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Lumenis Ltd. (NASDAQ:LMNS)

Q2 2014 Earnings Conference Call

August 4, 2014 5:00 PM ET

Executives

Tzipi Ozer-Armon – CEO

Ophir Yakovian – CFO

Analysts

David Roman – Goldman Sachs

Raj Denhoy – Jefferies

Larry Biegelsen – Wells Fargo

Bruce Nudell – Credit Suisse

Operator

Good evening, ladies and gentlemen, and welcome to the Lumenis 2014 Second Quarter Results Conference Call. Please note this conference is being recorded. Lumenis would like to remind listeners that today’s call may contain forward-looking statements as defined in Section 27A I-1 of Securities Act of 1933 as amended, including statements regarding, among other things, the Company’s business strategy and growth strategy. Expressions which identify forward-looking statements speak only as of the date the statement is made.

These forward-looking statements are based largely on this Company’s expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond their control. Future developments and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will proved to be accurate. This call does not constitute an offer to purchase any securities.

It is now my please to turn the call over to Tzipi Ozer-Armon, the Company’s Chief Executive Officer. Please go ahead.

Tzipi Ozer-Armon

Thank you, Lia. Good evening and welcome everyone to Lumenis second quarter of 2014 earnings conference call. Let me start with a brief agenda. I’ll begin with the highlights of the quarter and a summary of the performance in our three business segments and four geographic regions. Then, I’ll turn the call over to Ophir, our CFO, who will walk us through a detail review of our financial performance and our 2014 financial guidance. I’ll then provide an update on our progress towards the Company’s 2014 priorities and key growth initiatives, after which we will open the call for your questions.

Before we get started, I want to share my overall perspective on our business and why I’m enthusiastic about our prospect. We have a great global sales organization in place that is working diligently to drive growth in each of our geographic – in geographic regions. And we are getting extremely positive feedbacks from our customers on our newly introduced products. Finally, our R&D pipeline is progressing according to plan and our team is focused on enhancing profitability.

Now, turning to the second quarter. Our revenue grew by 9.3% compared to last year’s second quarter totaling of $72.5 million and representing our eighth consecutive of year-over-year growth. We posted double-digit growth in three of our four geographical regions. Well we show continued strong performance in APAC and EMEA, both growing at double-digit year-over-year and Japan posted more than 20% growth, while the Americas experienced a modest decline compared to last year.

Total revenue growth was driven by strong fundamentals and improved business activities in all of our three segments led by our aesthetics business. So far this year, we’ve introduced new products in each of our business segments as part of our goal of introducing one to two new product platforms in each of our business segments in 2014. In terms of profitability, we continue to improve gross margins, non-GAAP operating margins, adjusted EBITDA and non-GAAP EPS compared to prior year.

I would like now to turn to a more in-depth review of our performance in each of our business segments this quarter, starting with our surgical business. Our surgical business grew 1.3% year-over-year which is not indicative of the underlining growth trends in this segment. We would have toasted growth in the high single-digit year-over-year if not for an exceptionally large deal in our APAC regions last year which make year-over-year comparisons particularly difficult. We experienced this progress in both our urology and ENT business again in the second quarter.

In our urology business, we are progressing with the Pulse 120H commercialization plan. Following the European launch of the [indiscernible] we launched the product in the US in May at the AUA Meeting in Orlando and the product has been extremely well received by the physician in both communities. The Pulse is the most powerful and versatile Holmium Laser surgery solutions in the urology market offering superior technology and better outcomes. The Pulse enables surgeon to perform enucleation and vaporization of the prostate, strong flexible ureteroscopy known as Stone-Dusting and PCNL procedure with one device. As a result, we believe it is the single solution for urologists around the world.

We are currently focused on collecting clinical data and we are very encouraged with the feedback from physicians and the early results that they are achieving in US, EMEA and APAC. We believe that the adoption of the enucleation procedure using our advanced high-powered holmium laser technology and product solution which are by far clinically superior, can be accelerated by expanding our training program in conjunction with the newly launched training simulator, educating physicians on how to perform enucleation procedure.

