Cynosure's (CYNO) CEO Michael Davin on Q1 2016 Results - Earnings Call Transcript

| About: Cynosure, Inc. (CYNO)

Cynosure Inc. (NASDAQ:CYNO)

Q1 2016 Earnings Conference Call

April 26, 2016 09:00 ET

Executives

Scott Solomon - Sharon Merrill Associates

Michael Davin - Chairman & CEO

Timothy Baker - President & CFO

Analysts

Richard Newitter - Leerink Partners

Suraj Kalia - Northland Securities

Difei Yang - Brean Capital

John Block - Stifel Nicolaus

Anthony Vendetti - Maxim Group

Zachary Ajzenman - Griffin Securities

James Sidoti - Sidoti

Operator

Greetings and welcome to the Cynosure's First Quarter 2016 Financial Results Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] I would now like to turn the conference over to your host, Scott Solomon of Sharon Merrill Associates. Thank you. You may now begin.

Scott Solomon

Thank you, Rob. Good morning, everyone. Hosting this morning's call are Michael Davin, Cynosure's Chairman and Chief Executive Officer; and Tim Baker, President and Chief Financial Officer. Michael will provide the first quarter business review and the content for Cynosure's strategy. Tim will take you through the financials. And then management will be happy to take your questions.

Before we begin, please note that various remarks management makes on this conference call about future expectations, plans, and prospects constitute forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties, and actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including those discussed in Cynosure's filings with the Securities and Exchange Commission.

In addition, any forward-looking statements represent the company's views as of today, April 26, 2016. These statements should not be relied upon as representing the company's views as of any subsequent date. While Cynosure may elect to update forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so.

To supplement its consolidated financial statements presented in accordance with GAAP, Cynosure uses non-GAAP gross profit, non-GAAP income from operations, non-GAAP net income, and non-GAAP diluted net income per share. These are non-GAAP financial measures the company believes will help investors gain a meaningful understanding of Cynosure's results, exclusive of acquisition related expenses, foreign exchange gains or losses and amortization of intangibles, and also help investors make comparisons between Cynosure and other companies on both, a GAAP and a non-GAAP basis.

With that, let me turn the call over to Michael Davin.

Michael Davin

Thank you, Scott. Good morning, everyone. Fueled on an outstanding performance in North America, Cynosure's off to a strong start in 2016. First quarter revenue increased 26% year-over-year, helping to drive margins and profitability higher. Q1 was the 25th consecutive quarter in which the topline has increased on a year-over-year basis. While the individual business drivers of our growth, both organic and non-organic, have varied from quarter-to-quarter.

Our results underscore the company's ability to execute consistently on key strategic things which includes develop, innovate products, indications that have significant growth potential, demonstrate the safety and efficacy of our technology through a rigorous clinical process, distribute our products through a highly trained global salesforce using direct reps where feasible, and cultivate maintain strong relationships with customers by providing the training, tools and support to help and expand their aesthetic practice.

In the first quarter, we recorded revenue of $94.7 million compared to $74.9 million in the same period of 2015. Non-GAAP gross profit excluding amortization was 90 basis points to 60.1%. We generated non-GAAP earnings per share of $0.19, 27% higher than the $0.15 per share earned in the same quarter of last year. Improved margins and profitability were a function of the higher revenue and a strong product mix which included notable contributions from SculpSure, MonaLisa Touch, PicoSure and Icon.

Q1 marked the full U.S. launch of SculpSure, the first FDA cleared hypothermic laser or non-invasive fat destruction. Following its soft launch in key territories in late 2015, SculpSure is now being marketed through our entire U.S. salesforce to core and non-core physicians and aesthetic practioners nationwide. By virtually every measure, SculpSure continues to exceed our expectations. Reported by physician satisfaction where the technology is very, very high, and we are pleased with the overwhelmingly positive response from patients. We currently have received FDA clearance for treatment of the flanks and abdomen and we expect to have additional anatomical clearances for SculpSure in the coming quarters.

One of the benefits of the SculpSure business model is the recurring revenue stream generated from PAC usage. We are now beginning to receive reorders of the disposable PAC Key. As a reminder, each PAC Key provides a hundred applicator uses and typically positions our purchasing three PAC Keys with the initial system purchase as standard price for an individual PAC Key is $5000. A key contributor to SculpSure's success continues to be the turn key approach we have developed to support the product at the local level. This approach includes investments and dedicated internal marketing specialist to provide online training and support, dedicated field marketing reps who assist customers with the development of marketing strategies and promotional events to generate interest in SculpSure among current and prospective patients and dedicated field clinical specialists who provide advanced clinical training on an ongoing basis.

In the first quarter numerous SculpSure events were held at customer sites across the country generating new business and new customers for the respective positions practice. This kind of local grass roots initiative is a fundamental part of our strategy to bring the support resources to the field to help doctors build their body sculpting practice. We plan to augment our current marketing program for SculpSure with a targeted direct-to-consumer campaign scheduled to begin in select markets this quarter. Since it hasn't launched yet, I won't go into specifics at this point, except to say we plan for our direct-to-consumer spend to be focused, judicious and within our current level of spending.

