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Syneron Medical, Ltd. (NASDAQ:ELOS)

Q1 2012 Earnings Call

May 9, 2012, 8:30 a.m. ET

Executives

Zack Kubow – The Ruth Group

Louis Scafuri – CEO

Asaf Alperovitz – CFO

Dr. Shimon Eckhouse – Chairman

Analysts

Richard Newitter – Leerink Swann

Anthony Vendetti – Maxim Group

Operator

Good day, ladies and gentlemen, and welcome to the Syneron Medical Q1 2012 Results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, today’s conference is being recorded.

I’d now like to turn the conference to your host, Mr. Zack Kubow of The Ruth Group. Please go ahead.

Zack Kubow

Thank you, operator. I’d like to welcome you to Syneron Medical’s first quarter 2012 conference call.

Statements on this call may be forward-looking within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 relating to the company’s future events or future performance, including statements with respect to Syneron’s expectations regarding, but not limited to, the financial forecast for 2012, the launch of new products and the maintenance of a leadership position in core and non-core markets.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the company’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied in any forward-looking statements. These risks may include, but are not limited to the risk factors set forth under the heading Risk Factors in Syneron’s annual report on Form 20-F, filed with the SEC. These factors are updated from time to time through the filing of reports and registration statements with the SEC. These statements are only predictions and Syneron cannot guarantee that they will, in fact, occur.

The company does not assume any obligation to update the forward-looking statements discussed in today’s conference call.

Finally, this presentation includes non-GAAP financial measures. Syneron provides reconciliation information at the end of the first quarter results press release on the Investor Relation’s page at www.Syneron.com.

Speaking on the call today are Syneron’s CEO, Louis Scafuri and Syneron’s CFO, Asaf Alperovitz. Shimon Eckhouse, Syneron’s Chairman of the Board, is also on the call and will be available for questions during the Q&A portion at the conclusion of management’s prepared remarks.

Now, I’d like to turn the call over to Lou.

Louis Scafuri

Thank you, Zack, and welcome to Syneron’s first quarter 2012 conference call.

The first quarter was a great start to the year for Syneron with new levels of record revenue. Underpinning these results was a strong adoption of our recent new product launches and the completion of the acquisition of Ultrashape.

Ultrashape is a key strategic move for us that provides immediate entry into the attractive and high-growth body contouring market segment for the non-invasive fat cell destruction.

Other strategic moves in the quarter include the enhancement of our technology pipeline and intellectual property portfolios through our acquisition of Transformer Medical and our equity investment in Juvenis. These major initiatives add to our existing pipeline of new products in both professional aesthetic device and emerging business unit segments.

Each initiative offers a significant opportunity to expand our product offering and drive top-line growth. We will maximize these opportunities by leveraging our worldwide infrastructure, strong channel-to-market capabilities to strive our innovative science-based aesthetics products suite to market.

I’d like to offer a brief overview of our financial results followed by a review of some of the key drivers in the PAD and EBU segments to the quarter and beyond.

Total revenue in the first quarter 2012 was $62.7 million, up 26% over the prior year; another record quarter for Syneron. This marks our seventh consecutive quarter of double-digit year-over-year sales growth.

International sales grew 24% during the first quarter. These results were mainly driven by strong performance in ENMEA and Japan and successful continued rollout of our eTwo and eLace products.

North American sales rose 30% year over year. Of major significance in North America results is the launch of the GentleMax Pro during the quarter and market traction from our other recently-launched products.

Recurring revenue, which includes service and consumables, were up 4% representing approximately 31% of total PAD sales.

In the PAD segment, revenue increased 21% and non-GAAP operating income was $4.6 million, or 8.1% of PAD sales.

In EBU, revenue rose 111%. The EBU continued to generate an operating loss for the quarter. In addition, EBU sales were negatively impacted by the previously-announced voluntary field action we had [inaudible] the Lifetouch laser systems in Europe, which resulted in virtually no revenue for the product in the quarter.

We regained CE preformity to the Lifetouch system and remain on track to fully address the issue by the end of the third quarter of this year.

Excluding the Lifetouch business, EBU sales from Syneron Beauty Products and elure increased over 250% over the prior year, demonstrating the continued high-growth trajectory for this segment.