In Q2, we hosted this training program in APAC, EMEA and for the first time ever in the US at the Mayo Clinic in Phoenix. We are on track to host approximately 30 of these courses around the world in 2014. I hope you can hear how enthusiastic we are about this technology. However, due to the relatively longer sales cycle in our surgical segments, we don’t expect the Pulse 120H to make a material contribution to our top-line growth until 2015. In ENT, we’ve seen continued ramp up of the AcuPulse DUO our new CO2 platform that was introduced in Q4, 2013. AcuPulse DUO is a CO2 platform that allows surgeons to switch between fiber and free beam modalities electronically improving versatility during procedure such as ENT, gynecology and general surgery.

Turning to the ophthalmic business. Our ophthalmic business was up 1.5% year-over-year. We were pleased with the early response from the ophthalmologists using our Array LaserLink pattern scanning device in Japan in the second quarter after beginning limited market release at the end of Q1. The product and its unique feature of micromanipulator and heads-up display were well accepted in Japan and we plan to expand the launch to other markets later this year. The pace of improvement in this business segments remain measured as we continue to focus on implementing a strategy for margin enhancement that will support sustainable, profitable and long-term growth. We expect to see the result of this initiative manifest itself during 2015.

Aesthetics. Our aesthetics business demonstrated strong growth, up 21.7% year-over-year in the second quarter. This is the fifth consecutive quarter of double-digit growth for this segment. The growth in the aesthetics was fueled by both hair removal and our skin rejuvenation businesses. In hair removal, the recently launched Desire hair removal platform, drove growth as you can enjoy success with early adapters. Desire, is portable and upgradeable platform, enabling users to add new capabilities as they grow. We’re also progressing with the marketing campaign for the INFINITY, our premium hair removal platform that offer two wavelengths 805 nanometers for all skin types and 1060 nanometer the optimal wavelength for tanned and darker skin type.

We expect to see sales ramping up for the INFINITY in the second half of 2014. The growth in our skin rejuvenation business was driven by continued positive momentum of our M22 multi-application platform for skin treatment and by the marketer gains of the ResurFX module. We feel that the market is accepting for the M22 as the ultimate high-end application platform and with the introduction of the ResurFX module which is the only platform in the market that delivers a true fractional non-ablative treatment which has only added to the positive response we are seeing from our aesthetics customers. We look forward to continue strength in both our skin rejuvenation and hair removal product in the second half of 2014.

Turning to a brief discussion of our performance on a geographic basis. The APAC region posted solid double-digit growth increasing 13.9% year-over-year and the region now represents the Company’s largest geography in terms of revenue. The APAC region has been a key contributor to our growth in the recent years and importantly, we believe that our distribution infrastructure in this region is well established and it will support the continued strong growth in the coming years.

EMEA posted 19.8% growth in the second quarter. This will be the first quarter of consecutive double-digit growth for EMEA and we’re encouraged to see good momentum in the multiple countries and the regions. Japan was a good performer as well, demonstrating year-over-year growth of 23.3%. This growth performance was driven by the changes we have made over the last four quarters. Well we have refocused the strategy, implemented organization changes, enhanced the leadership and strengthened the sales team in Japan.

In the Americas, which include both North and Latin America, sales declined 5.4% compared to last year. As a reminder, we have new leadership in the Americas region as of the first quarter of 2014 and we believe we have the right team in place to execute our strategic plans. We expect improving results in the Americas in half through 2014 and for the regions to be a driver for our total company revenue growth in 2015.

In summary, we continue to deliver strong top-line growth and improving gross and operating margins. The new product introduction we’ve made in 2014 has been very well received and we are encouraged by the prospect for each of this product to drive growth in the future. Our entire organization from sales to operation to service and to R&D, remains focused on execution and are progressing according to our plan.

I will now turn the call over to Ophir, for a detailed review of our second quarter performance and our updated fiscal year 2014 guidance. I’ll then return for a brief review of our 2014 priorities and strategic growth initiatives before we open the call for your questions.

