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Cynosure, Inc. (NASDAQ:CYNO)

Q3 2010 Earnings Call Transcript

October 26, 2010 9:00 am ET

Executives

Scott Solomon – VP, Sharon Merrill Associates, Inc.

Michael Davin – President, CEO and Chairman

Timo Baker – EVP, CFO and Treasurer

Analysts

Anthony Vendetti – Maxim Group

Matthew Dodds – Citigroup

Dalton Chandler – Needham & Company

Josh Jennings – Jefferies & Company

Paul Nouri – Noble Equity Funds

Bill Dezellem – Tieton Capital Management

Operator

Good day and welcome to the Cynosure third quarter 2010 conference call. Today’s call is being recorded. There will be an opportunity for questions at the end of the call. (Operator instructions)

At this time, I would like to turn the call over to Mr. Scott Solomon, Vice President for Sharon Merrill Associates. Please go ahead, sir.

Scott Solomon

Thank you, Claudia and good morning, everyone. 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 third 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. 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, October 26, 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 Mike Davin.

Michael Davin

Thank you, Scott. Good morning, everyone and thank you for joining us on today’s conference call. Although we continue to face challenges in the current macroeconomic environment, particularly in North America, we continue to see the positive impact from the investments we have made into our international organization over the past few years.

Laser sales from our European and Asian subsidiaries, as well as our international third-party distributors were up nicely year-over-year. This fueled a 6% increase in total third quarter revenues of $19.1 million from $17.9 million for the comparable period of 2009. International markets outside of North America accounted for 55% of laser product revenue in Q3 of 2010 compared with 45% in the third quarter of 2009.

The strength of our overseas business is a testament to the work that we have done in strengthening our sales presence in both Europe and Asia both through our direct and indirect sales organizations.

Third-party distributors were an important driver for our revenue in the third quarter, accounting for 34% of overseas laser revenue and 19% of total laser revenue in the quarter. By way of comparison, third-party distribution comprised 25% of overseas product revenue and only 11% of total product revenue in the third quarter of 2009.

In North America, the economic climate continues to pose a challenge for our industry. Access to credit remains a major hurdle for many practitioners and equally is important, overall consumer sentiment has not returned to pre-season recession levels – pre-recession levels, which is continuing to make some U.S. doctors hesitant to make capital equipment purchases.

We continued to see good growth of our service revenue in the third quarter, which increased 12% to $4.7 million. While the willingness of our customers to keep their equipment healthy is a reflection of the current economic climate, it also speaks to the strength of our technology value proposition in the marketplace.

As we noted in this morning's news release, during the quarter, we further increased our overseas presence in several key regulatory approvals. These include marketing authorization for Smartlipo MPX in Australia and Canadian regulatory approval for the Affinity QS workstation to treat multi-color tattoos and pigmented lesions and Smartlipo Triplex for advanced laser lipolysis and high definition body contouring. Going forward, we will continue to seek additional regulatory approvals overseas, particularly our international footprint, to further expand.

Looking at our operating performance in the quarter, we have continued to manage our expenses tightly. Year-to-date, operating expenses were down $7.8 million or 17% from the same period of 2009, putting us ahead of our goal of reducing operating expenses by $5 million to $7 million on an annualized basis in 2010. With over $25 million in cost reductions that we have made over the past two years, we have appropriately sized the company and are well positioned to leverage the current organization and increase our profitability, as well as grow our revenue base.

In Q3, we posted our sixth consecutive quarter of positive operating cash flows and we continue to maintain a healthy and unencumbered balance sheet. We ended the quarter with cash, investments, and marketable securities of more than $95 million and no long-term debt.

We continue to be encouraged about the development of our newest flagship workstation, which we believe will give us a significant first-mover advantage in a high-growth end market. The new product is on schedule for launch in the first quarter of 2011.

In summary, we are pleased with the progress we have made over the past nine months. We are seeing a good return on the new investments we have made in our international organization and are optimistic about the future potential of the international markets. We are successfully executing on our plan to aggressively reduce expenses, while maintaining our focus on new products aimed at high growth aesthetic opportunities.

