ZELTIQ Aesthetics' (ZLTQ) CEO Mark Foley On Q2 2014 Results - Earnings Call Transcript

Jul.29.14 | About: ZELTIQ Aesthetics, (ZLTQ)

ZELTIQ Aesthetics, Inc. (NASDAQ:ZLTQ)

Q2 2014 Earnings Conference Call

July 29, 2014 4:30 a.m. ET


Nick Laudico - Senior VP & Group Leader of Medical Technology, The Ruth Group, Inc.

Mark Foley - President & CEO

Patrick Williams - SVP & CFO


Margaret Kaczor - William Blair

Bill Plovanic - Canaccord

Rich Newitter - Leerink

Jon Block - Stifel

Anthony Vendetti - Maxim Group


Good day, ladies and gentlemen, and welcome to the ZELTIQ'S Second Quarter 2014 Earnings Conference Call. (Operator Instructions)

I'll now like to turn the conference over to Nick Laudico with The Ruth Group. Sir, you may begin.

Nick Laudico

Thanks, operator. Welcome to ZELTIQ'S second quarter 2014 earnings conference call. ZELTIQ'S senior management on the call today will be Mark Foley, President and Chief Executive Officer; and Patrick Williams, Senior Vice President and Chief Financial Officer.

Our discussion today, including the Q&A session will include forward-looking statements reflecting management's current forecasts of certain aspects of the company's future business, including its guidance for 2014. Forward-looking statements are denoted by such words as will, would, believe, should, expect, outlook, estimate, plan, goal, anticipate, project, potential, forecast, and similar expressions that look towards future events or performance.

Forward-looking statements are based on current information that is, by its nature, dynamic and subject to rapid and even abrupt changes. Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied in our statements.

Such risks and uncertainties are discussed in today's press release and can also be found in the caption "Risk Factors" in the company's filings with the Securities and Exchange Commission, including the latest quarterly filing on form 10-Q filed with the Securities and Exchange Commission on April 30, 2014.

This conference call is the property of ZELTIQ Aesthetics, and any recording or rebroadcast of this conference call is expressly prohibited without the written consent of ZELTIQ Aesthetics. After management's prepared comments, there will be a question-and-answer session.

With that, I'd like to turn the call over to Mark.

Mark Foley

Thanks, Nick. Good afternoon everyone, and thank you for joining today's conference call. On today's call, I'll provide you with an update on our performance, discuss the progress we're making on our growth initiatives, and review the significant momentum we're experiencing in the market. I'll then turn the call over to our CFO, Patrick Williams, who will provide a more detailed financial overview and update to our full year 2014 guidance.

Q2 of 2014 was a landmark quarter for the company as we generated profit for the first time, increased our account utilization, reaped the benefit from our sales and marketing investments and had a very successful new product launch in CoolSmooth.

We're extremely pleased with our operational and financial performance, and believe the second quarter further solidifies that we have the right technology, people and growth strategy to further build on our clear leadership position in the non-invasive body sculpting market.

There are several important takeaways from our second quarter results, which are important not only in terms of highlighting what drove our results, but also in terms of understanding the true long-term potential for ZELTIQ and the sustainability of our growth and business model.

Let me touch on these three key takeaways. First, sales and marketing ROI; the investments we made in our global sales force and marketing programs during the first quarter continue to produce returns in the form of enhanced productivity and record quarterly revenue.

Second, strong financial profile; our outstanding financial performance resulted from a balanced mix of strong new system placements, growth in our consumable utilization and the launch of a new applicator, CoolSmooth. Additionally, our leverageable infrastructure enabled us to translate a significant portion of our revenue overperformance, which was highlighted by our positive EBITDA financial results.

Third, delivery on new product initiatives; the importance of new product introductions was demonstrated by the rapid adoption of CoolSmooth and it's ability to generate meaningful add-on applicator revenue and expand the areas that we treat. We continue to make measurable progress on our R&D initiatives to further leverage our innovative and proprietary-controlled cooling technology with a clear path to new product launches, enhanced outcomes, and progress towards delivering new therapeutic applications.

Let me now provide you with a summary of our outstanding financial performance. Our second quarter success was driven by increasing CoolSculpting momentum and awareness. It can also be attributed to the sales and marketing investments we made in the first quarter, a strong tradeshow presence and robust customer adoption of our newest applicator, CoolSmooth.

We realized record quarterly revenue of over $47 million or nearly 80% year-over-year growth along with a record quarter for consumable revenue of nearly $22 million over 60% year-over-year growth.

At the end of the second quarter, our worldwide install-base grew to nearly 2600 systems across approximately 2200 accounts. We were pleased with the mix of our revenue as both system placements and consumable revenue were up significantly on a year-over-year basis.

In North America, our year-over-year account utilization as measured by sell-in revenue increased by nearly 15%, and we saw similar increase across our global account base.

Upon review of data from our CoolConnect point-of-sale system which measures actual or sell-through utilization, we were able to verify that our growth in North American utilization resulted from a combination of increasing usage in approved body part areas, along with an expansion of treatment areas enabled by CoolSmooth and our thigh clearance.

Of note, our CoolConnect data suggested that our actual sell-through utilization grew at a greater rate than what is reflected in our sell-in revenue.

As a remainder, we have consistently stated that there is seasonality to our business and that maintaining utilization on a year-over-year basis is not only the basis for how we formulate our guidance, but also unprecedented in our industry.

Q2 marks the fifth straight quarter of showing constant or increasing year-over-year account sell-in utilization in North America, and more importantly marks the third straight quarter of low-teens year-over-year growth in our North American sell-in revenue utilization. This is an encouraging positive trend as we're seeing that the programs and investments we've put into place are having a direct impact on our results.

Based on the growing momentum we're experiencing in the marketplace and the strength of our results, we're significantly raising full year revenue guidance to between $160 million to $165 million, representing year-over-year growth of between 43% and 48%.

Our Q2 results position us as a $200 million revenue run rate company. With 47% organic growth last year and greater than 40% expected organic growth this year, combined with strong financial translation in our business model and a large underpenetrated market opportunity, we're increasingly encouraged with our ability to offer an attractive growth profile relative to our med-tech peers.

