Syneron Medical's (ELOS) CEO Amit Meridor on Q2 2016 Results - Earnings Call Transcript

| About: Syneron Medical (ELOS)

Syneron Medical Ltd. (NASDAQ:ELOS)

Q2 2016 Earnings Conference Call

August 4, 2016 8:30 A.M. ET

Executives

Zack Kubow - Investor Relations, The Ruth Group

Shimon Eckhouse - Chairman

Amit Meridor - Chief Executive Officer

Hugo Goldman - Chief Financial Officer

Jeff Nardoci - President of North America Body Shaping Group

Analysts

Richard Newitter - Leerink Partners

Anthony Vendetti - Maxim Group

Zack Ajzenman - Griffin Securities

Difei Yang - Brean Capital

Operator

Good day, ladies and gentlemen and welcome to the Syneron Medical Q2 2016 Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Zack Kubow. Please go ahead, sir.

Zack Kubow

Thank you, operator. I’d like to welcome you to Syneron Medical’s second quarter 2016 conference call. Statements on this call maybe forward-looking within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, relating to the company’s future events or future performance, including statements with respect to Syneron’s expectations regarding, but not limited to future growth prospects attributable to higher growth in North America due to our expanded sales team, senior management restructuring, development of our new dedicated Body Shaping team, and advancement of our Emerging Products, including UltraShape, UltraShape Power, VelaShape, PicoWay, Profound and CO2RE Intima, the positive market reception and benefits attributable to UltraShape, UltraShape Power, VelaShape, PicoWay, Profound, and CO2RE Intima, and the growth rate of UltraShape by 2017, and the anticipated global market share for our Body Shaping business by such time.

Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the Company’s actual results, levels of activity, performance or achievements to be materially different from any future results. Levels of activity, performance, or achievements expressed or implied in any forward-looking statements. These risks, uncertainties, and other factors may include, but are not limited to the risk factors set forth under the heading Risk Factors in Syneron’s Annual Report on Form 20-F filed with the SEC.

These factors are updated from time-to-time through the filing of reports and registration statements with the Securities and Exchange Commission. These statements are only predictions, and Syneron cannot guarantee that they will in fact occur. The company does not assume any obligation to update the forward-looking statements discussed in today’s conference call.

Finally, this call will discuss non-GAAP financial measures. Syneron provides reconciliation information at the end of the second quarter 2016 results press release on its Investor Relations page at www.syneron.com.

Speaking on the call today are Syneron’s Chairman, Shimon Eckhouse; Syneron’s CEO, Amit Meridor; Syneron’s CFO, Hugo Goldman; and Jeff Nardoci, President of North America Body Shaping Group.

I’d now like to turn the call over to Amit.

Amit Meridor

Thank you and good morning, everyone. Welcome to Syneron’s second quarter 2016 conference call. The agenda for today will be as follows; I will cover our financial highlights and key business updates. Shimon will provide an overview of our exciting new UltraShape Power systems and the third wavelength for the PicoWay. Jeff will provide an update on our North America Body Shaping business, Hugo will provide a full review of our financial results, and then we will open the call for questions.

I will begin with a revenue highlights for the second quarter. Revenue of $75 million, up 2% year-over-year with 11.5% international growth, and a 14% decline in North America. We had a challenging quarter in North America. Our results were lower than anticipated and we have taken immediate action to improve performance in this region, which I’d like to cover in detail shortly.

On the positive side, our higher margin Emerging Products, which represents our strategic growth engine grew 46% year-over-year. In total Emerging Product represents 30% of the total revenue, up from 21% last year, expanding our installed base of systems driving recurring revenue. A key driver in the quarter was our global Body Shaping portfolio, which grew 66% to $17.3 million. This includes a significant milestone for the UltraShape business, which achieved revenue of more than $10 million in this quarter.

Breaking down the strong international quarter revenue was up 11.5% to $51.2 million, which represents 68% of the total revenue in the second quarter of 2016. This was led by robust performance in the Asia-Pacific region, which grew 31%. EMEA direct revenue grew 35%, while overall the EMEA region was down 10%. We also made good progress with profitability metrics. Non-GAAP operating margin was 5.8%, up from 4% last year. On the bottom-line, we achieved the non-GAAP net income of $3.2 million or $0.09 per share demonstrating our focus on increasing profitability in 2016.

Turning now to an operational update, I will focus on two key areas, our Emerging Product and our North American business. Starting with the North American business, while we saw some pockets of continuous growth in various geographic in the U.S. the overall performance was disappointing and we’re highly focused on returning to growth. In response, we took immediate action to improve performance in this region.