While the economic climate in North America still presents some challenges for our industry, we are confident that we have the financial and operational strength at Cynosure to sustain our leadership position through technology and product innovation.

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

Timo Baker

Thank you, Mike. Good morning, everyone and thanks for joining us. As Mike mentioned, strong international sales from all regions drove total revenues up 6% year-over-year to $19.1 million in the third quarter. On a sequential basis, we were down slightly from the second quarter. But as we noted on our Q2 conference call, Q3 is typically a seasonally slow quarter for the aesthetics industry. So, the pullback in sequential revenue was anticipated.

Our ongoing focus on expense management continues to yield an improved bottom line. Third quarter GAAP net loss narrowed to $0.5 million or $0.04 per share compared to a net loss of $1.9 million or $0.15 per share for the third quarter of 2009. The decreased loss reflects the success of our ongoing and comprehensive cost reduction initiatives.

As a reminder, the third quarter 2010 net loss included income tax provision or expense of $32,000, representing an effective tax rate of 7.5%. This compared with an income tax benefit or a reduction to our loss of $1 million or $0.08 per share recorded in the third quarter of 2009 and representing an effective tax rate of 34%.

The change from a benefit to a provision in the 2010 period is a result of the company's establishment of an valuation – of a valuation allowance in the fourth quarter of 2009 against our net domestic deferred tax assets and results from taxable income generated in our foreign jurisdictions. We expect to continue to record a tax provision or expense for the balance of the year and expect our effective tax rate to range between 8% and 12% for 2010.

On a non-GAAP basis, excluding stock compensation expense of $0.9 million and using an effective tax rate of 7.5%, we had net income of just under $400,000 or $0.03 per diluted share in Q3 of 2010. This compared to a net GAAP – a non-GAAP net loss of $911,000 or $0.07 per basic share, which excluded stock-based compensation expense of $1.5 million and using an effective tax rate of 36% in the corresponding period last year. We had approximately 12.8 million and 12.7 million weighted average shares outstanding for the third quarters of 2010 and 2009, respectively.

Looking at our quarterly revenue in a bit more detail, laser product revenue accounted for $14.4 million or 75% of total revenue in Q3 2010 compared with $13.7 million or 76% of total revenue for the same period of 2009. Revenue from parts, accessories, and service increased 12% to $4.7 million in the third quarter of 2010 from $4.2 million in Q3 of 2009.

By territory, international markets were up 27% over the third quarter of 2009 and accounted for 55% of total laser product revenue, while North America accounted for 45%. This is a flip from Q3 of 2009 with North America generating 55% of laser product revenue and the overseas markets accounting for 45%.

Third quarter gross profit was 56.1% versus 58.4% for the same period in 2009. We continue to see average selling prices remain fairly stable through the first nine months of this year. The decrease in gross profit in Q3 was directly the result of the higher percentage of international revenue, particularly the increased contribution from third-party distributors. Distributor sales accounted for 19% of total laser revenue in the third quarter of this year, up from 11% in the 2009 period.

Turning to expenses, total operating expenses in Q3 declined 16% to $11.7 million from $13.8 million in the same period of 2009. As Mike mentioned, for the first nine months of 2010, we have decreased operating expenses $7.8 million, exceeding our previously stated goal of $5 million to $7 million in cost savings for all of 2010.

By category, selling and marketing expenses declined $1.7 million or approximately 19% to $7.1 million in the third quarter of 2010, reflecting a headcount reduction and the elimination of some non-core programs. Selling and marketing accounted for 37% of revenue compared with 49% in the third quarter of 2009.

Research and development expenses increased $0.3 million or 21% in the third quarter of 2010 as a result of our continued commitment to new technology and products, including the flagship workstation Mike mentioned that we have planned for Q1. R&D expenses accounted for 10% of revenue in Q3 of 2010, up slightly from approximately 9% in the same period of 2009.

General and administrative expenses for the quarter decreased $800,000 or 23% from the third quarter of 2009 as a result of our expense reduction initiatives. G&A expenses comprised 14% of revenue, down from 20% in the same period a year ago.