Internationally, we've begun a limited rollout of SculpSure to direct sales offices in the European Union and Australia. In addition, key third party distributors have been trained and will begin marketing the product as regulatory clearances are pained in their territories. Given the full launch of SculpSure for this quarter in the U.S., combined with comparatively weaker markets overseas, our business is heavily weighted towards North America, which are accounted for 72% of first quarter 2016 product revenue compared to 55% of product revenue in Q1 of 2015.

North America product revenue increased 76% versus the prior year period while international product revenue was down 11% as compared to the prior year period on a constant currency basis. This result reflected ongoing economic weakness in Europe and the Middle East, the softness among our European direct subsidiary areas and international third party distributors was partly offset by our subsidiaries in the Asia Pac region, was posted 17% higher product revenue year over year on a constant currency basis.

One of the strategic themes I highlight at the outset of the call is the critical validation of our technology. As products like SculpSure, MonaLisa Touch and PicoSure demonstrate, Cynosure is at the forefront of some of the latest research and newest energy-based applications in the aesthetic industry. The American Society for Laser Medicine and Surgery's recent annual conference in Boston, Cynosure technology was a subject of 17 oral abstract and three ePosters. These presentations detailed research studies involving a range of indications including non-evasive fat reduction, skin rejuvenation, Melasma, facial photo aging, tattoo removal and genitourinary syndrome of menopause or GSM. It's worth noting that of the 17 oral abstract, two were late-breaking abstract to evaluating MonaLisa Touch for the treatment of GSM that are presented as part of the first ever ASLMS session on women's health.

We are committed to expanding our leadership in this area as evidenced by our support of several U.S. clinical studies comparing MonaLisa Touch to other therapies for the treatment of GSM and associated symptoms. PicoSure also captured a lot of attention of ASLMS. Profiled on 11 of 17 oral abstract and two of the three ePosters. In addition to tattoo removal and skin rejuvenation, researchers report that they are highly interested in PicoSure as a treatment for the skin condition known as Melasma, a hyper pigmentation more common in women. As I mentioned on our Q4 call, we believe we have the most diversified Picosecond technology in the market with the broadest range of clearance and the ASLMS presentations reinforce that.

The next key development for PicoSure will be the anticipated launch of our 1064 nanometer wavelength which will be available as an upgrade to our install base. Tending FDA clearance, we expect to begin selling the new wavelength in the third quarter.

Let me conclude my remarks by saying that the global trend towards lesson-base of aesthetic procedures plays directly into the strength of our products, technology platforms and worldwide distribution network. We have a number of exciting catalyst in the quarters ahead and we'll continue our focus on financial and operational discipline as we execute our gross strategy going forward. Now let me turn the call over to Tim for his financial review. Tim?

Timothy Baker

Thanks, Mike, and good morning, everyone. As Mike noted, we reported a record Q1 revenue of $94.7 million of 26% from $74.9 million in Q1 of 2015. For the quarter, total product revenue grew 36% to $77.1 million or 81% of total revenue. Revenue from parts, service and disposables increased 26% for the quarter to $16.9 million primarily reflecting PAC Key orders and sales of our PicoSure Lens Array and consumables associated with the Ellmen RF product line. Royalty revenue decreased $4.3 million to $0.7 million, reflecting the final $3 million payment received in the first quarter of 2015, under a previously disposed settlement agreement with Tria Beauty as well as the MGH hair removal patent.

By region, North America product revenue increased 76% over the prior year of $55.2 million, accounting for 72% of total product revenue. Revenue from product sold outside of North America was down $3.3 million or 13% including the impact of foreign currency to $21.9 million. This primarily reflected softness in third party distributor sales and ongoing economic weakness in Europe and in the Middle East. On a constant currency basis, international product revenue was down 11% from the same period last year.

GAAP net income for the first quarter of 2016 was $2.8 million or $0.12 per diluted share compared with break-even net income for the prior year period. On an adjusted basis excluding acquisition cost, non-cash unrealized foreign exchange measurement gains and losses and amortization of intangibles, non-GAAP net income for the first quarter of 2016 was $4.3 million or $0.19 per diluted share, the 27% increase in earning using effective tax rate of 30%. This compares with non-GAAP net income of $3.3 million or $0.15 per diluted share for the first quarter of 2015, also using an effective tax rate of 30%.

We'd see this morning's news release for reconciliation or first quarter 2016 non-GAAP results is mostly directly comparable GAAP result. GAAP first margin for the first quarter of 2016 was 58.5% compared with 57.1% for the same period in 2015 due in part to the higher percentage of business from direct distribution compared with the 2015 period, product mix as well as the increase in disposables. On an adjusted basis excluding non-cash charges related to the amortization of intangibles, gross margin was 60.1% in the first quarter of 2016 compared with 59.2% in the same period a year earlier.

