Syneron Medical Q1 2007 Earnings Call Transcript

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Syneron Medical Ltd. (NASDAQ:ELOS)

Q1 2007 Earnings Call

14 May, 2007 8:30 am

Executives

Judith Kleinman - VP of IR

Shimon Eckhouse - Chairman

David Schlachet - CEO

Doron Gerstel - President of Syneron North America

David Seligman - CFO

Fabian Tenenbaum - VP of Business Development

Don Fagen - VP of Global Sales and Marketing, VISX Inc.

Analysts

Keay Nakae - Unterberg

Amit Hazan - CIBC World Markets

Jose Haresco - Merriman Curhan Ford

Suraj Kalia - Piper Jaffray

Mathew Burton - Sapphire

Presentation

Operator

Good morning. My name is Toni and I will be your conference operator today. At this time, I would like to welcome everyone to the Syneron Medical First Quarter 2007 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions). Thank you.

It is now my pleasure to turn the floor over to your host, Judith Kleinman, VP of Investor Relations. Ma'am, you may begin your conference.

Judith Kleinman

Thank you, operator. I would like to welcome you to Syneron Medical's first quarter 2007 earnings conference call. Two press releases were issued by Syneron Medical this morning, the first to report on our strong first quarter earnings, and the second, a description of changes to the senior management structure at Syneron. Our conference call today will address both press releases.

Speaking on the today are Shimon Eckhouse, David Schlachet, Doron Gerstel, David Seligman, Fabian Tenenbaum and Don Fagen. All will be available for questions at the end of our prepared remarks.

It now remains for me to reiterate the Safe Harbor statements of the conference call. Statements herein may be forward-looking within the meaning of the US Private Securities Litigation Reform Act of 1995, relating to future events or our future performance. These include statements with respect to our expectations regarding, but not limited to, financial forecast for 2007, maintaining a leadership position in core markets, cross-selling opportunities and the launch of a home use product. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our 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 those forward-looking statements, including, but not limited to the risk associated with our ability to commercialize new products, identify new markets for our technology; our ability to manage our growth; competition; pricing pressures and risks related to our intellectual property.

These risks and other factors are summarized under the heading Risk Factors in our Annual Report on Form 20-F for the year ending December 31, 2005, filed with the Securities and Exchange Commission on June 30, 2006. These factors are updated from time-to-time with the filing of reports and registration statements with the Securities and Exchange Commission. We do not assume any obligation to update forward-looking information contained in this press release.

I now please have the opportunity to turn the call over to Shimon Eckhouse, Chairman of the Board of Syneron Medical.

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Shimon Eckhouse

Thank you Judith and good morning everyone wherever you are. It's a real pleasure having you on this very important conference call on the results of our first quarter of 2007 and management changes, which we are implementing today. By now, I hope you had the opportunity to review our announcements that we issued today and let me go through the key points with you.

Syneron is moving forward strongly on many strategic fronts including new devices and technologies, expanding penetration in new markets and strengthening our distribution channels. Our first quarter results and reaffirmation of guidance for the full year are a strong testament to our ongoing progress. Revenues grew strongly over all regions and rose 36% relative to the first quarter of 2006. While the pro forma net income, exclusive of stock-based compensation was $11.1 billion or $0.40 per diluted share.

Our Board of Directors is very gratified by the progress we have made to-date. At the same time, the Board also recognizes the utmost importance of installing the management structure and executive team that can lead our future growth.

As you know, over the last 18 months, we have brought in a number of outstanding managers for Syneron. And this executive recruitment and retention profit is enabling us today to begin the seamless implementation of our planned management transition, to lead the company forward into its future growth.

We believe the enhanced management structure we are putting in place, strongly positions Syneron to execute on our business strategy, and achieve our growth and value creation goals for all of our shareholders.

As explained in detail in the press release, here are the main steps we are taking regarding the management change. Doron Gerstel, was currently the President of Syneron, North America, is becoming the CEO upon the planned retirement of David Schlachet.