We concluded the third quarter with $95.4 million in cash and investments and no long-term debt other than capitalized lease obligations. This is approximately $3 million higher than our cash and investments balance of $92 million in year-end 2009. As we noted in this morning's news release, the increase in our cash and investments balance included $1.1 million of stock repurchased in 2010 under our previously announced stock buyback plan.

We continue to effectively manage our accounts receivables. DSOs at the end of Q3 were 53 days, down from 77 days at the end of the Q3 of 2009. Echoing Mike's comments, we are in a strong position both financially and operationally as we approach the end of 2010. We are successfully executing on the expense management plan we laid out at the beginning of the year and we are excited about the product development and technology initiatives ahead.

With that, we are ready to open the call to questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question is coming from the line of Anthony Vendetti with Maxim Group. Please state your question.

Anthony Vendetti – Maxim Group

Thanks. Good morning, guys.

Michael Davin

Good morning, Anthony.

Anthony Vendetti – Maxim Group

Obviously, international revenue was – is strong and obviously, you pointed towards the difficult environment still in North America and the tight credit market. Can you talk about – as the quarter moved on and we moved through September, did things start to look a little bit better in North America or was it pretty much the same throughout the quarter? In other words, I'm just looking to see if you think things are starting to look a little bit better in North America at this point.

Michael Davin

Well, Anthony, this is Michael. As you know, the third quarter historically is our seasonal quarter and not only is it impacted by Europe shutting down in August, it's also very seasonal in the North American market and that was indicative in this past quarter.

So September is always the highest revenue contributor for the quarter, it's – probably 60% of the revenue in that quarter comes from September. So, that was consistent in terms of being not linear [ph] in that quarter. Although I would like to tell you things seemed to be improving in North America actually in the quarter, no, we still see North America as being very challenging and pretty much flat year-over-year in terms of revenue to the first – contribution to the first nine months.

Anthony Vendetti – Maxim Group

Okay. And the credit markets, I know you have been working with Bank of America on this. Are you seeing any other leasing companies come in to help drive sales in North America or is the credit markets still as tight as they were a year ago?

Timo Baker

Yes – this is Tim. I think overall, it's still a very tight credit market out there. We are seeing other players come into the market. We are able to do deals with other some lenders besides Bank of America. Bank of America is still a key partner for us, but we are seeing some cracks and some opening up. But it's – overall, I think all the players that are in the space are keeping a very tight credit box and watching things very closely.

Michael Davin

Yes – and this Michael. I think we have more lenders available, but they all want to do the same transactions, the very low-risk, high-quality type of transactions.

Anthony Vendetti – Maxim Group

Okay. And then in terms of Europe shutting down right now due to the strikes in France, is – how much of an impact could that be for you in the fourth quarter or is it relatively material?

Michael Davin

Well, first of all, as you know, that's a relatively new event taking place in France. Right now, we couldn't really comment on what kind of impact – I mean, France is a good business for us. But overall, we have seen some level of recovery in Europe as we go towards the end of this year. We are not sure on how the situation in France will impact that.

Anthony Vendetti – Maxim Group

Okay. And you talked about this high-growth product in the last conference call and where – this new product you have in the first quarter 2011. Are you prepared to talk about the potential indication or application for this product at this point?

Michael Davin

No, not at this time. But as I mentioned, the process on the regulatory side is going and going well, we believe and we are anticipating a regulatory clearance hopefully in the first quarter. From the technology side, we will be ready to launch in the first quarter. The regulatory will govern whether we are able to or not, the regulatory clearance will be the determining factor for a first quarter launch.

Anthony Vendetti – Maxim Group

Okay. But everything is on track there.

Michael Davin

Yes.

Anthony Vendetti – Maxim Group

Did the commercialization of the home-use product, you said 2012, are you leaving that open in terms of when in 2012, because it still needs 510(k) approval?

Timo Baker

Yes – yes, we are still saying 2012. The good news is we are on schedule, on target. We have a very good relationship with our partner Unilever, but we right now haven’t got any more clarity in terms of actually when in 2012.

