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Syneron Medical Ltd. (NASDAQ:ELOS)

Q3 2011 Earnings Call

November 10, 2011 8:30 AM ET

Executives

Zack Kubow – The Ruth Group, IR

Lou Scafuri – Chief Executive Officer

Asaf Alperovitz – Chief Financial Officer

Shimon Eckhouse – Chairman

Analysts

Rich Newitter – Leerink Swann

Anthony Vendetti – Maxim Group

Dalton Chandler – Needham

Operator

Good day, ladies and gentlemen. And welcome to the Syneron Medical Third Quarter 2011 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 follow at that time. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the call over to your host Zack Kubow. Please go ahead, sir.

Zack Kubow

Thank you, Operator. I’d like to welcome you to Syneron Medical’s third quarter 2011 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 respect to Syneron’s expectations regarding, but not limited to the financial forecast for 2011, the launch of new products and the maintenance of 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 achievements 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 filing 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 assure 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 press 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 Scafuri

Thank you, Zack. And welcome to Syneron’s third quarter 2011 conference call. During the third quarter we continued to execute on our strategic growth and profitability initiatives further positioning Syneron for ongoing industry leadership.

We achieved several important milestones including the settlement of Syneron and Candela’s patent litigation with Palomar and setting the stage to the launch of two exciting next generation products.

We also demonstrated progress in the PAD segment and continued to invest in the growth of our emerging business units. Together it was another strong quarter that is indicative of our momentum in the marketplace and highlights the success of the company’s strategic vision.

I’ll begin today’s call with a quick overview of our financial results followed by a review of our operational progress. Total revenue in the third quarter 2011 was $57 million, up 28% over the prior year. This represents our fifth consecutive quarter of double-digit year-over-year sales growth and an acceleration of our growth rate from the second quarter 2011.

This strong topline performance was especially significant in light of the typical summer month seasonality in the third quarter and the ongoing macroeconomic uncertainty worldwide.

We were able to achieve strong results in spite of these headwinds because of our unmatched global channel of marketing capabilities including continued cross selling, strong brand recognition, trusted scientific innovation and unrelenting focus on our customers and the patients we serve.

International markets grew 29% during the quarter led by growth across all geographies. We expect this momentum to continue as we have a solid combination of strong partners, market acceptance and relationships with key thought leaders on a global basis.

North America also presented a significant revenue growth of 27% year-over-year. This was driven by strong sales of Syneron and Candela products, particularly the recently launched GentleLASE PRO and increased sales of consumables driven by the utilization of the Syneron product line.

Consumable revenue increased 53% year-over-year demonstrating that our products are being well received by physicians and their patients. Overall recurring revenue, which also includes service revenue grew 22%, represented approximately of 32% of total PAD sales.

EBU revenue in the quarter was $5 million up nearly 500% compared to the prior year and representing 9% of this quarter’s revenues. Non-GAAP gross margin was 52.6% in the quarter, up from 52.3% in the prior year.

In our Professional Aesthetic Devices or PAD segment, non-GAAP operating income was $4.8 million or 9.3% operating margin. This is a very positive indicator that we are successfully increasing gross margin and managing operating expenses.

On the bottom line we achieved our fourth consecutive quarter of non-GAAP profitability with earnings per share of $0.03. This demonstrates our ability to effectively balance the growth of the profitable PAD segment with our investments in the rapidly expanding EBU segment.

Turning now to an operational update, I want to first highlight two new very exciting next generation products. In October we launched the new eTwo platform which brings together two of Syneron’s most innovative and successful applications in a single system for non-invasive fractional skin resurfacing and wrinkle reduction.

Specifically, the eTwo features Syneron’s unique Sublative Rejuvenation technology that was originally pioneered with eMatrix combined with Syneron’s proprietary elure technology via our new Sublime applicator.

The result is a highly effective skin rejuvenation treatment that increases collagen and elastin production for a brighter and smoother complexion with minimal dermal disruption across all skin colors.

We also updated the eTwo platform to include our new Sublative iD tips, which are designed to maximize treatment options in results. The initial feedback on this wide arrange of patient treatment tips has been overwhelmingly positive.

The eTwo international launch took place at the European Academy of Dermatology and Venereology at Lisbon followed by the U.S. launch at the 2011 American Society of Dermatologic Surgery Conference in Washington D.C. So far the feedback from both meetings has been very promising both from potential new and existing Sublative Rejuvenation customers.