In addition to the work that Doron has done in Syneron over the last year or so, Doron has held senior management positions in technology and medical aesthetic companies, where he has extensive experience in managing worldwide operations, introduction, engineering, IT, service and support, procurement, logistics, quality assurance and control, and of course more than anything else in phase management.

David Seligman had decided to pursue other interests and would be succeeded as CFO by Fabian Tenenbaum. Fabian has broad experience in profit and loss management, corporate strategy and international business management. As Vice President for Business Development, Fabian was responsible for developing the growth strategy for Syneron home use product, and played a key role in achieving the collaboration agreement with P&G, which is of course of high strategic value for Syneron.

Fabian's priority is to translate our strong revenue growth and expanding pipeline into sustainable earning growth, while helping to optimize our expense and capital structure. He is committed to proper control and transparency, as well as to working closely with our investor relations team in the United States and in Israel and to enhance our investor relationship program.

I wish David Seligman well in his future endeavors. We extend our deep gratitude for his contributions and stewardship. We are very pleased that David Schlachet, will remain with the company on the Board of Directors in order to continue to add his contribution to the growth and strength of Syneron.

Let me now turn the call over to David to review our first quarter results.

David Schlachet

Thank you Shimon, and good morning to everybody. To reiterate Shimon's comments on the quarter, we are very-very pleased with the strong revenue growth Syneron continues to achieve. Revenues for the first quarter of 2007 grew 36% over the same period in 2006 and amounted $32.3 million. Revenues grew strongly across all geographical regions with North America accounting for 56% of total revenue and international phase accounting for 44%. And as you know geographic balance is Syneron's strength and strategy.

Net income for the first quarter of 2007 was $11.1 million or $0.40 per fully diluted share, exclusive of stock-based compensation. We also reaffirmed our previously announced guidance and expect revenues for the full year 2007 to grow approximately 20%.

Our success in growing first quarter revenues was the result of our continued investment in marketing and sales and then with an emphasis on assisting the customer where and whenever needed to help grow their business, as well as the continued strength in the market for medical aesthetic equipment in North America and worldwide. Our investment in marketing and sales which peaked in the fourth quarter of 2006 has been reduced by close to 7% on a non-GAAP basis compared to the prior quarter; this is inline with our expectations and reflects our strategy to improve our gross structure.

We expect our investments in R&D and in new dental aesthetic technology to further derive product enhancement and in turn our long-term growth. We are particularly encouraged by our recent collaboration with Procter and Gamble that positions us as the leader in the energy-based home market. We are confident that the partnership will allow us to achieve deeper penetration of our growth product offering.

Before turning the call over to Doron to discuss our results in Americas and additional developments with Procter and Gamble, I want to take this opportunity to express what a privilege it has been to lead Syneron through its early stage development. I truly believe this company will continue to accomplish great things under the new management team. Doron.

Doron Gerstel

Thank you, David. I know that together we will accomplish a smooth hand off we (inaudible). I am very excited to have the opportunity to lead Syneron to its next growth phase. Syneron is unique in its technology, customer focus and people. I also believe that we have an outstanding opportunity to grow in the aesthetic medical market. We invested heavily in building our marketing and sales organization, which paid off as you all can see in Q1 results, with our ability to grow our top line and take market share from our competitors. Longer term our investment in R&D in new aesthetic technologies will further drive product enhancement and future growth.

We are particularly encouraged by our recent collaboration with P&G and reached a number of key milestones during this quarter. We successfully completed our internal second phase clinical trial. The multi-site study that included 28 patients who used the next stage, prototype in a home use setting and demonstrated excellent results, high satisfaction level and a strong purchasing trend. We also successfully test formal safety testing and are moving ahead in the collaboration according to the aggressive milestone we agreed with P&G.

Syneron is a great company, and I am energized by its track record, its people and its potential. In the forth coming weeks, Donald Fagen and I will be meeting with you, our shareholders in the U.S., Europe and Israel. We are looking-forward to speaking with you on a regular basis as part of an enhanced Investor Relation program we are launching.

Let me now turn the call over to David Seligman to address our results in more detail. David.