Anthony Vendetti – Maxim Group

And then lastly on the stock-based comp, Tim, it was a little bit lower this quarter. Can you provide the – A, why and then B, if you could just provide the line item breakout for that?

Timo Baker

Sure. I mean, the why is we are starting to roll off some of the 2007 grants which were granted at a much higher value at that time. So they are basically rolling off now through Q3 and will be gone by Q4. In terms of the breakout, in Q3, we had about $340,000 in sales and marketing, $120,000 in R&D, $325,000 in G&A, and about $66,000 in COGS.

Anthony Vendetti – Maxim Group

All right, perfect. Thanks.

Michael Davin

Thanks, Anthony.

Operator

Our next question is coming from the line of Matthew Dodds with Citigroup. Please state your question.

Matthew Dodds – Citigroup

Good morning. A couple of questions. On the service and accessories side, can you give any gauge from the accessories or the hand pieces what you think underlying growth is for procedures or just help really to make that assessment?

Michael Davin

I think it's still too early, Matt, at this time to make the assessment.

Matthew Dodds – Citigroup

Okay. So of that component on the service side, is it the view still that most of your customers are keeping their service agreements or is there risk over time as some of these machines get older that they might drop the service? At what point does the service become an issue with the North America sales?

Timo Baker

I think what we are seeing, Matt, is that more people are actually taking service and keeping their machines operating. I mean, the downside of that is obviously they may be delaying purchasing decisions, but the flipside is we are aggressively focusing on the service business and growing that. So, I mean, what we are seeing today, it is more of a trend to take service contracts than to back away from them.

Matthew Dodds – Citigroup

And then final question on that topic is, how have service contracts held up relative to pricing with – I'm going to ask that (Multiple Speakers) –

Timo Baker

Yes, they have actually held up fairly strong. I mean, we are – we have not had the significantly discount service and service contracts.

Matthew Dodds – Citigroup

All right, perfect. Thanks, guys.

Michael Davin

Thanks, Matt.

Operator

Our next question is coming from the line of Dalton Chandler with Needham & Company.

Dalton Chandler – Needham & Company

Good morning.

Michael Davin

Good morning, Dalton.

Dalton Chandler – Needham & Company

So just to – I guess to follow up on the geographic issues, if I did the math correctly, it looks like your product revenue was down year-over-year about 11% in North America. So the – I guess the question is, is that accurate and if so, was there anything unique in the quarter or do you think that's just where the market was?

Michael Davin

I think, Dalton, this is where the market was. It is the way we see it.

Dalton Chandler – Needham & Company

Okay. Then, just a couple of housekeeping things here. Could you give us the depreciation and amortization and the cash from operations in the quarter?

Timo Baker

Sure. So, cash from operations was $909,000 for the quarter and if you add back all the non-cash charges which should be depreciation and stock comp, it's about $2.4 million.

Dalton Chandler – Needham & Company

Okay. And what was the depreciation and amortization component?

Timo Baker

Depreciation and amortization was $852,000.

Dalton Chandler – Needham & Company

Okay. And could you –?

Timo Baker

I'm sorry, that's stock-based comp. $1.4 million.

Dalton Chandler – Needham & Company

Okay. And could you just remind us what you have remaining on your buyback?

Timo Baker

We have – the Board authorized a $10 million buyback and we to date have purchased about $1.2 million.

Dalton Chandler – Needham & Company

Okay. Thanks a lot.

Michael Davin

Thanks, Dalton.

Operator

Our next question is coming from the line of Josh Jennings with Jefferies & Company.

Josh Jennings – Jefferies & Company

Hi, good morning, gentlemen. Thanks.

Michael Davin

Hi, Josh.

Josh Jennings – Jefferies & Company

Just – I guess, just in sort of a more macro sense, I mean, can you guys give us an idea what you are getting the feedback from your customers in terms of procedure volumes on the laser aesthetic side and where they are trending and some of the price points that consumers are getting from physicians?

