Syneron Medical CEO Discusses Q3 2010 - Earnings Call Transcript

Nov.11.10 | About: Syneron Medical (ELOS)

Syneron Medical Ltd. (NASDAQ:ELOS)

Q3 2010 Earnings Call

November 11, 2010 8:30 am ET

Executives

Shimon Eckhouse – Chairman of the Board

Louis Scafuri – Chief Executive Officer

Asaf Alperovitz – Chief Financial Officer.

Analysts

Jeremy Parker – Gleacher & Company

Anthony Vendetti – Maxim Group

Dalton Chandler – Needham & Company

Patrick Delaney - UBS

Operator

Good day ladies and gentlemen and welcome to the Syneron Third Quarter 2010 Results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. Should anyone require technical assistance during today’s conference, please press star then zero on your touchtone telephone. As a reminder, today’s conference call is being recorded.

I’d now like to turn the conference over to your host, Ms. Carol Ruth of The Ruth Group. Please go ahead.

Carol Ruth

Thank you, Operator. I’d like to welcome you to Syneron Medical’s Third Quarter 2010 conference call. Statements on this call may be forward-looking within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 relating to the Company’s future events or future performance, including statements with respect to Syneron’s expectations regarding but not limited to the financial forecast for 2010, the launch of new products and the maintenance of a leadership position in core and non-core markets. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company’s actual results, levels of activity, performance or achievement to be materially different from any future results, levels of activity, performance or achievements expressed or implied in any forward-looking statements. These risks may include but are not limited to the risk factors set forth under the heading Risk Factors in Syneron’s annual report on Form 20-F filed with the SEC. These factors are updated from time to time through the filings of reports and registration statements with the Securities and Exchange Commission. These statements are only predictions and Syneron cannot guarantee that they will in fact occur. The Company does not assume any obligation to update the forward-looking statements discussed in today’s conference call.

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

Speaking on the call today are Syneron’s CEO, Lou Scafuri, and Syneron’s CFO, Asaf Alperovitz. Shimon Eckhouse, Syneron’s Chairman of the Board, is also on the call and will be available for questions during the Q&A portion at the conclusion of management’s prepared remarks.

Now I’d like to turn the call over to Lou. Lou?

Louis Scafuri

Thank you, Carol, and welcome to Syneron’s third quarter 2010 conference call. Before I begin, I’d like to welcome our new CFO, Asaf Alperovitz. I look forward to working with Asaf going forward as we continue to expand Syneron’s business.

We are pleased to report another quarter of top line growth and improved performance in our business. The combination of Syneron and Candela has made us the clear leader in the esthetic market. We are proud of the successful integration and increased operational efficiency of the combined company. We have achieved this while maintaining a strong focus on our customers which is crucial to our success.

We continue to direct our R&D programs in product development to address unmet customer needs in the market, elevate our reputation with industry thought leaders, and ultimately win in the marketplace. We are excited about the significant growth opportunities we are pursuing which include the multi-billion dollar markets of elure skin whitening and our home use initiative. We have an unparalleled opportunity to leverage our global channel to market capabilities, reverse new product pipeline, and strong clinical results to gain mind share with physicians and drive revenue growth.

Let us begin with the highlights of the quarter. Total revenue was up 10% year-over-year driven by 20.8% international growth which was partially offset by lower year-over-year sales in North America. We also saw significant increased utilization of our hard margin consumables which contributed to our recurring revenue stream and gross margin.

Consumable sales from the Syneron product line grew 123% year-over-year and 55% sequentially, demonstrating the real traction that our products have in the marketplace. Our customers are realizing the benefits of acquiring the latest innovative technology such as sublative rejuvenation with the eMatrix system and body shaping with VelaShape, both of which offer superior value propositions.

Syneron pioneered the sublative rejuvenation category. The eMatrix continues to be a strong performer because it delivers consistent skin rejuvenation results with exceptional patient satisfaction and little to no patient downtime. Physicians are using eMatrix for standalone procedures as well as bundled with other services, expanding their revenue opportunities. Its ability to treat all skin types and tones allows our global customers the opportunity to address a broader range of patients.