David Seligman

Thank you, Doron and good morning to all. In our earnings release, we presented GAAP base reporting which took into account the company's adoption of FAS 123R related to auction expense starting in Q1 of '06, as well as non-GAAP analysis. As in prior quarters, my discussion will concentrate primarily on our non-GAAP reporting, which we believe more appropriately reflects our financial results.

Revenues in the first quarter were $32.3 million. We had a strong quarter in international regions. Revenue grew 41% year-over-year to $14 million, accounting for 44% of total revenue. North America revenue grew significantly as well, representing a year-over-year growth of 33% to $18.3 million, and has accounted for 56% of total revenue.

Gross margins were 83, as expected, and a bit below prior quarters. This is, in part, due to geographical mix. We are higher than usual proportion of the revenue was recorded from international markets, and, in part, due to a mix of products. I want to point out that ASPs, average selling prices have not changed, and were similar to the ASPs of the last three, four quarters.

We have continued our investments in sales and marketing, but we are able to slightly reduce expenses on a non-GAAP basis from $13.5 million in prior quarters to $12.6 million in this first quarter. This plan is to continue and reduce expenses in absolute dollars as well as a percentage of revenue.

Net income on a pro forma non-GAAP basis, excluding stock-based compensation expense of approximately $2.6 million, was $11.1 million in the first quarter, and EPS was $0.40 per diluted share. Stock-based compensation expense in accordance with FAS 123R was $0.09 per diluted share.

Let us now turn to our balance sheet. In the first quarter, we generated $7.6 million in cash and investments. We ended the quarter with a cash position, including short and long-term equities and deposits of about $180 million and zero debt, representing cash per basic share of $6.5.

Our DSOs increased from 90 in prior quarter to 101 days in this quarter on an average level of trade receivables. This was mostly due to a slight delay in collection of North America. However, to-date, we have collected over $15 million of this balance. This is compared to a similar figure, which we have used to report in a prior conference call of about $10 million. If we take into account these figures, the DSOs would have been in the mid-90s, which is in our targeted range. We have no debt and very low ordinary liabilities, and, as a result, our equity continues to account for 88% of our balance sheet.

And now for our few final words. This is my last conference call as Syneron's CFO. With the retirement of David Schlachet, whom I had both the honor and the privilege to serve Syneron with, and with appointment of the Doron Gerstel as Syneron's new CEO, I felt it is appropriate to step down and turn to other opportunities. I have enjoyed working with you, our investors and analysts, and I want to wish Syneron all the best. I believe that Syneron's marketplace is a great opportunity and, if not, the Syneron will continue to excel.

I would like to pass the call on to Fabian Tenenbaum.

Fabian Tenenbaum

Thank you, David, and good morning everyone. I do look forward to working to effective smooth transition. As Head of Business Development to Syneron my commitment was to identify and bring to solution new growth opportunities, the agreement with Procter and Gamble being the most consequential to-date. As CFO, I also understand that the growth we achieved must be profitable and achieved under a tight cost structure that meets or exceed our Return on Capital and Return on Equity growth. I am committed to optimizing our internal controls and capital allocation. In sum, I plan to help Syneron to achieve strong top line growth, industry competitive returns, and proper controlled environment and enhanced transparency.

I would now like to hand the call over to the Donald Fagen, our new President for Syneron, North America. Don?

Don Fagen

Thank you Fabian and congratulations on becoming Syneron's new CFO. It is a great pleasure for me to become part of the management team of Syneron. I have been in the business of selling capital and medical equipment for elective medical procedures for more than 20 years. I have seen the growth and success of laser vision correction surgery and played a material role in bringing it to the U.S. market and assuming a clear leadership position for VISX.

With the acquisition and final integration of VISX by AMO, it became clear to me that I needed to look for another growth opportunity, which is at least as promising as that of laser vision correction. The business of non-invasive aesthetic medicine was the clear place for me. The exciting part about this business is the unlimited growth potential with the market, which is significantly larger than the available ophthalmology market, I estimate it at being at least twice that of ophthalmology.

