presence in non-core market in the second half of 2014.

We are pleased with the early performance of the junior reps we hired in 2015, which contributed to North American results that were down only slightly year-over-year in spite of the market weaknesses and the impact of the weather.

Looking forward, we believe this team will provide us a broad coverage in North American core and non-core markets and complemented by completing – complementing our existing team of 35 experienced Syneron reps that primarily focus on the core plastic surgery and dermatologic market.

At the end of March and in early April, we featured several new existing products, from our body-shaping products to Syneron ELOS-based systems to our Candela laser product line at the AAD and the ASLMS annual meetings. We received positive feedback at these meetings, and we believe our teams are well positioned with a strong product portfolio in North American market.

Outside of the U.S. we are beginning to see moderate return to growth in Europe and Asia Pacific. We will leverage our established and strong sales channels in these markets along with our innovative product portfolio to drive growth. In Japan, we recently received regulatory approval from the Japanese Ministry of Health to market the ALEX II System for the treatment of benign pigmented dermal lesions, a highly prevalent aesthetic problem in the Japanese population. In Europe, we are pleased to receive a new CE Mark indication for our sublative technology for treatment of stretch marks and acne scars.

The new system protocols are now available on all of our Syneron sublative compatible systems, which include elos Plus, eTwo, and eMatrix. These regulatory approvals highlight our commitment to innovation and provide new products for direct and distributor teams to sell into these international markets. A third key initiative in 2014 is our acquisition of New Star Lasers. It closed in early March.

Since then, we have been focused on the integration of our CoolTouch business, which is on track as planned. The CoolTouch business is beginning – is being led by Ilan Ben David, who brings more than 16 years of experience in the medical and aesthetic field. He has successfully developed sales and marketing organizations in both established companies and startups, and directed highly successfully new product launch in both domestic and international markets.

Our fourth key initiative, in the elure Advanced Skin Lightening product line. The major market opportunity for elure is, of course, in Asia. And as we previously communicated, it has received Korean regulatory approval and Japanese regulatory approval.

We are working to develop our distribution strategy for this market, along with ongoing efforts to gain Chinese regulatory approval, which we anticipate in the next few months. In parallel to this effort, we are evaluating various partnership opportunities for elure with large global consumer cosmetic companies with a strong presence in global and Asian skin lightening markets.

We are pleased with the level of interest and the degree of detail we are seeing in these discussions. We look forward to providing further updates as appropriate. Our fifth key strategic initiative for the year is the performance of our all-new joint venture with Unilever, Iluminage Beauty. During the quarter, Iluminage Beauty had a very successful Today's Special Value Event on QVC Home Shopping Network for the me hair removal system. They sold over 12,000 devices and delivered almost $4 million in sales, exceeding their event objective by 40% and delivering something very few brands do, they sold out before the end of the TSV.

This was a very good result and established for a very strong foundation for our Iluminage brand at QVC and the U.S. market. We are pleased with the progress that the combined team is making and remain confident that the joint venture will bring significant value for our shareholders.

In closing, I would like to reiterate our excitement for the recent FDA clearance of UltraShape, and the promotion of Body Shaping Business Group. This will provide us a platform for gain share in significant global market for body-shaping and noninvasive fat destruction, while also supporting the expansion of our high-margin recurring revenue business model. We are also focused in driving growth of the higher-margin Syneron product line in the North American core and non-core markets.

Outside of the U.S., we are encouraged by the stabilization of slightly improving markets in Europe and Asia. Together, these give us several avenues to grow our revenue, expand our margin, and improve our profitability. We also have two exciting opportunities with elure and our joint venture with Unilever. We remain focused on executing our strategic plan in 2014, which we believe will position Syneron to achieve revenue growth and operating leverage.

I will now return 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 for the first quarter of 2014. On today's call, I will be making comparisons to the pro forma result from the first quarter of 2013, excluding Syneron Beauty.

First-quarter 2014 revenue was $56.8 million, up 2% year-over-year on a pro forma basis from Q1 2013. North America revenue was down 5.5% at $18.3 million; and international revenue was up 6% at $38.5 million. The international results included the negative impact of approximately $600,000 due to changes in foreign currency exchange rates, primarily the decrease in the value of the Japanese yen against the U.S. dollar, compared to the first quarter of 2013. First quarter sales from North America corresponds to 32% of total revenue, with the balance of 68% coming from international markets.