Earlier this week, we announced the international launch of our next generation pain free laser hair removal system, which is named eLase that features the new Motif LHR hair removal applicator with Motif mode that leverages the proprietary eLase technology for a high-speed, low-energy hair removal treatment that is virtually pain free in addition to a standard mode of operation. eLase treatments are expected to be far shorter than with competitive devices.

eLase system was launched at the CosmoProf Asia 2011 meeting and is available in select international markets. Our distribution partners and direct subsidiaries have indicated excitement and a very strong interest in the product. eLase has an exceptional value proposition and is positioned as a mid-range price offering as compared to our premium GentleLASE family of laser hair removal products.

As I mentioned earlier, we continue to see very strong sales uptake of the GentleLASE growth during the quarter. It is complementary to the eLase system and continues to be our flagship laser product focused on the hair removal market.

Practitioners and patients are familiar and comfortable with the GentleLASE family of products and the long track record for reliable and fast results. The GentleLASE PRO raises the bar for this best-in-class product family with its faster speed, higher peak power and dynamic cooling device.

There also continues to be a strong customer enthusiasm for the CO2RE CO2 system and the ePrime dermal remodeling device. They have shown steady sales volume increases as we educate the market on the excellent clinical results achieved with both products. In particular we continue to build the market for ePrime, which represents an entirely new treatment category for the enhancement of facial dermal volume.

Now turning to review of our Emerging Business Units. We had another strong quarter in EBU, highlighted by the ongoing international rollout of the Me home-use hair removal system. We are receiving positive feedback from the orders from our distributors and direct retail partners for the Me system in Europe.

Demand for the product has exceeded our expectations driven by excellent safety and efficacy and added convenience of dual action elos energy-based hair removal along with an epilator or shaver.

During the quarter we received FDA clearance for the new Tända Luxe and Tända Clear+. Both devices represent the next generation of the Tända Regenerate. The Tända Luxe is indicated for the treatment of periorbital wrinkles and utilizes concentrated fractional red light therapy, sonic vibration and gentle warming.

The Clear+ combines the clinic approval benefits of blue LED light therapy with the same gentle warming and the sonic vibration piece in the Tända Luxe to treat and prevent acne.

The treatment heads to our compatible between the devices providing customers with upgradable multiple use skin care options. Both new Tända products became available to consumers at the premium retail stores in October building on the summer launch of the lower cost Tända Zap acne clearing device and continuing the momentum of the brand.

Our elure Advanced Skin Lightening product continues to build momentum with our focused U.S. topical sales team. We are encouraged by the positive feedback by physicians and patients alike.

Outside of the U.S. we’re working towards regulatory approval in several key Asian markets and we’ll keep you informed as we are able to launch the product in additional new geographies.

EBU segment represents the tremendous opportunity for revenue expansion and diversification and we are pleased with this performance in the third quarter. I want to briefly point out that while our discussions on EBU have tended to center around topline growth, we’re constantly working to improve the EBU margins and best leverage our infrastructure.

The EBU chains have done an excellent job and I believe we have a strong leadership group in place that can build the EBU into a larger and profitable segment of Syneron. We look forward to providing you future updates on the EBU as the products and business units rapidly develop.

Overall, we are well-positioned as the clear market leader in the aesthetic market. We have the unique combination of size and scale with robust channels and market capabilities allowing us to quickly adapt the changes in the worldwide economy. We have the broadest and most innovative product portfolio in the industry and continue to invest in R&D to ensure we remain ahead of the innovation curve.

We are working diligently on two game changing non-invasive body contouring products and technology, one of which is aimed specifically at the core physician market. Further, we believe our install base of over 7,000 Vela series customers and resulted knowledge base will facilitate rapid growth across all segments in this highly evolving growth market.

Our next major launch of innovation in the body contouring category is expected in the second half of 2012 and we’ll provide more details as we approach the launch. In addition, we also have several addition products after the PAD and EBU segments over the next year and believe our new product pipeline is second to none in the industry.

Going forward, we significantly reduced our ongoing legal expense with Palomar settlement further enhancing our operating margin and our ability to leverage our infrastructure as we grow the topline.

We’ve achieved improved financial results and operational success despite the uncertain worldwide economy and believe that we are in a period where the strong will only get stronger. We fully intend to strengthen our position as the industry leader and we expect our financial results to continue to improve as we capitalize on the many growth chatters that we are executing upon.