Michael Davin

Yes and this intel is really from North America, Josh. But – on the high – on the higher price procedures, the more expensive procedures, they really fall more in the plastic surgery discipline. We have seen – they have seen a fairly significant drop-off in demand, which you would expect in the economic climate that we are in.

In terms of the lower-cost procedures like hair removal or some of the skin rejuvenation indications that we treat, it's fairly flat to last year, they are not seeing a lot of growth and that's indicative of kind of how we are seeing our business compared to last year. So overall, when we – out intel is telling us from a marketing standpoint that our customers, being the physicians, are not seeing an uptick in demand for procedures. It's relatively flat, marginally up in certain areas.

Josh Jennings – Jefferies & Company

Great. And just in your commentary on relatively stable ASPs for the system, I mean looking at Artech [ph], they've indicated that there had been some discounted competitive pricing over the last few quarters. I mean, just – how you have been resilient there and how you have been able to navigate through this sort of competitive discounted pricing?

Michael Davin

Well, we think – as in the past, the value proposition of our technology, being a versatile platform, offering a variety of indications that we treated with the platform, not limiting the physicians to the patient types they can treat, we have been able to convey that value proposition during the sales process and we are able to maintain our ASPs. Where we've seen some of our competitive – competitors' ASPs drop significantly, we have done a nice job of conveying the value proposition and holding our ASPs at the current levels.

Josh Jennings – Jefferies & Company

Great. And then just in terms of your new product that's going to be launched potentially in Q1, can you share anything about where you expect those ASPs to come in, in terms of above or higher than where your sort of price points are now, gross margin potential? And then also just to reiterate, whether – what regulatory path were you going down for that – with 510(k) and whether – how much more red tape did you experience through this process relative to historic product approvals?

Michael Davin

Sure. I mean, we would expect, it being a new flagship introduction that is not cannibalistic to our current product offering, it should drive good, strong margins and strong ASPs obviously.

The regulatory path is – has been rigorous, there is a great deal of clinical information that we need to supply to the FDA. We are engaged in the process and we believe it's going fairly well. I think everyone is aware that the FDA also is looking at things a little bit differently than they have in the past. And so, we are not real familiar with that new component of the process and so we are challenged by getting a good feeling of how that will play out in terms of timing. But we feel fairly good that it will happen in the first quarter of 2011.

Josh Jennings – Jefferies & Company

Great. And maybe you can just review for me how you guys are thinking about strategically driving disposable or recurring revenue. You have a nice recurring revenue stream on the service side. But in terms of your hand pieces, et cetera, what are you guys doing going forward to try and drive that? I know you need a pickup in system placements, et cetera, but maybe speak to that strategy.

Michael Davin

Yes. Josh, right now the majority of our revenue from consumables comes from our Smartlipo platform, as well as our Affirm platform. When we launch the new technology, that will also have a disposable component.

And then of course our service revenue, which is really servicing our installed base, as Tim mentioned, we've put a significant effort behind kind of a new process and engaging with our installed base and offering a very versatile platform of service products for them to maintain the technology, and that's also stimulating growth to the service revenue. So we will be adding a new disposable revenue component with the launch of this new technology or disposable revenue opportunity to the company with the launch of this product in the first quarter.

Josh Jennings – Jefferies & Company

And how do you see sort of the consumables side accounting for a percentage of revenues over the next three to five years? I mean, do you see that getting out to 30% of sales or higher than that?

Michael Davin

I mean, if you include our service revenue, I think, Tim, right now we are somewhere around 25%. We are hopeful that with the new product introduction and then of course new system placements of the Affirm and the Smartlipo Triplex and MPX that that will stimulate additional revenue growth with those products on the disposables side. So I think that 25% number is realistic for the foreseeable future.

Josh Jennings – Jefferies & Company

Okay, great. And just competitively, your performance internationally was solid, especially in the setting of a – of the Syneron-Candela collaboration or merger and potential synergies there internationally. Can you just speak to what you are seeing in the competitive environment and maybe just also give us some detail in terms of what you think drove the strength internationally? Thanks a lot, guys.

Michael Davin

Sure, Josh. I mean, we are certainly not seeing the recession constraints in the international markets that we are seeing in North America and therefore we are seeing very good growth in the international markets, especially in Asia and Europe.