The increased traction of eMatrix has been supported by the recent launch of our new high density consumable treatment dip that expands the application of sublative rejuvenation. The eMatrix continued to be very well received as evidenced by the strong growth in consumable treatment dip sales. Several additional sublative rejuvenation product line expansions are planned in the near future.

Our Vela series also continued to steadily achieve positive traction. We are the clear leader in non-invasive body shaping and cellulite treatments. We are successfully leveraging the strong brand reputation of our Vela series to drive customer interest and utilization. For example, we received strong response to our VelaBABE promotion in October in which women who recently gave birth were targeted to receive a free VelaShape treatment. This marketing campaign increased consumer awareness of the product, attracted new business for our customers, and highlighted a fast growing segment of the body shaping market in post-pregnancy procedures.

International growth in the third quarter clearly reflects the competitive advantage of Syneron’s Candela distribution channel. We continue to see a strong demand for our products in emerging markets such as Latin America and Asia Pacific, two areas where we have strategically allocated resources to capitalize on high growth opportunities. Sales in Asia Pacific grew 32% over the prior year with strong results out of China, Japan and Australia. In Japan, we began selling the Candela VBeam pulsed dye laser system following regulatory approval in July. VBeam is the gold standard for vascular lesion procedures and it is the only pulsed dye laser system approved in Japan. Initial interest in the system has been strong and we expect this momentum to continue as we expand the product rollout.

Sales in Latin America grew 20% year-over-year driven by the steady demand for esthetic products and procedures in markets such as Brazil.

In Europe, our strategy to leverage Candela’s direct distribution is yielding results. Sales grew 6% year-over-year despite the difficult economic environment. The Candela brand is widely known in Europe and it is a strong platform for cross-selling opportunities. The addition of Syneron products to the well-established Candela product line allows us to be even more competitive. We have completed the transition to direct sales in France, Spain, Portugal and Germany, and we are seeing positive reception for the Syneron products in these markets. As the Candela sales organization becomes more familiar with the Syneron products, we expect that the strength of our product offering and strong reputation will translate into continued growth.

In North America, sales were lower due to a continuation of unfavorable economic and challenging financing environments. Additionally, we took the opportunity during the traditional slower summer months to further invest in the cross-training of our sales force. We expect this investment will deepen our penetration into the core market of our entire product portfolio. While this impacted sales over the quarter, we believe that over the long term our success will be driven by our innovative science-based technologies, strong brand recognition, customer relationships, and broad sales coverage. We believe that we are currently leading the market in all of these areas and have a significant strategic advantage with our cross-selling broader market initiatives.

During the quarter, we had a very productive interaction with our customers, particularly in the core market at major trade shows. We are pleased to see numerous podium presentations from thought-leading physicians on our products and technologies.

In Q3, we made initial shipments of our new CO2 fractional rejuvenation system to key luminaries and the feedback has been extremely positive. The CO2 platform, which is trademarked as core, offers innovation and a premium feature set. We can now offer a complete range of product solutions which address physicians’ and patients’ needs across a wide range of facial rejuvenation treatment categories. We are currently in the process of full outside the U.S. market launch as we await our 510K clearance in the U.S.

In Q3, we executed the initial Asia Pacific launch of our breakthrough elure skin whitening product in targeted markets. We have received an overwhelmingly positive feedback from physicians and patients during the limited release. We are also pleased with our continued progress in ramping manufacturing of the product and we are confident that our investments in elure will drive high margin, recurring revenue, and diversify our business as adoption grows.

Earlier this week, we announced the first commercial launch of elure in Singapore at a major company-sponsored symposium. This event coupled with the positive market reaction have allowed us to begin our first revenue shipments of elure in Q4 2010. We are also working diligently on preparing for the North American launch of elure in 2011. We believe that this product will position Syneron further ahead of the competition as we consistently offer our physician customers unique products that will enhance their business and secure additional patient revenue.

