Thermage Q4 2007 Earnings Call Transcript

Thermage Inc. (THRM)

Q4 2007 Earnings Call

February 19, 2008 4:30 pm ET

Executives

Steve Fanning - Chairman, President and CEO

Jack Glenn - CFO

Analysts

Anthony Vendetti - Maxim Group

David DeGiralamo - Pacific Growth Equities

Keay Nakae - Collins Stewart

Isaac Ro - Leerink Swann

Chris Cooley - FTN Midwest

Dalton Chandler - Needham and Company

Anthony Petrone - Maxim Group

Presentation

Operator

(Call starts abruptly)

Forward-looking and are subject to many risks and uncertainties that could cause actual results to differ materially from expectations. A detailed discussion of the risks and uncertainties that affect our business is contained in the company’s SEC filings, particularly under the heading Risk Factors. Copies of these filings are available online from the SEC or on the Thermage website. The company’s projections and forward-looking statements are based on factors that are subject to change, and therefore these statements speak only as of the date they are given. The company does not undertake to update any projection or forward-looking statements.

In addition, to supplement the GAAP numbers, we have provided non-GAAP net income and non-GAAP diluted income per share information that excludes the impact of the stock-based compensation and warrant liability charges. We believe that these non-GAAP numbers provide you with insight to conduct a more meaningful and consistent comparison of our ongoing operating results and trends compared with historical results. A table reconciling the GAAP information to the non-GAAP information is included in our earnings release.

With that, I’ll turn the call over to Steve Fanning, Chairman, President and CEO of Thermage.

Steve Fanning

Thank you, Jennifer. Good afternoon everyone. Thank you for joining us today for our fourth quarter and full year 2007 conference call. With me today is Jack Glenn, our new Chief Financial Officer. Jack joined us in January. He was formerly the CFO of Cholestech, which was acquired by Inverness Medical in the fall of last year and we are very pleased to have him on our Board at Thermage.

Now, this afternoon, we released our results for the fourth quarter and full year that ended December 31st, 2007. We reported record revenue for the quarter of 16.6 million or 12% above the prior year’s fourth quarter. This growth reflects a 7% year-over-year increase in domestic revenue and an 18% in the international markets. Sales of disposable tips in the fourth quarter increased 16% from the fourth quarter of 2006. Sales of our treatment tips and other consumables represented 76 % of revenue and helped drive our gross profit margin during the quarter to approximately 77%.

The strength of our tips sales demonstrates the success of our new, innovative treatment tips that we launched during 2007. The average selling prices on treatment tips increased in the fourth quarter. Now, tip ASPs were $339 in the fourth quarter compared to $316 in the third quarter and $292 in the fourth quarter of 2006. This increase reflected the contribution from the new premium STC tip introduced in August 2007, and the DC or body shaping tip introduced in October 2007. Now, these two new tips represented over 50% of our treatment tip revenues in Q4.

For the fourth quarter, we reported net income on a non-GAAP basis excluding stock-based compensation of 2.1 million or $0.08 per diluted share. This represented a substantial increase from the previous year when we posted a non-GAAP income of $332,000 or $0.02 per share.

Now, turning to full year results, we reported record revenues of 63.1 million and that represented an increase of 16% from 2006. In February 2007, we began shipments of our next generation ThermaCool NXT generator, designed to be more faster, more efficient and easier to use. Sales of the new generator exceeded our expectations and included a significant number of upgrades. During 2007, we sold approximately 630 ThermaCool systems. We also introduced four new procedures and associated treatments tips during the year. Hands by Thermage and Lips by Thermage we launched in the first half of 2007.

In August, we introduced the premium ThermaTip STC designed to reduce treatment tip time up to 25% and improve patient outcomes. In October, we launched the deep contouring tip and Body Shape tip procedure to help tighten, firm and shape the body in a single treatment. We have been pleased with the response to our new products and with their premium price points. They have been contributors to revenue and gross margins.

Our innovation will continue into 2008 with the pending introduction of the ThermaTip CL and cellulite procedure by Thermage, which incorporates our patented monopolar capacitive RF technology. This procedure is unique in the market and noticeably reduces the appearance of cellulite, importantly with just a single treatment. We premiered the new cellulite procedure at the American Association of Dermatology conference in San Antonio two weeks ago, and we received very positive feedback from clinicians about its potential. Shipments will begin in mid-March.