First quarter 2014 product revenue was $38.7 million, down 1% on a pro forma basis. Recurring revenue, which includes service and consumables, was $18.1 million, up 9% on a pro forma basis.

Non-GAAP gross margin for the first quarter of 2014 was 53.5%, excluding stock-based compensation, amortization of acquired intangible assets, and other non-recurring costs compared to 55.9% on a pro forma basis in Q1 2013. The decline in reported non-GAAP gross margin was mainly due to our favorable geographic and product mix, primarily lower sales in North America and higher sales from our lower-margin international market.

Non-GAAP operating income in the first quarter 2014 was $1.9 million on a reported basis or an operating margin of 3.3%, compared to $2.4 million or 4.3% on a pro forma basis in Q1 2013.

The decrease in pro forma operating income was primarily due to lower gross margin, as operating expenses decreased slightly year-over-year. We are pleased with our ability to tightly manage operating expenses while still executing on our strategic initiates mainly the investment in sales and marketing in North America.

Looking forward, we anticipate a sequential increase in operating expenses as we build our Body Shaping Business Group complete the recruiting of the APCs, and realize a full quarter of CoolTouch expenses.

On a non-GAAP basis, first-quarter 2014 net income was $1.3 million or $0.04 per share compared to $2.2 million or $0.06 per share on a pro forma basis in Q1 2013. The non-GAAP operating income and net income results exclude the amortization of acquired intangible assets, stock-based compensation, the remeasurement of contingent consideration income tax adjustments, and other nonrecurring costs.

Regarding the Iluminage Beauty joint venture, we did not make any changes into the fair value of our investment in the joint venture, and therefore there is no change to the asset value on our balance sheet.

Turning to the balance sheet, our DSO were 89 days in the first quarter of 2014, compared to 75 days in the first quarter of 2013, and 82 days in the fourth quarter of 2013 on a pro forma basis. During the quarter, we had a decrease in cash and cash equivalents including short-term bank deposits and investments in marketable securities of $15.9 million. This was primarily related to the acquisition of CoolTouch, for which we paid approximately $11 million in cash at closing in March, while the remaining amount was due to working capital changes.

At March 31, 2014 cash and cash equivalents including short-term bank deposits and investments in marketable securities, were $92.6 million. 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 questions you might have. Operator?

Question-and-Answer session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Rich Newitter of Leerink. Your line is now open.

Rich S. Newitter – Leerink Partners LLC

Hi, guys. Thanks for taking the questions. Just maybe to start off with North America in the first quarter, I think you mentioned three factors that caused – or why results came in – why the growth was down about 5.5%. Weather; you mentioned something about fourth quarter; and then you said something about underlying weakness in the market. Can you just elaborate on all three?

Amit Meridor

The weather, everybody was aware that it was a very tough weather on the first quarter. And we know from our customers that there was not a lot of traffic going to their clinics at that time. And we also had trouble to make appointment in big workshop that we were planning to do and we postponed several major events that was supposed to happen, due to the weather. That did not cancel the opportunities, but definitely it delayed to start of April. General weakness in the market is something that, if we look on the overall picture, it looks like the first quarter was a little bit slow. We strongly believe that it’s a one time for this quarter. We don’t anticipate to continue, we are already in the middle of the second quarter, so we believe it was a one time.

Rich S. Newitter – Leerink Partners LLC

That’s really helpful, sorry.

Shimon Eckhouse

I think to even add a little bit more color to Amit’s comment, as you know, we are – we have a few selling areas in the United States and you can see there is some degree of correlation between the badly hit weather areas in the Northeast in terms of their performance compared to other areas that were not really impacted by the weather. So that's quite a significant factor the result of the first quarter. As Amit mentioned and this is not just this year, but this is typical of first quarter, comes after a fourth quarter which really always is one of our strongest quarters. So that’s a seasonal thing that we see more or less on a consistent basis year-over-year.

Rich S. Newitter – Leerink Partners LLC

Okay. So but my understanding is – and correct me if I’m wrong when you say that the market was weak in the first quarter, it sounds like it was weak for explainable factors; and trends may have picked up into the second quarter, and you feel that this is largely isolated to the first quarter. outlook for the space is still solid. Can you give us a sense of what a normalized kind of market, North America growth rate is trending at?