On a consolidated basis, we achieved non-GAAP operating income of over $700,000 and non-GAAP earnings of $0.02 per share. This is our sixth consecutive quarter of non-GAAP profitability.

During first quarter, we completed several important operational milestones that will contribute to both our near-term and long-term success.

In February, we acquired Ultrashape, paving the way for our entry into non-invasive fat cell destruction and body sculpting market. Since the closing, we’ve been working closely with our new colleagues from Ultrashape to integrate the business with Syneron.

On the commercial front, we’re focused on educating and training our sales force and distribution partners on unique features and benefits of focus ultrasound with the Ultrashape Contour B3 system.

At the end of March, we hosted a symposium on new opportunities and trends in the dynamic body-shaping arena at the 2012 Anit-Aging Medicine World Congress in Monte Carlo. The event featured both Ultrashape Contour B3 focused ultrasound system and our VelaShape family of elos based body sculpting products. We were extremely pleased with the turnout and interest in our products that addressed this large-and-growing segment of the market.

We believe that there are tremendous synergies between Ultrashape focused ultrasound technology and VelaShape elos technology. Our install base of over 700,000 Velashape systems coupled with our market-leading global distribution infrastructure, creates a strong platform to expand the sales of Ultrashape.

We are convinced that we have the best technologies to safely and effectively provide patients with the comprehensive body-shaping results.

We also remain on track to launch two additional new body contouring products in the second half of the year, further enhancing and expanding our body-shaping portfolio.

The Ultrashape clinical trial study for FDA 510k clearance will start in Q2. We are on track with our investment in Ultrashape to be accretive by the end of 2012.

In China, we are in process of transitioning to a direct operation for Syneron products. We expect this transition to provide significant long-term benefits, particularly as we gain additional product approvals in the emerging market. We are building on the recently SFDA clearance of our E Series [inaudible] systems in China, capitalizing on the benefits of our elos technology and it’s ability to treat varied skin types and tones.

In the U.S. we have a strong presence at the American Academy for Dermatology’s annual meeting in March. This included the launch of the GentleMax Pro, our next-generation multiple-wavelength laser workstation that provides best-in-class treatments for permanent hair reduction and treatment of vascular pigmented lesions.

Many of our customers were eagerly awaiting the commercial launch of the GentleMax Pro and sales, with it’s new addition to our product line, contributed to our record results for the quarter. We believe that the GentleMax Pro, along with the recently-launched GentleLase Pro, which also contributes to our quarterly results, will only further heighten the Gentle family of product’s outstanding reputation for quality and performance.

The AAD also proved to be successful for Syneron across all of our other families of products. We continue to drive sales of the two products we launched in the fourth quarter, the eTwo facial rejuvenation system and the eLase with Motif painless laser hair removal system. eTwo, which is available globally, is a unique table-top platform system that builds on the success of sublative rejuvenation that Syneron pioneered with the eMatrix system by adding Syneron’s new sublime application. This combination creates a synergistic rejuvenation effect that allows our customers to provide their patients with the unique low-down time procedure with enhanced treatment outcomes.

eLase, which is available internationally, provides a low-cost hair removal system with a strong safety profile and an innovative pain-free mode. eLase also features an interchangeable treatment applicator that expands the utility of the system to include facial rejuvenation procedures. Our customers have been attracted by the versatility and value of the eLase system and we’re quite excited about the market adoption thus far.

Turning to the EBU, we delivered another quarter of growth in Syneron Beauty and also with the elure Advanced Skin Lightening System. During the quarter, we launched the Tanda Pearl Teeth Whitening device, with prestige retailers in the U.S. and Canada, further expanding and leveraging the Tanda brand in the retail channel. Initial orders were ahead of our expectations and contributed to a strong overall quarter for the Tanda family of products.

Sales of the me Home-Use Hair Removal System, and elure also continue to grow in the quarter. We are focused on further developing our eCommerce infrastructure to drive higher margins through direct sales with positive results. These moves, combined with our ongoing manufacturing and operating cost reduction initiatives, are part of our focus and ongoing efforts to improve the profitability of this segment.

Sales of our SkinBright whitening products reached over $900,000 for the quarter. In February, the Journal of Cosmetic Dermatology published the results of a randomized double-blind placebo-controlled study comparing elure to 2% hydroquinone cream. This study demonstrated superior skin lightening results with elure, narrowing the excellent clinical trials from our own clinical trials.