In addition to our outstanding revenue performance, we reported strong profitability results with an adjusted EBITDA margin of positive 12% and we were net income positive for the first time in the company's history, reporting GAAP earnings per share of $0.07.

Consistent with prior guidance, we plan to generate significant positive cash flow in the second half of 2014, and also expect to be positive on an adjusted EBITDA basis. Due to the seasonality associated with our business and the aesthetic industry and the strength of our CoolSmooth applicator sales in Q2, where we likely pulled forward some of our Q3 add-on applicator revenue, we expect Q3 to be down when compared to Q2. Therefore, we'd expect most of the positive financial contribution in the back half of 2014 to come from our Q4 performance.

Overall, we're increasingly confident about the long-term direction of our business after having produced six straight quarters of revenue outperformance, and believe that the maturity of the organization as a whole has provided us with increased visibility into the direction of our longer term growth trajectory and corresponding operating leverage.

Now, let me transition back to the three key takeaways I mentioned at the beginning of today's call, and provide more context as to how they relate to our business going forward. Sales and marketing ROI; our investments in sales and marketing continue to produce strong returns. At the beginning of the first quarter, we decided to make investments in our sales and marketing infrastructure to support not only the full year, but also to be able to support higher revenue performance. These investments were primarily related to the growth of our global sales force, expansion of our training initiatives and new marketing programs.

In North America, we grew the number of account sales managers or ASMs and restructured our North American geography by expanding to a fifth region along with increasing our sales management infrastructure. We also nearly doubled our practice development managers sales force or PDMs to support the increased number of systems we have placed into the market, and to ensure that we were able to provide the desired level of support to each of our customers.

On the international front, we have expanded both our direct and indirect sales force with an increased emphasis on in-country practice development managers. These in-country PDM additions have proven to be effective as they rollout similar sales and marketing programs that have proven to be successful in North America.

Our global sales and marketing investments have proven to be prudent based on our year-to-date results, and give us increased confidence that we can deliver on our revised full year guidance.

Also in the first quarter, we proactively built out our inventory in anticipation of strong demand for both CoolSmooth and new system placements. While this led to short-term cash utilization and an increase in our inventory balance, this has proven to be the right decision as we were able to support both higher CoolSmooth demand and strong same-store system sales in North America, where 25% of systems sold went to either existing accounts or accounts that purchased more than one system.

This brings our overall North American multi-system account base to 18% of our install-base, and is an increasingly positive trend since multi-system accounts consistently performed at utilization level that is 3X or single account or single system accounts.

Additionally, we made investments to ensure a highly visible and productive spring trade show season. Our Key Opinion Leaders or KOL participated in several podium presentation and evening events highlighting the clinical efficacy and overwhelming scientific literature behind our technology. Through our market meeting training programs like CoolSculpting University and our treatment to transformation clinical protocol, we're better able to deliver the wow results patients are looking for on a more consistent basis.

CoolSculpting University has become an increasingly important tool in the establishment of new CoolSculpting practices and enhancement of existing accounts. We've added additional resources at CSU due to very strong demand and are evaluating plans to expand our training capabilities both domestically and internationally. As we further evaluate the initial data we are receiving from CoolConnect we see strong evidence of a dramatic increase in utilization that accounted and participated in a CSU versus those that have not.

CSU attendees are averaging over 50% higher utilization as measured by CoolConnect. In addition to our investments in the sales force and training, we made a number of marketing investments designed to increase awareness and enhance patient conversion. Through our new branding campaign "Fear No Mirror," best practices playbook titled Five Steps to Success, a roadmap to $200,000. Investment and position based microsites, update to our corporate Web site along with a variety of trade, PR and social media initiatives, we are pleased with measurable impact that these initiatives are having on our utilization and patient awareness.

Based on greater visibility into the sales and marketing initiatives that are having an impact, we anticipate that we will again front end load our sales and marketing investments at the beginning of 2015 similar to what we did in Q1 of 2014. Following this we would expect to leverage these initiatives throughout the balance of the year. These investments will allow us to keep pace with our system placement goals, maintain and possibly grow our account utilization and ensure that we reach our long-term growth objectives. Patrick will discuss our 2014 and long-term financial guidance in more detail later on the call.

Strong financial profile, a financial profile is stronger than it has ever been with a bifurcated global sales force that is productive and well trained, we delivered robust growth on both the system and consumable sides of our business and experienced healthy growth in both our North American and international markets. We continue to see a large market opportunity for system placements and believe that we can sustain steady system placements for the next several years, perhaps more important, patient opportunity remains exceptionally large and under penetrated as we've only treated a small fraction of the 22 million U.S. patients that have indicated an interest in CoolSculpting.

Additionally, we are encouraged by the ability to grow our high margin consumable business as a percent of revenue and believe that our financial model provides for healthy translation for the bottom line as we continue to grow our top line.

Lastly, based on the strength of our North America business we believe that there is a significant international opportunity that we have yet to capitalize on.

Delivery on new product initiative, launches of new products like CoolSmooth are important events for the company as they enhance our competitive positioning, enable more areas of the body to be treated, drive incremental revenue, provide a source of excitement and means of reengagement with both new and existing customers and expand our overall market opportunity.

CoolSmooth significantly outperformed our expectations during the second quarter allowing us to achieve our full year target penetration of 50% of existing accounts in just its first quarter of launch. In the quarter we sold nearly 800 CoolSmooth applicators globally to our existing customers. We believe that the increase of second system sales in the U.S. that I previously mentioned was driven to some degree by CoolSmooth confirming our belief that the two hour treatment times associated with CoolSmooth would likely cause some practices to purchase the second system.

CoolSmooth reveal that our growth in North American sell-through utilization resulted from a combination of increasing usage in existing body part areas along with an expansion of treatment areas enabled by CoolSmooth in our body clearance. We remain encouraged by the early adoption of CoolSmooth and feel that this new platform provides us with greater flexibility as we look to expand upon our core technology.

On the R&D front we have several exciting initiatives focused on new products as well as the enhancement of CoolSculpting outcomes and the patient and physician customer experience. Recently we received IDE approval from the FDA to begin a clinical trial focused on the treatment of the submentum with a new applicator.