We are also excited about the targeted launch of ePrime in North America during the fourth quarter. ePrime is a minimally invasive RF device for the treatment of skin tone laxity and volume that provides physician and patients with a lower cost alternative and minimal downtime to the surgical lift procedures. The product’s efficacy has been verified by multiple clinic studies and has demonstrated a high level of patient satisfaction. We expect ePrime to be well received by core physicians because it provides them with a new treatment option and incremental revenue opportunities at a new price point for patients. ePrime will also expand our recurring revenue through its single use consumable treatment tips. We are working closely with the targeted early adopters as we prepare for a global market release in 2011.

Turning now to operations during the quarter, we executed on additional cost synergy and efficiency measures between Syneron Candela businesses. We are on track with our integration strategy and believe that our improved operational alignment will continue to strengthen our financial performance as well as support our high growth trajectory.

We are pleased with our progress in the third quarter. We continue to deliver revenue growth while executing our integration and synergy plan. We expanded our install base in consumable business model and we are leading the market with clinically validated new products that address the changing demands in the esthetic market.

Looking forward, our innovative new product pipeline is unmatched in the industry and includes several game-changing products. Combined with our strong results in execution, Syneron is clearly positioned as the current and future market leader in esthetics. This success is (inaudible) by our demonstrated commitment to operational efficiency. We believe we have significant momentum, are well beyond integration risk, and can drive significant value creation with new markets and product initiatives.

I’d like to turn now the call over to Asaf for his detailed review of our financial results. Asaf?

Asaf Alperovitz

Thank you, Lou. Before I begin, I would like to express my excitement to join the Syneron team. I look forward to working with Lou, the executive team and the Board as we expand on Syneron’s position as the market leader in the esthetic industry.

Now for the third quarter results. The financials we will present on today’s conference call for 2009 are pro forma, assuming that the merger with Candela had occurred on January 1 of 2009.

Revenue in the third quarter of 2010 was 44.4 million, up 10% compared to 40.4 million in the third quarter of 2009. International revenue grew 20.8% year-over-year to 29 million, and North American revenue was 15.4 million. Sixty-five percent of the third quarter 2010 revenue was in the international market compared to 63% in the second quarter of 2010 and 59% in the third quarter of 2009. Product revenue and service revenue for the third quarter of 2010 were 30.8 million and 30.6 million respectively.

Gross margin for the third quarter of 2010 was 52.3% on a non-GAAP basis excluding stock-based compensation, amortization, restructuring and expenses related to the Candela merger; or 50.8% on a GAAP basis compared to 40.89% or 47.2% on a GAAP basis on the second quarter of 2010. Gross margin for the third quarter of 2009 was 46.3% or 45.2% on a GAAP basis.

Third quarter 2010 operating loss was $0.5 million on a non-GAAP basis, or $5 million on a GAAP basis, compared to an operating loss of 3.3 million or 6.5 million on a GAAP basis in the second quarter of 2010. Operating loss for the third quarter of 2009 was 8.8 million on a non-GAAP basis, or 11.5 million on a GAAP basis.

On a non-GAAP basis, loss from continuing operations before non-controlling interest for the third quarter of 2010 was 1.5 million or $0.04 per share compared to a loss of 4.1 million of $0.12 per share in the second quarter of 2010. The non-GAAP loss from continuing operations before non-controlling interest for the third quarter of 2009 was 8.1 million or $0.24 per share.

GAAP net loss for the third quarter of 2010 was 5.3 million or $0.15 per share compared to a net loss of 6.2 million or $0.18 per share in the second quarter of 2010. GAAP net loss from continuing operations before non-controlling interest for the third quarter of 2009 was 10.1 million or $0.30 per share.

Turning to the balance sheet, our DSOs declined on a year-over-year basis to 85 days, representing an increase of 22 days compared to DSO of 107 days in the third quarter of 2009. On September 30, 2010, cash and cash equivalents, including short term and long term bank deposits and investments in marketable securities, were 222.6 million, and equity was 268.9 million. We continue to remain debt-free.