I would like to now turn the call over to Asaf for the financial review. Asaf?

Asaf Alperovitz

Thank you, Lou. Revenue in the third quarter of 2011 was $57 million up 28.2%, compared to $44.5 million in the third quarter of 2010. International revenue grew 28.7% year-over-year to $37.4 million and North America revenue grew 26.8% to $19.6 million. 66% of the third quarter 2011 revenue was in the international market compared to 65% in the third quarter of 2010. Product revenue and service revenue for the third quarter of 2011 were $42.7 million and $14.3 million, respectively.

Gross margin for the third quarter of 2011 was 50.6% or 52.6% on a non-GAAP basis, excluding stock-based compensation, amortization, restructuring and expenses related to the Candela merger compared to 50.8% or 52.3% on a non-GAAP basis in the third quarter of 2010.

Third quarter 2011 operating loss was $37 million or an operating income of $1.2 million on a non-GAAP basis. This compared to an operating loss of $5 million or an operating loss of $0.5 million on a non-GAAP basis in the third quarter of 2010.

GAAP net loss for the third quarter of 2011 was $40.1 million or $1.14 per share, compared to a GAAP net loss of $5.3 million or $0.15 per share in the third quarter of 2010.

On a non-GAAP basis, net income for the third quarter of 2011 was $1 million or $0.03 per share, compared to a net loss of $1.5 million or $0.04 per share in the third quarter of 2010.

Non-GAAP operating income, net income and earnings per share for the third quarter of 2011 excluding legal expenses associated with the Palomar litigation of $2.9 million, while non-GAAP operating loss, net loss and loss per share for the third quarter of 2010 did not exclude such expenses.

Third quarter non-GAAP results exclude one-time expenses as detailed in the company’s financials in today’s press release. The main exclusion is the one-time legal settlement costs of $33.9 million comprised of a settlement payment to Palomar Medical Technologies of $31 million plus related legal expenses of $2.9 million.

Now I will provide a review and commentary on the results from our two operating segments, the Professional Aesthetic Devices or PAD and Emerging Business Units or EBU.

For the third quarter of 2011 PAD revenue was $52 million or 91.2% of total revenue and EBU revenue was $5 million or 8.8% of total revenue. Operating income in the PAD segment was $4.8 million on a non-GAAP basis, representing an operating margin of 9.3%. This compares to a non-GAAP operating income of $0.8 million or 1.8% operating margin in the third quarter of 2010.

The improvement in our PAD operating result is primarily due to the following factors, higher sales mix of senior products in consumables which was also driven by increased cross selling, higher production, sales volume, operational efficiency and cost cutting measures we implemented mostly in conjunction with the Candela situation and due to the exclusion of $2.9 million of legal expenses associated with the Palomar litigation in the third quarter of 2011, while non-GAAP PAD operating loss in the third quarter of 2010 did not exclude $2 million or such legal expenses.

Operating loss in the EBU segment was $3.6 million. Similar to previous quarters, EBU’s expenses in the third quarter reflect higher relative costs associated with the ongoing development and launch of several EBU products.

These losses include the Me home-use hair removal system in Europe and in Israel along with the elure Advanced Skin Lightening and the Tända new line of products in North America.

We are pleased with the performance of these products and believe we are well-positioned and continue to grow both of these and all of our other new product launches. As these products gain traction in the marketplace, we feel confident that they will also have a positive impact on our profitability.

Turning to the balance sheet. Our DSO declined on a year-over-year basis to 72 days representing a decrease of 13 days, compared to the DSO of 85 days in the third quarter of 2010. DSOs were up slightly by two days compared to a DSO of 70 days in the second quarter of this year.

Our September 30, 2011, cash and cash equivalence including bank deposits and investments in marketable securities was $177.2 million, compared to $212.2 million as of June 30, 2011. This reduction is primarily driven by the one-time payment of $31 million to Palomar in settling the litigations against Syneron and Candela.

The settlement positions Syneron for increased profitability and we benefit from significantly reduced legal costs while the substantial cash balance will allow us to maintain the strongest balance sheet in the industry and continue investing in our business and potential acquisition opportunities. We continue to remain debt free.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Rich Newitter from Leerink Swann. Your line is open.