Shimon Eckhouse

Well, that’s a little bit harder to tell because we are still in the middle of the second quarter. Of course, we see so far in the second quarter is really much more encouraging in terms of rate of growth that we see. But to give you an exact number at this point in time will be a little bit going too far. And of course, combined with that, as Amit mentioned in some detail, we keep on investing in hiring, and training our APC salesforce. We are very pleased with the progress that we have there, and we have no doubt it will keep on contributing to growth.

Rich S. Newitter – Leerink Partners LLC

That’s great. Just maybe one more. You guys, despite negative mix shift impacted the gross margin line, your OpEx controls came in nicely above what we had modeled. Just, Hugo, can you help me understand the balance between incremental spending and any potential offset from kind of the improved efficiencies that you are seeing in the P&L? And any magnitude of step-up spend that we should be thinking about in 2014 for modeling purposes.

Hugo Goldman

Hi, Rich. We are continuing with the same approach in terms of our planning for this year, including the investments as we previously discussed. Today, what we faced in Q1 in terms of the gross margin because of the impact of the North America weakness which is direct sales, which are high margins in our products, and this on one hand reduced the gross margin on the other hand, we had stronger international sales, which those were lower gross margin. So all together this is something that if we – as improving our higher margin revenues that will better balance the overall gross margin and to our, call it, average gross margins for the last past quarters. In the operating expenses, as I just said, just to complete, we're continuing the same level of planning in terms of the investment, while we continue controlling the cost, as you can see in our results.

Rich S. Newitter – Leerink Partners LLC

Okay. Should we – 2014, clearly you are investing behind a really exciting new product cycle that you have coming in 2015, which makes a lot of sense. Should we think about kind of operating margin as flat to down year-over-year in 2014, with potentially meaningful leverage in, call it, late 2015 and beyond? Is it the right way to think about it?

Amit Meridor

Look, as we are investing in 2014, we still want to see some improvement to 2013.

Shimon Eckhouse

Relative to 2013.

Amit Meridor

Relative to 2013. Now, obviously, in 2015, we should see further improvement because of all the actions we are taking this year. Does that answer your question?

Rich S. Newitter – Leerink Partners LLC

Yes, that's helpful. Thanks a lot. I will jump back in queue.

Amit Meridor

Thank you, Rich.

Shimon Eckhouse

Thank you.

Operator

Thank you. Our next question comes from the line of Jeremy Feffer of Cantor Fitzgerald. Your line is now open.

Jeremy Feffer – Cantor Fitzgerald Securities

Hi, good morning. I wanted to come back on the UltraShape salesforce process. Can you remind me how many of the sales reps you have hired already, and just what the sort of cadence of those additions are going to look like over the rest of the year?

Amit Meridor

We are starting our process with the PDPs. Those are the most important ones that are going to work with the clinics. And as you remember, our first action in 2014 is go to our KOL and a very limited number of main customers that we are going to launch the product with. And the PDPs are the ones that we are going to work with them very closely on the UltraShape system. During the second half of the year, we will start to hire the TM that will support the UltraShape business.

Jeremy Feffer – Cantor Fitzgerald Securities

Okay. And then if we look outside the US, do you need to make additions there? Or are you sort of banking on the halo effect of FDA sort of validation and sort of the building of a US market?

Amit Meridor

Syneron for many years is very strong in the international. We are having both a direct operations in major countries and also very strong distributor channel. And we are going to rely on them to be able to take this clearance of the FDA and to get better sales also in the international.

Jeremy Feffer – Cantor Fitzgerald Securities

Okay, so UltraShape O-US will still be sold through distributors?

Shimon Eckhouse

Through distributors as well as direct, as Amit pointed out.

Jeremy Feffer – Cantor Fitzgerald Securities

Okay.

Amit Meridor

And to a large extent, your definition of using the halo effect is the main program for 2014 outside of the U.S.

Jeremy Feffer – Cantor Fitzgerald Securities

Okay. That is all I had. Thank you, very much.

Amit Meridor

Thank you.

Shimon Eckhouse

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Anthony Vendetti of Maxim Group. Your line is now open.

Anthony V. Vendetti – Maxim Group LLC

Thanks. Good morning.

Amit Meridor

Good morning.

Anthony V. Vendetti – Maxim Group LLC

Good morning. I just wanted to focus a little bit more on UltraShape and just – I know the rollout, at least for the rest of 2014, is supposed to be – is planned for the luminaries. Can you discuss a little bit of how that is going so far? Any feedback yet from the field, from the luminaries? Or is it too early yet? And is everything on track in terms of manufacturing and shipping out the product?