Most recently, elure received the 2012 Best in Black Beauty Award in the skin category from Essence Magazine, further highlighting the strong reception for this product as it is received from dermologists and patients across the U.S. We are expecting regulatory approval for elure in three large Asian markets, which when approved, would substantially expand the market opportunities of this product.

Business development remains a key strategy for Syneron. In addition to the acquisition of Ultrashape during the quarter, we completed two important transactions that enhance our development pipeline with innovative technologies and innovative product and intellectual property.

First, we acquired the assets from Transformer Medical, the transdermal drug delivery company, focused on the development and commercialization of an innovative RF-based active transdermal drug delivery technology. This acquisition is a key strategic move. First, this technology is based on the ability to create fractional RF microchannels that create microscopic channels across the skin for the improved absorption of a large molecule compound. We believe it has tremendous potential to provide fractional RF-based skin rejuvenation treatments in combination with the delivery of targeted cosmetic compounds to synergistically enhance a patient’s clinical outcome.

Second, Transformer has an extensive intellectual property portfolio on transdermal technology, including significant IP on the fractional delivery of RF energy that we believe further solidifies our patent position in the fractional treatment category.

The other key transaction we completed during the quarter was an equity investment in Juvenis, the development stage company with the unique dermo filler called Penafiel Penafiel is designed to use in high volume aesthetic applications and body contouring procedures. We believe Penafiel will be a competitive filler product with attractive features, including a tissue-like feel with slow and natural degradation in the body.

Penafiel could open a new market opportunity for Syneron and allow us to cross sell with complementary products in our portfolio and further leverage our channel market capabilities.

In summary, we continue to execute as the global market leader with significant growth results in both the PAD and EBU segments. After a strong start, we remain positive on our outlook to expand our momentum in 2012.

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

Asaf Alperovitz

Thank you. Revenue in the first quarter of 2012 was 62.7 million, up 25.9% compared to 49.8 million in the first quarter of 2011. International revenue grew 23.8% year over year to 41.2 million and North America revenue grew 29.8% to 21.5 million. 66% of first quarter 2012’s revenue was in the international market, compared to 67% in the first quarter of 2011.

Product revenue and recurring revenue, which include services and consumables for the first quarter of 2012 were 45.3 million and 17.4 million respectively. Consumables revenue, which reached a record level in this quarter, also included revenues from [inaudible] inducer and grew 20% year over year, or 6% organically.

Gross margin for the first quarter of 2012 was 61.4% or 53.5% on non-GAAP basis, excluding stock-based compensation and the [inaudible] of the intangible assets compared to 62.6% or 54.7% on a non-GAAP basis in the first quarter of 2011.

The decrease in non-GAAP gross margin was primarily related to higher mix of EBU segment product sales, which currently have lower gross margins compared to the PAD product. Additionally, EBU gross margin was effected in the first quarter of 2012 from the local gross margin contribution from the Penafiel business.

GAAP-based first quarter 2012 operating loss was $3 million, or an operating profit of 0.7 million on a non-GAAP basis. This compared with an operating loss of 2.6 million or an operating profit of 0.6 million on a non-GAAP basis in the first quarter of 2011.

The increasing non-GAAP operating profit was primarily related to the 26% year-over-year growth in revenue, which was partially offset by an increase in operating expenses, especially due to significant growth in the EBU segment business.

GAAP net loss for the first quarter of 2012 was 2.6 million, or $0.07 per share, compared to GAAP net loss of 2.4 million or $0.07 per share in the first quarter of 2011.

On a non-GAAP basis, net to income for the first quarter of 2012 was 0.6 million or $0.02 per share, compared to net profit of 0.2 million, or $0.05 per share in the first quarter of 2011.

First quarter non-GAAP operating income and net income excludes one-time expenses as detailed in the company’s financials in today’s press release, with the main [inaudible] the acquired tangible assets of 1.8 million, stock-based compensation of 1.2 million, non-recurring costs associated with the voluntary field action regarding the life of [inaudible] product in Europe was 0.5 million, and other non-recurring costs of 0.2 million.

