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Syneron Medical Ltd. (NASDAQ:ELOS)

Q4 2011 Earnings Call

February 9, 2012 8:30 am ET

Executives

Dr. Shimon Eckhouse – Chairman

Louis Scafuri – Chief Executive Officer

Asaf Alperovitz – Chief Financial Officer

Analysts

Anthony Vendetti – Maxim Group

Dalton Chandler – Needham & Co.

Jeremy Feffer – Cantor Fitzgerald

Richard Newitter – Leerink Swann

Operator

Good day ladies and gentlemen and welcome to the Syneron Medical Fourth Quarter 2011 Results conference call. At this time, all participants are in a listen-only mode. Later we’ll conduct a question and answer session and instructions will follow at that time. If anyone should require assistance, please press star then zero on your touchtone telephone. As a reminder, this conference is being recorded.

I would now like to turn the call over to your host, Zach Kubow. Please go ahead, sir.

Zack Kubow – The Ruth Group

Thank you, Operator. I’d like to welcome everyone to Syneron Medical’s Fourth Quarter 2011 conference call, which will also cover the Company’s acquisition of Ultrashape that was announced yesterday. 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 2012, the launch of new products, the acquisition and integration of Ultrashape, 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 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 SEC. 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 fourth 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.

Louis Scafuri

Thank you, Zack, and welcome to Syneron’s Fourth Quarter and Year-End 2011 conference call. The fourth quarter capped off a year of significant accomplishments and growth for the Company. Total revenue grew 20.5% for the year, up to 228 million driven by the strength of our worldwide infrastructure and channel to market capabilities, our strong technology platform, and our unwavering focus on our customers and the patients they serve.

In the past segment, we made several important new product introductions and further strengthened our relationships with our customers and industry key opinion leaders. Yesterday we announced the acquisition of Ultrashape, which further strengthens our PAD segment product portfolio and provides immediate entry into the large and growing market for non-invasive body sculpting.

Ultrashape has developed a best-in-class focused ultrasound system that safely and effectively destroys fat cells. Their technology is highly synergistic with our body contouring products and we believe there is a significant growth opportunity to distribute Ultrashape’s products through our global sales and distribution channels.

In the (inaudible) segment, we formed Syneron Beauty to focus on driving adoption of our home use product and began rolling out elure to key aesthetic physicians in the United States. Overall, we believe we are well positioned to expand our leadership position in the aesthetic industry.

Now let me turn to a review of our fourth quarter financial results and our operational progress, followed by a detailed commentary on the Ultrashape acquisition. Total revenue in the fourth quarter 2011 was a record $61 million, up 14% over the prior year. This represents our sixth consecutive quarter of double-digit year-over-year sales growth. International markets grew 14% during the quarter driven primarily by strong performance in Europe, Middle East and Africa, and strong sales of our recently introduced e2 and eLase products. North American sales grew 14.5% year-over-year with another quarter of strong sales of the GentleLASE Pro. Recurring revenue, which includes service and consumable revenue, grew 8% and represented approximately 29% of the total PAD sales.

While this represents solid consistent financial growth, our top line was affected by several factors. During the quarter, we had a temporary reduction in consumable and service revenue to one of our largest North American customers which underwent a restructuring. This customer has now completed its restructuring and we expect sales to this customer in the first quarter of 2012 to return to historical levels.

In the fourth quarter, we went direct into major markets in the rapidly growing Chinese market and also in the U.K. We’re now in the process of assuming full control of our joint venture in China to capitalize on our recent approval of Syneron products and on the significant and growing demand for aesthetic procedures in the Chinese market. In addition, in December we began commercial manufacturing of the GentleMAX Pro, our next generation multiple wavelength laser workstation that provides best-in-class treatments for permanent hair reduction and treatment of vascular and pigmented lesions. We’ve received very positive feedback on the new GentleMAX Pro, which will be launched during the first quarter of 2012. Our customers are eagerly awaiting its launch and some of them may have delayed their fourth quarter purchases in anticipation of ordering GentleMAX Pro once launched. Our continued top line growth supports our belief that in 2012 we will present strong growth for both our PAD and EBU segments.