Ophir Yakovian

Thank you, Tzipi. Unless otherwise noted in my commentary, we will discuss growth figures on a year-over-year basis. Total revenue for the second quarter of fiscal 2014 increased 9.3% to [$75 million] [ph]. Product revenue increased 10.6% to $58.3 million or 81% of total sales. Service revenue increased 4.2% to $13.6 million or 19% of total sales. Turning to our revenue performance by segment. Surgical revenue increased 1.3% to $27 million and represented 37% of total sales. Ophthalmic revenue increased 1.5% to $14 million representing 19% of sales and aesthetic revenue increased 21.7% to $31.5 million and representing 43% of total sales in the period.

In terms of geographic revenue breakdowns. Americas revenue decreased 5.4% to $22 million representing 30% of total sales. APAC revenue increased 13.9% to $26.9 million representing 37% of total sales. EMEA revenue increased 19.8% to $13.2 million representing 18% of total sales. And Japan revenue increased 23.3% to $10.4 million representing 14% of total sales.

Finally, approximately third of our revenue in the second quarter came from recurring revenue sources, service, consumables, disposables and rentals. Second quarter 2014 gross profit was $39.1 million an increase of $3.8 million or 10.7% compared to $35.3 million last year. Second quarter 2013 gross margin was 53.9% compared to 53.2% last year, an increase of 63 basis points. Total operating expenses on a GAAP basis increased $9.7 million or 39.7% to $34 million. Now, the second quarter 2013 operating expenses included a one-time benefit of approximately $7.1 million related to legal settlements.

The additional increase in operating expenses was mainly driven by increased SG&A expenses offset partially by lower R&D expenses compared to last year. On a non-GAAP basis, total operating expenses increased $2.1 million or 6.8% to $33 million or 45.6% of total sales. Non-GAAP operating expense excludes $0.3 million of one-time expenses related to our IPO and stock-based compensation expenses of approximately $0.7 million. Second quarter 2014, GAAP operating income was $5.1 million a decrease of $5.9 million or 53.5% compared to GAAP operating income of $11 million last year. Second quarter 2014 GAAP operating margin was 7.1% compared to 16.6% last year.

As mentioned earlier, second quarter 2013 GAAP operating net profit included one-time benefit related to legal settlements. Second quarter 2014 non-GAAP operating income was $6.1 million an increase of $1.7 million or 38% compared to non-GAAP operating income of $4.4 million last year. Second quarter 2014 non-GAAP operating margin was 8.4% compared to 6.6% last year. Adjusted EBITDA increased $1.8 million or 31.1% to $7.7 million, this quarter representing 10.6% of total sales. GAAP net income was $3.5 million or $0.10 per diluted share compared to $9.4 million or $0.32 per diluted share last year. Non-GAAP net income was $4.7 million an increase of $1.9 million or 65.1% compared to $2.9 million last year.

In addition to the above mentioned adjustment to operating income, second quarter 2014 non-GAAP net income also excludes revaluation expense of embedded derivatives of approximately $0.2 million. Non-GAAP net income per diluted share was $0.13 in the second quarter of 2014 compared to $0.10 last year based on 35.8 million and 29.5 million diluted shares outstanding respectively.

Turning to a summary of the – of the first six months of 2014. Total revenue increased $11.9 million or 9.4% to $138.3 million. Adjusted EBITDA increased $3.2 million or 33.6% to $12.5 million. Non-GAAP net income increased $3.2 million or 85.8% to $6.9 million or $0.20 per diluted share compared to $3.7 million or $0.13 per diluted share last year. Cash and cash equivalent were $111.6 million as of June 30, 2014 compared to $42.8 million as of December 31, 2013. The increase in cash and cash equivalent is primarily due to net proceeds related to our IPO in addition to $8 million cash flow generated from ongoing business activities. Those were partially offset by one-time payment to Bank of Berlin of $6 million related to the completion of the IPO and the achievement of our profitability milestone as well as additional IPO related expenses of $1 million.

