Cynosure's (CYNO) CEO Michael Davin on Q2 2014 Results - Earnings Call Transcript

Jul.29.14 | About: Cynosure, Inc. (CYNO)

Cynosure, Inc. (NASDAQ:CYNO)

Q2 2014 Results Earnings Conference Call

July 29, 2014, 09:00 AM ET

Executives

Scott Solomon – Vice President-Sharon Merrill Associates

Michael Davin – Chairman, Chief Executive Officer and President

Timothy Baker – Executive Vice President, Chief Operating Officer and Chief Financial Officer

Analysts

Richard Newitter - Leerink Partners

Matthew J. Dodds – Citigroup Global Markets Inc.

Difei Yang - RF Lafferty

Anthony Vendetti - Maxim Group LLC

Jim Sidoti - Sidoti & Company

Zack Ajzenman - Griffin Securities

Bill Dezellem - Titan Capital Management

Operator

Good day and welcome to Cynosure’s Second Quarter 2014 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 Scott Solomon, Vice President for Sharon Merrill Associates. Please go ahead sir.

Scott Solomon

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

Before we begin, please note that various remarks management makes on this conference call about forward expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including those discussed in Cynosure’s filings with the SEC.

In addition, any forward-looking statements represent the Company’s views as of today, July 29, 2014. These statements should not be relied upon as representing the Company’s views as of any subsequent date. While Cynosure may elect to update forward-looking statements at some point in the future, the Company specifically disclaims any obligation to do so.

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

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

With that, I’ll turn the call over to Michael Davin.

Michael Davin

Thank you, Scott and good morning, everyone. The $72.6 million in second quarter revenue marked a record high for our core business and on a GAAP basis, represented an increase of 45% from the same period last year.

On a sequential basis our business grew 17% from Q1 of this year. If we look at revenue as if we had own Palomar for the entire second quarter of 2013, total revenue improved 4% year over year reflecting gains and aesthetic laser sales both in and outside North America.

Keep in mind at Q2 2013 included approximately $5 million of revenue from Palomar, which we acquired on June 24, of last year.

In terms of revenue by region, North America accounted for 46% of the aesthetic laser product revenue. Because the acquisition makes a year-over-year comparison less meaningful it is more relevant to note that North American Laser Product revenue increased 28% sequentially from the first quarter of this year. While product sales outside of North America were sequentially up 14%.

Internationally, we were pleased of the contribution from both our agent and European direct subsidiaries as well as select third-party distributors. We continue to work and involve our international distribution organization to maximize our contribution and are pleased with our progress.

PicoSure, our flagship product for the removal of tattoos and benign pigmented lesions was a key contributor to the top line in the second quarter. In addition to continued strong results in North America, PicoSure also performed particularly well in Korea where it was improved for marketing earlier this year.

We have PicoSure's strong selling to our market leadership position. Our picosecond laser technology has rapidly become the first line standard of care for tattoo removal, a market that has increased 440% over the past decade according to IBISWorld.

We are further differentiating PicoSure through technology enhancement such as FOCUS, Lens Array and Boost adjustable pressure upgrade.

FOCUS microscopically concentrates the PicoSure pulse and small areas of tissue while boost magnifies the energy and shortens the pulse width. We believe that these enhancement position PicoSure to effectively treat additional high volume indications such as acne scarring, skin toning and skin rejuvenation.

As we announced last week, we have received clearance from the FDA that market PicoSure for the treatment of acne scars. This clearance represents a significant milestone in our strategy to pursue expanded indications that demonstrates the breath of this technology.

We are awaiting word from the FDA on our additional application to further expend PicoSure's marketing clearance to include the treatment of wrinkles.

Turning to our North American distribution channel, we exited the second quarter with a total of 90 sales reps and managers in North America compared with 85 at the end of Q1 and 76 at the end of 2013.

To provide adequate sales coverage for the combined Cynosure Palomar product line we plan to add additional reps throughout the balance of the year. Though I have mentioned on our last call, it's likely to take upward to six months until the new personnel is operating at full speed.

In Q2 we also finalized the successful integration of Palomar within our projected timeframe of one year. This was a significant accomplishment in just 12 months given the size and scale of the acquisition.

We're pleased with the integration and we were able to achieve the anticipated cost synergies within the forecasted range of $8 million to $10 million within the first year of ownership.

With the expansion of our Westford facility complete, all of our Massachusetts employees are now under one roof. Additionally, we have fully transitioned the Palomar product line to our contract manufacturing model, which we expect to result in greater operational and manufacturing efficiency, as we move through the second half of the year.

With our next flagship product scheduled for launch sometime in 2015, our core initiatives remains unchanged. Domestically, we are focused on broadening our reach through expanded indications and marketing programs and enhance North American sales force and technology innovations that enable our customers to offer their patients new aesthetic treatment options.

Another important development for our North American business is the recent launch of Unilever through its Iluminage Beauty joint venture, of the Skin Smoothing Laser.