Switching to the EBU, revenue in the quarter was $6 million, up 336% compared to the prior year and representing nearly 10% of this quarter’s revenue. In 2012, we plan to launch new EBU products in existing and new geographies as well as in new channels and expand our market for our existing products. In the fourth quarter, we achieved strong operating profitability of the PAD of 5.6 million or 10.1% of revenue. On a consolidated basis, the bottom line presented our fifth consecutive quarter of non-GAAP profitability with earnings per share of $0.03, reflecting our commitment to driving profitability in the PAD segment and presenting high growth and significant investment in the rapidly expanding EBU segment.

Turning now to an operational update, we are very excited about our recent expansion in China, the acquisition of Ultrashape, and our planned new product launches in 2012. In January, we announced SFDA clearance of our eLaser, eLight, eMatrix, eMax and VelaShape systems. The clearance for these five products significantly expands Syneron’s offering in China, which is a key strategic market for the Company and represents a great opportunity for growth. Syneron’s products and technologies are ideally suited for the unique composition of Asian skin and are backed by the expertise and support of our dedicated Asian market medical advisory board.

During the first quarter, we expect to launch the GentleMAX Pro, the latest innovation from the Candela product line. The GentleMAX Pro builds on the strong pedigree and installed base of the Gentle family, which has consistently been one of the best-selling Candela systems. It combines the capability of two best-in-class lasers, GentleLASE and GentleYag, to address aesthetic practitioners most commonly requested procedures, including permanent hair reduction and treatment of vascular and pigmented lesions. The GentleMAX offers practitioners the same unsurpassed speed, efficacy and ease of use found in all Candela lasers, along with the additional advantages of expanded treatment versatility and convenience.

Similar to the rollout of the GentleLASE Pro in the second half of 2011, we anticipate strong market reception for the GentleMAX Pro from both new and existing users that look to upgrade in the newest and most advanced multiple wavelength workstations. The GentleMAX Pro will be featured at our booth at this year’s annual meeting of the American Academy of Dermatologists in March in San Diego. We will also have booth presentations featuring the elure advanced skin lightening system, the e2 system, the ePrime dermal remodeling device and Evolastin procedure, the core fractional CO2 system and the eLase system. We expect each of these, along with eLase in international markets and other new products planned for the EBU to play a significant role in our growth trajectory and expect there will be a strong customer interest at the AAD.

In addition, we expect to receive marketing clearances in China, Japan and Korea for elure during the second half of the year. Once we have received clearance in these three countries, which represent the largest market opportunities for the product, we’ll be in a position to launch elure with the sales and marketing partners in these countries.

In the second half of the year, we also plan to launch two game-changing innovative body contouring systems for the core and non-core markets. These new products will build on the foundation established by the Syneron Candela family, which has an installed base of more than 7,000 systems worldwide and will be complemented by the acquisition of Ultrashape and its unique focused ultrasound products. This technology gives us immediate entry into the fat disruptive body contouring market and will make Syneron the clear leader in the overall body shaping segment.

Yesterday we announced a definitive agreement to acquire Ultrashape for $12 million. We project the transaction will be accretive within the first 12 month and we expect it to close before the end of first quarter 2012. The non-invasive fat cell destruction and body sculpting market is one of the largest and fastest growing segments of aesthetics. It provides the opportunity for our customers to address new aesthetic patients and provide a new and attractive procedure for their existing customers. We have become more interested in expanding our presence in this area as more patients and practitioners gravitate to non-invasive technologies and away from invasive techniques such as liposuction.

Ultrashape’s innovative non-thermal, multi-depth focused ultrasound system complements our own ELOS technology. This acquisition positions Syneron as the clear leader in body shaping by providing the most comprehensive body contouring and shaping solutions.