Cellulite represents a large new market for our company and offers another avenue of growth for 2008. Our development efforts continue and there are several new treatments and tip enhancements in the pipeline. As mentioned in the past, we are working on a new tip that will address fat.

Turning to sales, during the fourth quarter we made progress in expanding our sales team to meet the growing demand for our generators and tips. Since Q3, we have hired 14 additional sales reps increasing our U.S. sales force by approximately 50%. We have also redeployed the organization to better address our systems and tip segments. Our new realigned sales force will allow us to aggressively pursue new prospects and leads, improve service to our existing customers, expedite training of our customers on new applications, quickly retrain a physician staff in case of turnover and help our physicians market their practices.

To further accommodate our growth plans, we promoted Clint Carnell, previously our Vice President of U.S. Sales, to Chief Operating Officer. Clint will be responsible for worldwide sales, marketing, research and development, clinical affairs and operations. We believe the investment that we’ve made in increasing our sales force demonstrates our confidence in the continued growth of the aesthetics market. We anticipate that as the year progresses, the contributions from the realigned and expanded sales team will become increasingly evident in revenue growth.

While there has been additional expense associated with the increase in the sales force, the company is well positioned to expand market share in the U.S. As we have discussed in our third quarter conference call, our focus on high end, more efficacious procedures versus our legacy or commodity type products has resulted in our ability to grow revenues in the U.S. Our international sales grew 17% in 2007 compared with 2006. Our international sales team of regional managers and clinical specialists works with 35 distributors in over 80 countries. And the international businesses has grown to approximately 50% of our business.

We are very pleased with the progress we’ve made. We ended 2007 well positioned for the future with a broad and innovative product pipeline, a solid management team and an effective and efficient sales structure and a strong balance sheet. We look forward to making continued progress in 2008.

Now, I’d like to turn the call over Jack for a further review of our financial performance and full year 2008 financial guidance. Jack?

Jack Glenn

Thanks Steve and thanks to all of you for joining us today. I am pleased to be participating in my first call as a Chief Financial Officer for Thermage and look forward to speaking with you all further in the not too distant future. Now let’s review our financial results.

Fourth quarter revenue was 16.6 million, a 12% increase compared to the same period last year. The geographic split between U.S. and international revenues was 50% U.S. and 50% international. Revenue growth for U.S. and international for the full year 2007 was 15% and 17%, respectively. For Q4 year-over-year U.S. revenue grew 7% and international revenue grew 18%. Q4 revenue consisted of 12.5 million or 76% of total revenues in sales of our ThermaTips and other consumables. ThermaCool RF generator systems were 3.7 million for the quarter or 22% of total revenues, and service and other revenues were approximately 400,000 or 2% of total revenues.

For the full year 2007, we sold a record 633 ThermaCool RF generator systems. Q4 system sales were 142 worldwide and included 78 new system placements. Our installed base of systems at the end of the year grew to approximately 2,400, of which 1,260 are in the U.S. and 1,140 are international.

The gross profit margin for the quarter was 76.5% as compared to 72.3% for the prior year period. We achieved the improvement in gross margin due to three factors. One, higher average selling prices on both new systems and treatment tips driven by recent premium tip launches of our deep contouring tip for Body Shaping and the ThermaCool STC tip. Secondly, an increase in overall product volumes moving through our manufacturing facility here in Hayward, California. And lastly, direct cost efficiencies in the production of our ThermaTip. We expect gross margins for full year 2008 to be between 76 and 77%.

Now, turning to operating expenses, sales and marketing expenses for the fourth quarter of 2007 were 7 million or 42% of revenue compared to 6.1 million or 42% of revenue in the fourth quarter last year. The year-over-year increase was primarily due to expansion of the U.S. sales force. Research and development expenses for the fourth quarter of 2007 declined to 2.1 million or 13% of revenue compared to last year at 2.5 million or 17% of revenue. The year-over-year decrease is primarily due to efficiencies gained by conducting most of our clinical work at facilities in Guadalajara, Mexico, and our corporate facilities.

General and administrative expenses for the fourth quarter were 3.1 million or 19% of revenue, an increase of 0.5 million from last year. The increase was primarily attributable to costs associated with Sarbanes-Oxley compliance and certification as well as legal costs related to the patent infringement lawsuit with Alma Lasers.