I have reviewed carefully the various players active in this market and Syneron was the right choice for me. The combination of technology, customer focus, product pipeline and people convinced me that Syneron is my choice. I am excited to have the opportunity to lead the strongest and most talented sales, marketing and support team in North America. I want to thank to Ron and the Board of Directors for their trust, and I am sure we will deliver.

Thank you for your time this morning, and I'll now ask the operator to explain the process for the Q&A session. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time the floor is open for questions. (Operator Instructions) Our first question is coming from Keay Nakae of Unterberg. Please go ahead.

Keay Nakae - Unterberg

Yes, good morning. Why don't you talk a little bit about the margins? Starting with the gross margins, if the product mix that you saw both US or [non] US and the different product categories, what should we expect in those areas going forward as it projects the gross margin, which was down slightly sequentially?

Shimon Eckhouse

Let me answer first and then I'll let David Seligman to go into more details. We expect our gross margins to stay in the range of 83% to 85%, as we told you in the past. And David, why don't you go in a little bit more detail and explain where we are or where we were in the first quarter on this number?

David Seligman

Okay, as Shimon mentioned before, the number that we have guided the market, the numbers that we mentioned in prior conference calls, whether we expect gross margins to be in the range of 83% to 85%, and we are well within this range this quarter the reason why gross margins are lower than prior quarter are in part, as I said before, due to the geographical mix. If we would've felt the same geographical mix of the prior quarters, we will probably see the gross margins of 84% and the other section of it is the mix of products.

This slight difference in the gross margin should not allow me because the growth in the international markets which, where we sell the product through network of distributors is very important to note and while these sales offer slightly lower gross margins, they represent significantly better operational margin since we have a lower sales and marketing expenses in those markets. We believe that going forward you should continue to see gross margin between 83 and 85, and I want to emphasize what I mentioned before that we have not seen changes in ASPs of specific products to specific locations.

Keay Nakae - Unterberg

Just starting geographically, do you expect the OUS growth to be stronger than U.S. growth?

David Schlachet

Overall for the year we expect both regions to grow in similar technical magnitude, but it may vary from quarter-to-quarter.

Keay Nakae - Unterberg

Okay, and then as long as the product mix, what was it that you saw more of that was a lower ASP?

David Schlachet

We usually don’t go into a breakdown of specific products, so I would rather leave that to Doron to take this.

Doron Gerstel

Yeah, I would just say one thing to make it a little bit clear. As many of you may know, we sell products that are either based on intense pulse light (inaudible) or on lasers. Whenever we sell a laser based product, the cost of goods sold is a little bit higher because of the cost of the diode laser, and this is, I would say, the main impact we have due to the product mix.

Keay Nakae - Unterberg

Okay. With respect to the operating expenses, R&D was one of the items that did tick up slightly sequentially. Should we expect that level of spending for the balance of the year or can you give us some thoughts there?

David Schlachet

David, would you like to answer this question?

David Seligman

Yes, the R&D, we announced that the current R&D is being about 7% of sales, and we intend to continue and make expense this amount, as percentage of sale on R&D because the R&D and outcome of the R&D is one of major growth drivers of our activity.

Keay Nakae - Unterberg

Okay. And then finally on the P&G agreement. Any update on the timing of the commercial launch of your first product with them?

David Schlachet

I wish ask Fabian to answer this question, would you to say anything about it?

Fabian Tenenbaum

No. At this point, we are going through the agreed upon milestone. There is no change in the date of launch as was discussed in the previous call when we announced the deal.

Keay Nakae - Unterberg

All right, thanks. I will get back in queue.

David Schlachet

Thank you.

Operator

Thank you. Our next question is coming from Amit Hazan of CIBC, please go ahead.

Amit Hazan - CIBC World Markets

Hi thanks. Good morning and congrats to Doron and everyone that got the promotion.

Doron Gerstel

Thank you.

Amit Hazan - CIBC World Markets

Just a few questions from me; first of all just on the DSOs, can you give us the little bit more color? Is it, well in the US is it related to certain customer base, which is why it increased or what exactly happened in the US to cause the delay?