I will now provide an overview of the Ultrashape technology, it’s competitive positioning, regulatory status, and our plans for commercialization. Ultrashape’s products utilize focused ultrasound waves to selectively and non-invasively destroy fat cells for body sculpting by reducing the fat thickness on the abdomen, flanks and thighs. It’s important to point out that more than $50 million were invested by Ultrashape in the development of this technology. This focused ultrasound technology destroys the fat cells via a mechanical non-thermal process as opposed to other ultrasound technologies that utilize thermal injury of the subdermal tissue, including fat cells. There are also cold-based devices that use extremely long exposure times to cause apoptosis to the upper layers of a predetermined, predefined fat thickness, limiting their treatment areas.

Ultrashape’s newest product, the Contour V3 features the proprietary vertical dynamic focus, or VDF, pulse non-thermal focused ultrasound which instantly and permanently destroys fat cells in various depths of the fat tissue. The VDF’s ability to address multiple body areas with variable fat thickness allows the V3 to effectively treat patients of both normal and overweight size. The VDF technology also has potential synergies with Syneron’s ELOS-based body technologies which work by remodeling the connective tissue surrounding the fat cells. Ultrashape has a strong patent portfolio covering its products and we intend to leverage this for future ELOS combination treatments and systems.

The new V3 also has several other advantages compared to competing technologies. It was the first clinically proven non-invasive solution that offered measurable body sculpting results with no need for maintenance treatments. It has been shown to be safe and effective in multi-centered control trial and numerous other peer review published independent clinical studies. Patients experience an average circumference reduction of 4 centimeters or even greater after three treatments with high patient satisfaction. Treatment times range from 20 to 30 minutes and results are visible within 7 to 10 days. The procedure is pain-free and does not require hospitalization or anaesthesia. There is no post-procedure down time or thermal injury to the tissue. The physician can treat multiple body areas in a single session without excessive additional cost, increasing the value to the patient and the profitability to the customer.

The company’s technology is targeted at the core physician market with an installed based of over 700 systems. More than 200,000 Ultrashape procedures have been performed globally to date. The latest system, the Contour V3, is currently approved in Europe. The company has submitted for regulatory approval in China and anticipated potential approval in the second half of 2012. In the United States, Ultrashape has a clear and defined path for 510(k) clearance which will require a relatively small pivotal clinical study to evaluate the Contour V3. Based on the anticipated size and follow-up period of the clinical trial, the company anticipates that it could receive FDA clearance to market the Contour V3 in the United States in approximately 18 months, which would correspond with a product launch sometime in the second half of 2013.

Once the acquisition is closed, we intend to leverage our unmatched global channel to market capabilities to drive market adoption of the Contour V3 system outside of the United States. Our broad network of direct subsidiaries, distribution partners and support infrastructure will allow us to selectively target the largest, fastest growing markets and quickly introduce the Ultrashape technology. In addition, both Ultrashape and Syneron have strong relationships with key global luminaries in the area of body contouring which will further enhance our ability to add additional clinical data and scientific support to the already large body of work.

The Contour V3 also adds another treatment category for Syneron in the core market, presenting the opportunity for bundling with our broad range of industry-leading products. Overall, we believe that Ultrashape represents a near and long-term complementary technology that provides Syneron with a strategic entry into the non-invasive fat cell destruction body contouring market.

The company’s products carry consumable per-procedure accessories supporting the expansion of our recurring revenue business model. We believe that Ultrashape will benefit from Syneron’s global resources, including our broad distribution, customer support, and strong R&D pipeline to accelerate our growth across all market segments. We are very excited about the acquisition and look forward to providing additional updates as the transaction closes.

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

Asaf Alperovitz

Thank you, Lou. Revenue in 2011 was 228.3 million, up 20.5% compared to 189.5 million in 2010. International revenue grew 22.2% year-over-year to 150.6 million, and North America revenue grew 17.4% to 77.7 million. Sixty-six percent of 2011 revenue and 65% of 2010 revenue respectively were in the international markets.