Hugo Goldman

It is a little bit too early. Because even though we got the FDA clearance, we still need some logistics as far as the numbers to get the machines in; and it is taking a few weeks to get all the paperwork on the computation ready to ship the machines to the United States. But we did several events outside, mainly in Canada, that we brought our KOL over there, and the event was very successful and we feel that they are – mainly those doctors that are going to receive the UltraShape, they already have a lot of information and they are waiting for the system to come in.

As far as production and everything else is on track. And all our PDPs, we already hired seven people; our marketing team is ready; so everything is ready for the machine to come in and for their launch going on.

Anthony V. Vendetti – Maxim Group LLC

Okay, great. And then on CoolTouch, Hugo mentioned pro forma revenue was up 2%, so I just want to make sure I am thinking about pro forma correctly. The emerging business unit obviously with Iluminage is removed to do pro forma. Is CoolTouch included in your pro forma? Or is it just additive for the first quarter this year, but not in the first-quarter 2013?

Hugo Goldman

Exactly. Hi, Anthony. Q1 2013 obviously does not include anything of CoolTouch of course in the number of Q1 2014, because we have just a few weeks of CoolTouch into our numbers. There is some, but very immaterial.

Anthony V. Vendetti – Maxim Group LLC

Okay, okay. So it’s not in there. But that’s the right way of looking at the 2% up, right?

Hugo Goldman

Yes.

Anthony V. Vendetti – Maxim Group LLC

Okay. In terms of – CoolTouch has a couple of products obviously that complement what you are doing. Can you talk about how you are going to position that with the salesforce, vis-a-vis your current products, like in the endovascular market?

Hugo Goldman

Well, on the endovascular market is a market in which we have no presence and we have presence now because of CoolTouch. And to serve that market, we are really planning to have a much more focused salesforce that than the one that CoolTouch has, because CoolTouch before we acquired them used only independent reps to sell in the U.S., and a very indirect way of selling internationally and in both of these fronts, we are taking steps to strengthen their position.

They will also be able to enjoy the cross-selling opportunities, because we do serve in our core business and also to some extent our non-core business customers that are potential users of CoolTouch technology for endovascular treatment. As well as the bundling opportunity that we have, because many of the endovascular treatments are done for patients that also have aesthetic problems, mainly with what is called spider veins, or telangiectasias, which gives us another opportunity of both cross-selling and bundling. This is an effort that, as Amit pointed out, is moving according to plan and will really have an impact mainly in 2016, although we expect to see some initial results of that in 2014.

Anthony V. Vendetti – Maxim Group LLC

Okay, great. And then, Hugo, just on stock-based comp and across the four line items and…

Hugo Goldman

Anthony, on a total of $0.8 million rounded it's COGS, it's $0.1 million, R&D $0.1 million, sales and marketing $0.3 million; and G&A is $0.1 million.

Anthony V. Vendetti - Maxim Group LLC

Okay, good. And then the number of sales reps you currently have, quota-carrying sales reps and then sales managers?

Amit Meridor

In United States you mean? North America in total?

Anthony V. Vendetti - Maxim Group LLC

Yes.

Hugo Goldman

We have the territory managers, we have 35.

Amit Meridor

35. And then they have the APCs that we – the goal was 30, and with just a few headcount of that number.

Anthony V. Vendetti - Maxim Group LLC

Okay, great. Thanks.

Hugo Goldman

Thank you.

Operator

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

Zack R. Ajzenman – Griffin Securities, Inc.

Thanks. Good morning. First question, in recent quarters you have given us a little more detail on how the Syneron product sales have fared here in North America year-over-year, to sort of help us along with how the salesforce additions have translated to the revenue line. Do you care to give us any detail on how Syneron product sales in North America performed in the quarter?

Hugo Goldman

The level was similar, comparing to year-over-year.

Zack R. Ajzenman – Griffin Securities, Inc.

Okay. Assuming this normalized or moderate growth continues like you have seen here in the second quarter in the US and abroad, how should we think about gross margins for the year? What revenue number should we think about to get a sustainable gross margin of 55% and higher?