Rich Newitter – Leerink Swann

Hey, guys. Thanks for taking the questions. It was definitely a very impressive sales growth number and in a tough environment. Just wonder if you could and some of your competitors also seem to report an acceleration in growth in the third quarter, especially in the U.S.

I was just wondering if you could comment on what you’re seeing in the marketplace? Where do you think a lot of the strength is coming from? How much of this is market related versus Syneron’s new product launch initiatives? Any color there would be helpful.

Lou Scafuri

I think, Rich, we have a case of pent-up demand. And it’s clear we’ve lived in uncertain economic waters and it seems like every time somebody stands up and makes a headline, they get blown down again.

However, however, across geographies and some very, very surprising European markets, we had strength, the same in Asia, the same in North America and then Latin America. And I would say Syneron leading in terms of the actual dollar volume sales across open PAD as well as in the EBU is indicative of the global strength of the aesthetic business.

It’s good to see the competitors also get their share of the business and show growth and hopefully this note of optimism in our numbers reflects in terms of everyone’s viewpoint has the help given the health of the aesthetic space.

Rich Newitter – Leerink Swann

Okay. That’s helpful. Maybe just turning to the emerging products line for a minute. You guys have a number of products already launched in that segment and you said that you expect more to come.

It sounds like on the Tända side you just had the skin rejuvenation device. I know you have a Proctor & Gamble initiative that’s expected possibly sometime in 2012 for the same indication.

Can you just talk a little bit about your strategy here? It sounds like there are some duplicative products. What happens when the Proctor & Gamble product comes? Where are you going to focus your adoption efforts?

Lou Scafuri

Well, first off, just by definition, consumer markets means the general public, means it’s everywhere and everything, we developed our products and go to different channels to market with different partners as appropriate to reach given markets.

We see how the ability to sell our products, both the LED-based Tända products as well as future products in the company as being complimentary. We think about it very carefully. We measure channel conflict and in this marketplace that’s rapidly expanding, we look to exploit the opportunity.

We’re fortunate in the sense that we have breadth and depth in our core competencies and technology and we’re very fortunate in the sense that we’re not just launching one product.

We’re doing many things at once and we’re getting significant results in the EBU in just the three quarters that we announced the creation of the EBU. We look on this as an opportunity, Rich.

Rich Newitter – Leerink Swann

Yeah. And not surprisingly it seems like there’s some seasonality specifically across both segments but also in the Emerging Business Unit. Should we kind of expect a kid of sequential uptick in the fourth quarter for this segment as we do in the professional segment?

Asaf Alperovitz

Hi, Rich. It’s Asaf. I would say the value demonstrates certain of our EBU business units such as for instance the dental laser which has a similar seasonality effect as the PAD segment does.

But our units including in this EBU segment such as the, Me and Tända product launch for instance are less affected by the ability but rather from the timing for the stores to place new products on the shelves, launch of new products and et cetera. We think that we expect the momentum to continue towards Q4 for the EBU segment.

Rich Newitter – Leerink Swann

Okay. Thanks a lot, guys. I’ll jump back in.

Lou Scafuri

Thank you.

Operator

Our next question comes from Anthony Vendetti from Maxim Group. Your line is open.

Anthony Vendetti – Maxim Group

Thanks. Good morning, guys.

Lou Scafuri

Morning.

Anthony Vendetti – Maxim Group

In the -- I also noticed that your gross margin was a little bit higher also this quarter. Is that just improved efficiency with the integration of Candela? Or is it some of the newer products that slightly higher margins that’s driving that?

Lou Scafuri

I think it’s a combination of both, Anthony. And we focus very hard on our ASP. We focus additionally on our COGs. And we’re working very hard positioning our wide breadth of products in the market and look towards expanding our margins as we continue to execute.

Anthony Vendetti – Maxim Group

Okay. And is that a trend that you still think there’s more room to expand? Or have you squeezed that as far as you can at this point?

Lou Scafuri

I think we can always do better.

Anthony Vendetti – Maxim Group

Okay. And then on the home-based product I was wondering if you could give us a little bit more of an update on elure. I know that that’s a product that you’ve been rolling out and waiting for on a country-by-country basis approval. Is that still tracking according to plan? And where are you with that?

Lou Scafuri

If you followed our press releases you saw that the visibility and the awareness around elure is increasing. We announced that elure won the Best New Beauty Product this year. And so we had front page coverage, tremendous uptick in terms of interest according to Google Analytics as well as according to sales requests.