Revenue in the fourth quarter of 2011 was $61 million, up 14.1% compared to 53.5 million in the fourth quarter of 2010. International revenue grew 30.8% year-over-year to 40.1 million and North America revenue grew 40.5% to 20.9 million. Sixty-six percent of both the fourth quarter 2011 revenue and the fourth quarter of 2010 revenue were in the international markets.

Product revenue and recurring revenue, which includes service and consumables, for the fourth quarter of 2011 were 44.9 million and 16.1 million respectively. Recurring revenue in the fourth quarter was temporarily impacted by a restructuring that occurred at one of our major North American customers. Syneron consumable revenue decreased 7% year-over-year due to this event. Excluding the temporary effect of this restructuring, Syneron consumables revenue was up 54% year-over-year. Following the completion of the restructuring and the continuing commercial relationship with this customer, we expect revenue in the first quarter of 2012 from this customer to return to the levels recorded in prior quarters.

Gross margin for the fourth quarter of 2011 was 53.3% or 55% on a non-GAAP basis, excluding stock-based compensation and amortization, compared to 53.7% or 55.6% on a non-GAAP basis in the fourth quarter of 2010. The slight reduction in gross margin was primarily related to higher mix of EBU segment product sales which currently have lower gross margins compared to the PAD products.

Fourth quarter 2011 operating loss was 5 million or an operating income of 2.2 million on a non-GAAP basis. This compares to operating income of 8 million or 4 million on a non-GAAP basis in the fourth quarter of 2010. Fourth quarter 2010 GAAP operating income includes one-time income of $8.5 million related to the recognition of a deferred gain related to the Company’s merger with Candela Corporation.

Our operating margins in the fourth quarter were impacted by the lower gross margin, the major North American customer restructuring, increased sales and marketing efforts to support the launch of our eLase and e2 products, and the increase in operating expenses associated with the significant growth in EBU segment revenues. The EBU currently incurs higher relative operating expenses compared with the PAD segment due to start-up costs associated with developing and marketing its emerging technologies and products into existing and new markets.

Legal expenses in the fourth quarter were approximately 1.6 million. The main drivers of these expenses are one-time in nature and we do not anticipate they will recur meaningfully in 2012.

GAAP net loss for the fourth quarter of 2011 was 4.8 million or $0.14 per share compared to GAAP net income of 8.4 million or $0.24 per share in the fourth quarter of 2010. On a non-GAAP basis, net income for the fourth quarter of 2011 was 1.1 million or $0.03 per share compared to net income of 3.6 million or $0.10 per share in the fourth quarter of 2010.

Fourth quarter non-GAAP operating income and net income exclude one-time income and expenses as detailed in the Company’s financials in today’s press release, with the main items being amortization of acquired intangible assets of 1.9 million, post-acquisition severance accrual of 1.3 million, stock-based compensation of 0.9 million, and other one-time and non-recurring expenses net of 2.9 million.

Now I will provide a review and commentary on the results from our two reporting segments – the professional aesthetic devices, or PAD, and emerging business unit, or EBU. For the fourth quarter of 2011, PAD revenue was 55 million or 90.2% of total revenue, and EBU revenue was 6 million or 9.8% of total revenue. EBU sales growth included the continued rollout of the Syneron Beauty home use products and elure advance skin lightening, which was partially offset by lower year-over-year sales in the dental business.

2011 was our first full year of segment reporting with the EBU. EBU revenue for 2011 was $20 million, representing a 410 year-over-year growth. During 2011 we have learned and continue to learn about the dynamics of this emerging business. On the sales line, the main driver of growth for Syneron Beauty in any given quarter is the launch of products in new geographies or in new retail locations. The timing of our customers’ purchasing to support these launches is a key factor impacting our quarterly EBU revenue. We expect to see short-term quarterly fluctuations in EBU’s revenue as we open new territories and retail channels. In 2012, we expect significant year-over-year growth in the EBU segment.