Turning to discussion of our updated financial guidance for 2014. We expect revenue in the range of $284 million to $287 million up 7% to 8% year-over-year. This compared to a prior revenue guidance of $282 million to $285 million. We expect adjusted EBITDA in the range of $29.1 million to $30.6 million an increase of 12% to 18% year-over-year. This compares to prior EBITDA guidance of $28.6 million to $30.2 million. We expect non-GAAP net income in the range of $18.1 million to $19.6 million representing an increase of 21% to 32% year-over-year. This compares to prior net income guidance of $17.6 million to $19.2 million. We expect non-GAAP EPS in the range of $0.51 to $0.55 per diluted share. This compared to prior non-GAAP EPS guidance of $0.50 to $0.54 per diluted share. Now, that our non-GAAP EPS guidance assumes tax rate of approximately 15% a stable currency environment and an average of approximately 35.3 million shares.

With that, I’ll turn the call back to Tzipi to review our 2014 priorities and our progress towards our strategic growth initiative this quarter.

Tzipi Ozer-Armon

Thank you, Ophir. The entire Lumenis team is focused on increasing growth and improving profitability through our renewed focus on execution. We believe that our continued success and delivery against our well-defined strategy will drive strong returns to shareholders over time. There are two primary opportunity to drive our growth. Number one is our continued sales execution in conjunction with expanding our geographical footprint in new and existing markets. And number two, our continued new product introductions.

We are operating in good geographic markets and have vast global sales coverage that we are far from exploiting the opportunity. We demonstrated strong growth in three of our four regions this quarter and are committed to supporting these regions and their growth. In addition, we are focused on enhancing execution in the America as this region returns to growth. Regarding the new product introductions. Following the introduction of our product, in the first half of 2014, we are gathering clinical evidence to support the commercialization especially on the Pulse 120H. Our R&D is on track with the development of the product [thrown at] [ph] that will allow us to further introduce new products across our business segments and support our future goals.

In addition to driving revenue growth, we expect to generate EBITDA growth at the faster rate than our sales by focusing on reducing the product and manufacturing costs and leveraging our operating infrastructure. Our organization remains focused on executing upon our plans, and I’m enthusiastic about the opportunities in front of us and the prospects for our company going forward.

Before turning to Q&A session, I’d like to thank you. We appreciate your participation on today’s call and your continued confidence in Lumenis. I would also like to thank Lumenis employees and executives in five continents who are working diligently for the company’s success. Lia, we are ready to take questions now.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And first we will hear from David Roman of Goldman Sachs. Please go ahead.

David Roman – Goldman Sachs

Thank you, and good afternoon everybody. I wanted to start with the Americas and just see if could go into little more detail on the business there. And I understand that the year-over-year comparison being difficult. Maybe you could just help us with a little bit to certain update on end markets performance what you are seeing from an overall utilization standpoint. And if you are experience so far in the field has been different from what you initially contemplated with respect to the capital sales environment?

Tzipi Ozer-Armon

Okay. So, hi, David, and thank you for joining the call. So, overall, when we look at the America, of course, this is the market which has got the largest potential and as such we regard it as the market with strategic importance to Lumenis. When we look at this market, we estimate that the overall kind of market in general is growing at a what we call that the low to mid single-digit, okay in terms of the capital. For us, if we look at the half year, half one 2014, we’ve been flattish. If you recall, we’ve implemented a leadership change, we’ve got a new President in place as of the beginning of Q1. And we are currently investing in trending the business in the entire organization and we actually planning to grow in the second half of 2014. Overall, when we look at the growth of the America, we do expect that the growth will be below corporate guidance. So, we expect the other regions to grow at the faster rate for the year.

David Roman – Goldman Sachs

Okay. That’s helpful. And maybe just one on the business specifically, I’m thinking about the aesthetics line here. I know that was a category where you did introduce a number of new product launches toward I think the end of February or early March and that business saw a very strong performance despite being up against a tougher comparison in the second quarter versus the first quarter. Could you maybe flush out some of the details of how the new product launches are going? What type of response you’ve gotten from the field and where you think we are in those product rollouts, are we very early on in terms of gaining traction. Maybe just help us with some feedback from what you are seeing from your customers?