Beginning with the reporting of our fourth quarter 2010 financial results, we will provide segment reporting disclosure broken out between two operating segments – professional esthetic devices segment, which combines Syneron and Candela’s results; and our other emerging business activities. That way we can provide transparency into the performance and progress over different segments. It will also provide insight in the investments we are making outside of the professional esthetic device segment, underscoring our conviction that these initiatives will lead to long-term shareholder value.

With that, I will now turn the call over to the operator to answer any questions you may have. Operator?

Question and Answer Session

Operator

Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key.

Our first question comes from Amit Hazan of Gleacher & Company. Please go ahead.

Jeremy Parker – Gleacher & Company

Good morning. It’s actually Jeremy for Amit this morning. First question – in general terms, how should we think about sales growth over the next year; and I guess in addition to that, when do we start to think about you guys reaching profitability?

Louis Scafuri

We see the bottom has been reached in the core marketplace in North America, and we see procedure volume beginning to grow again the single digit figure. Internationally we have some very strong market growth, particularly in Asia Pacific. So we see—our forward look is one of growth. We’re working very hard as our number one priority to achieve profitability, and we continue to see top line growth and operational efficiencies as we move forward, and our synergies begin to become real in terms of the timing of the numbers.

Jeremy Parker – Gleacher & Company

Okay. And then on the two new products, the elure and ePrime, how should we think about these markets developing over the next, let’s say, two to three years? Obviously the ramp will be, I imagine, gradual; but really as we look out a couple years, what type of market size do we think we might see there?

Louis Scafuri

Well, the total available market for skin whitening products is quite large. We estimate professional markets to be in excess of a billion dollars of professional-grade products. We see the consumer level of that product to be north of $10 million, so there’s great opportunity there—billion, billion dollars, pardon me. We also see from the standpoint of ePrime a new treatment category. The ability to have tone laxity and volume treated consistently with a dynamic energy device allows us an unparalleled opportunity within the core marketplace to expand practices and treat a whole new category of patient.

Jeremy Parker – Gleacher & Company

Okay. And then finally, I guess, Europe – obviously there was some pressure, slightly positive this quarter, but what are you thinking about for Europe next year? Are you seeing effects of austerity measures that would drag on consumer spending?

Louis Scafuri

We see certain markets in Europe, actually the economy’s recovering. I think the challenge this year was one of training the direct sales organization of Candela on the Syneron products and expanding our coverage into those areas and transitioning from distributors. We also see our distributors having particular strength and interest in many of the marketplace that we feel strong about our ability to win in the market in Europe in 2010, as well as in 2011.

Jeffery Parker – Gleacher & Company

Okay. Thank you very much.

Operator

Our next question comes from Anthony Vendetti of Maxim Group. Please go ahead.

Anthony Vendetti – Maxim Group

Thanks. Just on the gross margin, you had nice improvement sequentially. Can you talk about specifically what factors or what were the drivers for that? And then I’ve just got a couple more questions, core versus non-core.

Asaf Alperovitz

Anthony, good morning.

Anthony Vendetti – Maxim Group

Good morning, Asaf.

Asaf Alperovitz

In terms of the gross margin, I think it’s reflecting the fact that we’re working to increase Syneron’s sales force. Syneron’s products sales have a higher gross margin. Also you can see that we have increased our consumables sales quarter over quarter, and that’s also these consumable products have a higher gross margin. And we continue, of course, to push costs down as reflected in our cost efficiency measures and synergy plan that we implemented in the prior quarters, and it’s taking effect now. We see some ASPs mainly in the U.S. coming up in the third quarter, and I would say that in Europe although there are significant pressures, we have the ASP at the same level pretty much. And going forward in order to continue this trend, as Lou indicated, we intend to present some premium products such as ePrime, the core, and the elure skin whitening cream with a relatively high ASP and profitability.

Anthony Vendetti – Maxim Group

Okay, so ASPs are not only stable but in cases where you’re launching new products, you’re seeing your overall ASP actually trending up?