Operating income in the PAD segment was 5.6 million on a non-GAAP basis, representing an operating margin of 10.1%. This compares to non-GAAP operating income of 5.9 million or 11.4% operating margin in the fourth quarter of 2011. Our PAD operating results were affected by the following factors: higher sales mix of Candela products, which was also due to lower Syneron service and consumable revenue that were impacted by one of our major North American customer’s restructuring which I mentioned before; and higher sales and marketing expenses associated with the launch of our e2 and eLase products. These factors were partially offset by higher production and sales volume, operational efficiency and cost-cutting measures that we have implemented.

Non-GAAP operating loss in the EBU segment was $3.4 million. Similar to previous quarters, EBU expenses in the fourth quarter reflect higher relative costs associated with the ongoing development and launch of several EBU products, with the highest expenses focused on marketing investments. These launches include the Me home use hair removal system in Canada along with the elure advanced skin lightening and the new Candela line of products in North America and in additional geographies. We believe we are well-positioned for continued growth of these and all of our other new product launches.

Turning to the balance sheet, our DSO declined to 65 days, representing a decrease of six days compared to the DSO of 71 days both in the fourth quarter of 2010 and in the third quarter of 2011. At December 31, 2011, cash and cash equivalents including short-term bank deposits and investments in marketable securities net were 171.1 million compared to 177.2 million as of September 30 of 2011. We maintained the strongest balance sheet in the industry and continue investing in our business and potential acquisition opportunities such as Ultrashape.

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 and you wish to remove yourself from the queue, please press the pound key.

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

Anthony Vendetti – Maxim Group

Okay, thanks. Good morning. In terms of the Ultrashape acquisition, you said 700 customers are using the product right now. Can you talk about the average selling price of the product, and then if you could just discuss a little bit what the trailing 12 months revenue have been; and if there’s been a decline in that revenue, what would you attribute that to, and how is this new product launch different than the existing product that’s out there?

Louis Scafuri

Anthony, as we look at the Ultrashape install base and product portfolio, of the 700 customers that our there, most of them are still the Contour version 1. It was within the last 12 months that the Contour Version 3 with VDF has been introduced; and again, that product is only available in Europe. The ASPs to the end customer are between 80,000 to 90,000, and there is a recurring revenue element along with it.

Presently Ultrashape sells the device through a distribution network, and as we look—we pointed out earlier that $50 million has been invested primarily in the technology. We believe that their marketing effort and sales effort has been significantly underfunded for a number of years, particularly in the last 12 months wherein they invested very heavily to get to this latest stage for FDA clearance. It’s our mind that in the last 12 months, they have a revenue dip from previous years mostly due to upgrades, lack of regulatory approval for the new version 3, as well as the significant investment they need to get to the FDA ITE clinical trial stage.

Asaf, any additional comments on the revenue?

Asaf Alperovitz

Yeah, Anthony, just in terms of the actual revenue numbers, Ultrashape is a publicly traded company in Tel Aviv, so (inaudible). For the first nine months of 2011, revenue was $5.5 million and for the year of 2010 revenue was $8.3 million.

Anthony Vendetti – Maxim Group

Okay. And in terms of the professional unit, you have obviously a very broad product portfolio and some new products coming out in 2012. If you were to categorize the current demand state or state of the market in terms of what you see out there, based on what you saw in 2011 and based on what you see in 2012, would you categorize the demand increasing, the market improving? And then if you could talk about any difference you’re seeing in the credit markets.

Louis Scafuri

Are we talking, Anthony, across all the aesthetic markets, or are you talking specifically about body contouring?

Anthony Vendetti – Maxim Group

Across all.

Louis Scafuri

Well, across all I believe we’re seeing an increase in the current demand. We have brisk quote activity. We have, of course, in North American the political election, and we have several other marketplaces that continue to be very strong. Recently we just came back from the IMCAS meeting, a major professional meeting in Europe, and the attendance was up close to 50% year-over-year of physicians. We’re seeing in terms of our website activity as well a significant number of hits. Our direct to consumer marketing and the other ways we reach out to the market and the way we measure the level of interest and activities internally continues to show strong positive trends coming into 2012.

Anthony Vendetti – Maxim Group

Okay. And then any comment, Lou or Asaf, on the credit markets? Any change there?

