Syneron Medical's CEO Discusses Q2 2012 Results - Earnings Call Transcript

| About: Syneron Medical (ELOS)

Syneron Medical Ltd. (NASDAQ:ELOS)

Q2 2012 Earnings Conference Call

August 15, 2012 8:30 am ET

Executives

Zack Kubow – The Ruth Group

Louis P. Scafuri – Chief Executive Officer

Asaf Alperovitz – Chief Financial Officer

Analysts

Richard Newitter – Leerink Swann

Jeremy Feffer – Cantor Fitzgerald & Co.,

Anthony Vendetti – Maxim Group

Dalton Chandler – Needham & Company

Operator

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

I would now like to turn the call over to your host, Zack Kubow with The Ruth Group. You may begin.

Zack Kubow

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

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

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

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

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

Louis P. Scafuri

Thank you Zack, and welcome to Syneron’s second quarter 2012 conference call. We achieved strong financial results in the second quarter, headline by another quarter with record revenue. This was driven by our recent new product launches and the strength of Syneron’s global channel to market capabilities. Clearly our commitments provide a broad range of innovative clinically validated aesthetic products that meet the needs of our customers, it allowing us to win in the marketplace.

During the quarter, we also benefited from better leverage of our fixed cost and infrastructure, particularly in the PAD segment, which drove improved operating margin, profitability for the consolidated business.

I’ll begin today’s call with a brief overview of our financial results followed by a review of the key drivers in the PAD and EBU segments for the second quarter and beyond.

Total revenue in the second quarter 2012 was $68.1 million, up 12% over the prior year; this marks our eighth consecutive quarter of double-digit year-over-year sales growth and our third consecutive quarter of new record revenue level. International sales grew 16% during the second quarter, mainly driven by the strong performance in ENMEA and Asia with eTwo and eLase products continue to perform well.

North American sales were up 5% year-over-year, which was attributable to the temporary delay in obtaining regulatory clearance for the highly anticipated release of the elos Plus Aesthetic Work Station. We obtained a regulatory approval to this important product late in the second quarter and expect to record strong sales of the elos Plus in North America this quarter.

Recurring revenue, which includes service and consumables, was up 13% representing approximately 32% of the total PAD sales.

In the PAD segment, revenue increased 12% and operating income was $7 million, or a 11.4% of PAD sales.

In EBU, revenue rose 13% driven by strong growth in Syneron Beauty and elure, which was partially offset by the voluntary field action in the LiteTouch Dental Laser business in Europe.

Excluding the Dental business, which recorded minimal revenue in the quarter, EBU revenue was up 40% year-over-year. We remain on track to complete the dental voluntary replacement by the end of the year. Overall the EBU continue to generate an operating loss for the quarter as we continue to invest in this high growth segment of the business.

On a consolidated basis, we achieved non-GAAP operating income of $3.1 million and non-GAAP EPS of $0.05 per share. This is our seventh consecutive quarter of non-GAAP profitability.

During the second quarter, we continue to execute on our growth strategy including new product launches integrating the Ultrashape business, as well as initiating our Ultrashape FDA clinical trial.

In June, we launch the elos Plus Work Station into the European and Asian market at the 9th Annual Spring Symposium of the EADV meeting in Verona, Italy. The elos Plus system utilizes the Syneron proprietary elos technology, which combines optical energy and bipolar radiofrequency energy. The elos Plus has the ability to deliver a full range of aesthetic treatments and is equipped with the most advanced features for optimum, speed, safety and efficacy. We have received positive feedback on the comprehensive and versatile treatment capabilities of the system. It also features our flagships sublative, sublime and multi-treatment applicators which offer users and patients, alike superior results and treatment experiences.

The international market launch of the elos Plus system was followed by FDA 510k clearance for the system in the last week of June. This next-generation elos product builds upon our large installed base in North America of over 2,000 E-series systems. The elos Plus has been long awaited and plans are on the way in Q3 to maximize sales of this high margin multi-application platform.

Turning to Ultrashape, we continued to make progress with the integration during the second quarter. We have trained our direct sales representatives and distribution partners in the EMEA, Asia and Latin America. We are off to a good start and we believe we have a large opportunity in these markets to sell the new V3 system to existing Ultrashape installed base while also cross-selling the systems to our customers.

At the beginning of this month, we announced that we have transitioned the Ultrashape business in Canada to our direct sales team and support to our organization another important milestone in the integration process. This will take advantage of our direct market presence in Canada and leverage a significant installed base of Ultrashape systems in Canada. In the U.S., we began enrolling patients in the Ultrashape clinical trials during the second quarter. The trial will be conducted at four primary sites in the U.S. and one additional site in Israel.

