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Cynosure Inc. (NASDAQ:CYNO)

Q4 2007 Earnings Call

February 12, 2008 9:00 am ET

Executives

Scott Solomon - VP of Sharon Merrill Associates

Mike Davin - President and CEO

Tim Baker - EVP and CFO

Analysts

Mark Richter - Jefferies & Co

Dalton Chandler - Needham & Company

Eli Kammerman - Cowen

Anthony Vendetti - Maxim Group

Matthew Dodds - Citigroup

Amelia Balonek - Ladenburg Thalmann

Isaac Ro - Leerink Swan

David de Degoroma - Pacific Growth Equities

Martin Yokosawa - Oberweis Asset Management

Anthony Petrone - Maxim Group

Operator

Good day, everyone, and welcome to the Cynosure's Fourth Quarter 2007 Conference Call. (Operator Instructions).

At this time, for opening remarks and introductions, I'd like to turn the call over to Mr. Scott Solomon, Vice President of Sharon Merrill Associates. Please go ahead, sir.

Scott Solomon

Thank you, Augusta, and good morning, everyone. With me on today's call are Cynosure President and Chief Executive Officer, Mike Davin, and Executive Vice President and Chief Financial Officer, Tim Baker.

We'll begin today's call with Mike providing the highlights of Cynosure's fourth quarter and year end 2007 results and an overview of the company's growth strategy. Tim will take you through the financials, after which management will take your questions.

Before we begin, please note that various remarks management makes on this conference call about Cynosure's future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions 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 the company's annual report filed with the Securities and Exchange Commission on Form 10-K for the year-ended December 31st, 2006; quarterly report on Form 10-Q for the period ended June 30th, 2007; and subsequent reports filed with the SEC. These filings can be accessed from the investor section of Cynosure's website at www.cynosure.com.

In addition, any forward-looking statements represent the company's views as of today, February 12, 2008. 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.

With that, I'll turn the call over to Mike Davin. Mike?

Mike Davin

Thank you, Scott. Good morning everyone, and thank you for joining us this morning to discuss our fourth quarter and year-end financial results.

Q4 marked another record quarter and a year of substantial growth and profitability for Cynosure. Revenues for the fourth quarter of 2007 rose 49% year-over-year to $36.6 million. This is a ninth consecutive increase in quarterly revenues, dating back to our inaugural quarter as a public company in December of 2005.

Our Q4 results reflect continued strong demand for all of our flagships aesthetically as workstations; particularly our Smartlipo LaserBodySculpting system and our new Affirm anti-aging workstation, which enjoyed a record quarter.

Sales of these high margin products, combined with increased contribution from our direct distribution, contributed to our gross profit margin of 66% in the fourth quarter. This represented an increase of nearly 400 basis-points from the first quarter of the year and 620 basis-points from the comparable fourth quarter of 2006.

For the full year, revenue increased nearly 60% in 2007. We believe that our focused distribution, continued innovation, and introduction of new technology into the marketplace have enabled us to continue to grow our top line and bottom line faster than our peers in the aesthetic laser market.

We are also fulfilling our commitment to our customers, helping them profitably build and expand their practices through seminars, online workshops, and training sessions. In the very competitive aesthetic laser market, we believe these efforts distinguish Cynosure and build brand loyalty for our product platforms.

We plan to continue to work hard to ensure these relationships continue for a long time to come, by not only offering superior comprehensive aesthetic solutions, but also continuing to capitalize on our product development environment, which places a premium on time-to-market as well as return-on-investment for our customers.

At this month's 2008 Annual Meeting of the American Academy of Dermatology, for example, we introduced a new flagship workstation called Accolade, as well as product enhancements for both Affirm and Smartlipo. We are pleased by the overwhelming positive response these innovations received at the AAD.

Accolade, our sixth flagship product, is our new solution, primarily for the removal of benign pigmented lesions, such as Nevus of Ota and Nevus of Ito. We also see additional applications for this product such as for the treatment of certain multi-color tattoos. The Accolade is a 755, Q-switched Alexandrite laser. Because of the prevalence of pigmented lesions among Asian populations, our initial target markets will include Japan, Korea and China, followed by Europe and Latin America.

In terms of revenue opportunity, those of you who have followed us for a while will know that we will only introduce a new product to market if we believe that it will result in at least $10 million in revenues in the first full year on the market.

Given the size of the pigmented lesion market and the strength of our international sales force, we are enthusiastic about the growth prospects for Accolade. The list price for Accolade is expected to be $95,000 and we expect to begin shipping the workstation early in the second quarter.

We also unveiled at the AAD, the Affirm Er 2940 nanometer wavelength, Erbium: YAG laser for our multi-energy Affirm workstation. The Affirm Er handpiece is designed as a complementary fourth wavelength for the Affirm anti-aging workstation. The new wavelength enables us to provide ablative skin resurfacing within the Affirm platform, a growing area of interest among consumers who want to reduce deep lines and wrinkles.

Currently Affirm features a 1320 nanometer laser for tissue tightening, a Xenon Pulsed Light system for discoloration, and a 1440 nanometer laser for micro-rejuvenation. The new 2940 laser further enhances Affirm's benefits to practitioners, providing an unsurpassed aesthetic solution to address these four aspects of anti-aging. Affirm Er's list price is $25,000 and we expect to begin shipping the product late in the second quarter.

The other exciting innovation we introduced at the AAD was our recently FDA-cleared SmartSense proprietary intelligent delivery system for Smartlipo.

SmartSense features an advanced microchip, the Accelerometer, which is inserted into the intelligent headpiece to ensure the precise level of energy is delivered, based on the area of treatment and predetermined settings, in conjunction with the motion of the headpiece.

The true benefits of the SmartSense are more control for the aesthetic surgeon and an additional layer of security for the patients. The device is expected to be a $15,000 upgrade to our Smartlipo systems or a $10,000 option when purchased with the new system. SmartSense is available now.