The product which we co-develop with Unilever is now being marketed through a number of distribution channels. We expect to begin receiving royalty payments in the fourth quarter of this year.

On the international front, we continue to gain new regulatory clearances to expand our product footprint in key countries. During the quarter, we received more than a dozen international regulatory clearances for our work stations and disposable products.

Among these the Cellulaze Workstation was cleared in Taiwan, Cellulaze and RevLite SI were approved in Argentina and four products Apogee+, Elite+, Smartlipo Triplex and Cellulaze received clearance in Mexico.

We also continued to enhance our foreign direct sales channels. We recently opened our third sales office in China for example, giving us a direct presence in and around the major urban population centers at Beijing, Shanghai and Guangzhou.

In parallel with our organic growth initiatives, we also maintained an active pipeline of potential acquisition opportunities that will enable us to further enhance our market leadership.

In closing we are very pleased with our performance in Q2, especially given our ability to complete the Palomar integration on schedule.

With that, I'll turn the call over to Tim for his financial review.

Timothy Baker

Thanks Mike and good morning, everyone. As I go through the numbers, please keep in mind that the second quarter of 2014 fully incorporates the results of the Palomar acquisition, which closed on June 24, of last year.

Total revenues for the second quarter of 2014 were $72.6 million, an increase of 45% from $50.1 million for the same period of last year. Product revenue was up 39% to $59.6 million, which represented 82% of total revenue compared with $43 million or 86% of total revenue in the year ago period.

Looking at revenues on a combined basis as if we had owned Palomar for the full second quarter of last year, product revenue was up 4% in Q2 of 2014. By region, North American product revenue totaled $27.6 million or 46% of product revenue in the second quarter of this year, which would have represented a year-over-year increase of 3% had we owned Palomar for the full second quarter of 2013.

International product revenue was $32 million or 54% product revenue in Q2 of this year up 5% over the same period last year on a combined basis.

Our combined basis services and parts revenue was $11.6 million compared with $10.7 million in the second quarter of 2013 while royalty revenue was $1.4 million compared with $1.8 million in the second quarter of 2013.

Second quarter 2014 GAAP net income was $4.6 million or $0.20 per diluted share with an effective tax rate of 27%. On an adjusted basis excluding acquisition related costs and amortization expenses, net income for the second quarter was $7.1 million or $0.32 per diluted share compared with adjusted net income of $5.4 million or $0.31 per diluted share for the same period one year earlier.

Please see this morning's release for reconciliation of second quarter 2014 non-GAAP results to the most directly comparable GAAP results.

Gross margin on a GAAP basis for the second quarter was 56.1% compared with 55.5% for the same period in 2013. Gross margin on an adjusted basis excluding non-cash charges related to the amortizations of intangibles to 58% compared with 58.5% for the same period last year.

Excluding acquisition related costs and amortization expenses, operating expenses as a percentage of revenue were 43.8% compared with 43.3% in the second quarter of 2013. Adjusted operating margin for the second quarter of 2014 was 14.2% compared with 15.2% in the second quarter of last year.

Acquisition related expenses totaled $1.8 million or $0.08 per diluted share in the second quarter of 2014 on a gross basis. For Q2 of 2014, we incurred approximately $2.1 million or $0.09 per diluted share on a gross basis in non-cash charges associated with the amortization of intangibles compared with 380,000 or $0.02 per diluted share for the second quarter of 2013.

We expect to incur approximately $2.1 million per quarter for the remaining two quarter's of 2014 for the amortization of intangibles of which $1.4 million will be charged the cost of goods sold in each quarter.

Turning to the balance sheet, we ended the second quarter of 2014 with cash and investments of approximately $123 million and generated cash from operations of $6.8 million.

During the quarter, we repurchased approximately $9 million of common stock under our $35 million share repurchase program and had approximately $10.6 million remaining available to repurchase shares under the program at June 30, 2014.

Day sales outstanding were 60 days at the end of the second quarter compared with 58 days at the end of the first quarter.

Before we go to Q&A, I wanted to let you know that Mike and I will be presenting at the Canaccord Genuity's 34th Annual Growth Conference in Boston on Wednesday August 13th. Please contact Canaccord or Sharon Merrill Associates, if you would like to meet with us during the conference.

With that, we will be happy to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is coming from the line of Rich Newitter with Leerink Partners. Please proceed with your question.

Richard Newitter - Leerink Partners

Hi, thanks for taking the questions guys. Just, Tim or Mike, just wanted to see you put up a - I guess 4% pro forma growth rate, which is a very nice sequential step-up from last quarter in your core base business growth or pro forma growth.

Just, is this kind of - it seems like this is a level where you have potentially some catalyst for tailwinds in the second half of the year with sales reps kind of more meaningfully coming up the productivity curve, comps only stay stable or get even a touch better.