Now, I will provide the review and commentary on the results on our two reporting segments. The Professional Aesthetic Devices or PAD and Emerging Business Unit, or EBU.

For the first quarter of 2012, PAD revenue was 66.5 million or 90.2% of total revenue, and EBU revenue was 6.1 million, or 9.8% of total revenue.

Operating income in the PAD segment was 4.6 million on a non-GAAP basis, representing an operating margin of 8.1%. This compared to non-GAAP operating income of 3.2 million or 6.8% of operating margin in the first quarter of 2011.

The improvement on our GAAP PAD operating results is primarily due to the following factors: higher sales volume, higher sales mixed with [inaudible] product and consumables and was also driven by [inaudible], higher production of sales volume and operational efficiencies and cost-cutting measures.

Moving to the EBU, unit quarter was successfully launched with the Tanda Pearl ionic teeth whitening system in North America and China and presented a strong growth in North America across all EBUs.

Additionally, we continue to develop and grow our eCommerce infrastructure to support and increase our [inaudible].

As Lou mentioned, during the quarter we initiated the voluntary field action of the Lifetouch Dental product in Europe, which had an impact on dental revenue and profitability, which are included in the results of the EBU. During the quarter, there was virtually no sales in the dental laser business, compared with $1.2 million in the first quarter of 2011. If you exclude the dental laser business revenue in the year-over-year comparison of the EBU, sales grew 253% in the first quarter 2012, demonstrating the high growth generated from the Tanda family products, the me [inaudible] system, and our skin lightening product which reached a record of 0.9 million in sales each quarter.

Looking forward, we expect the dental voluntary field action in Europe to impact EBU short-term revenue and profitability.

Non-GAAP operating margins in the EBU segment was 3.9 million. Compared from previous quarters, EBU’s results in the first quarter expect lower gross margins compared to the past, in this quarter, due to the lack of margin contribution from the dental laser products. We incurred higher operating expenses, including mailing investments and marketing associated with the launch of several EBU products, including the launch of the Tanda Pearl teeth whitening system, the continued launch of elure, and other Tanda products in North America and internationally. And the ongoing launch of the [inaudible] in Canada.

We are working to improve the EBU profitability by increasing direct sales, introducing higher margin product and implementing cost reduction initiatives. We are focused on continuing strengthening the profitability of our PAD business and improving margins in our expanding EBU business in order to arrive at profitable growth for Syneron.

Turning to the balance sheet, our DSO decreased to 73 days, representing in the improvement of three days compared to DSO of 76 days in the first quarter of 2011. At March 31, 2012, cash and cash equivalents, including shortly [inaudible] marketable securities net were 142.4 million compared to 131.1 million as of December 31, 2011.

During the first quarter, we used cash of 15.8 million for business development investments including $11.2 million net to acquire Ultrashape, 3.6 million to acquire the assets of [inaudible] and 1 million to make to connect with the investments in Juvenis. Including with EBIT position, we maintained the strongest balance sheet in the industry and we continue to evaluate opportunities.

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

Question-and-Answer Session

Operator

(Operator instructions). Our first question comes from Richard Newitter of Leerink Swann. The line is open.

Richard Newitter – Leerink Swann

Hi guys. Thanks for taking the question, and congrats on a really solid top-line result, and good first quarter results. Just, if I could start off, maybe Asaf, or I think actually Louis, you said that you continue to expect the Ultrashape acquisition to remain on track to be accretive by end of year. I was just wondering, first can you quantify what the sales impact and the EPS delusion impact was in the first quarter? And is that expectation for accretive by the end of the year on a both a non-GAAP and a GAAP basis?

Asaf Alperovitz

Hi, how are you? As you know, it deals with the policy, which is consistent in prior calls we’ve had. We do not provide granularity on the product-line basis. Louis, you want to comment on that?

Louis Scafuri

I would just say, give us an opportunity to drive topline with our existing infrastructures and what we have in terms of our RSD initiatives is very complimentary and actually synergistic.

Richard Newitter – Leerink Swann

Okay. But with respect to the comment that you made that you expected to be accretive, is that

non-GAAP, GAAP. Can you just clarify that for us?

Asaf Alperovitz

Yes, we expect the trajectory on a non-GAAP basis. And we usually relate to our results on a non-GAAP basis consistently.