The introduction of SmartSense for Smartlipo further differentiates Cynosure from the competition. We expect to introduce additional intelligent delivery innovations like this over the course of 2008, as we expand our Smartlipo product family and begin rolling out products internationally toward the end of the first half of 2008.

Before I shift gears to talk about our sales force initiatives, let me touch on our patent infringement lawsuit again CoolTouch.

Since we introduced Smartlipo at the beginning of 2007, we have not wavered in our commitment to vigorously defend our IP position on this technology. As we noted in the news release announcing our lawsuit in January, we feel Smartlipo is the gold standard for laser lipolysis. We believe that CoolTouch's lipolysis device infringes on the fundamental Smartlipo patent, and we believe that we will prevail on the merits of our complaint.

Now let's briefly turn to our discussion to our sales and marketing initiatives. Over the past several years, an important focus for Cynosure has been to build our direct distribution organization. Our Q4 results, again, demonstrate the success of that strategy.

As we pointed out in today's news release, the percentage of laser revenue attributed to our direct force increased 64% in Q4 of '07 from the same period in 2006. In addition, direct sales accounted for more than 80% of product revenue in each quarter of 2007.

One reason, of course, is that we have expanded our North American sales organization by more than 43%, to 66 at the end of 2007. During the year we added 15 surgical specialty sales reps to market Smartlipo in the United States and Canada. We also supported the efforts of our reps by establishing product training centers and hosting forums, workshops, webinars and other programs throughout the year.

As we continue to build our sales and marketing infrastructure, one of our initiatives has been to greatly expand our distribution business internationally. John Lenihan, who was appointed Vice President of International Distribution last fall, already has established key distribution relationships in the Middle East and Northern Europe. We also continue to broaden our presence in Asia and are considering opening additional offices in the Asia Pacific region. Cynosure is working hard to expand its international organization.

In summary, we have combined product innovation, manufacturing efficiency, and sales force excellence to deliver an outstanding year in 2007. On the strength of our new products and innovations we plan for the coming quarters, we believe we are positioned to deliver sustainable and profitable growth for our shareholders. Based on the current business environment, we believe that our goal to grow faster than the aesthetic laser market is well within our reach.

Now let me turn the call over to Tim for the financial review.

Tim Baker

Thanks, Mike, and thanks again to everyone for joining us this morning. As Mike mentioned, we posted a record fourth quarter with revenue of $36.6 million and GAAP diluted earnings per share of $0.41, versus revenue of $24.6 million and GAAP diluted earnings per share of $0.13 for the same period in 2006.

Laser products accounted for 90% of revenue in Q4 '07, compared with 89% for the comparable period in 2006. Laser product revenue increased 50% in the fourth quarter of 2007 to $32.9 million, from $21.9 million in the same period of 2006. Laser revenue from North America increased 83%, while international laser revenue rose 9%. For the full year, laser revenue from North America increased 85%, while international laser revenue rose 30% on a reduced product offering.

Looking at our performance by region, North America accounted for 68% of total laser revenue in the fourth quarter of 2007, compared with 56% in the same period in 2006. Laser from international markets was 32% of total laser revenue, compared with 44% in the same period of 2006. The increased contribution from North America is largely attributable to the sales of Smartlipo, which we currently only distribute in the U.S. and Canada.

Gross margin for the fourth quarter of '07 was 65.9%, compared with 59.7% in the fourth quarter of '06. The increase in gross margin reflects favorable product mix, strong average selling prices across our entire product line, and a higher contribution of revenue from direct distribution.

As Mike said, we ended the year with a North American direct sales force of 66, up from 46 at the start of the year. Our North American sales force includes 15 specialty surgical sales reps marketing Smartlipo. This direct distribution organization is complemented by subsidiaries in France, Germany, Spain, United Kingdom, China and Japan, and by third-party distribution arrangements in approximately 50 countries.

We continue to expand our direct distribution, and expect headcount in North America to be in the range of 75 to 80, by the end of 2008.

Looking at operating expenses, selling and marketing expenses were $12.6 million, or approximately 34% of revenue, and these were fairly above our expectations due to year-end volume bonuses. On a percentage basis, they were consistent with Q4 of '06, when sales and marketing totaled $8.2 million or approximately 34% of revenue. We expect sales and marketing to be in a range of 33% to 35% for the full year 2008, which includes the estimated stock-based compensation of $3.4 million.

Fourth quarter research and development expenses were $1.9 million or approximately 5% of revenue for the quarter; up in dollars, but consistent in percentage terms compared with the same period in '06. R&D expenses should remain in the range of 4% to 6% in 2008, which includes the estimated stock-based compensation expense of $1.2 million.

General and administrative expenses for the fourth quarter were roughly $3 million or 8% of revenue, compared with $2.8 million or 11% of revenue in the Q4 of 2006. For 2008, we are modeling G&A expenses in the range of 9% to 11%, which includes the estimated stock-based compensation of $2.9 million.

Operating income was $6.6 million or 18% of revenue in the fourth quarter of 2007, reflecting our record revenues and gross margin, along with increased operating leverage. Results for the fourth quarter of 2007 include $1.5 million in stock-based compensation, while operating income for Q4 2006 was $2.5 million or 10% revenue and included approximately $0.9 million in stock-based compensation expenses.

On a non-GAAP basis, excluding the effect of stock-based compensation expenses, income from operations increased to approximately $8.1 million or 22% of revenue, from $3.3 million or approximately 14% of revenue for the same period of 2006, an increase of 145%.

Net income in the fourth quarter of 2007 was $5.3 million or $0.41 per diluted share, compared with a net income of $1.5 million or $0.13 per diluted share in Q4 of 2006. On a non-GAAP basis, excluding stock-based compensation expense of $1.5 million and using the effective tax rate of 36%, net income for the fourth quarter of 2007 was $5.9 million or $0.46 per diluted share. This compares with $2.5 million or $0.21 per diluted share in the fourth quarter of 2006, which excluded approximately $900,000 in stock-based compensation and using an effective tax rate of 39.5%.