Can you comment on how we should think about that 4% growth rate with respect to maybe the full year outlook and just as a reference point, it looks like the consensus as you growing roughly at a mid-single digit growth rate. Do you feel comfortable kind of with where you are today that that's achievable?

Michael Davin

Hi, Rich, this is Michael. The first on the - as far as the industry growth rate, as you know on the first quarter we also meaning the peer group down business as it relates to industry overall. And we were pleased with the traction in the second quarter, which historically is our second strongest quarter to Q4 in the industry not Cynosure historically, just the industry historically.

I do believe especially because we saw some interruption in North America in Q1, good signs going into Q2 but still you know we believe there is some hesitation from North American physicians in their buying decisions. Not meaning they are not buying, they are just being more cautious about the process.

So I think we're probably looking at more of a single digit type growth market especially as we look at North America. As I mentioned, we had some real strong performance from our subsidiaries in particular in parts of Asia and also in parts of Europe so that's encouraging.

With the North America market the way it is, we have directed some initiatives towards the growth markets and that's the beauty of being a global company such as Asia and Europe where we are going to elevate or accelerate some plans to capitalize on the strength of those markets.

As far as the North American sales forces I had mentioned at the end of Q4 and Q1, we had hoped to be the north of a number than we actually were at that time. We were pleased with being at 90, but keep in mind the majority of the hiring of say 15 or so sales reps really has been in the last literally month of our six months and as mentioned it takes about six months those folks to come up to speed and become productive.

So we do believe we will see start to see them kick-in more in Q4 than in Q3. And as you know historically, Q3 the seasonality and it's our weakest quarter to Q1 and mainly seasonality coming out of Europe.

But I think overall we are very pleased with where we are from an infrastructure standpoint. We are also very pleased with having the majority of the heavy lifting of Palomar integration behind us.

And we do believe we have set the company up to be more consistent in terms of growth, but I do believe right now the market is probably sitting around that in the single digit and mid single digit growth opportunity.

Richard Newitter - Leerink Partners

Okay. That's definitely helpful. But maybe just a follow-on to that. It sounds like you have some company specific initiatives that may be should enable you to grow at least in line with the market possibly even slightly above or is that the right way to think about it or.

Michael Davin

Historically we've always grown greater than the market and our plan is certainly is to continue to do that. So, yes the initiatives that I mentioned we recently engaged in Q2 as I mentioned realizing the softness in North America although a much better performance in Q2 in North America against Q1.

But we were pretty proactive as it relates to markets that showed good strength in Q1 and really kind of doubling down in some efforts there as it relates to marketing efforts and distribution efforts to capitalize on the strengths of those markets that seem to be stronger currently than what the North American market is.

Richard Newitter - Leerink Partners

Got it. And then maybe just one follow-up and I'll jump back in on the gross margin this quarter came in a little bit late despite the sales upside, I would like to, Tim just hear a little bit about what might be going on in pricing or what contributed to the gross margin, step down last quarter.

And then also just with respect to kind of the margin outlook for the rest of the year, and your comments kind of about, let's just say a single digit or mid single digit growth outlook. What kind of margin expansion if any can we expect to see in the quarters ahead on a year-over-year basis?

Timothy Baker

Sure Rich. So obviously on the margin, we are a little down, half a point from last quarter for Q1. Some of that relates to product mix and geographic mix as we talked about in terms of direct distribution and third party distribution.

We did see some pricing pressure in the market. I wouldn't say a significant amount but clearly it's a competitive marketplace out there. So I think that had a little impact.

One thing Mike mentioned earlier is as we completed the Palomar integration, a big piece of that is the migration to our contract manufacturing.

So we're now manufacturing the Palomar product line, the consul piece of it down at our contract manufactures and that's fully integrated. We would expect to see that coming through in the second half of this year. We think there is some margin improvement opportunity there based on the cost reduction.

So I think, as Mike said we're kind of in a stable place in terms of the market and in our pricing. I think there is some opportunity for upside as North America contributes a higher percentage and also as we see some of these cost savings come through in the back half of the year.

Richard Newitter - Leerink Partners

Great and what drives the North America mix shift higher?

Timothy Baker

I think its traction from the additional sales and distribution improvements that Mike talked about.

Richard Newitter - Leerink Partners

Great. Thanks. I'll jump back in.

Operator

Thank you. The next question is coming from the line of Matthew Dodds with Citigroup. Please proceed with your question.

Matthew J. Dodds – Citigroup Global Markets Inc.

Good morning. Just a follow-up on the gross margin question. It did drop a lot sequentially from the most recent couple of quarters. So, prices some of it but did the contract manufacturing actually have a negative impact this quarter or is there something else?

Timothy Baker

No. Yeah. No negative. It's really mixed and some pricing in the marketplace.

Matthew J. Dodds – Citigroup Global Markets Inc.

Okay. And then just on the third quarter comments or the second back half comments. We should still expect a royalty payment going 3Q of around $5 million for the total revenue for the quarter, correct?