Excluding amortization and acquisition cost, operating expenses as the percentage of total revenue were 53.1% in the first quarter of 2016, compared with 52.4% in the first quarter of last year. Sales of marketing expenses for the first quarter of 2016 were $35.6 million or 37.6% of total revenue, in line with our expectations. This reflected the accelerated time line we discussed in Q4 for our infrastructure investment in SculpSure. We would expect sales and marketing expenses to remain in the range of 35% to 37% of revenue in Q2.

Turning to operating margin, our GAAP operating margin was 4.7% for the first quarter of 2016, compared with 2.7% for the first quarter of 2015. Excluding acquisition and amortization expense, adjusted operating margin was 7% for the first quarter of 2016 compared with 6.8% for the first quarter of 2015. For the first quarter of 2016, we incur approximately 2.2 million in non-cash charges associated with the amortization of intangibles of which 1.5 million was charged to cost of goods sold. We expect a similar level of amortization of intangibles in each quarter of 2016.

Our balance sheet remains strong, cash and investment at March 31, 2016 were $178.2 million compared with $182.8 million at year-end of 2015. Based sales outstanding with 37 days at the end of Q1, down from 58 days at the end of Q1 2015. Flexing In part, the accelerated SculpSure investment an increase in inventory related to new product and the timing of payments related to yearend accruals, we generated a break-even cash flow from operations for the first three months of the year, compared with negative $5 million for the comparable period of 2015.

With that, Mike and I will be happy to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. We'll now be conducting our question-and-answer session. [Operator instructions]. Thank you. Our first question comes from the line of Richard Newitter of Leerink Partners. Please proceed with your question.

Richard Newitter

Hi, guys. Thanks for taking the questions and congrats on the quarter.

Timothy Baker

Thanks, Rich.

Richard Newitter

I've got a few topics I want to touch on. Maybe just to start off with SculpSure. Clearly the momentum picking up in your first full quarter or your main launch, big take off in the first quarter. I was wondering, is there any way you can tell us what the launch did by geography and what the contribution was just APAC, versus North America? Was that mostly North America? Was any contribution OUS? Maybe to start there.

Timothy Baker

Yes, Rich. As we mentioned, this was the first full launch into the North American market. The majority of the revenue came from the North American market. A limited launch into our direct offices in Europe and our direct office in Australia and we've just begun third party distribution training. So the strong contribution came from North America for the SculpSure business.

Richard Newitter

Okay, that's helpful.

Timothy Baker

I should say we don't have a Canadian clearance yet, so obviously the majority of that came from the US.

Richard Newitter

Okay. I just want to think about this is a first full quarter of launch, so I'm just thinking about what we have in front of us for this product launch specifically. You mentioned the direct-to-consumer initiative. I'd like to hear a little bit more on that and you said that's going to be within the amount of spend you already described. I guess with direct-to-consumer steps of spend, you still are going to have sales and marketing margin 35% to 37%. That's the first part of that question.

The second is just can you just quickly run through what we have for SculpSure in the quarters ahead that we didn't necessarily have in the first quarter that should give us the increased confidence - in fact more meaningful acceleration driver as we move forward. With North America, new indications and then also outside the US, how you're thinking of phasing that rollout? Thank you.

Timothy Baker

Sure, Rich. This is Tim. I'll take the first part of that related to the spend. Our point is that obviously we're starting to rollout DTC advertising in Q2, but we wanted to set the point that this is within our normal spending area. As you remember in Q4, we talked about accelerating some of our sales in marketing, so just 35% to 37% of revenue, that's what we hit in Q1 through respects similar levels of that spending Q2 including the DTC. So we just didn't want people to think that we were throwing a significant cost on top of all this to go [ph], that's part of the strategy and is included in that 35% to 37%.

Michael Davin

Yes. Rich, I'll take the remainder of your question. As it relates to the DTC effort, which we did outline in our September 15th 2015 investor meeting as part of our strategy to roll SculpSure out, we had always planned a DTC initiative in Q2, so we're in-line with that launch and that will happen this quarter in selected markets, and that's a US-launch only. That is on target and we'll get more detail on that as I mentioned once it's fully defined and launches. So stay tuned on that.

As it relates to the rest of the rollout of SculpSure OUS, we're pending clearances and as we get those clearances, we're ready to engage in rolling SculpSure out to those markets. Where we have clearance, for example the third party distributors, we actually held off on rolling out to distributors until we had our direct operations that we're cleared in place. So in Europe, we are now rolled out in our direct offices, in Australia where we're also direct, we've rolled the technology out there. Our third party distributors, we've selected our largest distributors and begun the training. They are also placing orders for demo units and we're fully engaged in that process in this quarter.

Then of course our regulatory team is very active on several fronts: one, continue to get additional clearances in countries where we're not approved; two, to get additional anatomical areas cleared and as I mentioned, we expect to announce the additional anatomical clearances in the coming quarters; and then of course we're looking at other indications as we've discussed with the device that continued to enhance the product for the overall body sculpting experience.