We used approximately 12.8 million and 12.2 million weighted average shares-outstanding in computing earnings per diluted share for the fourth quarters of 2007 and 2006, respectively.

Recapping our full year 2007 results, revenues increased approximately 59% to $124.3 million from $78.4 million in 2006. Net income for the full year was $14.5 million or $1.15 per diluted share, compared with a net loss of $650,000 or $0.06 per diluted share in 2006.

Non-GAAP net income, which excludes stock based compensation expense and its related income tax effects for 2006, expenses relating to the termination of two agreements associated with Cynosure's legacy relationship with Sona MedSpa, and a royalty settlement and the related income tax effects was $18.3 million, or $1.44 per diluted share for a full year 2007, compared with $7.7 million or $0.63 per diluted share for the comparable period in 2006.

For more information on our non-GAAP financial measures discussed in today's call, please see the table for reconciliation of GAAP results and non-GAAP measures included at the end of our earnings release. The table has more details of the GAAP financial measures that are most directly comparable to non-GAAP financial measures and the related reconciliations between these financial measures.

Turning to the balance sheet, our cash position remains strong, as we generated $6.2 million from operations for the quarter, which provides us with good financial flexibility going forward. As of December 31, 2007, Cynosure had approximately $86 million in cash, cash equivalents, and marketable securities, an increase of $29 million over the balance at December 31, 2006. DSOs for the fourth quarter were 59 days, as compared to 64 days for the third quarter of 2007. We continue to have no debt other than capitalized lease obligations.

That concludes our financial review. In summary, 2007 was a very strong year of growth, both financially and operationally for Cynosure. We believe we entered 2008 with strong momentum across our full suite of flagship products.

And Mike and I will be happy to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will go first to Mark Richter at Jefferies & Co.

Mark Richter - Jefferies & Co

Good morning, guys, and great quarter.

Mike Davin

Thanks Mark.

Mark Richter - Jefferies & Co

Other companies in your space have blamed consumer confidence and credit concerns on their lackluster results, based on your quarter and what we are hearing from clinicians, this doesn’t seem to be the case. Can you just comment on what you are seeing on that front, globally?

Mike Davin

Yeah, Mark. Clearly, we are aware of what our competitors have been saying on their calls, and at this point we are not seeing that type of pullback, as you can see by our numbers in our business, as well as our channels checks with our distribution. Also in turn, they check with our customer base, they are not seeing a downturn in the business either. So right now, we're not seeing that type of pull back in our business as you can see and we're not hearing those types of comments from our customers or our distribution.

Mark Richter - Jefferies & Co

Okay, perfect. And I have sort of another general market question, other aesthetic players have also talked about pricing degradations in their products, clearly it looks like your ASPs only seem to be trending up across to your product line. Again, can you comment maybe on sort of pricing in general and what you're seeing from your company specifically?

Tim Baker

Sure, Mike, it's Tim. As we've mentioned on our previous calls, we continue to see good ASPs across our entire product line, clearly we're continuing to innovate and bring new technology to the marketplace, commanding a premium. I mean clearly we're seeing that in our gross margin expansion and like I said, this is really what we're seeing across our full product line, strong ASPs.

Mike Davin

And Mark, we also believe with the workstation platform and enhancing the platform over the course of 2007, for example, with Smartlipo with going from 6 watt to 10 watt to an 18 watt, or the Affirm introducing the multiplex approach and also 13-20 a new wavelength and now introducing the Affirm ER. This is not requiring the physician to go out and buy a new box, but we're increasing the value of their platform and also increasing return on investment to them. So we do believe this has allowed us to demand more of a premium for our technology both at a time, as well as customers realizing the future, they are going to be able to enhance the platform to drive stronger revenues.

Mark Richter - Jefferies & Co

Perfect. And then just commenting on Smartlipo, we believe clearly, Smartlipo is still in a scratch the surface of the opportunity that you have in amenably invasive lipolysis. Can you estimate sort of penetration rates today for Smartlipo, and then your strategy ultimately in addressing the OUS opportunity for minimally invasive liposuction? Thanks.

Mike Davin

As we've mentioned in the past, right now as you know, we only sell the device to physicians that are doing traditional liposuction. We see that North American addressable market anywhere between 8,000 to 10,000 physicians. As you know, we don't comment on our revenue per product or installed base or systems sold, but we do believe it's very early in the game. And as we've also mentioned, we will be rolling out an international platform of Smartlipo in the second half of 2008. Right now we're engaged in setting up the infrastructure for that launch to be successful. As you are aware, we believe it's very important to put the right components in place besides just the technology, the training, the education resources etcetera.

OUS, that's going to be a little more challenging, but we've already begun the process and are very excited about the launch of that technology into the international markets with both our direct and international distribution sometime in the early part of the second half of the year.

Mark Richter - Jefferies & Co

Perfect. Thanks guys. And again, great quarter.

Mike Davin

Thank you, Mark.

Operator

Next from Mr. Dalton Chandler of Needham & Company

Dalton Chandler - Needham & Company

Hey, good morning. You made the comment that for 2008 you intend to continue to grow faster than the market. A number of others have commented that they think the market growth rate is slowed. I think most people historically have been using about 20%. Could you comment on what you think the market growth rate is now?

Tim Baker

I don't know if I want to do that Dalton. I think when we look at our competitors. I think we're seeing that range or estimates between 10% to 15%, well, people are saying as a recalibration going into 2008, just looking at publicly traded peer group. I guess if we were use that as our barometer, we feel as though we can grow greater than that.