Timothy Baker

That's correct. We have the second half of the Tria settlement coming in $5.1 million, will be coming in September.

Matthew J. Dodds – Citigroup Global Markets Inc.

And then on international Mike, can you say how the distributors did this quarter after last quarter's unevenness. How did that they do kind of an aggregate in the second quarter?

Michael Davin

Yeah. So Matt we definitely saw improvement and I want to thank our distribution management for, as I said in Q1 we had a few particular distributor areas that were significantly half year-over-year.

And then speaking about initiatives, we immediately implemented some initiatives in terms of working with those distributors to get them back on the right trajectory and we did see improvement across the board in our third party distributor business.

I think last Q1 it was off about 18% and 19% year-over-year, actually 23% Tim tells me and I think we saw it off around 8% year-over-year in Q2. But overall sequentially it was up 22%.

So trending in the right direction and the good news is we see that momentum Matt carrying into the second half.

So once again speaking about the initiatives that now we put into our direct offices where we saw some good strength. We also had a very strong initiative plan to work with our distributors closely. Certainly, there was a number of those distributors, our Palomar distributors that were getting more acclimated to our way of driving the distributor business.

I think that’s behind us and now we're seeing good traction. The management has done a great job and I believe going into the second half of the year those distributors are going to continue to improve in the direction they've moved from Q1 to Q2 and I think that will continue as we go into Q3 and Q4 and into 2015.

Matthew J. Dodds – Citigroup Global Markets Inc.

You didn’t change any distributors around the quarter?

Michael Davin

We -- well we made some changes. One of the key changes we made was in the Middle East where we moved away from a series of small distributors and went with what we would call our flagship distributor that Cynosure had a very strong relationship with.

That was a great move. There was a transition period there and the Middle East was very strong for us as it relates to our distribution business. So there was a bit of a pause period as shifting away from the smaller distributors to the one large distributor, but we’re already seeing some excellent results with that move and we definitely expect that to carryover.

Otherwise Matt, we didn't make any additional distributor changes. Mainly we did was get closer to the distributors and kick off the Palomar ones, I'm working them to get them to better understand the way we do business and also to strengthen our support and resources to them to get them back on track.

Matthew J. Dodds – Citigroup Global Markets Inc.

Thanks Michael. Thanks Tim.

Michael Davin

You between, Matt.

Operator

Thank you. Our next question is coming from the line of Difei Yang with RF Lafferty. Please proceed with your question.

Difei Yang - RF Lafferty

Taking my question, so just a couple. Could you give us a little bit more color with regards to the business prospects in Asia as wells as in Latin America. Are they in line with the industry growth projections?

Michael Davin

Sure. Asia as you know, we're direct in Korea, we're direct in Japan and we're direct in China and as I just mentioned we just opened our third office in Gwangju, which we really believe completes the triangle of where we need to be with direct operations in China to aggressively pursue the higher concentration of population market opportunities.

That being said, China is our number one subsidiary right now as it relates to performance. And so adding that third office we also just recently brought on a high level manager for China to work alongside of our already great management team there. And so we’re making investments in China to capitalize on a market that's been very strong for us and we expect it to continue to be strong.

I also commented on Korea. Korea, we just received the PicoSure clearance. We had an excellent quarter as it relates to number one getting that technology into our key opinion leaders driving clinicals and all sets of nice revenue contributions and our office there has a done a great job in really putting that technology into the right hands.

And we expect to see continued excellent performance of PicoSure in that market and also we saw some nice activity with PicoSure in Japan. Our distributors there -- there were some areas of weakness and areas of strength, but overall Asia contributes about North of 20% of our revenue.

We expect that to continue and we do look at that area as a very important geography as to continue to add resources, additional feet on the street marketing efforts, clinical registration etcetera for the long term viability of driving that business.

South and Latin America on the other hand, we are not -- we're direct in Mexico and as I mentioned we just received four additional clearances, which are important for us to open up the market. As it relates to other opportunities in South and Latin America. It’s a key initiative for us to look at a more aggressive approach to penetrate markets like Brazil and Argentina, in particular Brazil where we have really worked for the distributor.

We have initiative in place there to go with a more direct operation there. I would say that that is an area definitely of strong focus for the management team to drive initiatives in place to capitalizing what is a very exciting ecstatic market. We just don’t have the price and stability we would like to have there, but we have initiatives in place to get us there.

Difei Yang - RF Lafferty

Thank you so much. And just a quick follow-up on the -- I think Michael you have talked about efficiency in the North American markets, sometimes are showing hesitations in getting expensive from equipments. Would you share with us what are some of the concerns?

Michael Davin

Yeah, it’s not about -- I don’t believe it’s about expensive equipment, as it is kind of the buying process that we’re going through. We did conduct a couple of surveys coming off of Q1.