We are hopeful that we will be able to launch a new product that addresses the submentum some time in 2015. As our customer gain more experience with CoolSculpting, use the technology in new ways and become more proficient and efficient in delivering successful outcomes, we e leveraging this experience to identify new ways to improve the efficacy, consistency and patient experience.

Additionally based on early clinical experience and anecdotal findings, we continue to evaluate new market opportunities such as skin tightening, cellulite reduction and acme treatment where we believe that targeted cooling may offer significant advantages over conventional therapies.

I'll now turn the call over to Patrick for a detailed financial review.

Patrick Williams

Thanks, Mark. Before I begin reviewing our financial results, I'd like to remind everyone that our supplemental financial information will provide further detail and historical backup for your reference is posted under the investor relation section of our Web site.

Revenue for Q2 '14 was $47.1 million, up 79% from 26.3 million in Q2 '13. North America revenue grew 75% year-over-year accounting for 37.1 million or approximately 79% of revenue in Q2 '14 versus 80% of revenue in Q2 '13. We saw another strong quarter in terms of growth in our international markets which accounted for $10 million or 92% year-over-year growth.

Q2 '14 revenue is our highest ever and comes after a very strong finish to Q1 '14. We mentioned in our Q1 '14 call that we began shipping CoolSmooth in April following strong demand at the initial launch. We did not record any CoolSmooth revenue in Q1 that we pre-sold approximately 400 applicators. Q2 '14 marks the first full quarter of CoolSmooth revenue and validate the initial demand and its status of the revolutionary product.

As Mark mentioned, we basically achieved our prior full year CoolSmooth expectations in the second quarter alone and have contemplated this in our go-forward guidance position.

Worldwide system revenue in Q2 '14 was 25.4 million, an increase of 96% compared to 13 million in Q2 '13. Add on applicator revenue consisting primarily of CoolSmooth in Q2 '14 was $6.1 million compared to add on applicator revenue of 1.6 million in Q2 '13. We expect CoolSmooth add on applicator sales to be materially down in Q3 '14 due to the large number of applicators that we already sold in Q2.

As a reminder, any add on applicator revenue is included in our system revenue line, backing up this add on applicator revenue provide a true ASP for our systems which is up in both North America and international on a year-over-year basis due to the increases in our list price resulting from the addition of CoolSmooth as the fifth applicator in a new system bundle.

As well, we continue to see very strong pricing in both our North America and international markets which we believe confirms the premium value assigned to our CoolSculpting offering in the marketplace.

Consumable revenue in the quarter was 21.7 million, an increase of 62% compared to 13.4 million in Q2 '13. Consumable revenue as a percentage of total revenue is approximately 46% compared to 51% in Q2 '13. The lower contribution of consumable revenue can be attributed to the higher contribution of add on CoolSmooth applicator revenue which shows up in our system revenue line. But when backed out, it resulted in approximately 53% consumable revenue contribution for the quarter.

As a reminder from our Q1 '14 earnings call and going forward, we will only report revenue generating cycles. Total revenue cycles shipped in the quarter were 166,116, a 63% increase year-over-year. International comprised 26% of revenue cycles shipped in the quarter versus 29% in Q2 '13.

We shipped 208 systems worldwide during the quarter, an increase of 53% from Q2 '13 and we shipped 145 systems in North America were 32% year-over-year growth and 63 systems internationally or 142% year-over-year growth marking the second straight quarter of over 100% year-over-year international growth. This brings our worldwide install base to 2,562 units, a 48% increase compared to Q2 '13.

We added 107 new accounts in North America, up 30% year-over-year; and 63 internationally, up 142% year-over-year. We continue to assume a one system to one account ratio for international system sale.

North America revenue sale and utilization by account per day was 1.43 for Q2 '14 compared to 1.25 for Q2 '13, an increase of approximately 14% year-over-year. You can reference our supplemental financial information for this graph.

As a reminder, we are consistently stated that there is revenue selling seasonality to our business, and that maintaining utilization on a year-over-year basis is how we formulated our guidance. Because of the introduction of CoolSmooth and its unique cycle card, we wanted to provide some more insight into its contribution in the quarter.

CoolSmooth cycle card contributed approximately $3 million in consumable revenue in the quarter. Our prior guidance contemplated 100% cannibalization of other cycle cards. We did in fact see a high percentage of cannibalization, but more importantly we saw an increase in the average cycle card purchased by our accounts in both North America and international. Thus our North America revenue sale and utilization was driven by both overall organic growth and the benefit from a mix of the new CoolSmooth cycle cards.

And as Mark mentioned, CoolConnect is actually showing that we are experiencing higher sell-through utilization on a year-over-year basis which is where we will have increased focus for our analytics as it normalizes for any anomalies or revenue lumpiness that can occur in our business. To that end, CoolConnect launched in Q3 '13 which is when we began retrofitting our existing North American system install base. We completed this retrofit by the end of 2013, so we have still not seen a full year-over-year comparison across our entire install-base. Our plans has always been to provide more visibility to our CoolConnect sell-through data as we progress through 2014 and as we collect more relevant and complete year-over-year comparisons.

Moving on to cash, we had positive cash generation of $2.1 million in Q2 '14. At the end of Q2 '14 our cash, cash equivalents and investments were 43.3 million compared to 52.5 million at the end of Q2 '13. As we mentioned on our previous earnings call cash usage trends will be similar to what we saw in 2013 with higher usage in the first quarter being followed by positive breakeven in subsequent quarters.

We invested a significant amount of cash in the first half of this year especially in Q1 to build an infrastructure capable of supporting revenue outperformance and higher inventory levels. A large portion of our early investments were in response to the strong initial demand for CoolSmooth and anticipated demand in systems. We decided to pull forward inventory and build more finished good to ensure that are able to meet customer demand when we started shipments.

Our investments paid off in the second quarter as we finished with record revenue and had our second highest quarter of system placements. Day sale outstanding dropped to levels consistent to what we have seen in the past down to approximately 27 days compared to the approximately 36 we saw in the first quarter.

Q2 revenue came in much more linear as opposed to Q1 where we saw a large amount of revenue come in during the last month thus affecting the timing of cash collections in Q1 which temporarily increase DSOs. We expect DSOs to maintain around our Q2 results as long as the revenue booking are not backend loaded in any given quarter.