I have taken leadership in the North America with aesthetic and Body Shaping division reporting directly to me. We are focused on the following initiatives to improve our performance. First, the change of leadership. The elimination of the North America CEO position will simplify the management structure and ensure efficient support for our sales team.

I have committed my full support and focus to ensure strong execution in North America, as we rebuild momentum and expand our share in this important market. Second, continues to improve productivity and efficiency of our sales force. We are supporting our territorial manager with a focused effort from the rest of the commercial organizations. This includes customer service, marketing, clinical support, and sales support. All of these functions are supporting our territorial manager with a goal of shortening the sales cycles.

We are utilizing new metrics to monitor and improve the efficiency of our teams in real time. This will also allow us to better track sales activity in the quarter and make tactical adjustments as needed. Sales continue to improve gross selling between the aesthetic and Body Shaping teams. Given the strengths of our overall product portfolio, we are incentivizing and supporting our teams to drive overall North America sales.

Our territory manager can offer a customer attractive bundle deal across both divisions. Fourth, providing customers and employee with advanced training to our Syneron Candela Institute for Excellence. We held the first event at the Institute of our headquarters in Wayland, Massachusetts during the quarter and we are planning to open a second Institute in the West region in the first half of 2017.

And fifth, new product launches. We are launching UltraShape Power in the third quarter. Prior to the launch, we worked with KOLs to build awareness and support for UltraShape in North America. This will be a non-suite of dedicated marketing campaign and an effort of our territory manager on Practice Development Partners. In fourth quarter, we will launch the new wavelength for PicoWay. The launch is the highest priority from me and the North American team.

In addition, our R&D teams are in the last stages of development of several new products with the aesthetic and Body Shaping portfolio that will arrive in the next 12 months. We are already walking on preparation to ensure successful launches of this product. While we continue to believe there is a tremendous growth opportunity in North America across our Body Shaping and aesthetic product, and we believe the steps we are taking will bring our teams back to growth in this important market.

Turning now to the Emerging Product, our Body Shaping portfolio continues to be the main driver of growth in the Emerging Products growth, achieving $17.3 million in revenue. We had a record quarter of UltraShape delivering more than $10 million in revenue. This represents about three quarters of our total emerging product revenue in the quarter and significant milestone for UltraShape.

Our activity in the second quarter include the launch of our new UltraShape Power system selected in the international market, highlighting the significant potential for our new UltraShape technology to drive growth as we rollout towards our entire business. Our performance was primarily driven by strong UltraShape sales in the Asia-Pacific region. Where we are building very strong momentum with the launch of UltraShape that began in the first quarter.

There was also very strong acceptance of the UltraShape Power in our direct demand market. Shimon will provide additional details on the UltraShape Power, but I can briefly summarize by saying its significant announcement compared to our prior V3 system. It provides more power, greater fat destruction, shorter treatment time, and in a nice experience for the practice on patients.

We received very positive feedback and interest in the UltraShape Power in the countries where we launched, and we look forward to expanding into additional markets. We believe UltraShape Power will have a significant impact on our ability to continue building our global leadership position in the fast growing non-invasive fat destruction market.

I will now turn it over to Shimon for some additional details on the UltraShape Power. Shimon?

Shimon Eckhouse

Thank you Amit and good morning everyone. In mid-July we received FDA clearance for UltraShape Power for non-invasive abdominal fat cell destruction. UltraShape Power is a completely new next-generation version of our UltraShape platform. It builds on UltraShape's unique non-thermal proven fat destruction capabilities in a more powerful faster and easier to use system. UltraShape Power includes key enhancements areas, which I am going to review some detail about.

First and foremost the UltraShape Power deliverers the fat layers 20% more than the older version of UltraShape V3, which we already approved in 2014. The clinical studies performed with the Power have clearly demonstrated a significant improvement in fat destruction capabilities with this increased ultrasound power.

Actually, the clinical studies that were submitted to the FDA have demonstrated an average abdominal fat thickness reduction of 32% with UltraShape Power. These results are significantly better than the 19% achieved results with UltraShape V3, the 22% achieved with CoolSculpting, and the 12% achieved with sculpture as reported in their FDA submission and in post marketing studies of these 12 products for treatment of subcutaneous abdominal effect.

Another significant advantage of the UltraShape Power is the advance treatment, I think that allows the full abdomen to be treated in approximately 30 minutes down from approximately 40 minutes to 50 minutes with the older V3 version that was launched in 2014. This is of course extremely important for the clinic profitability and effectiveness, as well as for patients comfort.