So we could better understand the mindset of the physicians and keep in mind 99% of our business comes from the physician market and not at all are they saying we’re not buying capital equipment. I think they’re just being a little tentative right now or being a little conservative.

Remember they’re coming off the recent introduction of the Affordable Care Act. A lot of our noncore doctors, which is about 50% of our revenue, they’re seeing a lot of these changes as it relates to their core business and with that I think they’re being a little cautious about investing in their business till they better understand how these changes are going to affect their overall revenues coming to their practice.

We do believe and we have launched the noncore initiative to really educate the doctors that -- we're not really part of this. Our businesses are not part of the capitation or the Affordable Care Act in terms of controlling the fees they receive from insurance paid medicine and that we can actually be more of a life liner stimulus to grow their revenue.

That initiative has been recently launched and seems to doing well but I think overall and -- we see these types of cycles -- we saw some more cycles obviously coming off the ’09 recession.

We’re not overly concerned about it. We do think that North America will be experiencing this kind of philosophy of the doctors right now in their buying cycle through the course of the year but we do believe initiatives that we’ll put in place will stimulate them to understand why it makes sense to bring our technology into their practice to drive cash bearing revenue procedures that are not going to be capitated by insurance medicine.

So the good news is we have other markets that are growing so we’re going to really focus on where we can capitalize and driving our growth. North America’s a very important market to us. We’re going to continue expand the distribution as I mentioned. We’re very pleased to be at 90 strong with managers. We’re going to continue to expand that and keep making investments in the very important North American markets.

Difei Yang - RF Lafferty

Thank you so much. That’s very helpful.

Michael Davin

Sure.

Operator

Thank you. The next question is coming from the line of Anthony Vendetti with Maxim Group. Please proceed with your question.

Anthony Vendetti - Maxim Group LLC

Thanks. Just a follow-up on the sales expansion. Michael, you said you’re at 90 now up from 85 in the first quarter and you intend to continue to expand that. Is there a goal by the end of the year in terms of the number of sales people you want to have in North America?

Michael Davin

Anthony, remember that’s 90 with managers and I think right now we have about six managers. So that means there’s 84 feet on the street and we recently did increase our Management team taking two of our very strong sales reps and moving them into management.

Also there is that whole berthing process there but those gentlemen have come along and up to speed very well and we’re really seeing some nice traction now that they’ve gotten their two legs so to speak to becoming management.

I think we’re definitely somewhere I think in that mid-90s is probably where we’ll exit the year and as you know Anthony we’ve really looked to our sales management team to guide us in what they think the right size of the distribution should be.

And so I think we probably could exit the year somewhere in that mid-90 range and then we'll certainly update everyone at the end of Q4 if we’re going to continue that expansion and also remember we’re continuing to expand our distribution O-U.S. obviously with the addition of the third office in China as well.

So we’re adding feet on the street globally but North America probably will exit the year right around the mid-nineties with reps and managers.

Anthony Vendetti - Maxim Group LLC

And you said Michael China is now the number one country that you had in Japan in terms of direct sales?

Michael Davin

Yes. China is our number one subsidiary in the world right now, that’s correct, and opening the third office is very important to its Gwangju really completes that triangle as I mentioned of the highly concentrated urban areas where we want to direct our efforts to drive business.

Anthony Vendetti - Maxim Group LLC

Okay. And then on the product pricing pressure, Tim you mentioned there was some mild pricing pressure. Specifically can you talk about in what product categories or what products because obviously you’ve some new products out there that probably are not experiencing the pricing pressure.

Timothy Baker

Yeah, that’s right. Obviously, the products that we’ve kind of a sole offering in the marketplace, obviously PicoSure being one of those. It’s a different pricing model because of the lack of competition and obviously are out there with the latest technology.

Some of them are matured products in mature markets like hair removal, skin rejuvenation. There are obviously competitions in marketplace and pricing is a factor. But it is -- it is definitely a factor, but it’s not a significant factor. I think getting back to the margin question, it really is more about the mix and really about North America’s contribution to our total but this quarter was about 46%.

If you look back at Q3 and Q4 of last year that was more in the mid-50 percentage in terms of total contribution of revenue. So as we’ve always said, we do get a higher margin out of our direct distribution in North America. So I think that’s really again the driver.

Anthony Vendetti - Maxim Group LLC

Okay, and then lastly Mike, if you can just give us an update on the progress of the laser system you’re developing for non-invasive fat removal.

Michael Davin

Sure Anthony. So as we mentioned we’re on a parallel path of driving a clinical process that will give us the FDA clearance that we want for this technology and that is a treatment of non-invasive fat. We think that is very important.

As I also mentioned a while back we’ve met with the FDA. We’ve gone through our protocol. We’re now fully engaged in our clinical sites.

We have two clinical sites, one’s a plastic surgeon, one’s a dermatologist and we’re also driving internal clinicals to meet the requirements of the submission and we do plan on submitting to the FDA sometime in the first quarter. So that process is going extremely well. As it relates to the innovation side, the other part of the parallel path here going also very well.