For 2008, we expect sales and marketing costs as a percentage of revenue to be at the same level as we incurred in 2007. General and administrative expenses will continue to be affected by higher legal expenses as well as costs associated with regulatory compliance. Costs related to the Alma litigation are anticipated to be approximately $2 million in 2008.

Now, turning back to 2007 performance, Q4 operating income on a non-GAAP basis, which excludes stock-based compensation charges, was 1.5 million or 9% of revenue. On a GAAP basis, operating income for the fourth quarter was 0.4 million or 3% of revenue. Total stock-based compensation charges for the quarter were approximately 1.1 million.

The breakout of these charges on the P&L was as follows: cost of goods sold, 71,000; sales and marketing, 439,000; R&D, 123,000 and G&A, 460,000. Below the operating income line, interest income for the quarter was approximately 670,000 and we recorded AMT tax provision of 124,000.

Net income improved significantly year-over-year as we continued to grow our top line and leverage our infrastructure. On a non-GAAP basis, excluding stock-based compensation, net income in the fourth quarter was approximately 2.1 million or $0.08 per share on a fully diluted basis. This compares with net income on a non-GAAP basis of 300,000 or $0.02 per share on a fully diluted basis last year. On a GAAP basis, net income was 1 million or $0.04 per share on a fully diluted basis compared to a breakeven result in the fourth quarter of last year.

Turning to the balance sheet, as of December 31, 2007, we had 52.4 million of cash and no debt. Accounts receivable at the end of the fourth quarter were 4.8 million, resulting in days sales outstanding of 27 days.

Now turning to the guidance for full year 2008, management expects full year 2008 revenue to be in a range of 69 to 73 million, which is 10 to 15% growth over full year 2007. We would also like at this time to reiterate the seasonal variations we typically experience in our business. As with our fiscal 2007 results, the second and fourth quarter of the year are typically our strongest quarters in terms of revenue, followed by the first and third quarters of the year. Management expects similar seasonal variation to occur during 2008.

In addition, as Steve mentioned, we recently completed the expansion and bifurcation of our U.S. sales force and expect that contributions from the realigned team will increase as the year progresses. For the full year 2008, largely reflecting the higher sales and marketing and G&A expenses previously discussed, management expects GAAP diluted earnings per share to be in a range of 7 to $0.12 per share. Non-GAAP diluted earnings per share are expected to be in a range of 25 to $0.30 per share. The per share earnings amounts are based on weighted average shares of approximately 26 million. We expect stock-based compensation charges to be approximately 4.8 million for 2008, and alternative minimum taxes on income are estimated to be approximately 9% of GAAP income before taxes for the year.

With that, I’ve concluded my overview of Thermage’s financial performance, and I’d like to turn the call back over to Steve.

Steve Fanning

Thanks, Jack. With a solid fourth quarter and a good year with significant growth in both revenue and earnings, we have established ourselves as a leader and an innovator in the fastest growing segments of the aesthetic markets, and we are continuing to research, develop and market new products and procedures that will further expand our product portfolio. We believe the innovation we are bringing to the market will also result in a better value proposition for the doctors and improved patient satisfaction. We are well positioned to continue our progress and we look forward to another good year for 2008.

Before I open the call to questions, I would like to thank all of the Thermage employees for their strong contributions in making 2007 a success.

Now, operator, I’d like to open up the call for questions please.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from the line Anthony Vendetti with Maxim Group. Please go ahead.

Anthony Vendetti - Maxim Group

Thanks. Good afternoon.

Steve Fanning

Good ,afternoon Anthony.

Anthony Vendetti - Maxim Group

Welcome aboard, Jack.

Jack Glenn

Thank you.

Anthony Vendetti - Maxim Group

Wanted to just go over a couple of things. The cellulite tip is scheduled to be shipped mid-March; can you talk about how that’s going to be priced and marketed to the physician, and what do you think an average physician could charge for his one procedure tip?

Steve Fanning

Sure Anthony. That tip will be priced exactly the same as our deep tip. And just to review that with you, the deep tip can run anywhere from $500 through to $925. And we think the physician will be charging, and this will vary by the geographical area in the U.S., somewhere between 3,500 up to $5,000, again depending upon the market, and again that’s going to be done in one treatment.