[indiscernible] user of the UltraShape power allows for customized precise targeting of small and large pockets of fed with easy maneuverability and accessibility. In addition, the overall system footprint and weight are significantly smaller, and 64% lighter than the V3. This allows easy delivery and movements within the practice. This is much smaller footprint was well received by doctors in international markets with typical smaller clinics and we expect it to be favorably received in the U.S. when we launched the UltraShape Power in this quarter of 2016.

The UltraShape Power of course also very comfortable for patients. It’s higher energy is delivered in a cost structure that ensures effective cell destruction with no damage to surrounding tissue, resulting in a safe and comfortable treatment experience. The clinical studies that we have done with the UltraShape Power show a pain score of less than one on a 0 to 10 point scale.

The UltraShape Power also incorporates a sophisticated treatment and patient management software package combined with flexible communication option. This includes an all new high definition camera and new 15-inch monitor with an all new graphic user guided interface. The system is also Wi-Fi enabled for simpler purchase and download of FDCs and remote service monitoring.

We believe the UltraShape Power will be a catalyst for our existing UltraShape customer to increase their utilization, while also generate many new system phase opportunity. Also within our Emerging Products we were pleased to receive FDA clearance for the 785 nanometer wavelength of the PicoWay. We anticipate launching this addition to the PicoWay platform in the U.S. in the fourth quarter.

The new ultra-short pulse 785 nanometer wavelength is the first of its kind [indiscernible] market utilizing a titanium software laser with the removal of blue and green inks. The clinical data on this new wavelength is very encouraging as our side and our press release on the clearance of the third wavelength. The new 785 nanometer wavelength turns the PicoWay into our comprehensive aesthetic treatment platform and further enhances its already strong capability for a tattoo and pigmented region removal.

I will turn now the call over to Jeff to provide some details on the North American launch of UltraShape Power. Jeff?

Jeff Nardoci

Thank you, Shimon and good morning everyone. As Amit mentioned earlier, one of the most exciting catalyst for our business in North America is the U.S. launch of UltraShape Power. We’ve taken our Body Shaping team through extensive training earlier this quarter on this new innovative next-generation version and they are now in the market introducing it to our new and existing customers.

To quickly recap, the team is highlighting the following key advantages of UltraShape Power to the marketplace. First, the increased efficacy with the achievement of 32% reduction in subcutaneous fat thickness. Second, our shorter treatment times of 15 minutes for the full abdomen.

Third, our Wi-Fi enabled connectivity and smaller overall footprint, and last the two key components from our previous generation, virtually painless procedures with no visible signs of treatment, and the ability to customize treatments with our handheld transducer to treat the unique contours of each patient.

We believe that these and other features highlighted by Shimon the list price is state-of-the-art UltraShape Power will be higher than our current V3 and will be priced at 129.9. Our FDC model remains unchanged moving forward. As we launch UltraShape Power into the market, we’re going to be targeting the following market segments. First, new practices that are interested in entering the non-invasive fat destruction market to take advantage of this new state-of-the art fully customizable and virtually pain-free system.

Second, we will look at our existing practices that are already in the non-invasive fat destruction market and on competitive systems and they're looking for other offerings for their patients that will improve efficacy and then provide the customization and pain-free experience witnessed from our previous products. Existing UltraShape customers who already enjoy the pain-free fully customizable treatment are going to be looking to add this new level of efficacy and the shorter treatment times.

Additionally, for these current V3 users, we have a power up program in place to provide incentives for them to move up into our new platform. As mentioned earlier by Amit to support the launch of UltraShape Power we are starting a new marketing campaign. This will ramp up as we continue to build the installed base. The consumer marketing will be delivered across the mix of print, radio, out of home and digital media. We’ve already initiated some of these activities and the initial testing that we put behind this resonates well with both consumers and our professional audience.

In addition, we continue to leverage our C5 messaging platform, which is only enhanced further by the advanced performance and features of UltraShape Power. Overall, we're very excited about UltraShape Power. We believe its unique features and benefits provide the professional market with a very strong value proposition in this fast-growing non-invasive fat destruction marketplace.

I will now turn the call back over to Amit. Amit?

Amit Meridor

Thank you, Jeff. In summary, during the second quarter, we delivered several positives, including strong growth with our Emerging Products and Body Shaping. We had a record quarter for UltraShape sales and systems sold, largely driven by the international launch of UltraShape and in select markets of the UltraShape Power. In North America, I have taken our direct management of our team and we were pleased to recently receive the FDA clearance for UltraShape Power.