But then again, I guess we'll differ to how the analyst size up the market, now that everybody has reported, I think Syneron reported this morning, so they have all the public companies that reported their end of year results. So, what we are expecting that that is probably going to come into that 10% to 15% is what we've heard.

Dalton Chandler - Needham & Company

Okay.

Mike Davin

We do believe that we are positioned to outpace that.

Dalton Chandler - Needham & Company

Okay. And then on your planned expansion of the sales force, how do you expect that to break out between the surgical sales force for Smartlipo versus the more general sales force?

Mike Davin

As Tim had mentioned, we ended 2007 with 15 surgical laser specialists. We do expect to bring that to 20 to 22, probably by the end of the first half of this year. That number of 75 to 80 around for a total sales force. So, if you were to back, the 20 to 22 out, we are looking at having around 60 direct through the other flavors of our distribution in North America.

Dalton Chandler - Needham & Company

Okay. And then just a final question with regard to the CoolTouch lawsuit and there are now some other competitors out there as well. Could you just talk about what IP you believe it is you have that is potentially blocking these other competitors?

Tim Baker

Dalton, this is Tim. We are not going to discuss in any detail our litigation and our strategy around litigation. Clearly, we have noted in our press release the patent that we feel that are being violated. And let's just say it's something we are closely monitoring in terms of other companies in competition. As we've said, we are going to vigorously defend our IP position.

Mike Davin

And we do have opinion obviously and we feel that our position is extremely strong.

Dalton Chandler - Needham & Company

Okay. All right, thanks a lot guys. Congratulations on another nice quarter.

Mike Davin

Thanks, Dalton.

Operator

We'll go next to Eli Kammerman at Cowen.

Eli Kammerman - Cowen

Thanks very much, and good morning.

Mike Davin

Good morning, Eli.

Eli Kammerman - Cowen

My first question is, your G&A expense seemed unusually low in the quarter, especially relative to the prior year's sequential increase, and the fact that you've got the lawsuit against CoolTouch going on. Was there something unusual that capped the growth in the G&A expense in the quarter?

Tim Baker

No, Eli, nothing unusual. We really are just leveraging again a kind of a fixed base across a greater revenue platform, and in terms of the CoolTouch litigation, really were no significant expenses related to that in the fourth quarter.

Eli Kammerman - Cowen

Okay. Next question is, would it be safe to say that the Smartlipo family of products now accounts for at least 20% of total sales?

Mike Davin

No comment, Eli.

Eli Kammerman - Cowen

Okay. Next question is, can you break out the difference in growth rate between Asia and Europe in the quarter?

Tim Baker

Actually, it was fairly similar. We had a number of regions that had very strong quarters. We had some international regions that we think create some more opportunities for us in '08. And as Mike had mentioned earlier, we are focusing a lot of resources and direction and product offerings into the international markets. So, we didn’t see a significant change or difference between those regions. It was more pockets within regions that were stronger than others, but we think the international markets create a huge opportunity for us going forward.

Eli Kammerman - Cowen

All right. And lastly, what is your internal goal for achieving penetration with the new Affirm ER attachment? Do you think you can get it into a third of the Affirms that are currently out there? Three quarters? What's the reasonable expectation there?

Mike Davin

Well, as we mentioned, I think first and foremost, Affirm had a record quarter for the company. We are very excited about that. We think adding the fourth wavelength in the Er handpiece only broadens the overall product offering. And we do, with past introductions of upgradeable handpieces or hardware to our platforms, we've got a fairly successful integration into our installed base, but I think we would like to see somewhere between a third, 50% of our installed base implement the Affirm Er handpiece to their platform probably within, during the course of the year.

Eli Kammerman - Cowen

Okay, great. Thanks so much guys.

Operator

We'll go next to Anthony Vendetti at Maxim Group.

Anthony Vendetti - Maxim Group

Good morning, guys.

Tim Baker

Good morning, Anthony.

Anthony Vendetti - Maxim Group

I've just got a couple of accounting questions and then just a broad question. The tax rate, was that a little bit lower this quarter just as a true-up and what would be expectations going forward?

Tim Baker

Yeah Anthony, it was almost 31% GAAP tax basis, really related to some valuation allowance releases in our international subsidiaries. We would expect going forward in '08 to be 36% which effectively what it was for the full year of '07. We think 36 is a good number used going forward in '08.

Anthony Vendetti - Maxim Group

Okay. And although there were no material expenses, legal expenses in the fourth quarter related to the patent litigation against CoolTouch. What would you estimate is a good run rate to use for 2008?

Tim Baker

Yeah. We're actually at this point not prepared to give that number. It is still very early in the proceedings. But as that does move forward, we will provide some guidance in terms of what we had anticipated in '08 for additional legal expenses up and above our normal run rate. So at this time, it is still little early to start giving that out but it's something we will definitely communicate up and above our normal run rates.

Anthony Vendetti - Maxim Group

Can we say that it will be significantly less than what Kendall and Paul Morrison to be spending in their battle against each other?

Tim Baker

At this point we won't comment.

Anthony Vendetti - Maxim Group

All right. Stock-based compensation, was that $0.12 before taxes or with the taxes?

Tim Baker

One second, before taxes.

Anthony Vendetti - Maxim Group

Okay. And then just as you continue to roll out new products, obviously you had a new platform, plus two new technologies, one is add-on and one seems like it's available not just with Smartlipo, SmartSense, is that something that can be used with other products or is that just Smartlipo at this point?

Mike Davin

Right now, it's just Smartlipo Anthony.

Anthony Vendetti - Maxim Group

Okay. Is there a timeframe to try to introduce that into the rest of your product portfolio or is that still early to determine?

Mike Davin

Right now the focus is around the LaserBodySculpting technology. As I mentioned, this is our first introduction of an intelligent delivery system and there will be other introductions throughout the course of 2008.

Anthony Vendetti - Maxim Group

Okay. And in terms of new products, any other new products in 2008, is this here for 2008, or do you hope to have something out before 2009?