Asaf Alperovitz

In terms of the financing environment, we can say that both domestic (inaudible) and international lending environments were stable through Q4, pretty much at the same level that we’ve seen them in the prior quarter. That goes also for Europe, that overall we see the same environment except for certain markets, specific markets where financing (inaudible). What we try to do in Europe is to find financing solutions and alternatives for our customers in these specific countries, leveraging and utilizing our relationship with BNC and some other banks we are closely working with.

Anthony Vendetti – Maxim Group

Okay, great. Thanks guys. I’ll jump back in the queue.

Operator

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

Dalton Chandler – Needham & Co.

Good morning. Could you just talk about your marketing plans for Ultrashape, and really I’m asking about when you go into an account, how you would determine whether you should be selling them an Ultrashape versus a VelaShape system.

Louis Scafuri

Well Dalton, that’s a very good question and it’s actually—the answer is quite easy. They’re both complementary. The Ultrashape works in the area of fat cell destruction. It not only de-bulks large areas of fat at various body parts, it would also as well allow the physician in the free mode to sculpt. The Vela adds RF and ELOS energy to allow the tightening of the connective tissue around the fat cells as well as the smoothness of appearance, so we believe the ultimate in body contouring solutions is a combination of both these technologies.

Dalton Chandler – Needham & Co.

Okay. And could you just talk about the regulatory process? I know Ultrashape has been around for a while; it’s been approved outside the U.S. for a while. What has happened that gives you the confidence that the 510(k) process is going to work now?

Shimon Eckhouse

This is Shimon. Ultrashape had a formal meeting with the FDA on this question not very long ago. They actually formally have an agreement with the FDA on the pivotal clinical trial that they have to go through, including all the details of this trial with also a very well defined labeling that everybody agreed on, which is very different than what they used to have up to very recently. Ultrashape has a history of trying to go originally to a 510(k) then going to a PMA with, I believe, not a very well defined clinical trial which really ended up in costing them lots of money and the very long process of struggling with the FDA. We believe it’s much cleaner now, very well defined, and can be carried out in the 18 months that Lou mentioned.

Dalton Chandler – Needham & Co.

Okay. How did the labeling change?

Shimon Eckhouse

Well, the labeling really has to do with defining the mechanism of action, and the way the mechanism of action is defined, as you may know, Ultrashape unlike other ultrasound technologies is really using relatively low frequency ultrasound that is focused so and it uses a mechanical effect mainly on cell membranes, which is really one of the main advantages of this technology because it makes it uniquely different and selective compared to anything else that is out there on the market. The labeling is really around that – around the mechanism of action and what it does. Combined with that is also a very well defined clinical outcome that the FDA is looking for, which when we look on the clinical results that were collected by Ultrashape with their latest version 3 device, we feel very comfortable that we can show quite successfully.

Dalton Chandler – Needham & Co.

Okay. All right, thanks very much.

Operator

Again, if you have a question at this time, please press star then one on your touchtone telephone. Our next question comes from Jeremy Feffer from Cantor Fitzgerald. Your line is open.

Jeremy Feffer – Cantor Fitzgerald

Hi, good morning guys. Wanted to come back quickly to the—want to make sure I’m clear on the recurring revenue issue, so it was the one customer in North America. What gives you the confidence that this customer is coming back? Has this customer starting repurchasing again in the quarter?

Asaf Alperovitz

Yes, as I said before, in the fourth quarter there was a temporary impact by the restructuring that occurred at one of the major North American customers, which is one of our most significant customers in terms of purchasing consumables. As you ask, they actually started purchasing in Q1 again and in the same volume that we are used to historically in the prior quarters, so we expect volume to increase in Q1 again to the standard level we’ve seen.

Jeremy Feffer – Cantor Fitzgerald

Okay, okay. And then I just wanted to come back to Ultrashape – a lot of my questions have been answered, but just on a sort of bigger picture, this is becoming somewhat of a crowded space now with some of your competitors also launching similar products in recent months. What’s going to be the point of differentiation – is it going to be the technology, is it going to be the power of your sales force? How are you going to stand out in this increasingly crowded space?