Anthony Vendetti - Maxim Group

Okay. And you mentioned in the call that the DTC and STC tip accounted for greater than 50% of revenues this quarter (inaudible). Is that all revenues or just tip revenues?

Steve Fanning

No, that’s importantly just tip revenues, Anthony.

Anthony Vendetti - Maxim Group

Okay. And I mean when you say greater than 50%, can you be any more specific in that or is that...

Steve Fanning

Yes, greater – somewhere between 50 and 60%.

Anthony Vendetti - Maxim Group

Okay. And can you review again how many patients have had the cellulite tip treatment?

Steve Fanning

Well, we’ve been out in a couple of things, Anthony; one, we’ve been down doing a lot of clinical work and then after that we went in and did some pre-market work. So, we’re in excess of 100 patients who have been treated.

Anthony Vendetti - Maxim Group

Okay. And with this tip were you seeing any reductions in natural fat and is that what’s leading you to work on fat or is that completely separate front?

Steve Fanning

No, we didn’t see any reductions in fat, no, no we did not. So the fat initiative, Anthony, is totally separate and focused within the company. In fact, there’s a whole theme that we have focused on the fat initiative.

Anthony Vendetti - Maxim Group

Okay. And can you give us any timeframe on that or where that’s at this point?

Steve Fanning

It’s going to be sometime in 2009 and that’s probably the best that I can give you right now, Anthony.

Anthony Vendetti - Maxim Group

Okay, okay. And is it safe to say that it’s really difficult to tell what the cellulite tip uptick will be at this point? And it appears that anyway with guidance that, right now guidance looks like it’s only embedding may be just modest uptick of this at this point?

Steve Fanning

Yes, it will be interesting to see, Anthony. It’s difficult to really get a handle on what we think it will be. But if I had to make a guesstimate, I would say that a run rate by the end of the year could be somewhere between 10 to 12% of our business in tip sales.

Anthony Vendetti - Maxim Group

Okay, great. Okay. I’ll jump back in the queue. Thanks.

Steve Fanning

Okay.

Operator

Thank you. Our next question comes from the line of David DeGiralamo with Pacific Growth Equities. Please go ahead.

David DeGiralamo - Pacific Growth Equities

Hey, good afternoon guys.

Steve Fanning

Hi David.

David DeGiralamo - Pacific Growth Equities

Welcome aboard, Jack.

Jack Glenn

Thank you.

David DeGiralamo - Pacific Growth Equities

So I can’t help but ask this question as a starter because I’m trying to get my arms around the guidance. Is it possible that you guys are being extremely conservative here? And the reason why I am asking this is that this is – Steve, after listening to your opening remarks, I mean, you would have guessed that perhaps the guidance would be higher because it seems that things are going well, you dealt with the issue of the sales force being the constraint in 3Q of 2007, seems like you got new products, new premium priced products that are going to kick in 2008. I am struggling to understand the 10 to 15% guidance.

I am hoping you can provide some clarity as to whether or not that’s a conservative estimate or if it’s a commentary about the macro forces, because it is the fastest or one of the fastest growing markets and you guys are a dominant player, which I believe, what does that say for the rest of the aesthetic space?

Steve Fanning

Yes.

David DeGiralamo - Pacific Growth Equities

So, there probably isn’t a question in that except I am just hoping you guys can help me understand this.

Steve Fanning

Sure. I guess I would use the word, it’s a prudent approach as opposed to conservative. But I’ve just looked at the other companies who have reported so far and we’re pretty much the last company. We’ve had very good growth both domestically and internationally, so I am pleased by the balance of our growth within our two major markets. And I look at the performance of some of the other companies and then I look at ours, and I am pleased by ours, but I guess I would say our approach is being prudent.

When I look at the U.S. market with, and we are not in this segment of the market, but in the commodity side of the market some companies in the U.S. are well below a 25% year-over-year decline and most of them with the exception of one -- or two -- excuse me – or three, including ourselves, are above and we are doing okay in the U.S. market. But I guess the word I would use would be prudent. I want to make sure that we are able to provide you with some good information relative to what’s going on in the market and then relative to what is going on in terms of us. We want to deliver on what we say.

David DeGiralamo - Pacific Growth Equities

Okay. Yes. I think I understand you. It’s hard given the context of the fact I think the low end of the Street estimates right there I believe are above your high end of guidance. The only parts that’s hard to harness in trying to understand, you’re prudent.