As we have previously stated, we continue to maintain a very strong balance sheet with no debt and have full confidence in our abilities to support our organic growth initiatives under our current without the need to raise additional capital.

Gross margin was 71% in Q2 '14 compared to 70% in Q2 '13. Sales and marketing expense in the second quarter was 21.1 million versus 14.6 million for Q2 '13 or 45% of revenue in Q2 '14 compared to 56% in Q2 '13. We were able to leverage the infrastructure build and upfront investments we made in the first quarter of 2014 to support our robust revenue outperformance.

The substantial sales force expansion the realignment of our sales territories in the first quarter produced outstanding results and we expect this leverage to drive further momentum into the back half of the year. Building out our global sales infrastructure early on puts us in a position where we can focus purely on execution of our business, of increasing our install base and driving utilization. We anticipate following a similar strategic approach to front end load sales and marketing investments as we head into 2015.

R&D expense in the quarter was 4.4 million versus 3.9 million for Q2 '13 or 9% compared to 15%. G&A expense in the quarter was 5.2 million versus 3.6 million for Q2 '13 or 11% versus 14%.

Our net income for Q2 '14 was $2.8 million compared to a net loss of 3.6 million for Q2 '13. On a per share basis, we had $0.07 earnings per share compared to $0.10 loss per share for Q2 '13. As Mark stated Q2 '14 marks the first quarter in the company's history that we are net income and EPS positive. Because we move into a positive net income position in the quarter earnings per share is being recorded using our fully diluted weighted average share count.

This year we began referencing an adjusted EBITDA margin percent, which we define as earnings before interest, tax, depreciation, amortization and stock based compensation. Essentially we are removing non-cash items for this non-GAAP measure. We believe this metric to be more indicative of our core operating performance and facilitate a more meaningful comparison of our operating results.

Our adjusted EBITDA margin for Q2 '14 was significantly higher, a positive 12% of revenue versus negative 7% of revenue in Q2 '13. I'll now turn to a discussion of our 2014 guidance.

We are updating guidance for the full year 2014 as follows; increasing revenue to $160 million to $165 million which represents approximately 43% to 48% year-over-year growth from prior guidance of 134 million to 137 million. The lower end of the revenue range contemplates similar year-over-year system placements and maintaining revenue sell-in utilization on a year-over-year basis. The higher end of our guidance takes into account possible upside in our increasing focus to grow our international markets and higher consumable revenue if we continue to see similar positive increases in our revenue sell-in utilizations that we saw in the first half.

We expect international to be still around 25% of overall revenue contribution for the full year. As Mark mentioned, we expect Q3 to be down primarily due to lower contribution from CoolSmooth add on applicator revenue. We do not expect to see more than $1 million in add on applicator revenue for Q3. Also our consumable revenue will be slightly down from Q2 due to the normal seasonality in this part of our business.

The overall lower revenue in Q3 will impact our EBITDA and cash generation results for the quarter where we would expect those EBIT and cash generation to move into slightly negative positions followed by a significant positive increase in Q4 due to higher revenue.

We continue to expect consumable revenue to be approximately 50% of total revenue and we continue to expect full year gross margin to be approximately 70%. We are reducing total operating expense as percentage of total full year revenue to approximately 75%. This includes R&D expense of approximately 12% of total full year revenue, G&A of approximately 12% of total full year revenue and sales and marketing to be down considerably to approximately 51% of total full year revenue.

We are increasing full year adjusted EBITDA margin to approximately positive 2% which is our prior guidance of negative 3%. In order to help bridge or adjust the EBITDA metric we are providing the following expenses: Depreciation and amortization of approximately $2 million for the full year unchanged from prior guidance, stock based compensation of approximately $9.5 million for the full year up from prior guidance of approximately 8.5 million.

As well we now expect other income expense of $250,000 and tax expense is about $150,000 for the full year 2014. We continue to expect to use our basic weighted average share count of 37.5 million shares for our EPS calculations.

I'll now turn it back to Mark for closing comments.

Mark Foley

Thanks, Patrick. As you can clearly see our business is firing on all cylinders. We made significant investments in the first quarter that have led to a rapid ROI in the form of robust revenue growth and leverage in the P&L which we believe is sustainable. We achieved balanced growth across our business and CoolSmooth significantly outperformed our expectations and made an immediate and material contribution to our business. And we continue to make progress on our R&D initiatives which will allow us to leverage our market leading and proprietary controlled cooling technology platform as we move forward. As we look toward the remainder of 2014 and beyond, we have increasing conviction in our strategy and believe that we are focused on the right initiatives to drive consistent and long-term growth.

In summary, our decision to invest in the growth of our global sales force and marketing initiatives is paying off and we expect continued momentum and productivity as we move forward. We remain bullish on our ability to place systems and further penetrate the growing non-invasive body contouring market, and we are beginning to see the benefits of increased revenue sell-in utilization from our high margin consumable revenue business.

Our business model provides significant operating leverage and healthy translation as revenue increases as demonstrated on our Q2 financial performance. And we believe we can continue to execute on our R&D initiatives and deliver a steady cadence of new products and possibly new therapeutic applications, but leverage our proprietary and controlled cooling technology platform.

Finally, we're looking forward to providing greater insight into our business during our second annual investor day which we plan to hold in New York in mid-September. The agenda will include an overview of our market penetration and financial model assumptions, R&D pipeline, growth strategy and longer term initiatives. As part of this we will also include physician presentations that will address CoolSmooth experience, case studies, and new awareness efforts. We hope to see you there.

I'd now like to turn the call over for your questions.



Thank you. (Operator Instructions) The first question is from Margaret Kaczor of William Blair. Your line is open.

Margaret Kaczor - William Blair

Hey, guys. Thanks for taking the question.

Mark Foley


Margaret Kaczor - William Blair

So your supplemental information is not on the call you guys had. You give a lot of clarity in terms of utilizations for accounts being pretty high at 1.43 this quarter, that's way up from the 1.25 you had last year. But it seems to be a bit of an outlier in terms of what we have seen in previous quarters. So excluding those extra CoolSmooth cards that you needed with that new CoolSmooth applicator, what was that revenue cycle per account utilization number?