Mike Davin

This is not yet for 2008.

Anthony Vendetti - Maxim Group

Okay, great. All right. Excellent. Thanks.

Mike Davin

You're welcome.

Operator

We'll take our next question from Matthew Dodds of Citigroup.

Matthew Dodds - Citigroup

Hey, good morning. A couple questions. I want to follow up on the Smartlipo internationally. When you talk about your rollout plans in the second half of the year, can you at least say if there is any market, when I say market, I mean, broadly like Europe, Asia Pacific, Latin America, that you think the opportunity is greater than any of the other regions for that particular technology?

And then did [Decca] have any success in any certain markets. I know they didn't have much of an effort, but were there any markets where they actually saw a good penetration in their limited model? That's the first set of questions.

Mike Davin

Sure, Matthew. First, we'll be focused on our direct offices with the rollout. So, as Tim mentioned, where we are direct right now is to the U.K, Spain, Germany, France in Europe and then also Japan and China. We'll rolling out to our direct distribution first because we think it's imperative that we put controls in place like we had here with our distribution and knowing that there are direct distribution, we can enforce those controls.

So, yes, we believe Europe is an excellent opportunity. There is a very large procedural, I should say there is a large amount of procedures of traditional liposuction done in Europe. So, we think naturally the technology will fold in nicely there. And we know [Decca] has had success there in the past.

Asia Pacific, especially Japan, we know [Decca] has done well there and we also see that as a great opportunity for us. As you know we have two offices there, one in Tokyo and one in Osaka, and we are contemplating opening a third office there. And once again that's direct distribution. And then we are looking to our larger third-party distributors to roll the technology out to them after we complete the introduction to our direct distribution.

Matthew Dodds - Citigroup

Got it. And then the second question is, coming off AAD and talking about the market demand, you do have this bifurcation of spa versus specialist demand and sometimes in the past you've talked about, if one's stronger, I mean are they both strong. Are you seeing any change in that dynamic coming into 2008?

Tim Baker

Yeah, Matt, this is Tim. We are really not. We are still seeing about 70% of our business coming from the non-traditional market and we are not seeing any slowdown or any kind of shift toward one practice or another.

Matthew Dodds - Citigroup

And I know you don't like commenting specifically on products, but are non-traditionals buying things as high end as Affirm or is that too high a level for the non traditional?

Tim Baker

No, we definitely have non-traditionals buying high end as Affirm as most Elite is very well of non-traditionals. Well, we are also seeing bundling there, Matt as we've talked before, we are not just buying Affirms and Elites together, and TriActives as well. So we are seeing more bundling activity in the last two quarters and in quarters past.

Mike Davin

As we said before, the pricing isn't as sensitive as the return on investment and the non-traditionals are seeing this as additional opportunity to increase the revenue base. So we are not seeing any hesitation on buying the high end technology.

Matthew Dodds - Citigroup

All right. Thanks Michael. Thanks Tim.

Mike Davin

Thanks, Matt.

Operator

Next we will go to Amelia Balonek at Ladenburg Thalmann.

Amelia Balonek - Ladenburg Thalmann

Good morning, gentlemen. I was just wondering if you could comment on the revenue per sales person trend?

Mike Davin

Amelia, as we have said in the past, again, we look at our sales reps, it takes typically between six and nine months for a sales rep to get up and fully productive. We kind of calibrate a productive sales rep at 1/2 to 1/4 range. So, it's really just a rolling kind of cumulative equivalent full sales rep as they are up and running from in terms of training and contribution. So we are not seeing any change again in terms of what we see fully trained in place sales rep delivering.

Amelia Balonek - Ladenburg Thalmann

Okay. So the revenue per sales person is stable.

Mike Davin

Yes.

Amelia Balonek - Ladenburg Thalmann

Okay. Can you comment a little bit about your usage of cash or capital? Have your thoughts changed on that at all?

Mike Davin

Not, at this time. As we have mentioned in the past, we spent the last four years just focused on bringing Cynosure to where it is today. We are very excited about our ability now to be profitable and generate cash, as we have the last couple of quarters and this is now putting us in a position to maybe look at opportunities to invest that cash, but at this time nothing on the horizon.

Amelia Balonek - Ladenburg Thalmann

Okay. You didn't mention turnover for the year I believe, can you comment on that, what you saw?

Mike Davin

As in distribution turnover?

Amelia Balonek - Ladenburg Thalmann

Yeah, what was the turnover for the year?

Mike Davin

Yeah, I think as we've always talked about before, we're not seeing significant turnover -- the majority of the turnover that we've seen our distributions has been involuntary turnover.

Amelia Balonek - Ladenburg Thalmann

Right.

Mike Davin

So we've been able to obviously continue to grow our sales force in a much stable type environment.

Amelia Balonek - Ladenburg Thalmann

Okay, excellent. One final question, we've seen a great development in gross margin and I was just wondering if you had any thoughts about changing your guidance?

Mike Davin

Guidance in terms of?

Amelia Balonek - Ladenburg Thalmann

Gross margin.

Mike Davin

Yeah, we typically don't give guidance on gross margin, I guess what we have said in the past that we sent out some targets which we've achieved at this point in time and really at this point, given our product mix and distribution mix, we think there is small incremental improvement, but we're not anticipating significant upside to the gross margins at this point in time.

Amelia Balonek - Ladenburg Thalmann

Excellent, thank you very much.

Mike Davin

You're welcome.

Operator

And next we'll move to Isaac Ro at Leerink Swann.

Isaac Ro - Leerink Swan

Hey guys, thanks for taking the question.

Mike Davin

Hi, Isaac.

Isaac Ro - Leerink Swann

Hi, first one would be just a little bit I guess a follow-up on the gross margin question. Have revenues from your disposables related to Smartlipo and Affirm, have they kept pace or maybe accelerated past the growth rate that you're seeing on the actual equipment side, and what can you tell us about utilization rates for those disposables and maybe how they impact gross margins going forward?