And as you know, over the past few years, we have opened additional offices across the globe and more importantly – or of equal importance, driving additional regulatory clearances. It's nice to have a presence there, but if you don't have the regulatory approvals, you can't market, position, and sell the technology.

So we have received a number of regulatory clearances over the last couple of years (inaudible) our marketing team, as well as our distribution teams to exploit the opportunity and go after additional revenue growth in those markets. And as I mentioned in the script, we will continue to do that and we are continuing to receive additional regulatory clearances and also we will be launching these new technologies as they roll out into those markets as well.

As far as the competitive landscape, I think North America is extremely competitive because the market certainly is very tight and it's not a growth market as we see at this time. Internationally, a much broader market; depending on what your infrastructure is like, I think the competitive environment varies.

Operator

Okay, thank you. Our next question is coming from Paul Nouri with Noble Equity Funds. Please state your question.

Paul Nouri – Noble Equity Funds

Going back to the buyback, when does that expire?

Timo Baker

It does not have an expiry date. Basically, the Board had authorized up to $10 million buyback. We do have a 10b5-1 plan in place that we are purchasing under and that actually expires next August.

Paul Nouri – Noble Equity Funds

And you have obviously done a great job of bringing down operating expenses. If sales increase next year, do you think you will be able to moderate the increase in operating expenses?

Timo Baker

We do. We feel that – again, we have really positioned the company to get our core competencies down to the level now. We can really leverage the organization as revenues begin to grow. So we think there will be fairly small incremental costs that will accompany additional revenue growth, more variable straight selling costs.

Paul Nouri – Noble Equity Funds

And when we think about the international market, obviously just in general, their economies are doing better. But do you also think that they are increasing the using of laser-based aesthetic technology?

Michael Davin

Yes, we do. Well, we see a heightened interest in light-based technologies being a replacement to conventional approaches in those markets.

Paul Nouri – Noble Equity Funds

All right. Thank you.

Michael Davin

You are welcome.

Operator

(Operator instructions) Our next question is coming from Bill Dezellem with Tieton Capital Management. Please state your question.

Bill Dezellem – Tieton Capital Management

Thank you, that's Tieton Capital Management. Let me ask about the North America market. It was down in the third quarter and Michael, I think you had mentioned at the – as you exited the quarter, you viewed it as flat and you may have just been rounding, but if I were to pick up on the new launch and – potential new launch in your comment that the North America market would have improved or you feel that has improved from being down to being flat. Is that a correct reading of your comments or is that over-reading into it?

Michael Davin

I think, Bill, actually my comment was reflected [ph] going to the third quarter. I mean – excuse me, going into the fourth, exiting September. When Anthony had asked what was kind of the general sentiment as we exit this quarter, I responded with the seasonality in the third quarter and also going into September, being the heavily weighted month of revenue contributions in the third quarter that we did not see a momentum going into the fourth – relatively flat through the nine-month period.

Bill Dezellem – Tieton Capital Management

Okay. So flat, you do not view that as an improvement from where you had been then?

Michael Davin

No. I mean, when we look at it, we say flat really to 2009.

Bill Dezellem – Tieton Capital Management

Okay.

Michael Davin

It's how we see the North American market opportunity at this time.

Bill Dezellem – Tieton Capital Management

Right. Relative to the split between the U.S. and O-U.S. markets, not near term but long term, how do you view that potential?

Michael Davin

Well, we are certainly excited about where our business is internationally and also the prospects of that business going forward.

North America is a concern, a concern that we really can't control. We believe when we start to see the macroeconomic environment get healthier, which we are hopeful we will start to see that in 2011 – clearly, we have not seen that in 2010 with unemployment still at 9.7% and consumer sentiment and discretionary spending all still relatively consistent with the way we started the year. Even though the stock market has done well, overall, I think the sentiment of the – of individuals in this country or the consumer in this country is still one of tenuous and rather uncertain. Until we see that environment begin to right itself and get healthy, we do not expect the North American business to grow.