We’re excited to be in the early stages of launching this important new product to our North American Body Shaping team. This activity would be complemented by the launch of the new PicoWay wavelength by our North American aesthetic team in the fourth quarter. Despite lower than anticipated results in North America, we delivered improved operating margin as we benefited from our Emerging Products increasing to 30% of total revenue.

Cost reduction initiatives combined with prudent expense management and the performance of our large international business. This contributed to the second quarter non-GAAP EPS of $0.09 as we continue to focus on increasing profitability.

I will now turn the call over to Hugo, for the financial review. Hugo?

Hugo Goldman

Thank you Amit and good morning everyone. Given that we have issued our news release this morning and Amit has addressed some of the topline developments, I’ll focus my comments on some of the financial highlights for the quarter. North America total revenue was down 13.9% or $23.7 million and international revenue was up 11.5% at $51.2 million.

International results included 31.3% growth in Asia Pacific and a decline of 9.5% in the EMEA region. Second quarter sales from North America corresponds to 32% of total revenue with the balance of 68% coming from international markets. Second quarter 2016 product revenue was $55.3 million, up 2%.

In North America product revenue decreased 21.1% in the second quarter. EMEA product revenue was down 9.8%, and Asia-Pacific product revenue was up 36.7%. Recurring revenue, which includes service and consumables was $19.7 million. Recurring revenue represented 26% of total revenue in the second quarter of 2016 and was up 2%, compared to the second quarter of 2015.

In May, the company sold its small Dental laser subsidiary Light Instruments. The divestiture of this non-core asset is aligned with the company's strategy to leverage our existing global sales organization focused on the core and non-core aesthetic customers. And in particular driving growth and improving profitability with our emerging products. As a result of this sale, we recorded a gain of $1.5 million in the quarter, which is included in the GAAP results and excluded from the non-GAAP results.

Second quarter 2016 revenue included $0.2 million in sales from the subsidiary, reflecting a partial quarter contribution following its sale in the end of May 2016. This compares to $0.7 million in sales for the dental laser subsidiary in the second quarter of 2015. Excluding the Dental laser subsidiary from both periods the second quarter 2016 revenue was $74.7 million, up 2.8% compared to $72.7 million in the second quarter 2015.

Non-GAAP gross margin for the second quarter 2016 was 52.8%, excluding stock-based compensation expense and amortization of acquired intangible assets, compared to 53.9% in the second quarter of 2015. This is primarily reflecting an increased mix of international distributor revenue, partially offset by sales of the company's higher margin emerging products.

Non-GAAP operating expenses were $35.2 million, compared to $36.7 million in the second quarter of 2015. In terms of operating margin expansion, we are making progress with our plans to leverage our emerging product growth and prior investments in sales and marketing. During the second quarter, operating expenses decreased by 370 basis points, driven by lower sales and marketing, general and administrative, and research and development expenses.

Non-GAAP operating income in the second quarter of 2016 was $4.4 million or an operating margin of 5.8%, compared to $2.9 million or 4% in the second quarter of 2015. This reflects growth from the company's higher margin Emerging Products, cost reduction initiatives, as well as the growth in international market markets through the company's existing infrastructure.

We are pleased to see the operational leverage beginning to take place. On a non-GAAP basis, net income in the second quarter of 2016 was $3.2 million or $0.09 per share. This compares to a net income in the second quarter of 2015 of $2.5 million or $0.07 per share. The non-GAAP operating income and net income results exclude expenses related to stock based compensation expense, amortization of acquired intangible assets, fair market value adjustment to the investment in Iluminage Beauty joint venture, re-measurement of contingent consideration fair value, legal settlements and related fees and a gain from the sale of light instruments, and finally tax benefits.

In addition, our pro forma non-GAAP results, excluding the Dental laser subsidiary are as follows. The operating income is up $0.2 million to $4.6 million. The operating margin is up to 6.1% and the net income is up $0.2 million, with EPS non-GAAP increasing pro forma from $0.09 to $0.10. During the quarter Syneron and Unilever are ready to invest each $2 million to support the ongoing execution of the Iluminage Beauty joint venture growth.

As of June 30, 2016, the fair market value of Iluminage Beauty joint venture was marked down by $2 million to $20 million. On a GAAP basis, operating income for the second quarter 2016 was $1.9 million, compared to an operating loss of $0.2 million in the second quarter of 2015. GAAP net income and earnings per share in the second quarter of 2016 was $1 million or $0.03 per share, compared to a net loss of $0.3 million or a loss of $0.01 in the second quarter of 2015.