Mike Davin

Yes, we're seeing as we've said it before, we've got a cumulative effect as the installed base grows, well, obviously we're starting to see more of an impact from our disposable business. It's still a fairly small piece of our business as we said earlier, 90% of our revenue is still coming from the selling of new technology, new capital equipment, but again, that’s growing at a rate of 60%. So, we're still catching up to that, but we are seeing more and more contribution from the disposable revenue stream both from our installed base, as well as obviously the Affirm tips in the Smartlipo fibers, with obviously accretive to our gross margin. But overall, it's still a very small piece of our revenue pie, not having an overall large impact on a gross margin improvement, but we do expect to see that continue to grow with each quarter as the installed base grows.

Isaac Ro - Leerink Swan

Okay. And then as a follow up, I know that the Accolade doesn't necessarily have the disposable with it, but as Mike mentioned, I think there is potentially new products in the pipeline for the year. Would you guys have a strong bias towards continuing to develop equipment that has disposables as a part of the revenue stream?

Tim Baker

Yes. When we look at products in the R&D stage through production and launching new technology, we're always looking to add a disposable component to the device. But once again it's important that, that disposable is better of a non-disposable in terms of the clinical outcome. So that's the biggest challenge, making sure that we can differentiate why the disposable is advantageous of the physician in terms of getting a better and superior clinical result versus a non-disposable.

Isaac Ro - Leerink Swan

Great, okay. And then, slicing things slightly different way on product categories, it seems like given the challenging quarters a lot of your competitors have seen, would you care to say whether or not you think you're gaining market share in areas like fractional devices, such as the Affirm and how you think that market share might -- where you guys stand in that market?

Tim Baker

When you look at $124 million in top-line revenue in '07 versus $78 in '06, and introducing several new products over that period of time, we do believe we're gaining some market share. We can't exactly pinpoint how much. And seeing that Affirm had a record quarter in Q4 of '07, means the product is really ratcheting up in terms of our expectations, and the momentum seems very strong on that platform, especially now with the introduction of the 2940 firm Erbium handpiece. So, overall we are very excited about the performance of our flagship technology.

Isaac Ro - Leerink Swann

And then last item on that would we, would it be fair to say that you think the multi-energy source of the Affirm, those capabilities are an important differentiator versus some of the standalones that are out there or what do you think would be driving that? Is it somewhat also a function of price or?

Tim Baker

No, we absolutely believe it's a differentiator. We are hearing that directly from our distribution management team, as well as our distributors and we do believe it allows us to drive a very strong ASP and premium for the technology. As Tim mentioned, the physicians, many of which in North America lease the technology if it's a matter of a couple of hundred dollars differential per month, but they are seeing the capabilities of the device in terms of generating stronger revenue opportunities for them. They see that as a very easy decision to make, and we do believe, as you know, we've never been a company to sell on price, we sell on the value of our technology and what our technology delivers to the physicians and to the patient that the Affirm platform, as well as our other workstations, our flagship platforms provide that financial solution as well as clinical results. So, we do believe that's a strong differentiator for our distribution to position itself against our competitors.

Isaac Ro - Leerink Swann

Great, and then last question would be on Smartlipo. If I remember correctly, [Decca] had rights just to 6 watt version. So, would it be fair to assume that you guys will launch aggressively overseas with the higher powered devices as a way to sort of reintroduce the product to the market?

Mike Davin

Yeah, we are not going to really comment on the platform we are going to launch overseas yet. But, that’s forthcoming.

Isaac Ro - Leerink Swann

Okay. Thank you very much.

Mike Davin

You are welcome.

Operator

Next, we'll go to [David de Degoroma] at Pacific Growth Equities.

David de Degoroma - Pacific Growth Equities

Thanks. Good morning, guys. Great quarter.

Mike Davin

Thanks, David.

David de Degoroma - Pacific Growth Equities

I wanted to first just sure up one thing, you touched on not seeing any market slowdown. I just want to make sure I understand this as well. I know you talked about the traditional versus non-traditional segments. Are you seeing any difference at all between, lets say the plastic surgeons/dermatologist and the family doctor or the OB/GYN doctor, not necessarily the MedSpa per se, but those other type of doctors that are looking to glance into this type of arena?

Mike Davin

I think, as Tim mentioned, our split this quarter was about 70, 30, non-core versus core, core being that 30%. I think that is pretty consistent through all four quarters this year. So, we know that Smartlipo is more directed to the core markets, especially plastic surgeons, the Affirm we think that’s a little more physician, special seasonality of rate of approach for the plastic surgeons, but overall, I think we are fairly consistent in the mix set of 70, 30 split throughout all four quarters of this year.

David de Degoroma - Pacific Growth Equities

Okay. And you don’t see any actual overall industry slowdown when you breakout those two segments?

Mike Davin

No, David. As we said, we are seeing still good contribution in that nontraditional market, from the OB/GYNs, from the family practice doctors, that mix, within that mix has not changed significantly. So, as we are showing on the top line revenue growth, and still we can maintain that 70, 30 split, clearly, there is lot of growth still in that non-traditional market, that is non-Smartlipo also.

David de Degoroma - Pacific Growth Equities

Got you. Okay. Next question is, we are running into, as you can imagine a very cynical investor base at this point. They are concerned about overall market growth, which you guys aren’t seeing, some of your competition are, which I think is a good sign for you. Some would suspect that most of the growth is due to new product flow. Now, I know you guys don’t breakout the product sales, but are there other reasons outside of new products, our side of Smartlipo and Affirm that might explain why you guys continue to outperform, relative to the competition. If there are, what would you cite as the main reason for that?