The initiative is we’re fully engaged on the development of this technology and the process is going very well. Our team is doing a great job and we’re very excited to have this technology at the market as we mentioned sometime in 2015 and we do believe it will be typical of Cynosure technology introduction a game changing flagship technology for the treatment of non-invasive fat.

Anthony Vendetti - Maxim Group LLC

Okay, great. Thanks guys.

Michael Davin

You bet. Thanks Anthony.

Operator

Thank you. Then next question is coming from the line of Jim Sidoti with Sidoti & Company. Please proceed with your question.

Jim Sidoti - Sidoti & Company

Good morning, can you hear me?

Timothy Baker

Sure.

Michael Davin

How are you, Jim.

Jim Sidoti - Sidoti & Company

Good. Good. Can you -- I am not sure whether you said it or not, but can you breakout what the impact was strictly from integration expenses and not the amortization?

Michael Davin

Yeah so $1.8 million in the quarter Jim for integration expenses.

Jim Sidoti - Sidoti & Company

Okay and then what was the amortization fees?

Michael Davin

Total amortization was $2 million.

Jim Sidoti - Sidoti & Company

$2 million. Okay. And on the sales force, you said you have about 85 people on the street now?

Michael Davin

Yeah so Jim we have 90 total with managers. We have about six managers, so 84 feet on the street of which 15 or so have been hired in the last six months.

Jim Sidoti - Sidoti & Company

Okay. And you still want to get to 90 by the end of the year. Is that right?

Michael Davin

Yeah, we -- with managers we see somewhere in that mid-90 range by the end of the year.

Jim Sidoti - Sidoti & Company

Okay. All right and then there’s obviously going to be another competitor for PicoSure or Pico system in the market by the end of the year or early next year. How does that change your strategy or does it?

Michael Davin

Actually it doesn’t change our strategy. We fully anticipated that we would see other Pico second technology competition coming to the market and as you know and I was talking to the engineering team, it’s not about when they come, it’s about where we are when they do come/

And we’re very, very pleased 18 months into the launch of our Pico second technology not only in how great the technology is doing, but other advancements that we’ve made and probably the most telling is we have a success rate with this technology of greater than 90% with our install base.

We continue to get registrations most recently in Taiwan and Korea. Companies I mentioned right now getting CE mark. We know that the FDA process is a lengthy one. We continue to advance the technology as it relate to enhancements.

We just launched Boost, which allows our physicians to get a shorter pulse width and that’s very important and higher energies. We also introduced the FOCUS Lens Array, which allows them now to deliver this unique technology in a way in which they can reduce [spot lifts] (ph) of energy to address things such as the acne scarring clearance that we just received last week, skin rejuvenation, discoloration. Also the team has just done a great job in setting up an infrastructure.

This technology is very unique. You need to have the right service organization. You need to have the right clinical investment. The American Society For Laser Medicine And Surgery in April, we had ten papers presented just on Pico second technology, was a significant investments that we made back in 2013 to be on the podium in 2014 at ASLMS and we have -- our people are trained.

We have several KOLs probably north of 30 KOLs, now there they have the technology and continue to be enamored with what the technology does in terms of driving other indications.

So Jim as you know historically Cynosure’s about the first mover. We think we have an excellent 18-month first mover position. We’re going to continue to keep our head down. We are very pleased with what we’ve done, but more importantly we’re very excited about where we’re going with this technology.

There’ll be additional registrations and clearances being announced in the coming quarters as well as additional advancements to the technology and we welcome the competition because it validates that we know that this technology will be game changing coming to our industry and overall we're thrilled with where we are and more importantly where we're going.

Jim Sidoti - Sidoti & Company

All right. And then I know you said there is still uncertainly in the U.S. market with some your docs but I think you did put up a 17% quarter-over-quarter growth for the June quarter. Where did the strength come from? Was it mostly international or something is getting better, can you let us know what it is?

Michael Davin

I think we saw U.S. sequentially increase by 28%. I think we said international increased by 14%. So everywhere we saw and keep in mind once again Jim, Q2 historically is our second strongest quarter.

But I do also believe there has been an overhang and a drag on the overall company with completing the Palomar integration whether its internal or external. A lot of that has been smoothed out now. North America, remember still organically grew 3% and international grew 5%. We're pleased with that, certainly a much better performance of Q1.

I just think it's a combination of things coming together. Pico is certainly gaining momentum, working with our distributors especially on the Palomar side they are getting used to once again the kind of our culture driving the distributor business versus what they were used to.

So just a lot of different I guess data points some coming off the integration, some of it being Q2, some of it coming off of a challenging Q1. I think in North America doctors might be starting -- be starting to get a little more comfortable on the new universe they're living in as it relates to managed care, as it relates to just overall feeling of their business where it is and where it's going.

So, can’t point to one thing and probably just a lot of different things that enhance Q2 over Q1.