Steve Fanning

Yes.

David DeGiralamo - Pacific Growth Equities

Now, in terms of U.S. versus international, any thoughts on how you address those two out from a growth perspective?

Steve Fanning

I think that what we experienced in 2007, we’re going to see pretty much the same because of a couple of factors. Number one, the international markets will hopefully be increased not only by good organic growth but they’ll increase as a result of potentially getting approvals in China, which we hope will occur sometime during the first half. And also, in a couple of countries where we’ve not gotten approval for NXT, so one example would be Korea, where we now have the ability to sell that product. So I think you are going to continue to see the same split even though we’ve increased the U.S. sales force because of the new markets that we will be able to achieve from the international market.

David DeGiralamo - Pacific Growth Equities

Got you. All right. And then last question for now, I’ll jump back in queue. Regarding consumer slowdown because obviously you guys have – that’s probably the question that’s been asked to you and every other aesthetics company over the last six months or so. I mean, I know that’s a result of your competitors are not so hot, but are you seeing any impacts of consumer demand slowdown and if so, to what extent and if not, how should we look out it as it relates to you guys specifically?

Steve Fanning

I think, one, look at it as it relates to the guidance we’ve given you. Obviously, that’s number one. Number two, in my discussions with doctors, it’s a real mix bag out there. Some have actually said their business is down. I talked to a lot of doctors at the AAD, some said their business was down; the numbers they were giving 5 to 10%. A lot of other doctors said that their business was not being affected. So, I really think it’s a mix bag out there right now and I think the first quarter we’ll see how it shapes out and May somewhat pertain what the balance of the year is.

David DeGiralamo - Pacific Growth Equities

Got you. All right guys thanks for taking my questions.

Steve Fanning

You are welcome.

Operator

Thank you. Our next question comes from Keay Nakae with Collins Stewart. Please go ahead.

Keay Nakae - Collins Stewart

Yes, good afternoon.

Steve Fanning

Hi Keay.

Keay Nakae - Collins Stewart

Can you give us the revenue split for tips U.S., o-U.S.?

Steve Fanning

Revenue split for tips o-U.S; let’s see, I think we can give that you. So, if we look at it, I’ll give you some approximate numbers here, but for the U.S it was about 6 million and international just about 6 million.

Keay Nakae - Collins Stewart

Okay.

Steve Fanning

And by the way Keay, sorry to interrupt, that was for Q4.

Keay Nakae - Collins Stewart

Yes. And with respect to the metric you’ve been talking about, revenue per system per month, what did that metric look like?

Steve Fanning

Yes, actually we saw that metric improve, and we had some nice sequential improvement Q3 to Q4.

Keay Nakae - Collins Stewart

Is that not a number you’re going to provide?

Steve Fanning

No, if you look at the sequential improvement, yes, we could give that number to you. In looking at it worldwide, it was approximately almost $250 more, which is a nice number.

Keay Nakae - Collins Stewart

Okay. Talk about the projected operating expense for next year. First of all, with respect to R&D, you didn’t give any color there; could you at this point?

Steve Fanning

Yes. First of all, in terms of R&D, it will be about somewhere between 13 to 14% of our total revenues.

Keay Nakae - Collins Stewart

Okay. And with respect to G&A, obviously you’ve got the legal expense for Alma. I think you said expect about 2 million for the year. Could you give us a sense of how that might be incurred throughout the year? Will it be more front-end loaded, back-end loaded?

Steve Fanning

Yes. I think, Keay that will be more back-end loaded, and the reason I’m saying that is that we will go into Markman hearings toward the end of the year. So, in prep for that we’ll experience a rise in costs, but I see it rising as the year progresses.

Keay Nakae - Collins Stewart

Okay. And you were not specific about the additional expense from regulatory; could you give us a little more color there?

Jack Glenn

Yes. As far as the SOX-related expenses and year-on-year comparisons, probably in ‘08 it’s going to be about 5 to 600,000 more for SOX. As a bulk of that actually for ‘07 actually hit this in the first quarter of ‘08.

Keay Nakae - Collins Stewart

Okay. So that 5 to 600,000 will be more heavily weighted towards Q1?

Jack Glenn

A big portion of that.