Turning to the balance sheet, our DSO were 66 days in the second quarter of 2016, compared to 76 days in the second quarter of last year. During the quarter, we generated $5.6 million in cash from operations. As of June 30, 2016, our overall cash position, including cash and cash equivalents short-term bank deposits and marketable securities were $76.7 million. We continue to have a very strong balance sheet with no debt.

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

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] We will now take our first question from Richard Newitter from Leerink Partners. Please go ahead.

Richard Newitter

Hi, can you hear me, okay.

Shimon Eckhouse

Yes.

Amit Meridor

Yes.

Richard Newitter

Okay. Thanks for taking the question. So, Amit maybe we can start the leadership changes that are occurring on the North American business segment, I appreciate that you are hoping to create a more efficient, I guess reporting structure, but if I just kind of back over the last two years there has probably been, I think anywhere from three, maybe four restructuring, organizations, our management switches that have happened in North America. And I am just wondering why is this time different and what exactly is in need of so many different fixes, and how can you give us confidence that whatever you are doing in North America is the final move that you identify to what you need to do and that this is going to enhance your competitive positioning to re-accelerate growth.

Amit Meridor

If I recall, thanks for the question. If I recall correctly, this is the second change on the leadership that we are doing in the last 2.5 years. As you are well aware, we’ve been doing very big changes in North America infrastructures and the sales organization in the last two years. We built two sales force, we built full support around the sales force, and during the process we hired more than probably 100 people in the last year and a half to complete the plan of having those sales organizations, with the big thinking behind that we want to be focused on the body segment, so we created a pretty small team compared to our competitors, but we thought for the long term it will be the right move to do it and a static team that are doing the rest of the product portfolio.

Obviously, this is a very strong change that we’ve been doing in the last year and a half. And the reason I’m feeling right now – confident that we are in the right direction, because we have all this infrastructure that it was not easy to build. We have around 100 people in the sales and commercial operations. We have the leaders of those divisions doing their job and all these on the PMs are fully aware of the assignment or task and the processes in the sales process. So that’s what I feel that today we are making the structure a little bit more simplified and relying on the people in the line to do their job with - I can give them much faster support is that the right thing to do and we'll built this correctly for the longer term.

Richard Newitter

Okay. You also mentioned that I think you're going to spend a little bit more on the consumer, marketing side of the equation. Can you give us any quantification of what kind of incremental dollars will go towards whether it’s direct-to-consumer spend or whatever it you have in mind in the back half and what does this mean or help quantify help quantify this from a margin expansion, how shall we be thinking about your margin trajectory on a year-over-year basis in 2016 and then into 2017 in light of the spending?

Amit Meridor

We are definitely increasing our marketing expenses in the second half of the year, mainly in North America. We have the big launch of the UltraShape Power that as Jeff described, we build specific campaigns in different Medias and different channel to support the UltraShape Power launch. We also have the other product like the CO2RE Intima and Profound and the third wavelength that’s coming into the Pico that we're going to support.

So, the second half of the year will have a larger array of marketing expenses. It’s not going to change the total plan that we have for the year, but compared to the first half it will be larger than the first half of the year.

Richard Newitter

Okay. So may be just what does that mean for margins? Are you still going to be able to expand margins on a full-year basis in 2016? I think the consensus has you at about 300 basis point year-over-year increase in 2016 and then kind of further extension from that level in 2017 or is there a change to that?

Amit Meridor

Yes, like I said, if you -- and you know very well, the first half of the year, we even set some money on the marketing, preparing for the second half, so the full year there is no changes. We strongly believe that we will be able to deliver our numbers. And the second – and the 2017, this is the year that will definitely see the biggest leverage on our expenses and the sales will grow and the marketing expenses will be even reduced as far as percentage.

Richard Newitter

Okay. You guys give – do you have an emerging markets revenue number or emerging product revenue, just – can you just tell us exactly what is defined as body contouring and what is defined in that Emerging Products that grew 46%?

Amit Meridor

The body is the UltraShape. Today, it’s the UltraShape V3 that we still sell in some areas and now with UltraShape Power and we also have the different Vela that we are selling in different countries. So it’s the UltraShape and Vela today that going to the body segment. It’s mostly around fat destruction and body contouring. All the rest of them in the emerging product are the Pico for the tattoo removal, the Profound for the submental and CO2RE Intima for the vaginal. The way we described our emerging product is those are high growth segments that have a better growth percentage year-over-year than the average other segments like hair removal or any others. Those are product that have recurring revenue model associate with them and we decided to focus on them most of our marketing and sales activities to push them through the next three years to help us improve in gross margin. All of those products have the highest gross margin, more than 65% and with recurring revenue of more than 80% gross margin it will support our gross margin growth. And in segments that growing rapidly more than the average in the static business, it will help us to get in the three years to the double-digit growth that we are looking for.