David Schlachet

It's not anything specific-to-specific customers. This accounts for both as OBOs who were collected in April instead of being collected in March. And as I mentioned before, we typically, in the conference call, used to report collection of about $10 million to $11 million, out of the balance and then discounted cash flow we can report over $50 million. If this is being collected on time, we would have shown on the cut-off date about [additional] to the mid 90s. Unfortunately you know, we reported on a cut-off date, regardless if you recollect something on April 1st.

Amit Hazan - CIBC World Markets

And then on the sales guidance for the year, you kept it the same; I know that you want to be conservative there. But maybe just a little bit of help on how we should be thinking of the quarter share unfolding in 2007? And that it obviously means that we are going to see some quarters below 20% growth to get to your 20% growth, since you put up nice growth this quarter. How should we think about the growth, I know you don't want to give quarterly guidance, but a little bit of general color on the quarterly growth trajectory?

Doron Gerstel

From a general color standpoint, I think the first quarter is, give the color. The color is that we did more of what we expected, we gained more market share and we took full advantage of the weakness of some of our competitors. That's definitely a good sign and we intend to continue in this trend going forward.

Amit Hazan - CIBC World Markets

Okay. And then perhaps a little bit of that, maybe indirectly but can you talk about how your inside sales reps are doing right now and how much they are actually contributing and what you think about that program, where you are in terms of the sales force there? And then just generally from a direct sales rep perspective, did you lose any, did you have turnover during the quarter, just give us an update on where you are there?

Doron Gerstel

As far as the inside sales this is an initiative that we started back in Q4 2006 [with the] pilot and now we have a team of seven sales reps in Toronto that are running in full steam. Definitely created the expected outcome from lead qualification and an inside sales and we intend to increase the number of inside sales reps to 11, that's our plan for this year. What was the other part of your question?

Amit Hazan - CIBC World Markets.

Your direct sales reps, have you lost any one during the quarter?

Doron Gerstel

We didn't lose anyone that we regret.

Amit Hazan - CIBC World Markets.

Okay. Hopefully they are not listening to this call. And the last question I have is just on the dental laser, if you can give us an update on both the sales force there, and also any contribution from that segment this quarter?

Shimon Eckhouse

Yeah, this Shimon. There is not a very significant number that we have seen in the first quarter of '07. What we are doing right now in the US is selling systems through mainly our opinion leader, which is a very important process in generating the marketing activities that we need, in order to move to larger numbers. And international markets, we signed up a few, I would say, extremely attractive distributors that are very excited by the product and are willing to take products. They are doing it of course very carefully, because we don't want to have a too aggressive launch. But everything we get is feedbacks on the product from the dentists, their view is extremely positive.

Amit Hazan - CIBC World Markets

So, how many reps do you have in the US and when should we see contribution?

Shimon Eckhouse

Right now, we have a very small number. I am not even sure what the exact number is, but it's probably around two to three reps not all of them direct. I believe that in the US we will start seeing a significant contribution from the third quarter on, and it should be probably third to fourth quarter international market.

Amit Hazan - CIBC World Markets

Okay, thanks very much.

Shimon Eckhouse

Thank you.

Operator

Thank you. Ladies and gentlemen, as a reminder, the floor is still open for questions. (Operator Instructions). Our next question is coming from Jose Haresco of Merriman. Please go ahead.

Jose Haresco - Merriman Curhan Ford

Good morning folks and congratulations on a great quarter.

Doron Gerstel

Thank you.

Shimon Eckhouse

Thanks Jose.

Jose Haresco - Merriman Curhan Ford

And congratulations on the promotions as well.

Shimon Eckhouse

Thanks again.

Jose Haresco - Merriman Curhan Ford

One housekeeping I have, on the DSOs, David, is it fair to assume then that because you've selected a number of these April that did DSOs decrease in the second quarter?

David Seligman

I think the target number that we use is in the mid-90s and I think we should expect that to continue.

Jose Haresco - Merriman Curhan Ford

Okay. Shimon, I know you guys can't give a lot of color on what's happening in the P&G deal. But can you give us some sense of what the next steps are in the product development process over the next few quarters and whether or not that timeline still holds steady for a mid or late '08 release for natural products?