Keay Nakae - Collins Stewart

Okay. And then sales and marketing, obviously you’ve added to the sales force, so what’s your expectation of where you are now with head count; is that going to be fairly steady state?

Steve Fanning

Yes. I think we’re ramped up in that I think we have capacity now within the sales force. So, yes, I think that you’ll see in the U.S. that we think that the 12 capital reps that we’ve added, again just to be repetitive, and the 26 sales consultants that we did have, plus we have four clinical specialists and four inside sales reps. So, we believe that that will be sufficient for this year.

Keay Nakae - Collins Stewart

Okay. And on the marketing side, obviously you just were at the Derm meeting; you are launching cellulite; is there going to be a more heavily weighted expense for marketing in Q1?

Steve Fanning

Yes, I think there’ll be some more marketing. I know there’ll be some more marketing. We are spending on cellulite because we believe it’s a good opportunity for us. So, yes, I think that’s a very fair assumption.

Keay Nakae - Collins Stewart

Okay. And one final question if I may, Steve.

Steve Fanning

Yes. Sure.

Keay Nakae - Collins Stewart

You talked about some feedback you had about the economic environment out there. Historically, Q1 and Q3 have been – less revenue than Q2 and Q4. You just came off a strong Q4; you’re halfway through Q1. Are we looking at a sequentially down quarter for revenue in Q1?

Steve Fanning

No, it’s difficult to tell right now relative to our new product sales, the new sales force and all of that. But it was a strong – I mean you have the numbers right. So, obviously, it’s still unfolding, so it’s difficult to say right now.

Keay Nakae - Collins Stewart

Okay.

Steve Fanning

What you will see though, it’s the consistency of that strong Q2, and that strong Q4 is very much still within this business; that has not changed. One would argue it’s gotten even a little bit stronger.

Keay Nakae - Collins Stewart

Okay, very good. Thanks.

Steve Fanning

You’re welcome.

Operator

Thank you. Our next question comes from the line of Isaac Ro with Leerink Swann. Please go ahead.

Isaac Ro - Leerink Swann

Hey guys. Thanks for taking the question.

Steve Fanning

Sure, Isaac.

Isaac Ro - Leerink Swann

Hi. So, first on the tips, I think, last quarter you said that the STC was about a third of your tip revs and then the DC was 25 to 30% maybe. Could you share with us kind of where they were in the fourth quarter and beyond that what may be the overall utilization rate you saw was in the quarter?

Steve Fanning

Well, we really don’t break out that extensively the different tips as they are in the quarter, but in terms of the Q3 there was no DC tip in Q3. So the DC tip, if my memory serves me correctly, was launched October 15th.

Isaac Ro - Leerink Swann

Okay. And then on the utilization rate, I think in the past you’ve shared with us kind of how that was looking based on the generators that you had.

Steve Fanning

Yes, as I indicated, our revenue in Q4 was a nice sequential increase, and then in Q4 itself standalone, it was approximately $1,600 for the full year of 2007. And remember what our goal is; our goal is somewhere to get between 14 and $1600 per generator per month. But in Q4, -- I’m just getting some numbers here for you – it was approximately $1700.

Isaac Ro - Leerink Swann

Okay. Thanks.

Steve Fanning

You’re welcome.

Isaac Ro - Leerink Swann

So you have one more thing, Jack, or...

Jack Glenn

No. No, no go ahead.

Isaac Ro - Leerink Swann

If not, okay. Okay. The next question would be just on your installed based for the NXT. What percentage could you say has been upgraded at this point and where do you think that number is going over the next 12 months, now that you’re a year into the new introduction?

Steve Fanning

Yes, it’s 13% for the full year and I think it will be less than that for this year. But I want to add a caveat to that. Remember that we have a dual sales force now, and that there’s one segment of the sales force that is focused on selling new generators to new customers. But the tip sales force now is compensated for selling upgrades to their existing customers. So, the fact that we’ve split the sales force now, I think there will be a greater incentive if you will to sell upgrades to existing customers. Now having said that, Isaac, I don’t believe it’s going to be near the 13%, because we’ve got the low-hanging fruit. But nonetheless, I just want to kind of caveat it by saying that we think that it will be down from what it was last year. And last year, to give you the exact numbers, it was 278. I think it’s going to be somewhere between 150 to 175, if I had to put a guess.