Now, one catalyst next year will be the introduction of our new technology. Assuming that we get the regulatory clearance on time, we could see contributions from that launch in the second, third, and fourth quarter of the year, which would be obviously additive to our current business in North America.

Bill Dezellem – Tieton Capital Management

That was a perfect segue to my next question, which is, relative to that new product, and maybe you just answered it frankly, but do you see it as being unique enough to generate sales in a flat market environment?

Michael Davin

Yes, we do.

Bill Dezellem – Tieton Capital Management

And you had mentioned first-mover advantage. So, not only is it not cannibalistic to your existing product suite, but there are no competitors that are offering such a product at this time. Is that a correct read?

Michael Davin

That is a correct read, Bill.

Bill Dezellem – Tieton Capital Management

And would you see this new product replacing a procedure that a plastic surgeon would be doing today, but allowing them to use the laser or light approach, which would be simpler and requires less downtime for the patient or would it be something that's really not even addressed in really any form today?

Michael Davin

Yes, we believe – currently, no. The indication that we will be addressing, which will be a high volume indication, is not currently being addressed in the manner in which we will address it once the product is released to the market.

Bill Dezellem – Tieton Capital Management

And do you see it being addressed in some other manner? And if so, how effective do you feel that other manner is today?

Michael Davin

Yes, we – as I mentioned, we don't see it being addressed currently in another manner and we do believe that when we launch this technology that surgeons, as well as non-surgeons will have an opportunity to treat this indication in a way that it's never been treated – it has never been treated before.

Bill Dezellem – Tieton Capital Management

That's very helpful. And then on the financial front, it appears given how successfully you have controlled your expenses that as you move into the fourth quarter, which has historically been a stronger seasonal quarter, especially relative to the third quarter, that you have a pretty good shot at being profitable in the fourth quarter. Is that an assessment you would concur with?

Timo Baker

Well, Bill, we don't give guidance on profitability. But I think as we have said is that we think we are at a level of spending – that again, as our revenue growth continues, we will move towards that profitability. Our goal as it's been over the past year and a half is to really be a cash flow positive and effectively running at a cash flow breakeven, which we have been. I will note that as we move into this new product launch that we will have some incremental expenses associated with that both in clinical in terms of clinical studies ongoing, also additional R&D, and also product launch expenses.

So we are going to continue to invest in the business. We are not obviously scaling back to the point they were hurting any future potential. So I would expect some additional incremental spending supporting this new product.

Bill Dezellem – Tieton Capital Management

And just one additional follow-up here. So, if you get some revenue growth, even though you are at a loss of $0.04 in the quarter which is nearly breakeven and so excluding the comments you just made, a little revenue growth would be to a better profitability. But relative to the comments that you just made, are those costs enough that could offset that or is it really a function of just how much revenue growth we are talking about?

Timo Baker

I think it's a function of where the top line goes.

Bill Dezellem – Tieton Capital Management

All right. Thank you, both.

Michael Davin

You are welcome, Bill.

Operator

Our next question is coming from Bill Plovanic with Canaccord Genuity. Please state your question. Bill Plovanic, your line is now live.

Okay, we will move on to our next question from Paul Nouri with Noble Equity Funds. Please state your question.

Paul Nouri – Noble Equity Funds

The – this new Coolsculpting technology has gotten some media attention. Can you talk about it and how your product is competitive with it?

Michael Davin

I think – are you referring to the Zeltiq platform?

Paul Nouri – Noble Equity Funds

Yes.

Michael Davin

That's a – that's a non – recently, FDA cleared noninvasive approach to body contouring. We don't really have a competitive product to that. As you know, we use an invasive approach to removing unwanted fat and contouring the body with our Smartlipo platform. So, it's a very new product to the market, I think FDA cleared recently – maybe a month or so ago. I haven’t seen the technology out there, but they are using a cold approach to circumferentially reduce anatomical areas for body contouring. So, I don't have a lot of information on it at this point.

Paul Nouri – Noble Equity Funds

Okay, great.

Michael Davin

You are welcome.

Operator

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

Michael Davin

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

Operator

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

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