Louis Scafuri

We’re seeing that both with current products as well as with existing products. I think we’ve done a good job with positioning as well as with bundling some of the products, helping us with our ASPs.

Anthony Vendetti – Maxim Group

Okay. And in terms of the credit markets in the U.S., I’m sure that that’s still a factor contributing to the softness in the U.S. Is there any signs of that loosening up, or are you seeing any leasing companies or banks more receptive to providing financing at this point?

Louis Scafuri

Well, we see two things, Anthony. It was commented on earlier calls about it. By selling to the core marketplace, they have a better credit profile and are clearly easier to get financed, and so knowing what the requirements are and having several banks willing to do that, we have a relatively efficient program despite the challenges that we have. Secondly, in terms of banks coming into this space, we do have other opportunities with additional banks who are looking to reenter the leasing for esthetic devices.

Anthony Vendetti – Maxim Group

Okay. And do you have that—Asaf, do you have that core versus non-core breakdown?

Asaf Alperovitz

Yeah, I can say that it’s pretty consistent with the 50/50% distribution.

Anthony Vendetti – Maxim Group

Okay.

Asaf Alperovitz

It will give you the approximate ratio.

Anthony Vendetti – Maxim Group

And lastly just on the new products, and then maybe Asaf you can give the stock-based comp breakdown across the operating line; but on the new products, so you have ePrime, elure, is there any other products coming our before AAD, or upgrades to any products out before AAD?

Louis Scafuri

As far as 2010, in previous calls we talked about three product launches this year, and the two products you mentioned – elure and ePrime – we also have launched the core CO2 product as well. So that’s three for this year, and we also have a very robust product pipeline for 2011 including products in new treatment categories. So we’re particularly bullish in the new product pipeline area.

Anthony Vendetti – Maxim Group

Perfect. Okay, thanks. And Asaf, if you have that comp?

Asaf Alperovitz

Yeah, sure. I can give you the distribution of the stock-based compensation between the different line items. So in terms of overall it was 925 for the quarter. G&A out of that is 343, sales and marketing 357, R&D 218, and comp we have 7.

Anthony Vendetti – Maxim Group

Seven? Okay.

Asaf Alperovitz

Yeah, 7,000.

Anthony Vendetti – Maxim Group

Okay, great. All right. Thanks, guys.

Louis Scafuri

Thank you.

Operator

Our next question comes from Dalton Chandler of Needham. Please go ahead.

Dalton Chandler – Needham & Company

Good morning. Could you just review for us the pricing of—or the list price of the new products and in particular the associated disposables?

Louis Scafuri

The price of the CO2 product is priced at $70,000 U.S. It has a choice whether with a consumable or without a consumable, and the consumable is approximately $150 per treatment. The ePrime when we introduce it will be launched at a price of $79,000 and the consumable charge will be $500 per procedure.

Dalton Chandler – Needham & Company

Okay. All right, thanks a lot.

Operator

Again ladies and gentlemen, if you have a question, please press star then one on your touchtone telephone. Our next question comes from Patrick Delaney of UBS. Please go ahead.

Patrick Delaney – UBS

On elure, you mention it’s a patented product. Who owns the product, who owns the patents, and how comprehensive are they?

Shimon Eckhouse

This is Shimon. We invested a while ago in a company called RBT. This company owns the product and we have worldwide unlimited rights to market these products in the professional markets. The patents that RBT has are very strong patents. They have to do both with basic technology of the enzyme that they are using, the way it is manufactured, as well as the application for treatment of pigmentation.

Patrick Delaney – UBS

Thank you.

Operator

I’m showing no further questions at this time and would like to turn the conference back over to Mr. Louis Scafuri.

Louis Scafuri

I’d like to thank everyone for joining us on today’s call, and I would like to also thank our employees worldwide for the continued hard work, focus and ability to produce results. Thank you very much everyone, and we look forward to our Q4 call.

Operator

Ladies and gentlemen, that does conclude today’s conference. You may all disconnect and have a wonderful day.

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