Isaac Ro - Leerink Swann

Okay, great. And then what you said before on ‘08 guidance for R&D being about 13% of revenues, and I think last year sales and marketing hovering in the 40% area, I’m just trying to get a sense here for operating leverage in ‘09. How do you think those numbers start to shape up? Not looking for guidance, but just directionally, should you see a trend down at least on the R&D line?

Steve Fanning

Yes. I think when you look at the ‘09 to ‘10 numbers and you look at the trend, I think sales and marketing probably will be 10 to 12%. You look at R&D, it’s going to be growing at 11 to 12. So I think you’ll continue to see some leverage in the out years.

Isaac Ro - Leerink Swann

Okay. And then last question, just regarding the fact that you said you were working on or the fat products.

Steve Fanning

Yes.

Isaac Ro - Leerink Swann

Have you said in the past or are you willing to say whether or not that technology will use some variant of the monopolar RF technology the rest of your products use or would it potentially be a totally different modality?

Steve Fanning

Number one, it’s going to be our technology, so it will be monopolar capacitive coupling radiofrequency technology.

Isaac Ro - Leerink Swann

Okay, great. Those were my questions. Thank you.

Steve Fanning

Okay, Isaac.

Operator

Thank you. Our next question comes from the line of Chris Cooley with FTN Midwest. Please go ahead.

Chris Cooley - FTN Midwest

Thanks for taking the questions.

Steve Fanning

Sure.

Chris Cooley - FTN Midwest

Just a couple of quick ones. Could you address if there was much – I know in the past you said they’ve been fairly the same, but was there much variance just in regards to the ASP U.S., o-U.S. on the tip side? And as a follow-on to that, just as we’re looking out at ‘08, and we’re thinking just directionally throughout the whole year, should we see the growth in the top line coming from greater utilization on the installed base, improved mix through the higher ASP? Help me just think a little bit about the weighting there.

Steve Fanning

Sure. Yes, first of all, just to recalibrate, our international versus U.S., just to refresh your memory, there is a transfer price. And remember for the distributors, it’s a discount of 15% for tips, and not that you asked this, but for the generator it’s 30. Now, having said that, we continue to see good ASP increases, and in fact when you look at the worldwide increase just in Q4 alone, that was mid-teen. So we’re continuing to see a very nice lift, both domestic and international, in ASP. And please remember that the premium tips that we launched in ‘07 will not anniversary sometime until Q3.

Chris Cooley - FTN Midwest

Right.

Steve Fanning

So we’ve got a nice opportunity there, when you look at ASP as the first two quarters, if you will, of the year unfold. But just going back, and looking at the ASPs, our worldwide ASP in Q4 was $339 and that’s up from Q3 of 316. And quite frankly, starting out at the beginning of the year it was below $300. So we’ve seen a nice improvement.

Chris Cooley - FTN Midwest

Okay. Super. And then so I guess as an additional follow-on, could you talk just a little bit about the growth that you realized during the quarter here in the U.S, I guess we are all coming at this merit of different angles. But did you see greater growth with the cosmetic derm? Was growth balanced between the cosmetic derm, the plastic surgeon or just a general derm practice? I am just trying to see if you see any pockets of stronger growth on a relative basis.

Steve Fanning

Yes, Chris, we looked at that. The answer is, no. I can’t tell you that we’ve got one segment growing faster or one segment not declining. It’s pretty well balanced across all of our, what I would call classes of trade, types of doctors.

Chris Cooley - FTN Midwest

Super. And just one final question, I’ll get back in the queue.

Steve Fanning

Sure.

Chris Cooley - FTN Midwest

When you look at your growth in the installed base – excuse me – for 2008, do you view the cellulite treatment more as additive in terms of utilization? Or is it more additive in terms of the potential to place new systems and accounts which either don’t have a system today or possibly get them to affect an upgrade to the NXT?

Steve Fanning

I think it’s the first. I think cellulite will be important, but I don’t think that doctors will be buying our system or generator solely for cellulite. Now, there may be one or two, but at the end, don’t hold me to that, and I’m sure there would be more. But my point is, no, I think they buy Thermage for the entire concept, not to focus solely on cellulite.

Chris Cooley - FTN Midwest

Understood. And I apologize, one last...

Steve Fanning

Yes.

Chris Cooley - FTN Midwest

...and I will hop back in. Just for clarification, on the guidance for the tax rate in the upcoming year. Does that assume a reversal of the R&D tax credit, or you assume that the tax credit is in existence throughout the course of the year?