Shimon Eckhouse

Yeah. First of all, the timeline is still hold in terms of the detailed milestones, which we did not disclose for obvious reasons. As far as the specific progress that we have made, as Doron already mentioned, we completed third clinical trial, which was done now in a home setting environment with excellent results. We have other processes that are going on in (inaudible), including approving the product as far as safety is concerned, which we also completed. And this is very important milestone in enabling us to bring the product to the market.

The next steps really has to do is building up, of course, the leadership of P&G, and with our help, a very detailed marketing and launch plan that is based on all the information that we have collected and that is still being collected by users of the product, and under our own control and under the control of P&G. And the end result of that should be launch of the product at the same timeframe, which I mentioned before.

Jose Haresco - Merriman Curhan Ford

Last question is, should we expect any new products this year from you guys?

Shimon Eckhouse

Yes. For competitive reasons, I wouldn't go into detail of what these products will be. But the only thing I would say is, we put a big focus on the body shaping market, and whatever is associated with it. With it, we have developed of course, and applications that come out of developed. And I believe we should see things there, as well as in our more core traditional markets, of what I tend to call the phase market.

Jose Haresco - Merriman Curhan Ford

Thank you very much and congratulations again.

Shimon Eckhouse

Thanks Jose.

David Seligman

Thank you.

Operator

Thank you. Our next question is coming from Suraj Kalia of Piper Jaffray. Please go ahead.

Suraj Kalia - Piper Jaffray

Good morning gentlemen. Congratulations on a nice quarter.

Doron Gerstel

Thank you.

Shimon Eckhouse

Thanks Suraj.

Suraj Kalia - Piper Jaffray

I guess David or Doron what percent of revenues in the quarter were "normal orders versus bulk orders"? Just trying to get a perspective on sales force productivity?

Doron Gerstel

What do you mean by bulk orders, is this order from distributor, or what is a bulk?

Suraj Kalia - Piper Jaffray

Orders from center such as American Laser Centers, what percent, or any group purchases, how would you characterize your sales in the quarter as coming from bulk purchases versus "non-bulk"?

Doron Gerstel

So from a sales productivity point of view, one of the things that we definitely see in Q1 is the importance of incentives. The whole idea of incentives was that they able to qualify these and allow our sales rep, mainly the selling direct in North American to focus more on what being now the best, which is closing. So, from a productivity standpoint, we definitely improved productivity. So, to your question some of our orders are coming from the tons of bulk orders, in this sense, the distributors and ALC in this category as well.

Suraj Kalia - Piper Jaffray

Okay.

Shimon Eckhouse

But the specific drivers as far as I remember, this is Shimon; the number was a little bit lower than what we had in the fourth quarter.

Suraj Kalia - Piper Jaffray

Okay. And Shimon, so pardon me, I just jumped in a little late on the call. Specifically, what precipitated the change in senior management, and by the way congratulations to everyone. But what was the thought process that precipitated the change?

Shimon Eckhouse

Well, as I think, we mentioned in the past, Syneron is a relatively young company. We, not a long time ago, since we celebrated our sixth birthday. Being a young company with extremely fast growth, we have to go through a few phases of change from very early start-up to I would call at an older start-up, which on the one hand still is able to maintain the entrepreneurial spread. But on the other hand, has to put in place infrastructure and console systems that enable the company to support something like 7,000 customers worldwide to support change that's well over $100 million and everything else that is associated with this kind of operation.

In this transition process, we actually took the first step at the end of 2005, and ask David to takeover and really help us in two important elements. One is, in building up, enhancing and strengthening the infrastructure of the company. And the second one is, to play a key role in recruiting strong managers, which will become part of the long-term management team of Syneron.

David has done an excellent job in this work, and has brought Syneron a group of very strong managers in all of the areas of operation. And just to mention a few, we started out with Amit, who took over our international phase and has grown our international phase almost 50% year-over-year. We then brought in Doron that had a shorter time than Amit but has been able to restructure everything we do in North America and turn it into focused and effective phase marketing and supporting. We brought in Fabian for Business Development, and he was really able together with the rest of the team to do what we had to do in order to get this very strong and exclusive collaboration agreement, with Proctor and Gamble.