Mike Davin

I think as I had mentioned in the past, innovation has always been the cornerstone of this company in its 17 years of existence. And as you know we're very focused on continuing to innovate and roll out new technology. Last year we rolled out two new platforms with the Smartlipo as well as the Affirm. At the AAD, we just rolled out our six flagship product in the Accolade and enhancements to Smartlipo and Affirm. We will be rolling out additional delivery systems and platforms throughout the course of this year.

So innovation has not slowed down at all, although I would also attribute our success to an excellent distribution model. We have a great management team here in North America and throughout the world as they have been excellent at being different in the way they roll out their distribution, they train their distribution and they teach their people to really sell the value of the innovation that we've created.

And our marketing team has done an awesome job in positioning globally. So I think it's a combination of just real good execution on behalf of our management team and putting together a plan that we have a lot of confidence in and have had confidence in the past, as well as going forward.

David de Degoroma - Pacific Growth Equities

Got you. And is it fair to say that platforms like Smartlipo and Affirm that you are achieving synergies across other platform. So, are you selling more synergies and Apogees because you're out there counting Smartlipo and they also regaining greater exposure to some of your other platforms, do you think you are seeing any synergies there?

Mike Davin

Well, I wouldn't just say because of Smartlipo, I would say also because of Affirm. Keep in mind, the third-party analysts are projecting the anti-aging market in this year, 2008 in terms of procedural volume to be higher than hair removal. So, we think the anti-aging opportunities are enormous, a bigger opportunity than the invasive LaserBodySculpting.

So Affirm, Smartlipo, Elite is still doing an outstanding job for us in terms of our premier hair removal device. But to your point, yes, there is no doubt that the flagship platforms are opening doors for bundling opportunities as well as opening doors for our distribution that were not opened maybe two to three years ago.

David de Degoroma - Pacific Growth Equities

Got it. Last question for you Mike, as we look out to the top line growth for 2008 on a quarterly basis, we're seeing two things mainly. I mean on the one hand, you've got your international expansion of Smartlipo, it sounds like it's mainly going to be a second half story. On the other hand, I would guess that Smartlipo did better in the second half of 2007 than last year, have been in the first half rather. How should we look at the top line growth? Are those two offsetting factors or are you seeing fairly consistent growth over the next fourth quarters?

Tim Baker

Dave, this is Tim. We are seeing fairly interesting growth. Clearly we're going to see incremental growth throughout the year, as the new products get out there, as the new enhancements to the product we just released at AAD is coming out, coming available at the end of the second quarter for the ER and into the first quarter for the Accolade and SmartSense now. So we'll see some obviously effect of that as year progresses.

Again, historically this first quarter is challenging quarter, typically is coming off a strong fourth quarter and sequentially through the year, we see improvement in growth. So some of that has obviously been mitigated over the past couple of years with new product introductions and again as we continue to roll out our new technology, I think we'll see that as we go forward.

But I think we'll see a cumulative through the year sequentially the quarters improve as the new technology gets out into that marketplace.

Mike Davin

And David as you know, as we mentioned, we do believe we are positioned as we go into 2008 to outpace the expectations for growth, which we believe are somewhere around that 10% to 15%. So, we do believe that we can beat those types of percentages or expectations.

David de Degoroma - Pacific Growth Equities

All right, that's great. Thanks again.

Mike Davin

You are welcome, David.

Operator

We'll go next to Martin Yokosawa at Oberweis Asset Management.

Martin Yokosawa - Oberweis Asset Management

I would like to kind of explore your market a little bit. You know your sales are good is the direct buyers, are their decision cycle, is that lengthening at all?

Mike Davin

We are not hearing that, no, Martin.

Martin Yokosawa - Oberweis Asset Management

What would slow down your end consumer? And then how does that put, also plan to your direct buyer. So what I mean is the health spa or the surgeon, are they still buying today, hopes that there is going to continued end user demand, the kind of guessing or what's going on?

Mike Davin

We believe they are buying today because their demand is existing now. The answer to your question, what would slow that precision down, I guess if they started to see a reduction in demand from their customer base. But as I mentioned what we are hearing and keep in mind, we also because our portfolio technology is so diverse, someone who may own hair removal device, they bought from us a year ago are doing very well with it. They say they want to get into the anti-aging offering now. They are going to buy the Affirm platform or may be they want to get into the cellulite markets now by the TriActive.

So, we are kind of a one stop shop in terms of the technology offering that we have to address high volume cosmetic applications, but in terms of our customers as I mentioned earlier, we are not hearing from them, they are seeing a reduction in demand from their customer base which is the consumer.

Martin Yokosawa - Oberweis Asset Management

Have you seen anything which would say the plastic surgeons that their consumer patient is saying why can't afford the high-end plastic surgery. So I'm just going to actually -- I'm just going to go for the anti-aging or something like that and there is actually in their plastic surgeries market is actually dropping down which is a benefit to you, do you think?

Mike Davin

That's a good question. We do believe where we would start to see a drop off first is in the higher cost cosmetic procedures, such as facelifts or breast augmentation etcetera. Those procedures that are may be north of $5000 per application. As you know the majority of our applications range in the hundreds of dollars per treatment, and that's a good question in terms of they are seeing a slowdown on the high-end, with that increased demand on the lower end and I don't really have an answer for that. All I can tell you in broad strokes is that we are not hearing there is a slowdown for demand for their applications as of today.

Martin Yokosawa - Oberweis Asset Management

Okay. And lastly, if say the plastic surgeon or health spa, whatever it says. I am getting pressure that I can't make enough margin myself or because my consumer is going away. What would your response to be in say your prices or how you are handling your business to the doctor?

Mike Davin

I don't really have an answer for that question.

Martin Yokosawa - Oberweis Asset Management

Okay, great. Thank you.

Operator

And next we'll move to Anthony Petrone at Maxim.

Anthony Petrone - Maxim Group

Hi, guys, thanks for taking my questions. Just a couple on the Smartlipo. I know you have three versions out there now, 6, 10 and 18. Can you give any indication of where the sales most focused and what the contribution say from upgrade revenue was this quarter?