Richard Newitter

Okay. And then just the last one and I'll let others jump in. The segue to OUS, that continues to be weak in the EMEA region, but your APAC results are growing solidly in the double digits. Could you talk a little bit about where the discrepancy from growth rate is coming between those two regions? Is that a product specific area? Is that Pico gaining traction, you meant deletions? And what gives you confidence that OUS can pick up as you move through the year? Or do you have confidence?

Michael Davin

Yes. I wouldn't use the word “confidence” and I'd also state that just for clarification, we set our APAC subsidiaries, we're up 17% year over year. But our distributor business both in APAC as well as in EMEA is off significantly. Then of course our subsidiary offices in Europe also are struggling, which as we mentioned in '15 we expected things to be pretty much status quo as we wanted 2016 to related to the market in the international areas that were negatively, I guess, impacted in 2015, that was going to be a continuation going into 2016. Although, we do believe a catalyst for stabilizing the business there and potentially having growth opportunities in those markets will be the launch of SculpSure.

So we have just launched as I have mentioned in the direct offices in Europe, so we are hopeful we will get some traction there and that will offset some of the core business. The nature of the flat business there is down a little bit and now that we are engaging in third party distributors and training them and they are placing orders for SculpSure. They are getting very excited about the product. We think that will help the third party distributor business and of course as we get regulatory clearances for SculpSure in the Asia-Pac region for example, right now we are pursuing Korea, we are pursuing other countries over there. As we get those clearances we believe this product could stimulate growth going forward. But as we see the international market today, we expect them to continue to be challenging in the near future.

Richard Newitter

Okay.

Operator

Thank you. Our next question comes from the line of Suraj Kalia with Northland Securities, please go ahead with your question.

Suraj Kalia

Good morning gentlemen, congratulations on a very nice quarter.

Michael Davin

Thanks Suraj.

Suraj Kalia

So Michael let me just start out with piggybacking with the DTC question. Michael we all know that cool sculpt is out with the national campaign, a DTC campaign. We have seen the TV ads and all, can you give us some perspective of how SculpSure is going to be different in the messaging via the DTC?

Michael Davin

Yes, I mean we don't really want to compare ourselves to our competitors with our strategy. As we have always said we believe the non-evasive fat market is enormous and we believe it's relatively untapped and our analysts agree with that assessment. So our strategy is not one in which we really are looking at what our competition is doing. Our strategy has been organically developed by the Cynosure executive team and the marketing efforts and the distribution to really position SculpSure, to go after the global opportunity and we know marketing is a very important component of that.

So right now our first initiatives were to roll out of the internal and external marketing efforts for which we have hired the folks. They are fully engaged and our physicians are really appreciating the unique nature in which we are working with them and their practices to drive patients to their practice not only for SculpSure but you can imagine when they come in the door they are also interested in other indications.

So we are getting a lot of goodwill from our customers as it relates to our initial marketing initiative and our clinical initiative which is also, at the ground level as well as internal. Both of those initiatives are going extremely well. That was the plan and we have executed. Now the next step of the plan is to direct the consumer marketing campaign. It's going to be very different to what's traditionally been done out there today or what traditionally is being done in marketing.

And I am not going to disclose what that strategy is for obvious reasons, but you will see it as it becomes, as it gets unveiled and we are very excited about it. As I mentioned it's going to be happen soon within the next few weeks and we can give a lot more detail on that strategy as it rolls out.

Suraj Kalia

So Michael or Tim, let me ask a multi-faceted question, try to squeeze it in. Nobody doubts you guys' ability to execute in terms of your marketing messaging. Specifically for Q1, were there any bullish orders for SculpSure and the reason I ask is historically your Q2 steps up from Q1 and I know you don't provide guidance. I am just trying to better understand.

Is there a reason why Q2 should be any different from what it has been historically and Tim specifically for you, I know you don't provide these numbers, I appreciate that. At least give us some color on some metrics for SculpSure versus MonaLisa Touch. Maybe centers, units, some directional color would be great. Thank you for taking my questions.

Michael Davin

Sure Suraj, let me address the first part of the question and maybe some of the second part too. Q1 historically in our industry is the softest quarters, so we are very pleased with the results we have generated in Q1. Q2 historically in our industry is our second strongest quarter after Q4. For your question I think I have it correctly, we saw the highest level of bundled orders we have ever seen in our company history in Q1 and we believe a stimulus to these bundled orders meaning where the doctor has an interest in one of our products and when our representative gets into discuss that product, the doctor also shows a strong interest in maybe one or two other systems.

So we have multiple order systems. We do believe a catalyst for this, for the bundled growth that we have seen, the levels we are seeing here today has been associated with SculpSure and MonaLisa Touch. So definitely SculpSure is getting us in the door and MonaLisa Touch is getting us in the door and our distribution is doing a phenomenal job as well as the marketing team and asking the right question at the physician and positioning other technology that the physician maybe interested in offering in their practice. So that's going very well.

As it relates to giving any more color on SculpSure or MonaLisa Touch based on geography or based on penetration, historically we have never done that and we are going to continue to stay steadfast in our position on that. We can just tell you that both products continue to do well. Obviously MonaLisa Touch is anniversary one year now and continues to do well on as I had mentioned we had a significant investment going on in that category to strengthen our clinical validation and SculpSure is in the early innings but so far we are very pleased with the launch to date.