And a few others that are not mentioned here and of course the last set, which is very important in this process, was the recruitment of Don Fagen that is now in California Time Region show for him at 6'o clock in the morning.

This is very strong group of managers that I mentioned. And the one that I didn't mention really enabled us to move from the first phase of the growth of the company to the next phase, and really make us feel very strong about the ability of this new management team to build up Syneron into 2007, 2008 and 2009.

And in addition to that as you know and we announced, we have done quite a lot in strengthening our marketing team. We brought in Mark Taylor a few months ago. Mark is really the guy, which is to a large extend responsible for what everybody in this industry calls now to actual technology and he is playing a very important role in enabling us to differentiate ourselves from competition by many of the things that we are doing but also in terms of branding Syneron. So with this very strong group of managers and the infrastructure that David and the management team has been able to build, we feel very comfortable with this new young and very aggressive group of managers that will lead Syneron from now on.

Suraj Kalia - Piper Jaffray

Okay. One last question and I'll hop back in the queue, and again Shimon or Doron maybe you can pitch in. How would you characterize or what is Syneron doing differently in the marketplace especially given the recent top line misses by two of your competitors? How should we look at that?

Shimon Eckhouse

Doron?

Doron Gerstel

Yeah, so I can start from a North America perspective, and this is something that it took us a while to build and we put a lot of efforts and thoughts about differentiate ourselves from our competitors. The ELOS technology is definitely a key differentiated factor from a safety and efficacy. But, from our market the element that we're seeking and it's become very helpful for us, is the fact that from positioning standpoint, we invested a lot in customer care and let me elaborate a bit on this element. Its basically started is what our customers are expecting from entering or expanding or offering aesthetic service. And the bottom line for them is to increase, is to make a profit out of it. And its become Syneron responsibility to stand behind and support them all the way and support all the way in three elements.

The first element is the technical support, allows them a minimum downtime and the second element is the clinical support, educate them into a staff to get to the results and maximum satisfaction from the patient. And last but not least is the business practice support, how they able to attract more customers to the clinic. This is a very unique positioning in the market where most of our competitors selling capital equipment and by doing this transaction, they are moving to the next prospect.

It took us a while in educate the reps and we call them now account managers. And they are managing the account mostly after the transaction is being done. And I believe that word of mouth is the best marketing vehicle and we've gotten what we've seen and this is the trend that we see in Q4 and while we saw it in Q1 that we have more and more referral business, that happy customers referred their colleagues to buy Syneron mainly because of the reasons that I mentioned.

Suraj Kalia - Piper Jaffray

Doron, just to pick up on what you just said, how much would you characterize in this quarter, business that was referred to you either new accounts or existing accounts that bought more equipment. Can you give us some sort of a number or gauge, how do measure the interest level?

Doron Gerstel

We measure their referral amount and right now it's 25% of our business in North America.

Suraj Kalia - Piper Jaffray

Perfect. Gentlemen congratulations again on a nice quarter. Thank you for taking my question.

Shimon Eckhouse

Thank you, Suraj.

Operator

Thank you. Our next question is coming from Matthew Burton of [Sapphire]. Please go ahead.

Mathew Burton - Sapphire

Hi, everybody. Thanks for taking my question. You guys are developing quite a large cash hoard. Can you maybe comment on your plans to utilize that and what do you think, if you don't utilize it, the cash term will be by year-end?

Doron Gerstel

Well the second question is probably easier than the first one, and it should be significantly over a $100 million based on our expected growth in revenue and margin structure. Regarding the first question, we always took the position that we will grow through three avenues. The most important one, which is really the one which contributes the most to the growth of Syneron, so far, is our internal growth, and it keeps on being the focus of everything that we are doing. The second one is investments in other technologies or startups mainly in Israel, but not only in Israel but are in the same area in which we are interested in aesthetic medicine, and we have been doing quite a few.