Richard Newitter

Okay. I guess I was just trying to make sure I had the dollar number right on the prior year and in the current year, just what was the dollar number for that business segment at the end of three years?

Amit Meridor

For the second quarter or...?

Richard Newitter

Yeah, just – you said it was up 46%, I just want to make sure I have the right comparison.

Amit Meridor

The body was $17.3 million, that’s the UltraShape mainly – and we said in the call that UltraShape was $10 million and the total body was $17.3 million and the total emerging product was $22.5 million.

Richard Newitter

Okay. Thank you. Disposables and your consumable mix shift and your capital on UltraShape, what’s that breakdown now and can you remind us what your longer term goal is of that? What percent was disposable?

Amit Meridor

Our target in three years is to achieve with service and consumable, 50% of our revenue to come from consumable and service. Right now, we are on 26%.

Richard Newitter

I’m sorry, just disposables without service.

Amit Meridor

We don’t say – we don’t break it down because service is – it’s doing the same thing as the recurring revenue. It’s something that coming as a recurring. Its contract – a lot of the service is very similar to our recurring revenue model. So that’s why we are putting service and recurring revenue. I can you tell you that if I remember correctly in the 50%, it will be probably 30% of it – 35% will be the pure consumable that you mentioned and 25% will be the service.

Richard Newitter

Okay. That’s helpful. And then just one last one. You guys announced out a collaboration with Allergan or a preliminary collaboration in the first quarter, you said you would update or have an update at some point moving through the year, I was just wondering if you could tell us what contribution if any that is having on the business and what are you plans for either fine tuning this agreement or extending it or not into the back half thanks.

Amit Meridor

We just started to see the first things coming out of there as far as lead generation and we are having meetings in the next couple of months with them to decide on the next steps. Operator?

Operator

[Operator Instructions] And we will now move on to the next question Anthony Vendetti from Maxim Group.

Zack Kubow

Rich, did Rich finish?

Amit Meridor

Something happened with Rich, he was in the middle of asking questions and suddenly he disappeared from the call? So, Rich, if you hear us and you can go back to the back and we will be happy to answer more questions if you have. Operator, if there is more question, please.

Operator

Yes, Anthony Vendetti from Maxim Group is on the line to ask question.

Anthony Vendetti

Okay, thanks, guys. Yeah, so, I just wanted to talk a little bit about the ASPs. I know gross margin was a little bit lower, but there was a lot more international revenue, so that naturally has a lower gross margin. But are you seeing any pricing pressure on any of the products? Obviously, the Body Shaping categories is a hot category, there is more competition in the space, you new product is now 1,299, [indiscernible]. What are you seeing in terms of ASPs for your products as well as what the competition is doing? Are you seeing more bundling? Just a little bit of color on that please.

Amit Meridor

I think from what I see for the body especially in North America because in the international we are just starting. The pressures are holding in the body. There is no strong pressure right now on pricing. That’s why we feel very comfortable to come with UltraShape Power with stronger price to support the 20% more power and the 32% fat destruction that we will have compared to our competitors, so body is really stable. That’s not the place where the competition is. The competition is mostly on the efficacy and the success of the unit in the clinics. I can say that around Pico, there is much more pressure. Obviously, this was a very high price from the start when we launched it and our competitor launched it. So there is more pressure and when more doctors what to get into this technology of tattoo removal and pigmentation. And when – we were the second one to come with the Pico and now we have something like five or six competitors into this segment. So it’s having some problem as far as pricing. But we still have very strong gross margin around the Pico and we can compete very strongly. And coming with third wavelength is helping us to keep the price and not to take it down due to the competition. The other one – the Intima and Profound, they also don’t have a lot of pressure on pricing.

Anthony Vendetti

Okay. And then on the – you mentioned on service and disposables is 26%, the goal is 50% by when? I missed that.

Amit Meridor

Three years. That’s probably the end of 2018.

Anthony Vendetti

Okay. And in terms of – you have $76.6 million. Did you buyback any shares in the second quarter?

Amit Meridor

No.

Shimon Eckhouse

No. We finished the plan in Q1.

Anthony Vendetti

So you don’t have any plan that has anything left at this point?

Amit Meridor

No, not at this point.