Mike Davin

The most significant demand now is more towards the 10 and the 18 watt. Although we have had a number of people who bought the 6, as you know upgrade to the 10 and now to the 18 watt system. The power is a direct correlation to speed. So they are able to perform the procedures in a more expeditious manner and therefore their throughput increases. The second part of your question, I think Tim that might be deferred to you.

Tim Baker

Yeah. We don't break that out in terms of what the upgrade revenue is, as we talked about in the past and we are seeing about 50% uptick from the 6 watt upgrading. It's less than that now from the 10 to the 18, we are into that power range of the 10 watt system.

Anthony Petrone - Maxim Group

Can you quantify what percentage of the 6 watt has moved on to the higher wattages?

Tim Baker

Yeah. About 50%. North of 50%.

Anthony Petrone - Maxim Group

Okay. Just couple on the Accolade. It looks like, is there any overlap between the Accolade and Cynergy? It seems that they do similar type of treatments, although they seem a little bit different, is there any potential for cannibalization there?

Tim Baker

No. Not at all.

Anthony Petrone - Maxim Group

All right. And then, I know you are not breaking out -- any contribution from the legacy products, but it seems that some of your legacy products have been benefiting from kind of the awareness for Smartlipo and Affirm out there, are you still seeing that trend or has more of the revenue shifted towards the newer products?

Tim Baker

Yeah, we're seeing again good contribution from all of our flagship products. As Mike had said, I think our broad platform is giving us significant advantages to bundle that technology based on the practitioner's particular needs. So we're seeing definitely, some leveraging across our product line.

Anthony Petrone - Maxim Group

And how does the bundling strategy affect overall pricing on some of those legacies?

Tim Baker

It doesn't. I mean again we're not -- bundling is an opportunity it isn’t a price saving opportunity. It's surely an opportunity to get the technology and then broaden a practitioner's practice. So we don't see in particular pricing pressure just because we bundle.

Anthony Petrone - Maxim Group

I guess, because my next question is about, I guess competition in the field. How many of the deals that you do in a particular quarter are competitive, would you say, were you seeing competition there and you have a potential client that's entertaining a number of different offices?

Mike Davin

I mean, I think there's probably 7 or 8 players out there, it's competitive but not overwhelmingly competitive. So I think it's been consistent, the Q4 was very consistent in what we've seen throughout the majority of 2007 on the competition front.

Anthony Petrone - Maxim Group

And lastly just on American Laser Centers, I know that was -- it was a push to get Affirm installed there. Where is that agreement right now and how it penetrated into that organization or you with Affirm?

Mike Davin

I think you're aware Anthony that American Laser Center recently sold to a private equity firm, that deal closed I think about a month ago, month and a half ago. We have had dialogue with the new management and we're in the process of understanding what their business plan is moving forward. The installed Affirms are doing very well, being used as we would expect, and overall I know that they are very happy with the technology in terms of its clinical endpoint to their customer base.

Anthony Petrone - Maxim Group

So currently, no change to your relationship there at this point?

Mike Davin

There is a change because they've been acquired.

Anthony Petrone - Maxim Group

Absolutely, but I am saying just in terms of the actual agreement?

Mike Davin

Yes, no change.

Anthony Petrone - Maxim Group

Okay, great, thanks.

Operator

We'll go next to Anthony Vendetti of Maxim Group.

Anthony Vendetti - Maxim Group

Hi. Just couple of quick housekeeping items, I missed the core, non-core breakout.

Tim Baker

70, 30 I think.

Anthony Vendetti - Maxim Group

70-30, okay. And international North America breakout?

Tim Baker

68% international -- I am sorry 68% North America.

Anthony Vendetti - Maxim Group

Okay.

Tim Baker

I think at 32.

Anthony Vendetti - Maxim Group

All right, perfect, thanks.

Tim Baker

Thanks.

Operator

We'll go next to Mark Richter, Jefferies & Co.

Mark Richter - Jefferies & Co

Hey, thanks guys for taking my follow up. Just a clarification of guidance and I appreciate you guys are being very conservative and you did mentioned that you would grow better than the industry's growth and you said that, that is expected to be closed to 10% to 15% at least for a growth expectations. But if we take your four quarter revenue and you annualize for '08, you'd grow at least 18%. So, I mean is it fair to assume that you're going to at least grow quarter sequentially, maybe not in the first quarter as you talked about seasonality, but I mean you got to see growth. So, I got to imagine that 18% is the low watermark.

Tim Baker

It's your model, Mark. And I think as Mike said, we feel confident given our distribution, our technology, in our broad opportunity that we can continue to grow faster. I think it's still a moving target on how fast the market’s growing.

Mike Davin

Well, really Mark, we saw the number 10% to 15% out there, because that's we have been hearing, but I think now as I mentioned, especially with Syneron this morning and now us, I believe it's the last of the public companies to report. We are expecting that you guys will now calibrate what you see the market growing, at what rate it's going to grow at moving forward.

Mark Richter - Jefferies & Co

Okay. But it is fair to say that you do see growth, so therefore, obviously my model is my model, but if you do thing you were going to grow, that would be a fair assumption, and that would be probably be somewhere like a low watermark?

Mike Davin

It's fair to see that we do see growth.

Mark Richter - Jefferies & Co

Perfect. Thanks guys.

Mike Davin

Thank you.

Operator

And at this time we have reached the end of the Q&A session. I will now turn the conference back over to Mr. Davin for any closing or additional remarks.

Mike Davin

Thank you, Operator. I would like to thank everyone for joining us this morning. We'll be on the road, meeting with investors and participating in a number of industry conferences in the coming months, and we look forward to updating you on our progress. Have a nice day.

Operator

And that does conclude today's conference. Thank you for your participation.

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