Richard Newitter – Leerink Swann

Okay. And, you know, it seems like there are a number of profitability improvement drivers potentially as begin to move through the year. And we probably should be considering the first quarter, maybe even as a significant low point for the year. And if I highlight those, I would say you have the Ultrashape, you know, moving towards profitability by year end. You have potentially a high margin product like elure coming through, and you also have a just overall improved profits. Now, how should we think about kind of each one of those contributing as we move through the year? And also layering on the Lifetouch recall? Can you help quantify for us when that stops diluting your EPS as well. If you could just touch on each one of those, key profitability drivers?

Louis Scafuri

Again, Rich, I think incapable to say as we drive topline. We use our market leading distribution channel to go out into the markets, both on a direct basis, as well as with some of the top aesthetic distributors in the world. We should see on a non-GAAP basis, a lot of our activity, sales activity, and positive sales result help us on a non-GAAP basis.

As far as elure is concerned, we do have momentum. I just said earlier in my comments, we are anticipating 300 million to markets in Asia to have our approval this year. We have marketing partners, ready, willing, and able. And we, again, feel very positive about the ability for elure to be a positive contributor in this year’s non-GAAP results.

Richard Newitter – Leerink Swann

If I could just squeeze one last one in there, on that last comment. So, let’s just say you got approval in one or more of those key Asian markets for elure, let’s just say at the beginning of the third quarter. Would you immediately be able to sell into that market, or are we going to be looking at a potential ramp? You say your marketing partners are ready to go, is there going to be any bottleneck there, or should we begin to see the positive (inaudible) impact from day one, once you get that approval?

Louis Scafuri

We are building our production capabilities to meet market need now. We have a product that’s anticipated in the marketplace, and as far as how we look at things, we always want to see continued progress growth and momentum.

I believe back to your previous question Rich, which I didn’t get to, which was (inaudible). We believe we’ll be through the product replacement, the voluntary product replacement by the end of Q3.

Richard Newitter – Leerink Swann

Does that mean that you won’t be incurring any onetime charges from here on out, or we might still have a couple over mediation charges in the second quarter, third quarter?

Louis Scafuri

That means we are going to have to actively selling it in Europe. Our number priority right now is to make sure we get through this voluntary replacement program. So, we’re focusing our efforts there versus the sales activities.

Richard Newitter – Leerink Swann

Okay, thanks.

Louis Scafuri

You’re welcome.

Operator

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

Anthony Vendetti – Maxim Group

Thanks. Just maybe, Louis, if you could just talk a little bit more about the two body contouring products that will complementary to Ultrashape. Can you talk about, I know you said the second half of the year, anymore clarity as to when in the second half of the year?

And then also, how that rollout should go. Is it going to be CE-Mark approval first, you know who it’s going to rollout in each kind of segment?

Louis Scafuri

Well, we have a lot of things going on. First up is the complementary products. We view this market having multiple segments. There’s many different customers to reach on a global basis. We see ourselves as the leading global aesthetic device company. As we look at the number that we continue to put up on the board, we are capable of launching outside the U.S. first, but in terms of our internal plan we can’t predict when the FDA gives us the clearance for the devices. But everything here is happening contemporaneously. If we delay for reason with the FDA, we will launch outside New York.

Anthony Vendetti – Maxim Group

And on gross margins, as we move forward here, are we peaking in terms of the efficiencies that you can eek out with the Candela product line? Or would these newer products, the new GentleMAX Pro, the new GentleLASE Pro, are these products higher margin, and can we expect, you know, margins to continue to incrementally improve?

Louis Scafuri

That’s a very good point Anthony. Clearly we feel we’ve been able to provide premium product in both the new Gentle series of products, and both products have positive cost-to-good advantage for use to improve our gross margins.

Anthony Vendetti – Maxim Group

Okay, great. Thanks.

Louis Scafuri

Your welcome.

Operator

Thank you. I’m not showing additional questions at this time.

Louis Scafuri

We’d like to thank everyone for participating on this call, and we’d also like to thank our employees and our partners on a worldwide basis for the continued hard work, their execution, and their commitment to be the market leader. I’d like to thank everyone and have a very good day.

Operator

Ladies and gentlemen, this does conclude today’s conference. Thank you for your participation and have a wonderful day. You may all disconnect.

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