Anthony Vendetti

Okay. And then just a little more on Bill Griffing, so that position has been eliminated. When was Bill’s last day or is that – can you share with us that?

Amit Meridor

It’s not a specific day. I took over right after the end of the second quarter. Bill was with us helping us in the process, but I took over the responsibility right after the end of the second quarter.

Anthony Vendetti

Okay. And sales and marketing was a little lower than we expected this quarter, but it sounds like that that was just more of an anomaly, it sounds like that that’s going to ramp up based on what Jeff said in terms of increasing spending on advertising for UltraShape Power both digital, radio, media rate, print?

Amit Meridor

Yes, we are preparing for the much stronger second half of the year in North America and that’s how we build also our marketing expenses to be able to support growth on the second half of the year in North America.

Anthony Vendetti

If we do the math here on the emerging products, it looks like about $5.2 million encompasses PicoWay, Profound and CO2RE Intima, it’s a little lower than I would have thought. I was just wondering is CO2RE Intima or Profound, was it ramping slower than expected, if so why and how do you think that will play out as we move through the end of this year?

Amit Meridor

You are right in your – looking into the numbers, definitely the Profound and the Intima are slower ones. We don’t put a lot of marketing support and campaigns around this. We put most of our effort around - mostly around the body segment and the Pico, and we let the pace of the Intima and the Profound taking step by step and that’s why you see right now that the number is lower. Obviously, we also had very weak quarter in North America where the Intima for example and Profound those are the places and that’s why we feel that on the second half of the year we’ll start to see improvement in the total Emerging Product coming also from North America besides the body.

Anthony Vendetti

Okay. Maybe this is for Shimon, I just wanted to go over the clinical results UltraShape Power, so in terms of fat destruction, UltraShape Power is getting 32% compared to quail skeleton which is around the same amount and did you say Ultra [ph] had 12%.

Shimon Eckhouse

This is what they published and quail skeleton was around 22%.

Anthony Vendetti

22? Okay.

Shimon Eckhouse

Yes.

Anthony Vendetti

Okay. Thanks very much. I’ll hop back in the queue. Thanks guys.

Shimon Eckhouse

Thank you.

Amit Meridor

Thank you.

Operator

We will move on to our next question from Zack Ajzenman from Griffin Securities. Please go ahead.

Zack Ajzenman

Thanks. Good morning. Just to be clear on North America Amit, should we think about Q2 is a blip in terms of decline which I think was the first decline since 2014. Are we expecting growth in North America beginning this quarter?

Amit Meridor

Yes.

Zack Ajzenman

Okay.

Amit Meridor

It’s a short answer but the answer is yes.

Zack Ajzenman

Good enough.

Amit Meridor

It’s not just coming from what happened in Q2 because we do have this UltraShape Power launch in the third quarter. We have the third wavelength coming in. Lot of our marketing activities are focused on the second half of the year, so it’s not that only what happened is happened very focused in Q2 we do have very clear plan how to make the second half of the year much, much stronger.

Zack Ajzenman

Okay. On the gross margin side in the press release, the explanation behind the gross margin pressure was an increased mix of international distributor sales. However, it sounds like the EMEA distribution business had a pretty difficult quarter. Can you just help me reconcile what’s going on there?

Amit Meridor

In EMEA, if you look on the last four quarters what happened with us and what happened with our competition, you will see that there is a big difference every quarter. The economy there is not stable enough and it depends where for example area like Russia, Europe, Turkey and Greece. This quarter was much more difficult obviously for some local thing that happened in those countries and the oil pressure. And in different quarters, you’ll see different things happening there in EMEA. So you can’t look on EMEA as one region that everything is happening and affecting all the different countries over there.

We had a 35% growth in our direction operation, that’s the UK, Italy, Spain, France and Germany. So there is a lot of things going on in EMEA. Looking on the last four quarter, I think we’re still showing a growth year-over-year from the last four quarters, but definitely there is pressure out there that we cannot very strong predict exactly what’s happening. We’re doing our best especially in the direct operation to improve our presence.

Zack Ajzenman

So again as the press release notes, the increased mix of international distributor sales in the quarter presumably does that mean the source of that is mostly Asia?

Amit Meridor

Yes. As you can see, we had 36% growth in Asia-Pacific. Most of the Asia-Pacific beside the Australia and Japan is distributors. So obviously that’s what happened in the mix of the gross margin that we did had less in distributors from EMEA but we had a very strong sales in distribution in APAC that affected the gross margin.