We have a sales team, a small sales team in dedicated geographical markets who report back to us continually both on a quantitative as we as an anecdotal basis how much the physicians and patients alike are appreciating the benefits of the product. We’re still early on in the launch.

We believe it still has blockbuster potential and as we await revenue clearance in some of the key Asian marketplace in the foreseeable future we continue to be very optimistic on the future results with the product.

Anthony Vendetti – Maxim Group

Okay. And then, Asaf, just two quick questions, core versus non-core and then stock-based comp breakdown by line item?

Asaf Alperovitz

Sure. So in terms of North America core versus non-core were 52% core and 48% non-core. And in terms of the stock-based compensation for this quarter, we’re at $949,000, $7,000 of COGS, $179,000 of R&D, $302,000 sales and marketing expenses and $441,000 as G&A expenses.

Anthony Vendetti – Maxim Group

Okay. Great. Thanks, guys.

Asaf Alperovitz

Thank you.

Operator

Our next question comes from Dalton Chandler from Needham. Your line is open.

Dalton Chandler – Needham

Good morning. You touched on this a little bit but let me ask more directly. The EBU revenue was up nicely year-over-year but it was down sequentially. Can you just comment on what was driving that? And what your expectations are for the next quarter?

Lou Scafuri

Well, as Asaf just mentioned, Dalton one of the components of the business is central which basically tracks the same seasonality as the professional aesthetic devices, the rest of the lasers that we all know about.

In terms of the seasonality, we had hoped to get, of course, approvals faster and we’d hoped to get products on the shelves even sooner and we also need to take into account we had an extremely strong Q2 as well.

So again we’re operating out -- this is the third quarter out commercializing these products and there is a little bit of adjustment as we go along here, as we navigate some of these waters.

Dalton Chandler – Needham

Okay. So does that mean then that dental is a disproportionate percentage of EBU revenue at this point?

Asaf Alperovitz

No. It doesn’t. It’s means that we have different business units, including this part of the segment and I think as both Lou and I indicated that for some of these product lines, such as the Me and Tända, they are affected in terms of mostly the timing of the store to actually put new product on the shelf, launching new products, regulatory issues, new products coming in and timing between the quarters.

In terms of the fourth quarter we can only say that we believe that the strong momentum we have experienced until now we’ll continue into the fourth quarter.

Dalton Chandler – Needham

Okay. And I think you’ve got within the EBU you’re selling some products in some geographies but not in others. Can you just remind us what you’re selling where?

Lou Scafuri

We are selling the Me hair removal device in several key countries in Europe most particularly in the U.K., as well as in Israel. We’re selling Tända series of products across North America primarily. We are awaiting regulatory approval for several of the devices here in North America. And we’re also awaiting several countries regulatory clearance before we go and launch and expand out into other markets in Europe.

Dalton Chandler – Needham

For the Tända you mean?

Asaf Alperovitz

For the Tända, yeah.

Dalton Chandler – Needham

Okay. And now that you’ve settled the suit with Palomar, are you looking to launch the Me in the U.S.?

Lou Scafuri

We’re first looking at a Canadian launch, gaining some experience in Canada and we are anticipating bringing this product to the U.S. in the future.

Dalton Chandler – Needham

Okay. And then just final question, I think you mentioned you have two new body contouring products in the pipeline. Is that two completely new products? Or is that a VelaShape update plus another product?

Lou Scafuri

We really have some very exciting new technologies. We’ve been in the field of body contouring again we were one of the pioneers in the field. We’ve had tremendous success, continue to have tremendous success with the Vela line of products and we’ve learned very much from our clinical results as well as our intense R&D effort around the affect of different forms of dynamic energy on the ability to do body contouring.

So we believe the products will be innovative. We believe that they will be accretive to what we’re doing now. And we believe we have the ability to sell products not only to the core but across all segments and geographies.

Dalton Chandler – Needham

Okay. All right. Thanks a lot.

Asaf Alperovitz

Thank you.

Operator

I’m showing no further questions at this time. I will now like to turn the call back to management for closing remarks.

Lou Scafuri

Well, we’d like to thank our employees and our customers for their support, hard work and dedication to our company and to our product lines. We’re committed to be the market leader across the globe and we look forward to continuing our momentum to Q4. Thank you very much.

Operator

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

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