Suraj Kalia

Thank you.

Operator

Our next question comes from the line of Difei Young with Brean. Please go ahead with your question.

Difei Young

Hi, good morning and thanks for taking my questions. Congratulations on a great first quarter. Just a couple of questions. First one on the technology side, what are you hearing? I know it's early based on offshore lunches, what are you hearing a key differentiation point between SculpSure and competitive technology that doctors like?

Michael Davin

You know as we though when we were talking about the product before we launched it in September 2015, we hoped the innovation effort that our phenomenal engineering team drove with this product that it would be unique in nature and offer significant advantages over the technology that was on the market. So certainly treatment time is very important, people like the 25 minute treatment time.

Lack of suction from the applicator, people feel as physicians feel, patients feel we can treat non-pinch able fat, we don't get the post-operative cramping or pain associated with the suction device. Four independent universal applicators, this has allowed the doctors to place the applicators anywhere on the body independent of themselves but engage the applicators all simultaneously to treat the area of fat.

I would say those are the four key areas that physicians and the patients seem to enjoy about this platform and also future. The potential for expandability of the platform, certainly we are going to get additional anatomical areas but also using a hyper-thermic approach we have always felt that going with this approach or using a modality of hyper-thermic that we will be able to pursue other body sculpting indications and we are convinced that we are going to be able to do that.

And we have received positive information coming back to us from our installed base and things that they are seeing that validate what we'd hoped as it relates to continuing to expand this platform.

Difei Young

Thank you and just a quick follow up. Do you think under the chin are would be workable/feasible for SculpSure technology?

Michael Davin

Yes, as we have mentioned we are pursuing the submental area and we plan to have a solution offered to our customers, an upgrade solution to our customers in the not too distant future.

Difei Young

Thank you. So changing direction to Asia, would you give me a little bit more color with regards to what countries do you see the strongest growth and possibly what product line are the most favorable on that side on the world?

Michael Davin

Yes, you know the Asia market is mentioned in our direct offices, the subsidiaries were up 17%. Our strongest presence is in China, we opened our fourth office in China last year so I would say we look to China as continuing to be a growth engine for our Asia Pac business to drive SculpSure through the regulatory process there, but as we've discussed in the past, even of late with PicoSure, that process is more rigorous and time-consuming than it's ever been, but we were fully engaged in driving SculpSure into the China market, into all the Asia Pac markets; and certainly Pico is starting to really get some excellent traction in Asia Pacific, which we have anticipated based on the large install base of nanosecond technology there. We're getting some phenomenal clinical results on the treatment of pigmentation which is highly prevalent in the Asia Pac market. So we're seeing excellent traction with the Picosecond technology and we're also across the board on our technology for skin rejuvenation, hair removal and other indications, we're seeing some nice traction in the Asia Pac market and we'll continue to drive the regulatory clearances to open those markets up even further.

Difei Yang

Thank you so much, Michael, for the color and just a quick follow up on that question. Where do you see - well, let me jump into my next question. In terms of cash position, you have about $180 million in cash. How do you see the best utilization for that cash?

Michael Davin

It's a good question and we've discussed this in the past. We pretty much always had a very strong balance sheet even as we went through the recession in '08-'09. To date, we've utilized the strength of our balance sheet for acquisitions and as part of our long term strategy, we continue to look at non-organic opportunities to drive the company's growth and certainly we'll use the strength of our balance sheet without initiative. We've also acquired our equity at certain times. We currently have a $35 million stock purchase plan, stock buyback plan in place today. We actually just closed out the stock buyback plan. We're about $31 million of our equity back last year and those are the two main categories that we've looked to use the strength of our balance sheet to assist in creating value of our company.

Difei Yang

Thank you so much.

Operator

Our next question is from the line of John Block with Stifel. Please go ahead with your question.

John Block

Great. Thanks and good morning, guys. Maybe just two or three relatively quick ones. The first one just on the sales of marketing expense for two Q, a little bit higher than what we currently got, but clearly you guys have seen a very good return on your recent spend. So just as I look toward the back half of '16 as sort of sales and marketing and call it the low 30% as the percent of sales for 2H. I don't want to pin you down, but is that a good range to expect as you start to get some leverage SculpSure ramps?

Timothy Baker

Sure. I think as we talked about in Q4, we're kind of taking out of quarter-by-quarter basis and we're making the decisions as we see the results of that investment. Therefore we're back to the 35% to 37% for Q2. We do think we'll normalize probably back around that 34% to 35% and then get into next year, kind of getting back down to those 32% to 33% levels. But right now we're seeing a good return. Like as you said, on that investment, we're going to continue to invest and drive the business. We're clearly seeing top-line opportunity come from that. Right now we're taking it on a quarter-by-quarter basis, but we would expect to probably around that 35% to 36% for the full year.