Zack Ajzenman

Okay. What percent of UltraShape sales this quarter have bundled with Vela products?

Amit Meridor

In North America, that’s where recording is right now, it’s 64%.

Zack Ajzenman

Okay. And then last one from me, can you quantify the year-over-year growth excluding CoolTouch business last year?

Shimon Eckhouse

The difference is quite smaller outside. We will give you the answer afterwards the exact number.

Zack Ajzenman

Okay.

Hugo Goldman

We don’t have it in front of us, so we’ll look into it and get back to you.

Zack Ajzenman

Okay. Thanks guys.

Amit Meridor

Thank you.

Hugo Goldman

Thank you.

Operator

Thank you. Now we move on to our next question from Difei Yang from Brean Capital. Please go ahead.

Difei Yang

Hi, good morning. Thank you for taking my question. For UltraShape, is there – my assume is to face the mechanism of action did not change, so it’s not based on heat it’s still based on mechanical acoustic energy, is that right?

Amit Meridor

Yes.

Difei Yang

Okay. And is they hand free?

Shimon Eckhouse

No.

Difei Yang

Okay. So I was wondering if you could help us to understand we have competitive products in the market for Body Shaping. How would you send the message to the decision maker? I assume will be the doctors. How do they make their decisions to pick UltraShape Power instead of other choice?

Jeff Nardoci

Jeff, do you want me to take that or?

Amit Meridor

Yes, sure, go ahead.

Jeff Nardoci

This is Jeff. The first thing they are looking at efficacy. They want to receive the clean clear results obviously now with power being the leading product in the market. That’s a great advantage for us. Second, it’s the patient satisfaction and comfort. As Shimon stated earlier on the 1:10 scale, we scored less than so extremely comfortable product in the position. Again, time to treat and profitability for them. We’ve greatly reduced the time to treat now on the product. We are down around 30 minutes now to do a full abdomen which is great. That was one of the enhancements we had to bring to our current product portfolio. And then they look at overall support and what we got to the marketplace. So we believe now with everything we’ve put in place, we have the leading product in the market for them to choose from.

Difei Yang

Okay. Just a follow-up on UltraShape, thank you. Would you think UltraShape and [indiscernible] was?

Amit Meridor

UltraShape was about the same, extremely low, both of them were down less than 1%. So UltraShapes, always been known for that, that mechanism of action, the cavitation effect versus doing any thermal injury because we don’t have the thermal entry and also reflects the sign of treatment which is great for consumers. I think that was immediately, there is no boozing, everything watched really good for patient post. So those are all distinct advantages of us. The other thing the doctors are really liking about the system as well, as you get into larger customers, when you have fixed size applicators and get unevenness of the result where our applicator now can be custom any shape, the gear, design that unique individuals. So you don’t - given any unevenness, you don’t get any shelving, no debits, it’s a good smooth work and combined with improvements the tone and texture with the look. So we really believe our ultimate package will lead this marketplace as we move forward.

Difei Yang

Yes, thanks. So then just a quick follow-up on the patient – from patients percentage, what’s your feedback from the landwill [ph] with regards to whether you think patient here about, that is how the technology works or they really only care about efficacy and comfort.

Amit Meridor

Patience are looking at efficacy and comfort and lack of side effects. The biggest thing if you’re someone who is constantly participating in gym activities and working out, and then you go away and have this done, and then you can go to the gem because you can’t take your shirt off for a while. People wonder what’s going on. So it’s a big advantage not have visible signs or side effects that stop you from being in New York continuous routine, ours doesn’t have that at all. The no pain factor is very important to own their like get to the great results but if I get to be as comfortable as possible and now with the 32% would definitely have the best in the marketplace out there. So we are very impressed by that. Our old system was very good at 19% right on the heals 22%, a and significantly higher than the scalper. So we have a great existing product, but the new brand has really stepped up a level as you move into power, and really accelerated what we’re going to see as far as results.

Difei Yang

Okay, thanks. Then my final question is on the last amount of revenue decline, so what does across the board, weakness excluding the body shaving division. Or what specifically related to a couple of product line.

Amit Meridor

It was more general. It was not specific in one product line and that’s why we feel the changes that we are planning to do with the focused activities on the launches will change that direction.

Difei Yang

Okay. Thank you.

Amit Meridor

Thank you.

Shimon Eckhouse

Thank you.

Operator

Operator. That will conclude today’s Q&A session. I would now like to turn the call back to the speakers for any additional remarks?

Amit Meridor

Thank you. I would like to thank everybody for participating and have a good day. Thank you very much.

Operator

That will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

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