Shimon Eckhouse

Let me refer to technology first, and then Lou will be happy to talk about our channels. In terms of technology, as I pointed out, Ultrashape is really using a unique technology which it’s invested a lot of money in over the last year that it has been doing this, and really pioneered a mechanism which is selective on fat cells. Simply by the fact that you use low frequency ultrasound that creates a mechanical process that breaks up fat cells, which happens to be—in a way, fat is a very resistant form of tissue, but it has one weak point which is the membrane of the fat cell. In a way, this technology really focused on that; and in that sense, although the market is crowded, we believe that this technology stands out from everything else that is out there.

We, as you know of course, have been in this application for many years mainly based on ELOS technology, which is a combination of the use of RF light and massaging, which we believe is a very effective technology to repair connective tissue; but we do it through an injury process which is what other competitors use as well when they make claims about body sculpting. Ultrashape stands out because it’s a different form of technology.

Louis Scafuri

To add to what Shimon just said, again, we believe we have a complete portfolio of product offerings. If one looks at this segment and looks at the market studies as well as some of the key luminaries, they have multiple ways to address different ways to treat a patient’s different body part areas as well as to tighten and achieve results. If we look at the value proposition of this device, this device allows the physician to treat both obese as well as normal-sized patients. It allows the physician to treat different body treatment areas – abdomen, flanks and thighs, buttocks – all with the same device. It further allows the customer a price point which, again, as we analyze the best way to go to market and to achieve market share very quickly, we believe we will have the best value proposition both from the cost of acquisition, the cost of ownership, as well as clinical results.

We also have the ability to bundle. Most of the core customers have one or a series of our products – things like service contracting, offering ability to reach all geographies. We sell in over 90 countries both on a direct as well as through distributor partner basis. It’s second to none in the industry. Our channel is there, established, transacting and supporting customers on a worldwide basis today. So we’re very excited about this. We’re very excited about building on our Vela technology, and we’re very excited about the clinical reports as well as the anecdotal reports we get continually from the plastic surgeons and key dermatologists that have used this version 3 technology. So we’re quite excited about this, Jeremy.

Jeremy Feffer – Cantor Fitzgerald

Okay. That’s very, very helpful. Thank you very much.

Operator

Our next question comes from Rich Newitter from Leerink Swann. Your line is open.

Richard Newitter – Leerink Swann

Hey guys, thanks for squeezing me in. Can you hear me okay?

Louis Scafuri

Yes, Rich.

Richard Newitter – Leerink Swann

Okay. I wanted to go back to the quarter for a second and the service revenue disruption. Asaf, maybe could you just quantify just what that impact was to fourth quarter sales and what the impact was to margin, just if you were to back that out?

Asaf Alperovitz

Rich, we don’t provide consumable data. What we do provide, as in the prior quarter, is the quarter-over-quarter change in terms of consumable, and as I said in my script, if we exclude this temporary effect, instead of going down in consumables year-over-year, consumable revenue was actually up 54% if you neutralize or exclude this one-time event. Again in Q1, we are back to business with this customer and the actual purchasing to date implies that we are back to standard level of operations. So that’s as much as I can present to your question.

Richard Newitter – Leerink Swann

Maybe just leaning in a little further, can you quantify just even a range – I mean, were we talking 1 to 3 million, 4 to 6 million? What was even the ballpark?

Asaf Alperovitz

I would say 1 to 3 would be a relevant range.

Richard Newitter – Leerink Swann

And on the EPS line, on the margin? Service revenues, I would imagine, carry a higher margin, correct?

Asaf Alperovitz

Yes, it’s mostly consumable and also some service revenue, and certainly the consumables are running at a very high gross margin.

Richard Newitter – Leerink Swann

Should we think about that closer to the 70 to 80% range, just to get to a rough EPS impact?

Asaf Alperovitz

It’s close enough.