John Block

Got it. Perfect. I'm not going to waste your time trying to ask for a SculpSure number, but maybe instead a high level, if you can talk about the type of accounts that you're winning, if that's evolved? Is it still sort of the typical long tenure insider customer or we believe we've been starting to see some new customers pop up as well? Just any metrics you can share behind the SculpSure core versus non-core new customers et cetera will be very helpful.

Michael Davin

Yes, John. On the core or none-core, we're finding North America or the U.S. the SculpSure acquisitions or purchases are very similar as a percentage to our traditional business. So to date, SculpSure about 40% of the purchases are from our core business and 60% from our non-core. As you know, we've always mentioned Cynosure's ability to penetrate that none-core market and our initiative when we rolled out SculpSure or any product is to utilize the strength of our install base and our reputation with our existing customers. So when we launched SculpSure it was no different. We went directly after our install base and our existing customers which are very happy with Cynosure technology, and many of them were waiting for the SculpSure launch.

Our salesforce has done a great job in going after the non-core and core markets, going after the existing customers that were very excited about the launch of SculpSure and once they learned more about the technology, once we officially launched, they became engaged in the process of looking at acquiring the technology. We think that's a major advantage for Cynosure is we'd roll out any product to be able to leverage our 25-year history of our install base, our reputation, our service to our customers. Right now, the majority of the SculpSure business which is typical of any launch is coming from our existing customers that really have enjoyed Cynosure technology in the past and expect the same from us in future acquisition.

John Block

Perfect. Maybe one as last question quickly on MonaLisa Touch. At ASLMS, you can see sort of some additional competitors starting to creep into the market. Can you just talk about at a high level, the price integrity that's currently in the market and then you did mention what I think are some very important studies. Are there any approximate time arising for those studies that I believe will help further differentiate you guys versus recent new venture? Thanks, guys.

Michael Davin

Yes. So as you mentioned, John, which is typical in this industry or any industry, we were first to market the MonaLisa Touch and things are going extremely well and there are some competitors coming in. That's something obviously we'll expect. Our strategy though in launching in product for the treatment of vaginal atrophy and indications associated with it has not changed, we are stepping up our investments in clinical validation, we're getting a lot of respect for that initiative from the thought leaders in this category as well as physicians that are buying our technology. We're looking to broaden the indications, we're looking to broaden the use of this technology which our doctors are very excited about, but keep the safety profile, keep the X on satisfaction from both the physician's practice and from the customer itself.

The competition always comes and goes. Our feeling is we have the right initiative, we're going to stay focused on it, we're making the right investment, we don't really have a time line on these other studies. All I can tell you, the studies are being conducted at Marquee Academic Institutions [ph] by Marquee thought leaders and that's very traditional with Cynosure. It's always done with any of its technology. It's rolled out. We're staying consistent with what we've done with the past and we're very excited about this opportunity and we believe this market is relatively untapped once again, but we want to be the leader and we believe we know the right things to do to not only sustain, but maintain that position.

John Block

Perfect. Thanks for your time, guys.

Operator

Our next question is from the line of Anthony Vendetti with Maxim Group. Please go ahead with your question.

Anthony Vendetti

Thanks. Just on terms of sales force, Mike talked about adding specific sale support to SculpSure and then also talked about increasing the dedicated sales force to the MonaLisa Touch. Could you just give us an update on where that's at and first just your total sales force right now and then the breakout for SculpSure or MonaLisa Touch?

Michael Davin

In North America, Anthony, we have 158 total sales reps and managers. That's up eight from the end of Q4 2015. We still have 13 MonaLisa Touch specialists and I believe we have 18 SculpSure specialists. But as we mentioned, the product is being throughout the distribution. That's where we stand today as it relates to the North American distribution.

Anthony Vendetti

And then just in terms of SculpSure though, there's dedicated people on the sales side, but there are also dedicated clinical and support. Does the 18 include all the clinical and support, the training people, or if there are in addition to those 18?

Michael Davin

Yes. Actually I'll turn it over. Tim, he has a breakdown. The 18 does not include some of the other resources we talk about adding with the SculpSure launch. Tim will give you a breakdown of where we are as it relates to those initiatives at the end of Q1.

Timothy Baker

Right. As much, we have 18 direct sales focused on SculpSure in North America. We have 13 direct clinical specialists, so these are people who are out in the field driving clinical, helping the doctors for training and again being at local resources in the field. We have actually six dedicated field marketing reps now. It's soon to be eight. Again, this are in the field working with doctors to drive programs, to drive open houses, to drive marketing at the local level, marketing that doctors practice; and then that's backed up by 68 people that we have inside dedicated internal marketing specialists again focusing on grams collateral advertising, you know, all about driving that doctor's practice and driving patients to that doctor's practice so overall we have internal marketing, the external marketing and the external clinical end of sales team.

Anthony Vendetti

Okay. So pretty robust team so the question is, is that where you need to be or are you looking at each one of those areas for SculpSure right now or you are okay now and may look to add as you move through the year?

Michael Davin

We actually accelerated the original plan because of the early excitement for the product. We had hoped, I believe, to be at this level at the end of June and we are actually at this level at the end of March so if we continue to see the positive traction that we witnessed so far, our heads of these departments are well aware that they can continue to add personnel as needed. There certainly is a formula in which they know we look to add head count.