Tzipi Ozer-Armon

Okay. So, in relation to the aesthetics, our overall Lumenis has been – so what’s being considered as the goal standard in the industry for many years. In the last three quarters we’ve actually introduced three products, one for the skin rejuvenation and two for the hair removal. All the products that we have introduced actually has been very well received in the markets. And that actually we’ve seen a faster adoption by the what we call the early adopters in the space for this product which have drove actually the growth in this segment very much in the first half of the – in the first half of the year. Going forward, we do expect these segments to continue and enjoy very favorable growth rate which will be above the – above corporate guidance that not at the same rate that we have been experiencing in the first half.

David Roman – Goldman Sachs

Okay. Maybe just on some of those new product launches, I understand that there is the early adopter phenomena but you did talk about, I think some differentiating features of the products like the laser hair removal. What is it take to penetrate the non-early adopters and see these products take off more broadly, do you need more data? Do you need word of mouth and Trade Shows? Maybe just help us understand how the product launches go more broadly into your user base?

Tzipi Ozer-Armon

Okay. So, I think that the answer actually split into two, okay. So, if I take for example the hair removal segment. So, in the hair removal segment, we’ve introduced two products. One is the Desire product which actually in terms of the clinical evidence, we’ve got a lot of clinical evidence for that product and as a result of that, we’ve been able to do a very nice ramp-up for this product. And going forward, it’s just a matter of execution on the one hand. And on the second hand, is just to continue to get the regulatory approval on a global basis so mainly APAC, okay, this was still missing. I think that on the INFINITY, it’s a release to a new domain the dark skin that we are tacking the dark and tan skin.

So, it’s the first time that we are offering actually solution for that market with the 1064. And here really the pace of adoption requires two things, one it requires more clinical data. And the second thing is more reference site. So, actually we’re working on it in the second half of the year to obtain more of these two that will provide us with the marketing tool and that could equip our sales team in order to drive the sales. As for the ResurFX, which is the additional that we did for the skin rejuvenation in Q4 last year, I think that we’ve well used the last three quarters to collect very good clinical data and very good reference site and the physician site. And, this is one of the reason that we continue to see the ramp-up that we have in this space for the skin rejuvenation. Overall, when we look at the space of the aesthetics, we are – we see very good growth potential for both of these domains for Lumenis, both in the existing product, I mean and in the new product to drive the overall growth.

David Roman – Goldman Sachs

Okay. Thank you, very much.

Tzipi Ozer-Armon

Thank you.

Operator

And next we’ll hear from Raj Denhoy of Jefferies. Please go ahead.

Raj Denhoy – Jefferies

Hello, Tzipi and Ophir. Wonder, if I could ask about the margin potential in the business. You continue to put up nice expansion in both your EBITDA margins, your operating margins. And I’m curious if there is a way you can perhaps describe how much of that margin expansion is coming from the leverage of the infrastructure you describe versus natural kind of cost reduction in the business? And again, how much is truly leverage driven versus what you’re extracting from the business from an operational standpoint?

Ophir Yakovian

Hi, Raj, it’s Ophir. I think it’s a combination of leverage and cost reduction. When we look on a longer term view, the most of the improvement in the operating margin, EBITDA margin or profitability margin will come from the improvement in the gross margin as we expect the certain marketing expenses R&D to remain at the same or more or less at the same level as percentage of revenue. So, most of the improvement in the longer term to the bottom-line will come from the improvement in the gross margin. And there, we think that there is a potential still to leverage the infrastructure that we have as we grow revenue, that’s one thing. The other thing is improving the operation and that will come from improving processes and things that we are doing now and cost reduction of the products, we are focusing on that and it will come from both R&D efforts and better sourcing and better engineering. And these things are ongoing, it is an ongoing effort that we think that we are seeing the full of it and we continue to see the full of it in the coming periods.

Raj Denhoy – Jefferies

No, in the quarter, in the second quarter you supported that, the cost of product sales was essentially flat, the margin and you didn’t see much actually deteriorate a little bit I think if my math is correct it’s about 40 basis points. Most of the benefits you saw on the gross margin line came from the service line which my sense is that’s probably a factor of leverage in a sense of having a larger revenue base over which you’re putting expenses. And so, I guess I’m curious where you are in that in the ability to extract cost out of the product side of the business at this point, I mean was it just a little bit low we saw here in the quarter and you expect to now drive the cost of product sales number down from here?