Mark Foley

So I think we addressed in our prepared comments. And I would say about half of it was more organic growth and the other half was related to what we call the mix of CoolSmooth in our prepared comments, but still a very strong quarter from a sell-in standpoint. And I think more encouraging for us, and you heard in our prepared comments as well was really related to the CoolConnect data. We're seeing a much greater rate than the rates that you're seeing on the sell-in utilization, and the true sell-through utilization is related to CoolConnect.

That's extremely encouraging for us, because at the end of the day that's really what's going to matter. And as we said, we will continue to give more of those data points related to CoolConnect as we move forward. We just want to make sure we get a better understanding of that information as we start doing year-over-year comps across the entire installed North American base as we stated during our prepared comments.

Margaret Kaczor - William Blair

Sure. So I guess the question is, why wouldn't it continue to grow on that adjusted basis as we get into the Q3 and Q4? Why wouldn't it grow similarly in Q2 if you have all the new reps fully ramped and marketing programs continue to [fetter out] (ph) in conservatism?

Mark Foley

Well, I think its one quarter. CoolSmooth is new in the marketplace. We like what we're seeing in terms of the CoolConnect utilization data, but that's where we gave a range of guidance. So at the higher end of the guidance that would assume that we see some lift on it versus the way that we initially modeled our guidance which was consistent through maintaining utilization on a year-over-year basis. But again, we're one quarter into the CoolSmooth launch and we're looking for more data points to give us some increase in conviction.

Patrick Williams

This is pretty big, I mean, obviously we had a very strong quarter, but it was a pretty substantial increase in our overall full year guidance, right, even on the low end of the range. So I'm not sure I would call it conservatism based on just the growth percent that you're starting to see now.

Margaret Kaczor - William Blair

Sure. Great. And then, can you talk a little bit about how many treatments patients are going to carry out obviously some of that data coming from CoolConnect? But it used to be around two and half treatments a couple years ago with CoolSmooth and CoolFit and all of those fairly a lot higher than that, and where can it go?

Mark Foley

Yes. So I think Margaret, we don't have great data on that. We really rely on our PDMs to get that information from the accounts. We're looking at some initiatives with CoolConnect to see if we can capture that a little bit more reliably, but we do think it's trended up because of treatment to transformation and that being really the only protocol that we focus on.

So, our guess is that, it's around the three number could be a little bit higher. We certainly see some of our higher performing accounts doing more than five cycles per patient. And so we know that there is the ability to drive more cycles per patient. We think it frankly in most cases it's going to deliver a much better patient outcome. So we can tell you that to see a really good directional trend there.

Margaret Kaczor - William Blair

Okay, and last one for me. Can you guys talk a little bit about potential therapeutic indications? You talked about a little bit acne, cellulite, skin tightening, what sort of clinical trials did you guys have to complete, really, get approval there? Would you get a new applicator, have you started doing clinical trials? Any human data or anything like that would be helpful.

Mark Foley

Yes. So I think we will talk a little bit more about this at the Investor Day, but as we put the different ones out there we've got submentum that we've talked a little bit about. That's probably the nearest term project and we've received approvals for IDE so that one is certainly more mature and is tracking well. Beyond that we talked about skin tightening, cellulite improvement and acme.

On the skin tightening we've had some of our clinicians report that they see skin tightening. There have been some published articles on that. So for us it's really a function to trying to better understand how reproducible is it, what's the mechanism and so we continue to work on that.

In terms of cellulite improvement with our CoolSmooth applicator and some of the outer thigh trial work that we did and early patient experience, we have reports from some of our clinicians that they are seeing improvements in the skin tone and quality post outer thigh treatment where there is cellulite, again, we are really on understanding that we are not in a position to give more clarity.

And then lastly on the acme side of it, we had a paper that was presented at ASLMS looking at reduction in sebum production based on some collaborative work that we've done with MGH. And so we are continuing to move that one forward as well.

Margaret Kaczor - William Blair

Thank you.

Mark Foley



Thank you. The next question is from Bill Plovanic of Canaccord. Your line is open.

Bill Plovanic – Canaccord

Great, thanks. Good evening. Can you hear me okay?

Mark Foley

We can. Hey, Bill.

Bill Plovanic – Canaccord

Hey, good evening. Nice quarter. Just a couple of questions here, I'm curious, there's a lot of headwinds going on that could have impacted the quarter as well. I know it's great, you put up stellar numbers, but as you change the co-op marketing and the Cool Rewards, what type of headwind did that pose in the quarter?

Mark Foley

I mean it's hardly known for sure, Bill. Because as you mentioned we had such a strong quarter that we probably blew through some of that. But as a reminder we made changes in our first awards program at the beginning of Q1. And we really did this to try and provide our customers with co-op dollars that we are going to be more efficient. And so we replaced some of the co-op dollars with microsites and a couple of other programs designed to increase awareness and improve patient conversion. So in Q1 we definitely had a lot of chatter in the marketplace. So I think clearly some of our customer weren't pleased with the changes particularly since they had an opportunity to look at what some of the upsides might be in the new programs.

I think some of that die down a little bit in Q2. So I think we are starting to hit more of a steady state normal half. I mean we are continuing to look at ways that we can take as partnership with our customers and make it more beneficial for both of us.

Bill Plovanic – Canaccord

Would you say that -- I mean, business-wise, dollar-wise, most of that would have hit in Q1 or it would have carried into Q2 from an accounting standpoint, I'm just trying to get a feel because if that's already washing through while you're reporting good numbers then you clean it out of the system and you get more normalized as we get into the back end of the year. And how much does that shift around purchasing patterns as well?

Mark Foley

Yes. So I think it's still a little difficult to tell. But I think a lot of it has probably been played out. We saw it a couple more quarters. We are monitoring it very closely. And I think that's of the importance of CoolConnect for us. On a more real time basis we can monitor what's going on at the account level from a sell-through and start anticipating when the next purchase will happen. There is nothing out there at this point that alarms us that there is a unfavorable behavior in the purchasing pattern due to any changes in our loyalty program. But consistent to what we've said historically, we do believe there could be some more linearity in the purchasing patterns of our customers wherein instead of them stacking up, we will call it in a single quarter and then not purchasing again for another quarter or two that they are more likely just purchase throughout the year.