Amit Meridor

I mean we should see the – as we reported, we had the overall North America was down a few percent. So we should see some – in North America, it's a combination of having regular conditions is going to contribute some, and then on the additional junior sales reps will provide additional contribution. So overall, we should see increase in the North America product revenues going forward, which should bring us to the levels of gross margins that you are talking about.

Zack R. Ajzenman – Griffin Securities, Inc.

Okay. and last question. I believe last quarter management mentioned that they plan to complete the non-core salesforce additions, to get to that number of 30 by the end of the first quarter. It seems it has been pushed out to the second quarter now…

Amit Meridor

Yes.

Zack R. Ajzenman – Griffin Securities, Inc.

Any reasons for that?

Amit Meridor

The process of hiring people most of time is not something that you can know exactly in a question of weeks when you are going to finish, especially when we are doing a very strong increase of numbers. We are talking about 30 people all over the United States. So we may have some delays, about a few weeks, but not more than that. And then we have all the training that we have to give them. So that’s why we are saying it will be fully in place in the end of the second quarter.

Zack R. Ajzenman – Griffin Securities, Inc.

Okay.

Hugo Goldman

I would like to just to clarify when I earlier said I was just a few headcount off of today. So since the end of the first quarter, we continue a few people hiring and now we have our remaining.

Amit Meridor

In terms of hiring, we are very close (indiscernible) training, of course

Zack R. Ajzenman – Griffin Securities, Inc.

Okay, thank you.

Operator

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

Rich S. Newitter – Leerink Partners LLC

Hey, thanks for the follow-up. Just a quick one. Hugo, the CoolTouch contribution to expect, should we be thinking of that as a kind of a $2 million roughly sales per quarter going forward? And on the bottom line from a non-GAAP EPS standpoint and margin, it's neutral to accretive in 2014? Is that the right way to think about it?

Hugo Goldman

We said it’s going to be accretive in 2015. As to the revenues, it’s about average of $2 million per quarter.

Rich S. Newitter – Leerink Partners LLC

You said it's accretive to 2015 on a GAAP basis?

Hugo Goldman

In 2015 non-GAAP.

Rich S. Newitter – Leerink Partners LLC

So 2015 it’s non-GAAP, so probably – is that probably dilutive in 2014?

Amit Meridor

Yes. In 2014 we’re going to have some investments as we discussed in previous call this year.

Rich S. Newitter – Leerink Partners LLC

Got it. And just circling back, you said that you think operating margins will increase versus 2013 on a non-GAAP basis, despite the stepped-up spending around UltraShape and despite dilution from CoolTouch. Is that correct?

Amit Meridor

Yes, we said that we expect to see some improvement compared to 2013 in the operating income number.

Rich S. Newitter – Leerink Partners LLC

And can you just remind us what the pro forma 2013 operating income number was?

Amit Meridor

It was 5.1%

Rich S. Newitter – Leerink Partners LLC

Okay, so 5.1% or better in 2013 or slightly better.

Amit Meridor

Yes.

Rich S. Newitter – Leerink Partners LLC

Okay, thanks guys.

Amit Meridor

Thank you very much, Rich.

Hugo Goldman

Thank you.

Shimon Eckhouse

Thank you very much.

Operator

Thank you. Our next question comes from the line of Jeremy Feffer with Cantor Fitzgerald. Your line is now open.

Jeremy Feffer – Cantor Fitzgerald Securities

Hey, one quick housekeeping follow-up for me. I notice on the balance sheet the line item where you apparently are reflecting the Iluminage joint venture. The value of that didn't change quarter to quarter. I am just curious how you are going to be treating that. Do you revalue that every quarter? Or just curious on how that will be treated.

Hugo Goldman

I mean we are going to as we said we are going to from time to time of – we are going to reevaluate the fair value of that holding in the JV. Right now it’s very shorter time since we completed the JV, so it’s too early stage to really see any changes in the fair value, but going forward we will be evaluating the fair value from time to time, and will be reflected accordingly in the balance sheet and the GAAP results.

Jeremy Feffer – Cantor Fitzgerald Securities

Okay, that’s helpful. Thank you.

Hugo Goldman

Thank you.

Operator

Thank you. And I am showing no further questions at this time. I’d like to hand the call back over to our CEO, Amit Meridor.

Amit Meridor

Okay, I would like to thank everybody for taking the time and being with us, and looking forward to our next call. Thank you very much.

Hugo Goldman

Thank you.

Shimon Eckhouse

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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