Jim Sidoti - Sidoti & Company

All right, but it sounds like, maybe there was some distraction during because of the integration and you definitely be on that at this point.

Michael Davin

Well there always is distraction as you know. It's the most significant integration we've ever done and just completing its first year anniversary, a few weeks ago. I will tell you, we're in a much better place now than we were obviously when it started and then certainly our integrations efforts going on Phase 2 integration, but yes, as always integrations do have a drag on an organization as you bring the two companies together.

Jim Sidoti - Sidoti & Company

Okay. All right, thank you.

Michael Davin

You're welcome, Jim.

Operator

(Operator instructions) Our next question is coming from the line of Zack Ajzenman with Griffin Securities. Please proceed with your question.

Zack Ajzenman - Griffin Securities

Thanks. Good morning. This may have been touched on earlier in the call, but the cautiousness that has been exhibited across the U.S. physician environment is more prevalent in the core immunity or noncore immunity?

Michael Davin

That’s a great question. I think our survey will suggest it's across both disciples of core or noncore.

Zack Ajzenman - Griffin Securities

Okay. And moving to the recently hired sales reps are they focused on any particular areas of the product portfolio.

Michael Davin

So we historically and still do today have had kind of a bifurcated sales force as it relates to whether we have juniors reps or we have reps dedicated to the minimally invasive product line, full line reps, so we still have that diversification in our distribution and we will continue to have that as our model. So the reps that we've hired over the past six months are variety -- they are a variety of those different reps in the different disciplines I mentioned.

So some are focused on the full line, some are focused on more the Palomar lines, some are focused on the minimally invasive line and then we have also have reps that are just out there driving lead generations. So variety of those types of reps were hired over the last six months.

Zack Ajzenman - Griffin Securities

Okay. And on your acquisition type line comments what areas in your portfolio would you look to serve or enhance with any potential acquisition.

Michael Davin

With any acquisition we're really looking at -- we're looking at opportunities that will either drive of course drive new opportunities for us for revenue growth and profit growth and in categories that we may not be in.

As you know we've decided to go on our own organically to drive a noninvasive fat platform, which we'll launch sometime next year. But there are other opportunities for us where we have a leadership position and we are looking -- we make an acquisition to take on technology to really makes us either number one or number two in the market.

So there are opportunities out there. Certainly we are going to disclose what those are, but we are very active in M&A as it relates to continuing to use the model that brings in technology that we currently don’t have available today allows us to grow our top and our bottom line to bring in the types of margins we’re used to just drive our overall shareholder value.

Zack Ajzenman - Griffin Securities

Okay and one last question. Within service and parts, would you care to give any additional color as to how the consumables portion did in the quarter?

Timothy Baker

Yeah I think -- it's obviously in that number, we do continue to see improvement in our disposables and we clearly would like that number to be a bigger number but we are seeing some nice traction on our disposable fibers with our minimally invasive product line.

We’re started to see some now disposable revenue from our PicoSure on our FOCUS Lens Array. So as we continue to move more and more products with the disposable component, that number is continuing to grow but obviously as a percentage of a much larger number based on the capital equipment it’s still a small percentage of our business.

But we are seeing good traction. We are pleased with what we are seeing especially in the disposal fibers on the minimally invasive products.

Zack Ajzenman - Griffin Securities

Thanks a lot. Good luck.

Michael Davin

You're welcome.

Operator

Thank you. The next question is coming from the line of [Andy Shopigo] (ph) a Private Investor. Please proceed with your question.

Unidentified Analyst

Thank you and good morning.

Timothy Baker

Good morning Andy.

Unidentified Analyst

Could of quick questions for you. How many shares did you actually repurchase in 2Q?

Timothy Baker

416,000.

Unidentified Analyst

About 416,000 and that would mean that you’ve repurchased about 1.3 million aggregate in the programs that you’ve announced.

Timothy Baker

Yeah 1.395, almost 1.4 million.

Unidentified Analyst

Okay good, and secondly, how will the Tria one-time royalty payment of $5 million plus be tax affected. Can you give us any kind of guidance on what that will look like on a net basis?

Timothy Baker

It will come just right through on our royalty line as we had it and the first time that it came through, $501 million at a gross margin of about $3.9 million and will flow right to the bottom line. Our effective tax rate right now is about 28% -- 27% on a GAAP basis. So it will flow through just as ordinary income.

Unidentified Analyst

Yeah and the reason I am asking that is because you do have deferred tax assets and I am wondering to what extent you’re anticipating any further recovery of some of those assets in the current year.

Timothy Baker

Yeah, I think the big question that we’ll be addressing at the end of the year will be our valuation allowance. Right now we’ve about $20 million in deferred tax assets, net deferred tax assets with our full allowance against that. So the analysis we're doing at the end of the year will be whether or not to remove that allowance on the deferred tax assets.

Unidentified Analyst

Are you limited in the amount that you can realize at any time?