For us, we like that business model; certainly it lends some more predictability. It has everything to do which is the adjustments we made in the loyalty program where you have to purchase more in order to hit the certain curbs, but its really a bit of a non-event frankly from of a day-to-day business standpoint at this point.

Bill Plovanic – Canaccord

Okay, that's perfect. That answers the question. And then you mentioned, obviously, with CoolSmooth, $6 million flowing through the capital side this quarter. We're trying to back into what a normalized US ASP would be on the system concerning you have five applicators now. What is the list price and how should we think about a normalized North American ASP?

Mark Foley

Well, I think you backed out obviously the add on applicator revenue because that always massively give you the visibility there. I think the big thing here is we did about 10% increase in our list price which brought it to $109,000 for a system including five applicators. We saw pretty strong translation of that 10% increase frankly. That was one of the things we weren't sure if the net meaning after discounts that we would be able to hold that up. But our sales force has done a fantastic job not only in North America, but internationally. So I think the ASPs that you are seeing in Q2 are indicative of what we will continue to see.

I know that there have been other folks in our space that have talked about pressure on their ASPs possibly or lower ASPs, we are frankly not seeing that. I think that really speaks to the value proposition and just have differentiated our product that is out there, and the willingness of our customer base to frankly pay what the product is worth.

Bill Plovanic – Canaccord

And then lastly, on the same topic of CoolSmooth, you have like 2,500 systems, you have 800 now installed with CoolSmooth. How long do you think it will take for the remaining systems to upgrade?

Mark Foley

Well, we continue to see some in Q3. The question is you can do the math as quickly as I can. I don't think we will meet a 1005 account penetration with our existing accounts on CoolSmooth. I would expect over the next couple of quarters it will come down quite a bit as I reference. I don't expect more than a million dollars in add on applicator revenue. To be clear that add on applicator revenue was primarily CoolSmooth, but we continue to sell some of our other applicators. So I think we are starting to hit a point a little bit. Just leave it at that, maybe another million this quarter maybe another million in Q4. And then, we're probably hitting a point there where existing accounts are getting a little bit capped out.

But as I said it's only one quarter out there, and there is a lot of momentum behind it. And it's still doing fairly well in the early part of Q3.

Bill Plovanic – Canaccord

And is that included in the guidance that you gave?

Mark Foley

The guidance contemplates less CoolSmooth being sold in Q3 Q3 and Q4; still not at the same rate that you saw in Q2 certainly. The way to think about it is our initial guidance anticipated -- we'd sell these applicators over a two-quarter period, primarily Q2 and Q3. We essentially were able to achieve that in a single quarter. And I'll just go back to the fact that I think add-on applicator revenue will be about a million dollars in Q3 right now. It could come in higher, which will be great, but we want to see how this plays out just because we haven't had an applicator sell-in at this rate of penetration in existing accounts. We do acknowledge it is offering a new body part, and that certainly has driven the acceptance of it or the selling-in of it.

Bill Plovanic - Canaccord

Great. Thank you, that's all I had.

Mark Foley

Thanks, Bill.


Thank you. And the next question is from Rich Newitter of Leerink. Your line is open.

Rich Newitter - Leerink

Hi, guys. Thanks for taking the questions, and congratulations; really impressive numbers. Let me just start off on CoolSmooth. I was just wondering, did you guys have any accounts that bought -- would had have more than one CoolSmooth or that are ordering the second CoolSmooth?

Mark Foley

Yes, we do. And we …

Rich Newitter - Leerink

Go ahead.

Mark Foley

Yes. We made some comments, Rich, too that we saw some -- we saw an increase in second system sales or multi-system sales in North America in the quarter. And so, we think that some of that driven by CoolSmooth and the fact that it's a two-hour cycle, and that when people are coming in to get the outer thighs done, they can do two treatments at the same time. And so, accounts that have more than one system, if they want to do that, need to buy two CoolSmooths and we did see that in the quarter.

Rich Newitter - Leerink

Got it. And then maybe just a follow-on to that, is the increased utilization that you're seeing, to the extent that you can parse it out attributable to CoolSmooth, is this re-energizing utilization of accounts maybe that had been less active over a period of time and now with the new hand piece now they're starting to get back on board to have a new body part to treat, and maybe previously they couldn't or just more kind of the accounts that were already high volume, are they moving into hyper drive now? Can you give any color there?

Mark Foley

Yes. We actually saw that CoolSmooth was a great way to re-engage some of our existing accounts. And we did see an increase in the actual consumable revenue in some of our lower accounts, which we do believe is a function of CoolSmooth. We don't have the direct correlation between the percent of those accounts that purchased CoolSmooth, but I think that -- just again, it was another reason for people to pay more attention to CoolSculpting. And so, I do think it had a bit of halo effect where we saw the benefit spread more broadly across our entire utilization base versus just CoolSmooth alone.

Rich Newitter - Leerink

Got it. And then maybe just one more on CoolSmooth, are you seeing any usage, I know you're not allowed to market it as such, but any usage outside of the thigh area, are they using it in traditional areas where there would be such an usage?

Mark Foley

We are. And I think as expected, we felt and heard that some of our customers were going to try and experiment with it to really figure out where it's optimally can be used. And so, in looking at our CoolConnect data, we saw that certainly a majority of the usage was in the outer thigh, but people are using it more broadly.

One example of that is in the abdomen over the belly button, if there is a fat area that's right in and around the belly button since that area of the body is more tethered, we find that some of our accounts are using it there. And this is one of these where we're getting good feedback from our customers and that will inform some of our additional efforts both on the clinical and development side.

Rich Newitter - Leerink

Great. And one last one, Mark, just as you think about CoolSculpting as it moves into perhaps the next phase of advertising or promotion, you've moved on to the micro sites, you're promoting through Cool university, you've got your PDM managers, but how and when is the right time to take the awareness bill to the next level, kind of in the way Allergan moved Botox more into the public awareness form? Is that on the horizon? How are you guys thinking about ZELTIQ'S role in potentially pushing this to the next level?