Ophir Yakovian

I think that what we saw in this quarter is a bit of a mix, that caused that little change in the – decline in the product gross margins. The geographical and the different segments mix can change and fluctuates the gross margin on a quarterly basis. So, in that regard I wouldn’t take that as a – something that drives on anything more than that. We are progressing as we plan. We see good results of the efforts that we’ve put in reducing cost. So, we’re looking at where our plan for year and of course in the financial and from the operational point of view, we are very happy with what we see and the progress that we’ve made so far.

Raj Denhoy – Jefferies

Okay. And just one last on the margin front, and I’ll jump off. But, in terms of your – the way you described the US business, the Americas business actually change – with a change in leadership there now. Is that – and you also described the market that you’re committed to in terms of investing in it. How should we view that in terms of the margin structure for the overall business? How much are you willing to invest into the US business over the next couple of years and what is sort of trend actually in the next several quarters I should say the trend that business a little bit?

Ophir Yakovian

I think that as I mentioned, it’s a very important market for Lumenis and we expect it to be a significant contributor for the future growth. Having said that, we are going to keep the overall sales and marketing investment at more or less the same level. So, we are going to remain at the 30% and 31% of revenue in investing in sales and marketing. So, it will lead to remain in that framework. But, we think that – we can still shift the resources and make enough investments to be successful in the market and resume growth in the coming quarters.

Raj Denhoy – Jefferies

Great. Thank you.

Operator

And Larry Biegelsen of Wells Fargo as our next question.

Larry Biegelsen – Wells Fargo

Hi, Tzipi and hi, Ophir. I hope all the Lumenis folks in Israel [indiscernible]. Thanks for taking the question. So, I wanted to drill down a little bit on the surgical business. If we look at the first quarter, I mean the first half I’m sorry, growth was about 3%. So, can you talk a little bit about that – I know you talked about the tough comp in the second quarter, but the first half is still below the trend over the past couple of years. And when does that improve and do you expect an improvement in the second half of this year or we should wait until 2015? Thanks.

Tzipi Ozer-Armon

Okay. Hi, Larry. Thank you for joining. So, overall, when we look at our surgical business, we expect the overall growth in the second half of the year to be in line with the total company growth. If we look at the first half of the year, without the what we call the tough comparison that we had with the very large one-time deal that we have in the APAC region. I think that overall the surgical business will be mid to high single-digit growth number. So, this year, second half as I said we’re looking at mid to single – mid to high single-digit growth for the surgical with very minimal impact of the Pulse 120H on the numbers. And, for next year, we are looking to have the – see the growth actually accelerating following the 120H starting to be commercially more impactful.

Larry Biegelsen – Wells Fargo

Okay. That’s very helpful. And then, I wanted to drill down on the Americas a little bit. Which area was weak this quarter and I’m just curious is it new competition in the ophthalmic area that’s hurting you? Thanks.

Tzipi Ozer-Armon

Okay. So, in the Americas and overall we said that we’re not going to disclose – we’re not going to disclose the specific details by segment because of competitive reasons. I would say that what we felt was not above the weakness of the market, I think that overall we do feel that the market is growing at the low to mid single-digit. But, it is about our executing upon the plan with the new sales leadership. We do have a very robust plan in place. And, we do think that we’re going to resume growth in the second half and at the moment we see no issue there.

Larry Biegelsen – Wells Fargo

Okay. Thank you very much for taking the questions.

Tzipi Ozer-Armon

Thank you.

Operator

And ladies and gentlemen, at this time we have one question remaining in the queue. [Operator Instructions]. And Bruce Nudell of Credit Suisse as our next question.

Bruce Nudell – Credit Suisse

Hi, Tzipi. Hi, Ophir. How are you? Just thinking about and just to recap what I think I heard you say is that second half surgical mid to high single-digits. I’m presuming ophthalmic is like, should we be thinking about it low to mid and a slight grueling on the aesthetic side?

Tzipi Ozer-Armon

We’re done.

Bruce Nudell – Credit Suisse

Good. Okay.

Tzipi Ozer-Armon

Hi, Bruce, thank you for joining. Thank you for joining the call. Overall this is, I think that summarized what we’ve basically said for the second half of the year.