Anthony Vendetti

Okay. And MonaLisa Touch which is 13, is the goal to be 15 or 20 in the not too distant future there?

Michael Davin

Yes, I think the goal is probably more to 15-ish or high teens, I don't know if it goes 20. Once again our distribution did a great job in cross selling so even though we have the specialist that are dedicated in this category especially, because it's different from our traditional business. The other reps are out there and they are seeking opportunities and if opportunities come along as it relates to MonaLisa Touch they then direct that to the specialists. But right now we are at 13, I can see us going to maybe 15 or 16 but I don't think much greater than that at this point in time.

Anthony Vendetti

And then just in terms of SculpSure you mentioned you have seen the largest ever bundled orders driven by SculpSure and MonaLisa Touch, just in terms of SculpSure's ASP, where's that at right now as there is more competition in space do you think you can hold that steady, just a little comment, color on that?

Michael Davin

Yes, ASP of the product is 135 and that is for the device itself and that doesn't include the additional PAC keys. So it depends on how the reps negotiate the actual upfront purchase and as I mentioned it is not uncommon for doctors to buy 3 PAC keys or let's say 300 applicator treatments at the initial acquisition so that's over and above the 135 but on the box right now it's 135. We are not getting any push back on that and we didn't think we could and right now the distribution is doing a phenomenal job really presenting the futures advantages and benefits of the technology. As I mentioned earlier the positions are certainly getting it, it resonates with them and so right now we don't anticipate pricing pressure on the SculpSure platform.

Anthony Vendetti

Okay. And then you said the SculpSure non-core is about 60% of your sales and non-core about the same percentage of your overall business right now right?

Michael Davin

That's correct, that has been the case for the last few quarters.

Anthony Vendetti

Okay. Great thank you guys.

Operator

Our next question comes from the line of Zachary Ajzenman with Griffin Securities. Please go ahead with your question.

Zachary Ajzenman

Good morning, first question on SculpSure, do you have an idea how we should think through the year PAC keys as a percentage of overall SculpSure sale?

Timothy Baker

Yes, so we are not obviously giving any guidance on utilization and as Mike said with the initial purchase of the equipment, doctors are typically buying 3 PAC keys with the initial purchase which again gives them 300 applicator usages so as we mentioned we are seeing reorder points now coming obviously the Q4 orders, shipments. Obviously all the programs we are talking about are focused on driving utilization for the doctors and we are pleased with the utilization we are seeing so again as that installed base grows we expect to do that cumulative impact of the PAC keys.

We think it will obviously be favorable on our gross margin. We are seeing some of that now, so right now it's too early to tell. But clearly as we get more units installed we are driving utilization we're seeing that increased revenue in that PAC.

Zachary Ajzenman

And just maybe you can remind us, an average patient receiving a SculpSure treatment, how many applicators are they typically receiving?

Michael Davin

Yes, that is really depending on the site. We are driving an issue of a treat to complete where heading on the anatomical areas it can range from maybe 4 to 8 or maybe 10 PAC in the core area. So that would be abdomen and flanks, once on the patients' side. So we are seeing that though patients or customers, because this is a clinical training are starting to expand the utilization of the applicators because of their unique nature of being independent and able to contour them to certain areas of the body. So that's evolving as we speak, we can give a little bit more color on that as the product continues to get utilized.

Zachary Ajzenman

Okay. Great and then last one on gross margins that continue to trend up nicely here and again Q1 being historically the weakest in terms of the top line, how should we think about how gross margin plays out to the end of the year as we think about approved scale and also growing/recurring specifically consumable revenues when it comes there leveraging the SculpSure, it is all based on growing PAC keys and when it's right for.

Timothy Baker

Sure Zac, we are expecting to see an increase in our gross margin, we were talking about that 60% level. One thing we have to keep in mind, for this quarter, the good news and bad news, with the challenges we are seeing in the international market today. We are obviously seeing a large percentage of our revenue coming out of North America of 72% through direct distribution.

If we look on global basis, we have about 90% of our revenues coming from our direct distribution globally that typically is around 81% or 82%. So that all obviously drives to higher gross margin as we drive more through our distribution. So we have that kind of working with us as well as obviously the launch of SculpSure with the ASP, the 135 and the PAC keys.

So we expect to continue to see improvement in the margin, the only thing maybe headwind against the margin but obviously good news for the bottom line is more or higher contribution from our international market although I heard something the gross margin line obviously drives the bottom line so there is that playing against it but overall we would continue to expect to see that margin hold and continue to improve sequentially and move through the rest of the year.

Zachary Ajzenman

Okay. Thank you.

Operator

Our next question is from the line of James Sidoti of Sidoti & Company. Please go ahead with your question.

James Sidoti

Good morning, I know you are reluctant to break out product line but you did grow your system revenue in the U.S. by $23 million or so year-over-year. Should we assume that the lion share is SculpSure or are you seeing growth in MonaLisa and PicoSure?