Unfortunately or fortunately, those are not very large investments. So, we cannot spend all the money we have on using those investments. So, though we believe that the future potential of them is at least as significant as the things we are doing internally.

And the third element is really areas where we can change our business model. And I wouldn't hide it from you because I believe you all know it, if there is one weakness in the markets in which we are, it is the fact that we are selling boxes. And the first day of the quarter is always the first day where you start out with a zero phase and everything that you can do is done over the next 90 or 91 or 92 days that you have in the quarter.

We want to change this business model and have a recurring revenue or annuity model to what we are doing. And opportunities that we are looking for are the ones that can compliment what we are doing in this area. We are doing it on a continuous basis. We announced one thing, not a very long time ago in the area of teeth whitening, which we believe is a very significant business area. But we are looking for more opportunities in these areas, and there it may be either start-ups or young technology companies that we may invest or buy. Or even more, well established companies where we will need a larger amount of cash to do a transaction like that.

Mathew Burton - Sapphire

Great. And maybe can you also refresh my memory vis-à-vis the dental laser, how do are you distributing that?

Doron Gerstel

The dental laser in the United States is right now distributed by a very small sales force. In the international market, we already signed up a few distributors that are very excited about the products, and at least for the near term, we believe that this would be the structure.

Mathew Burton - Sapphire

So, no plans to work with the big guys to support that, does that is a--

Shimon Eckhouse

No, I didn't say this. I said this is the plan for the near term.

Mathew Burton - Sapphire

Okay.

Shimon Eckhouse

Thank you, Matt.

Operator

Thank you. Our next question is a follow-up question coming from Keay Nakae of Unterberg. Please go ahead.

Keay Nakae - Unterberg

Yes, Doron, you have stood at the investment, sales and marketing that occurred throughout '06 and the company has guided to The Street to expect that investment to level off. But now that you are assuming the range of the company, how should we think about the pace of investments there? Do we continue to just stay at this level, or do you see perhaps more value in further investments?

Doron Gerstel

Yeah, so, as far as sales and marketing, first of all, I think the Q1 was a very interesting quarter for us than what we identified at the beginning of the quarter, that this is an opportunity aggressively to take market share from our competitors. We are, presently delighted that our efforts bore its planned fruit. So, in Q1, we invested more of what we planned only to surpass our top line.

The other point is that in addition you might have noted that we are recording a 7% reduction in the marketing and sales expenses in Q1 2007 versus Q4 2006. I would also like to know that Q1 included expenses that related to key events that only happened in Q1 for 10A-3 which are not expected to be incurred in the following quarters.

Going forward, as a percent of sales, I expect to continue the optimization and reduction of our marketing and sales expenses. I mentioned my great belief on inside sales and other activities that we are doing in this regard.

Keay Nakae - Unterberg

Okay. And the second question, regarding for actual technology, it seemed to be a key theme at this year's derm meeting. Now, what are Syneron's plans for introducing a technology like that?

Doron Gerstel

Well, we are, as you may know, quite careful in [explicitic] pointing out to new technologies that we are introducing to the market. But we are in a position where we will definitely make sure that nothing here, that is haltered, that our customers like will not be in the arsenal of Syneron.

Keay Nakae - Unterberg

Okay. So, we can read between the lines that you stated there?

Doron Gerstel

Yes.

Shimon Eckhouse

This was the end of my answer. Any other question?

Keay Nakae - Unterberg

No. I am fine. Thank you.

Shimon Eckhouse

No. I am sorry. Operator?

Operator

Thank you. At this time, I would now like to turn the floor back over to management for any further or closing remarks.

Shimon Eckhouse

Well, this is Shimon again. I would like to thank everybody for participating in this call. I would like thank David Schlachet and David Seligman for the significant contribution to the growth of Syneron, and I want to wish Doron and management team lots of success and growth. Thank you very much.

David Schlachet

Thank you.

David Seligman

Thanks.

Operator

Thank you. And this does conclude today's Syneron teleconference. You may disconnect your lines at this time and have a wonderful day.

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