Mark Foley

Yes. And so, obviously those are discussions that we're having pretty regularly. I think going back in time, the first thing that we felt we needed to do was to do a better job of setting the nets. So, that net working with the practices to do a better job of trying to share with them best practices, how to convert awareness to consult, and consult to an actual case. And now that we have a broader base of physicians out there, and I think through CoolSculpting university and our PDM organization, a better ability to support our customers and help them in the conversion of new patient interest, I think we're at a point where we can start exploring alternatives to our conventional co-op program and how we might drive awareness.

I think what we're seeing is, we do have a couple of breakout new customers that are becoming a lot more aggressive with their direct to consumer advertising. And so, we're frankly getting the benefit of some of these investment efforts of our physician partners. And I think as we continue to get more information, that's probably going to give us more insight on what to do, but yes, I think we're getting to a point now where the CoolSculpting brand awareness and the number of accounts that we have out there might allow us to do some more traditional marketing efforts, and that will continue to be evaluated.

Rich Newitter - Leerink

Thanks, congrats.

Mark Foley



Thank you. The next question is from David Roman of Goldman Sachs. Your line is open.

Unidentified Analyst

Hi, guys. It's actually Chris in for David. I apologize if I've missed any of the previous answers, juggling a couple of calls here, but -- first of all, congrats on a good quarter, but my first question is that you talked a little bit about some of the pull-forward in the quarter, which certainly makes some sense. But could you help us think about maybe the long-term impact that you expect from the stronger system placement near-term? Could these better system placements today come into expense of future periods? How do you put that into the context of your total addressable market?

Patrick Williams

Well, to clarify. We didn't say it was strong pull-forward on systems, what we said is our CoolSmooth original guidance contemplated selling to CoolSmooth add-on applicators to existing accounts over a period of two quarters from last. That would be Q2 and Q3. We felt that we pulled in most of that revenue into Q2, which is $6.1 million of add-on applicator revenue, a high majority of that was CoolSmooth.

So, in terms of our guidance related to systems and consumables, I'll just repeat what we said in our prepared comments for your benefit, Chris, the low-end of the guidance contemplates consistent or steady year-over-year placement assistance, and as well as steady or constant utilization on a sell-in basis. The high-end of our guidance contemplates seeing the results so far to-date on our utilization on consumables hitting those similar type levels, as well as we believe that there are some opportunity in international that we're starting to have an increased focus on.

So, I'd say just the add-on applicators was a bit of a pull-in, but the pull-in was like I said a shift. There still could be some upside to that number as we move into Q3 and Q4, but we're very happy with our performance and the ability to place systems as we move forward.

Unidentified Analyst

Right. And if I can go back to Bill's question from earlier on the ASP front, what I'm looking at the -- what a normalized ASP would be, I'm stripping out the contribution from CoolSmooth. It seems that -- I mean you mentioned a 109,000 list price, but it seems like discounting is still fairly robust if I try to get to a normalized number. So, am I right to think about this as in the low 90s range on U.S. systems?

And I'm also a little bit taken back by the level of conservatism regarding the only a million dollars of CoolSmooth in the third quarter. You said that you had 50% of your annual goal in the second quarter. I can't imagine that people would have just stopped buying right at the end of the quarter. Why can't that continue to be a 3 million or 4 million type number?

Mark Foley

There are two clarifying points. When you're looking at global ASPs you have to take into account that we had international market that is indirect. So, that's sold through a wholesale standpoint. And so, when you say that it's considerable discounting, there is not considerable discounting happening out there. That's a byproduct of mix related to the fact that probably 15% to 18% of our revenue is on the wholesale basis versus retail. So, does that make sense? And then, I'll address your second question.

Unidentified Analyst

Sure. Yes.

Mark Foley

Okay. So, the second question is on the CoolSmooth and the add-on applicator; to be clear once again, we didn't say that we hit 50%. We said we exceeded our initial guidance of 50% penetration. So, at the end of Q2, we have now done 800 systems. When we did the initial guidance we had less than 1600 accounts worldwide. And that would have been at the end of 2013.

And so, if you look at those numbers, yes, we believe we can sell some more in, but if you want to call it conservatism at a million dollars of CoolSmooth in Q1, it may be. I'm just trying to figure out if it's going to be a million dollars in Q3, a million dollars in Q4 or if it's going to be 2 million in Q3 and then zero in Q4.

We've already shown that people are buying this product very quickly. We might have some upside as I addressed at the very beginning in this, but we want to see how this plays out.

Unidentified Analyst

Okay. Thanks.


Thank you. The next question is from Jon Block of Stifel. Your line is open.

Jon Block - Stifel

Great, thanks. Just maybe first one, a quick one, you mentioned in terms of the sell-in versus sell-out and you actually mentioned by CoolConnect you were able to see that sell-out was higher. Do you have any specific metrics that you can share in terms of what sell-out was versus sell-in or what sell-out was versus a year ago?

Mark Foley

Jon, we're not in a position really to give more granularity. I think as we talked, this CoolConnect will be in a position where later this year we'll have data that's for our complete range of systems on a year-over-year basis since we installed CoolConnect or began installing it on existing systems back in Q3 of 2013. I mean when we looked at it though we did see that the sell-through utilization was higher than our sell-in utilization. So, directionally we like how that's trending, but that will be something we'll give more clarity on as we get into the back half of this year.

Patrick Williams

And just to clarify, it's Patrick. I mean we have the information, it's just as we said in our prepared comments we launched CoolConnect in Q3 of '13 and so we're not even at a full year-over-year comparison. And there is no doubt that just like we see seasonality on the sell-in, there is likely seasonality that could occur on the sell-through. We just don't know what it is. So the last thing we want to do is start reporting numbers and not give any sense or an appreciation of how that number can change on a quarter-to-quarter basis based on possible seasonal fluctuation.

So, let us get through a couple more quarters, let us get a little bit more of an in, in terms of the number of systems that were out there. And we're definitely moving in that direction, and we'll adjust and move forward from an external standpoint of those metrics.

Jon Block - Stifel

Understood. I just want to be clear that I think you guys are clarifying the big numbers aren't just a function of people buying CoolSmooth and stocking the cards specific to CoolSmooth, you saw it on the sell-through as well, to be clear.