Michael Davin

Yes, we are seeing growth in MonaLisa and PicoSure and I can't comment on assumptions, so thanks.

James Sidoti

Alright and then as far as the non-cash adjustment, Tim was it all just the amortization expense or was there kind of any integration expense at that type of thing in the quarter?

Timothy Baker

Yes, no integration expense. That was all the amortization expense that we have been dealing with the last couple of years and also we exuded the FX gain, measurement gain that was in the quarter so just to keep apples and apples so no acquisition.

James Sidoti

Okay. Then on R&D you have been running between $5 million to $5.5 million in 2015 and it jumped up to about $7 million this quarter, is that related to SculpSure or can you tell us?

Timothy Baker

It's actually related to a number of products. One of the things we have always prized ourselves on is our continued innovation and ability to drive new products onto the marketplace and be the first movers. So we are continuing to fuel that R&D pipeline and we have number of exciting projects in play so we are going to continue to invest in there as a percentage of the revenue but we think that our success directly relates to our investment in R&D.

James Sidoti

Okay. I would ask you what those projects are but I don't think you'd answer so thank you guys.

Timothy Baker

Good assumption. Thank you.

Operator

The next question is from the line Richard Newitter of Leerink. Please go ahead with your question.

Richard Newitter

Hi guys, thanks for taking the follow up. Just on that last one, Mike, you historically have said you plan to launch kind of roughly one new product each year and you don't have to tell us what it is but can we expect kind of, a new platform kind of technology for launch in 2017 and would we expect to hear about that launch or what it could be at some point in the future?

Michael Davin

The answer is yes and yes, as Tim mentioned, we're not pulling back at all from our strategic initiatives in the past years to continue to invest in research and development. We have a number of programs that we're driving right now and we do expect to launch a new product in the 2017 and I think we'll also be launching a few enhancements to existing products.

Richard Newitter

Okay, that's helpful. And then just one last follow up on the GYN segment which is somewhat new for you over the last 12 months with MonaLisa Touch. I guess within the context of your comment that you're bundling more than ever. I'm just curious as suggest that your SculpSure install base, it comprise almost 15% of GYN. So I'm curious of that bundling and cross-selling that you're talking about. Is the large component of that actually - you got to flip the door, to the new call point the GYN with MonaLisa and then you pull through the SculpSure into the GYN segment? Can you confirm that?

Michael Davin

I think part of your question, and I'll answer it, yes, but I don't want it to be specific to SculpSure or specific to a discipline like OB-GYN. I think everybody is well-aware that insurance-paid medicine is not getting more attractive, it's becoming less attractive to what we call the non-core physicians and they're looking of as they have in the past alternative revenue streams that are not going to be capitated or controlled by insurance. Cosmetic procedures fall very nicely into that category for them. Whether it's buttocks injections, or whether it's laser hair removal.

As we've mentioned in the last several quarters, 60% of our revenue in North America is coming from the non-core doctors. The big stimulus and driver of that is that our procedures are 100% cash bearing. I have to give a lot of credit toward distribution. When they get in, whether it's PicoSure that brought them into the practice because that's what the doctor was initially interested in and then they talked to them about SculpSure, or they talked to them about elite or an ailment product, your radio frequency, they're just doing an outstanding job and really selling the whole portfolio and that's why we're continuing to see very strong bundle deals in the case of this past quarter, the best we've ever seen in our company's history and we hope that continue.

Richard Newitter

Thank you.

Michael Davin

Yes.

Operator

Our next question is a follow-up from the line of Difei Yang, Brean. Please go ahead with your question.

Difei Yang

Yes, hi. Thanks, a quick follow-up. We all hear that the Chinese economy is slowing down, but obviously it's a different story. Could you help us to understand what are you seeing that's different in this market versus the general economy over there?

Timothy Baker

You know, I'm not an expert on the macroeconomic factors with the exception of what I read in the paper or see online. So, China certainly has seen a slowdown. Although I think it's a more realistic growth projecting going forward and it's being driven by the consumer, I would anticipate not necessarily the government as much. That falls right into our wheelhouse in terms of the consumer is driving growth. There's a strong awareness in Asia, obviously including China for cosmetic procedures. I think if we continue to innovate the right technology for those markets and get the regulatory clearances, we'll continue to have a stimulus for our business to grow in those markets for what we believe for many years to come.

Certainly, there will be fluctuations, but overall, we believe the market in China is enormous, just based on the population and the rapidly growing middle-class. We plan to continue to invest across the board, in all our strategic initiatives to take advantage of that market with rolling out exciting technology with that great safety profile and a great return on investment propositions and a great clinical outcome for the patients.

Difei Yang

Thanks.

Timothy Baker

You're welcome.

Operator

Thank you. At this time I will turn the floor right to Mr. Davin for closing remarks.

Michael Davin

Thank you, operator. Thank you for joining us this morning. We look forward to keeping you updated on our progress. Have a great day.

Operator

Thank you everyone. This concludes today's conference. Thank you for your participation and you may now disconnect your lines.

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