Bruce Nudell – Credit Suisse

Okay, perfect. And, just looking at the surgical business, enucleation and Stone-Dusting are somewhat of missionary efforts, I know enucleation is very – it has been very successful. In the UK, where it’s kind of a greenfield market for lasers and it really took off but given that, there are alternative energy approaches for both for BPH and stone treatment. Are you guys playing there and do you have initiatives ongoing that could – just take a decent amount of share even in relatively modest growing markets?

Tzipi Ozer-Armon

Yes. So, overall, when we look at the BPH segments, you’re absolutely right. The largest market there actually in procedure wise is on the vaporization side. The new Pulse 120H with the new set of tools in terms of the fiber, one of the advantage of this product is that, it actually it started vaporization market and once you are doing an ablation procedure with this equipment, actually the results that you’re getting in any parameters are is good or better than the existing solutions in the market. So overall, it is true that in the US it is more difficult to change the habit of – overall it’s difficult to change the habit of surgeons. But in the US, I think it’s even – it’s more difficult. And as a result of that, we have identified this as an opportunity with a very, very large number of procedures. The other advantage of it is that every procedure correlates with a single used fiber which correlates to our strategy of increasing the recurring revenue. At this point in time, what we are doing is that we are installing a machine at the several few key sites in the second half of the year here in the US in order to both collect a clinical data and to have several KUL actually to be able to speak on behalf of this technology for the vaporization. And the result that we are getting so far has been very, very encouraging and very good. So, we are very optimistic about that driving the growth going forward.

Bruce Nudell – Credit Suisse

And on the stone side, is there anything going on in the side Stone-Dusting?

Tzipi Ozer-Armon

Yes, absolutely. So, on the stone side, there are two things that are going. First of all is the Stone-Dusting that the new machine is capable of performing at a faster rate. But, there is also the new machine the Pulse 120H that has got the capability of doing a PCNL procedure for stones. And we’re at the moment we’re also running some clinical marketing clinical try actually not in the US for this procedure actually outside of the US and once that is completed, we would initiate the launch there. But our first priority at the moment for the US for the 120H would still be the Stone-Dusting and the vaporization followed by pushing the PCNL.

Bruce Nudell – Credit Suisse

Great. And my last question relates back to what Raj asked. And on the product gross margin side, the area for big improvement is ophthalmic, I think you’ve moved or the process is moving from US to Israel. But, is it really that kind of a gating, the gating segment for nice strides in gross margin on the product side?

Tzipi Ozer-Armon

So, overall, when we look and when we think about the gross margin for our business, we actually see opportunities to improve the margins in all three segments, okay. However, since we’ve made a very nice progress already in both the aesthetics and the surgical, we expect to see smaller margin gains on these segments and on the ophthalmic, we do see relatively significant potential in terms of the gross margin improvement. However, in terms of the pace, since some of the changes required, it’s not just a simple negotiation on your part that you can just implement straight away but in order to reduce the cost, there is some infrastructural change that is needed in terms of how we want our operation as well as some redesign of the products, it’s going to take us slightly longer than it took us in the surgical and in the aesthetics, but the potential is very substantial there.

Bruce Nudell – Credit Suisse

Thanks so much.

Tzipi Ozer-Armon

And we do have a very detailed – and we do have this to make an emphasis, we do have a very detailed planning now on how to do it. So, it’s not just the statement we are progressing according to a very detailed plan which has worked very well.

Bruce Nudell – Credit Suisse

Thank you.

Tzipi Ozer-Armon

Thank you.

Operator

And that does concludes today’s question and answer session. At this time, I like to turn the call back to over Ms. Ozer-Armon for any additional or closing remarks.

Tzipi Ozer-Armon

Okay. Thank you, Lia. And thank you all for joining us to discuss our 2014 second quarter results. We are excited about the opportunities in front of us for the remainder of the 2014 year and we look forward to updating you on our next call. Thank you.

Operator

And that does conclude today’s conference. Thank you for your participation.

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Source: Lumenis' (LMNS) CEO Tzipi Ozer-Armon on Q2 2014 Results - Earnings Call Transcript
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