Richard Newitter – Leerink Swann

Okay. And just maybe looking towards 2012, it sounds like you are very confident that you’re going to get approval in one of your key markets for your skin whitening product, elure; and you specifically said you expect very significant year-over-year growth in the EBU. I would imagine that’s in large part due to elure. Can you just talk a little bit about the ramp that would be involved there? Is this something that once you get an approval in one or all of those key markets, that you can from Day 1, you think, start seeing immediate contribution to both sales and EPS, or will it take time? And what’s the relationship with your marketing and distribution partners in those regions?

Shimon Eckhouse

You ask quite a few questions at the same time, but first of all, just to clarify – the elure sales in the EBU are not, at least in the quarter that we reported so far, don’t play a very important role. You are right that we view it as a product that has very significant potential. The three markets that Lou mentioned are markets where we are well advanced in the regulatory process, and this is the reason we believe we will have it by the second half of the year. In all of those markets, we had some discussions with potential partners on distribution. Even if we get the clearance at the beginning of the second half of the year, there will be a ramp-up period that may take a while before we see significant numbers out of that. But all in all, yes, this is a very significant product for us with a very large potential, but so far in what we reported in the EBU, it’s a very small percentage of our income.

Richard Newitter – Leerink Swann

And if I could ask one more – Lou, just on the emerging markets expansion, it sounds like you guys are a little bit more focused on some of the pure emerging markets, China specifically, in 2012. Can you talk about the role emerging markets played in 2011, perhaps what the percentage of sales from some of those key emerging markets is today, and where you think it can go?

Louis Scafuri

Rich, as we look at 2011 in perspective, we were very fortunate that many more things went right than went wrong for us. You know, we had tsunamis and I’m sure every other CEO is going to talk about past market conditions as well. I would say we’ve barely penetrated. We’re in these markets barely with one finger or one toe. We have significant upside potential in markets like China, Brazil, the U.K., marketplaces such as Canada – all of which areas we went direct in. Some of the other markets that we feel that we can continue to grow further – certainly North America, we believe the economy is improving there. And as I look at the top three things that we look to execute upon to deliver significant revenue growth next year, I could just pick three markets – China, Brazil and certainly a market such as Korea – and I have significant growth opportunity beyond which we achieved in 2011 results.

So as we focus—one thing we committed to when we put our company together with Candela was to be agile in our marketing, to be able to go where the market opportunity was; and we remain standing ready and able to deliver, again, execution in any market opportunity.

Richard Newitter – Leerink Swann

And then—I’m sorry, if I could just ask one more. You’ve got the Ultrashape acquisition, you have one of the strongest cash positions in the industry. Any color you want to give us with what this signals for future business development activities? Should we expect more of the same size deals going forward? I know you had previously expressed an interest in doing a deal in the elure side. Is that still in the cards?

Louis Scafuri

I think as you look across all of our segments—first off, there’s a reason why we have our cash in the bank, and the reason why is when you look at an acquisition such as Ultrashape, an acquisition such as Candela, an acquisition such as Primaeva, an acquisition such as Pharos, I think we created great accretion and we will create great accretion around the ultra-safe asset because we’re very—we think through things quite thoroughly and we believe we can do both bolt-ons as well as acquisitions of scale at this point in time. We’ve built a lean infrastructure. We have the operating process to do that, and as we look at our three business segments we certainly contemplate additional business growth opportunities in acquisitions, both internally through organic growth as well as look at our PAD, as look at elure, as well as looking into Syneron Beauty and the rest of the EBU. So we’re very opportunistic around opportunities, and again, our job is to create shareholder value and to expand our profitability.

Richard Newitter – Leerink Swann

Okay, thanks a lot, guys.

Operator

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

Louis Scafuri

I would like to thank all of our very, very hardworking and dedicated employees for the contribution in 2011 and their focus, dedication and desire to achieve results. We look forward to 2012. We look forward to servicing our customers, increasing our market share, and to winning in the market despite the circumstances.

I’d like to thank everyone for joining us on the call, and we look forward to speaking to everyone in the near future. Thank you.

Operator

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

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