Timothy Baker

Yes, there’s about a $3.9 million limit on taxable income that we -- that basically limits us each year on our NOL.

Unidentified Analyst

Okay and lastly I noticed that LN, which holds about 4% of your stock currently did sell or announce owing 1.1 million shares in March. Have you had any discussions with them about doing a direct repurchase of any shares they may wish to sell?

Michael Davin

No. No Andy we haven’t.

Unidentified Analyst

Okay. Do you have any insight into what their plans are regarding their current holdings?

Michael Davin

No we don’t.

Unidentified Analyst

Okay. Thank you very much and I am glad to see the progress you’ve made in the quarter. Oh! One last thing, to what extent are there any additional synergies left to be realized, that you haven’t already accomplished in the Palomar integration?

Timothy Baker

Yeah, I think that we've seen the synergies come through the P&L. Andy, I think that the thing is our there still to be realized is the operation efficiencies that we’ll see in the subcontracting.

Unidentified Analyst

Okay. Thank you very much.

Michael Davin

Thanks Andy.

Operator

Thank you. Our next question is coming from the line of Bill Dezellem with Titan Capital Management. Please proceed with your question.

Bill Dezellem - Titan Capital Management

Thank you. Relative to your PicoSure and the new disposable aspect for acne, would you discuss that please and how significant you would anticipate that potentially to be?

Michael Davin

Yeah, hey Bill, its Michael here. We did launch FOCUS in October of last year and as Tim mentioned we’re starting to see some disposable revenues come through. When you buy the PicoSure and pretty much all of our customers are buying it now with a FOCUS delivery system, you get kind of a starter kit. I believe it’s of three tips.

After the starter tip, the tips are $500 a piece. Pending on how the doctors use the delivery system, they can treat anywhere say from 8 to 10 patients, although we are seeing doctors now taking this delivery system and utilizing it in other anatomical areas versus just the face.

With the acne scarring clearance now, first of all that’s a major regulatory clearance because the FDA has now acknowledged that the FOCUS Lens Array is a safe delivery system and realizing once again the Pico second technology is unique. So we keep driving kind of these unprecedented clearances and registrations through agencies that are really -- just really becoming familiar with Pico second technology.

So with that being said, getting the acne clearance we do believe is now going to allow us to continue to get other clearances maybe in a more timely manner, because we have been able to demonstrate the safety and efficacy of the FOCUS Lens Array. So its early, the product was just launched. This clearance now broadens the use of the delivery system. I know our customers are very excited about it. Our sales force is very excited about it. We’ve just announced it on Thursday of last week.

As I mentioned we also are hopeful in our submission on the treatment of wrinkles, which certainly would incorporate the FOCUS Lens Array as well, another high volume indication. So as we keep adding indications that encompass or incorporate FOCUS, we believe that will not only drive the excitement of the technology but certainly drive the revenues and we’ll keep our shareholders and investors informed in the coming quarters now that we -- the FOCUS is out and available to our customers.

It’s also now available internationally as well. We really didn’t launch it internationally until the beginning of this year.

Bill Dezellem - Titan Capital Management

Thank you, Michael. Did I understand you to say that FOCUS actually was introduced last fall and so it has been available to physicians prior to the regulatory approval on Thursday of last week?

Michael Davin

That’s correct and physicians were primarily using it for the treatment of pigment, which we had FDA clearance on, benign pigmented lesions and also tattoos back when we first had the product approved.

Bill Dezellem - Titan Capital Management

Understood. Thank you.

Michael Davin

Now the acne scarring opens up another indication to use the FOCUS technology.

Bill Dezellem - Titan Capital Management

Great. Thank you again.

Michael Davin

Sure.

Operator

Thank you. Our next question is a follow-up coming from the line of Richard Newitter with Leerink Partners LLC. Please proceed with your question.

Richard Newitter – Leerink Partners LLC

All right. Thanks for the follow-up. I’ll keep it quick. Just Michael you touched upon acquisitions and the comments that you put in your press release. Anything you can say about the size of the potential kind of things you might do? You said more technology add-ons. Is that to assume nothing as transformational as something like a Palomar type thing on the horizon, correct?

Michael Davin

Yeah Richard and for obvious reasons I appreciate the question. We’re really not going to comment on our strategy as it relates to M&A.

I think the important thing for our shareholders to know is that we’re going to continue to grow our organization not only through strong investments in research and development, but use of strength of our balance sheet to acquire exciting opportunities for the company. So it’s more of a stay-tune, but the initiative is still in full play as it relates to the acquisition mode of our strategy and then of course heavy investments in research and development for organic technology introductions.

Richard Newitter – Leerink Partners LLC

Okay. Thanks.

Michael Davin

You bet.

Operator

Thank you. Ladies and gentlemen, that is all the time that we have questions for today. I would now like to turn the floor back over to Mr. Davin for concluding comments.

Michael Davin

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

Operator

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

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