Jack Glenn

Well, that assumes that’s based on an alternative minimum tax rate, so we’re at 9%.

Chris Cooley - FTN Midwest

Okay. Okay, got it. Thank you.

Steve Fanning

You’re welcome.

Operator

Thank you. Our next question comes from the line of Dalton Chandler with Needham and Company. Please go ahead.

Dalton Chandler - Needham and Company

Yes, hi. I think you had at least partly answered this question already, but I was just want to make sure I understood this. For the quarter you placed 78 new generators; is that correct?

Steve Fanning

Yes, that’s correct.

Dalton Chandler - Needham and Company

Okay. And I think that’s a little bit below what you had been targeting. Is that may be a result of the transition in the sales force, and also what do you have in your 2008 guidance in that regard?

Steve Fanning

Yes. Yes, just to reclarify, worldwide 142, total 78 new, obviously 64 in the balance. But when you look at the ‘08, we’re looking at approximately 400 new generators and we’ve always said that’s the neighborhood that we wanted to be in for our generators and our model works exceedingly well at that.

Dalton Chandler - Needham and Company

Okay. And as the sales force is transitioned, would you expect that those new unit sales to be somewhat back-end loaded then?

Steve Fanning

Yes, I would. As we transition and the new people get to understand their territories better and all of that, yes, I would see us definitely more in the back half of the year.

Dalton Chandler - Needham and Company

Okay. That’s all I had. Thanks.

Steve Fanning

Okay, Dalton.

Operator

Thank you. Our next question comes from the line of Anthony Petrone with Maxim Group. Please go ahead.

Anthony Petrone - Maxim Group

Thanks for taking my questions. Just to recap on the systems outlook for 2008, so what exactly is the ASP you’re modeling when you take into consideration your guidance, and also what is the revenue split within that guidance?

Steve Fanning

Okay. Yes, again just to reiterate in terms of the pricing in the U.S., it’s going to be between 40 to 45,000, and then in the international just take 30% off of that 45, the top number and that will get you to the international number.

Anthony Petrone - Maxim Group

Okay. And break, of the, call it 71 million in guidance between systems capsules and service, were we looking at a similar split from where you ended the...

Steve Fanning

Yes, although I must say, I mean as you continue to see the premium price of our tips and how that relates to our split, I would say I’m probably more in the neighborhood of 72 this year.

Anthony Petrone - Maxim Group

And then maybe 2-3 service from main systems?

Steve Fanning

Yes.

Anthony Petrone - Maxim Group

Now in regards to the service contracts, I would imagine for existing accounts that are taking on more and more technologies and as those service contracts anniversary is the overall rate of the service contracts going to be extended or be increased?

Steve Fanning

No, it’s pretty much going to remain the same. It’s such small piece that I don’t see it really impacting us much at all.

Anthony Petrone - Maxim Group

Okay, great. And then finally, if you could shed some color on cellulite in regards to existing installed base, I guess if you can share this, what percentage of the existing installed base has expressed interest?

Steve Fanning

Well, we have strong interest from the vast majority of our installed base and obviously this is the time of the year to be selling it. So, I think it’s been received very well and we’ll be highly focused on making sure that we are detailing all of our doctors on this new tip. Obviously, we’re very excited about it.

Anthony Petrone - Maxim Group

All right. Great. Thanks.

Steve Fanning

You’re welcome.

Operator

(Operator Instructions). Your next question comes from the line of Anthony Vendetti with Maxim Group. Please go ahead.

Anthony Vendetti - Maxim Group

All right. This one is just a little quick. The revenue split for the quarter between RF generators, ThermaTips and service?

Steve Fanning

Sure. It was 76% of tips and then about 2% on the service or other, all other; we call it all other around here.

Anthony Vendetti - Maxim Group

Okay, good. All right, thanks.

Steve Fanning

Okay.

Operator

Okay. And at this time, there are no more questions. Please continue.

Steve Fanning

Okay. Well, thank you, operator. And thank you everyone for joining our conference call today. And we look forward to continuing to keep you up to speed regarding Thermage. Thank you very much.

Operator

Ladies and gentlemen, this concludes the Thermage fourth quarter results conference. Thank you for your participation and you may now disconnect.

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