Patrick Williams

That's correct; 100% correct.

Jon Block - Stifel

Got it, okay. And then just, I mean the numbers are huge, any commentary, Mark, where you're from a market share standpoint? I mean clearly your docks have gotten more aggressive, we've seen them go out advertise, etcetera, but just from an overall market share perspective, maybe where you're today versus pick a point in time, 12 to 24 months ago?

Mark Foley

Yes. This will be something we'll hit more detail at Investor Day. We look at our penetrations two ways; one is our physician account penetration, and then the second one is our patient penetration. Obviously the market for patient is so large that the question is how practical and realistic is it to penetrate that market, and at what level can we?

On the physician account side of it, we look at our core market and our non-core market, and we're still under 20% penetrated in our core market and we've been very focused on our core market, but then if you look beyond the core and you go into the non-core there is a huge opportunity that we're yet to really aggressively move into. And there is a question as to whether or not directionally we'll go there?

And so, we still got a lot of runway on the systems. And that's just in terms of opening up new accounts. And as we're seeing, we've got an increasing number of our existing accounts playing more than one system. So there is also an opportunity to place some more systems into existing accounts. So, long way of saying is we're looking at over time, we like our ability to place consistent systems over the next few years.

Jon Block - Stifel


Patrick Williams

And we'll layout some of this I think in our longer term projections as Mark referenced on the Investor Day. It will come up in early-mid September. I know people are anxious to understand market penetration rates, but we've done that I'd say pretty adequately to-date, but we'll outline it up again for everyone to see.

Jon Block - Stifel

Okay. And last one for you, and I'll take the rest offline. Patrick, you may have referred this one to the Analyst Day as well, but just big picture, sales and marketing this year 51% of rev is down about 500 bits from last year. You just guided to around 162 next year, excuse me, 162 this year; three was out, 165 next year. And so where I'm going with this is you mentioned last quarter you had the infrastructure where it needed to be to deal with the bigger revenue number. Clearly, we saw that this quarter, but we're going to leverage next year. What sort of rates can we see specific to sales and marketing?

And just a ballpark, I mean do you have to upsize materially the sales reps on both the disposable and the system side, or how should we think about the sales and marketing as we move into '15?

Patrick Williams

So, I'll defer a little bit as we move forward towards the Investor Day, but I think with steady system placements, especially in North America and internationally, we don't anticipate having to grow our capital sales reps, our ASMs materially.

From a PDM standpoint, as we place more systems by default, as we said, one of the big factors we see is PDM engagement with the accounts has a direct correlation to the amount of sell-in revenue utilization that we see. And we're starting to see the sell-through utilization as well.

So, we'll have to continue to increase that. And I think the other thing that we mentioned is international. We now made an effort over the last -- past quarter or two to put more in-country practice development managers in. There is a huge opportunity we believe on the international markets as Mark addressed during this prepared comments. And we're just at the tip of the iceberg there. We simply haven't spent, I'd say, as much focus, but now with the little bit of the performance that we're seeing in North America and the opportunity it's giving from margin standpoint, we've got some dollars that we can take and look to grow international possibly even quicker than we originally anticipated.

So, we'll continue to do the same thing, where I believe we'll have more of a step function coming into the beginning of the year where we'll build out our sales force globally and our sales and marketing initiative. And then that will always be set up to try to hit higher numbers as we move throughout the rest of the year. So, it's been successful for the last two years. It's a bit of a management style thing on our side. And we're going to do it again in 2015, but as always we can move quickly if things aren't working out.

Jon Block - Stifel

Perfect, very helpful. Thanks, guts.

Patrick Williams



Thank you. And the next question is from Anthony Vendetti of Maxim Group. Your line is open.

Anthony Vendetti - Maxim Group

Okay. Just one quick question since most of my questions had been answered. In terms of the market opportunity, I know you talked about there is -- I think you mentioned 22 million potential patients and you're just scratching the surface there. In terms of marketing to groups other than dermatologists and plastic surgeons, where are you with that strategy? And what are your thoughts on that as you move through the rest of this year and into next year?

Mark Foley

Right now we remain very core-focused. I think that's where over 70% of our physician customers come from. We've seen great adoption. We still think that we've got a lot of room to place more systems into the dermatologists and plastic surgeon offices. And so, the non-core interest right now is coming more from inbound interest of those folks.

So right now, we don't anticipate a shift in our strategy, but clearly for a lot of the other aesthetic companies out there, 50% or more of their business comes from non-core physicians. And so, that's something that we'll continue to evaluate as we go forward, but right now we like our focus and interaction with the core community.

Anthony Vendetti - Maxim Group

And just on the patients, I know it's harder to count, but you believe you've always scratched the surface there, barely penetrated the potential patient population. Do you have any metrics around that in terms of percentage penetration or anything like that?

Mark Foley

Yes. It's so large. The 22 million patients that we talk about in the U.S., that's a result of a market research study that we did in Q3 of last year. And what they did is they went out and surveyed about 3500 patients that were representative. And then, narrowed it down based on age, BMI, income and interest in non-invasive procedural like CoolSculpting and that's how we got to the 22 million number. You can take our total North American cycles that we performed, divide it by an average of three, which is the average number of cycles per patient and come up with again a pretty low number.

And frankly, when we started looking at our market sizing initially we thought that once a patient was treated they were done, but now what we're finding is that with treatment and transformation with new applicators to treat other body part areas, some of these patients are coming back and are opting for either additional treatment in the same area or new treatments in adjacent or new areas. And so, I think there is not only an opportunity to expand the number of patients that we can treat, but also an ability to increase the number of cycles that any given patient ultimately gets over the course of few years.

So it's so small that our bigger issue is around really how do we create awareness and how do we help our physician customers convert that interest into treatment.

Anthony Vendetti - Maxim Group

Okay, great. Thanks.


Thank you. There are no further questions in queue at this time. I'll turn the call back over for closing remarks.

Mark Foley

Great. Thank you everyone for joining our Q2 call. Obviously very pleased with our performance, and we hope to see some of you at our Investor Day in September. We'll be putting out a press release on the specifics once we finalize the rest of the details. Thanks, again.


Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.

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