We will enroll a total of 80 patients with primary endpoint measuring circumference reduction. Based on the pace of enrollment, we expect to complete the trial around the end of the year. This anticipated completion date would allow us to submit the clinical data to the FDA in early 2013, with the expected FDA clearance later in 2013.

In addition to the Ultrashape clinical trial, we also continue to advance our exciting new body contouring products. These systems will be complementary to our existing portfolio and will enhance Syneron’s comprehensive body sculpting and body contouring offering to our customers. All together, we are on track with our best in UltraShape to be accretive by the end of the 2012.

Turning to the EBU, we delivered another quarter of growth in Syneron Beauty lead by the Tanda Family of LED Skin Rejuvenation and Acne products. We also grew sales of the Me Home-Use Hair Removal System. During the quarter we continued our efforts to improve the profitability in the EBU, this includes expanding direct sales, allowing us to capture a higher gross margin, implementing manufacturing and operating cost reduction initiatives and launching new premium products.

Sales of elure skin brightening products also grew in the quarter and we reached the significant milestone of $1 million in quarterly skin brightening product sales. It was exciting to rapidly reach this level of sales the large market opportunity for elure continues to be in Asia, we remain on track to launch elure in at least two major Asian countries before the end of the year.

In summary, we continue to execute as a global market leader with significant growth results in both the PAD and EBU segments. We have several new product launches that will be added to our recent launches and continued to drive growth in the second half of the year. We are also focused on leveraging our fixed cost and operating infrastructure with good progress in the quarter. Together, our significant revenue growth opportunities with our existing products Ultrashape, elure and other planned launches combined with our improving operating efficiency, this has positioned Syneron for a long-term profitable growth and enhance shareholder value.

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

Asaf Alperovitz

Thank you, Lou. Revenue in the second quarter of 2012 was $68.1 million, up 12.4% compared to $60.6 million in the second quarter of 2011. International revenue grew 16.3% year-over-year to $46.2 million and North America revenue grew 4.9% to $21.9 million. 68% of second quarter 2012’s revenue was in the international market, compared to 66% in the second quarter of 2011.

Product revenue and recurring revenue, which include services and consumables for the second quarter of 2012 were $48.6 million and $19.5 million respectively. Consumable revenues, which reached a new record level in this quarter and included revenues from Ultrashape transducers grew 11% year-over-year.

Gross margin for the second quarter of 2012 was 53.2% or 55.1% on a non-GAAP basis, excluding stock-based compensation and amortization of acquired intangible assets compared to 51.4% or 53.1% on a non-GAAP basis in the second quarter of 2011.

The increase in non-GAAP gross margin was primarily related to the higher production and sales volume, recently implemented costs cutting and efficiency measures, and year-over-year improvements in EBU gross margins.

EBU gross margin improved in a year-over-year basis despite the fact that it was impacted by the loss of margin contribution of the dental business, which is still undergoing the voluntary field replacement, we initiated last quarter.

Second quarter 2012 GAAP operating loss was $0.9 million, or an operating profit of $3.1 million on a non-GAAP basis. This compared to an operating loss of $1.1 million, or an operating profit of $0.3 million on a non-GAAP basis in the second quarter of 2011. The increase in non-GAAP operating income was primarily related to the revenue growth the 200 basis points improvement in gross margin and improved leverage of the company’s fixed cost base.

This was partly offset by an increase in operating expenses associated with the growth in EBU segment revenues. GAAP net loss for the second quarter of 2012 was $1.6 million or $0.05 per share compared to GAAP net loss of $0.3 million or $0.01 per share in the second quarter of 2011. On a non-GAAP basis, net income for the second quarter of 2012 was $1.9 million or $0.05 per share compared to net profit of $0.2 million or $0.01 per share in the second quarter of 2011.

Second quarter non-GAAP operating income and net income exclude one-time expenses as we did in the company's financials in today's press release, with the main items being amortization of acquired tangible assets of $2.1 million, stock-based compensation of $1.3 million, and other non-recurring costs of $0.6 million.

Now, I will provide the review and commentary on the results of our two reporting segments, the Professional Aesthetic Devices or PAD and Emerging Business Unit or EBU. For the second quarter of 2012, PADs revenue was $61.1 million or 89.9% of total revenue and EBU revenue was $6.9 million or 10.2% of total revenue. Most segments recorded all time high revenues in the quarter.

Operating income in the PAD segment was $7 million on a non-GAAP basis, representing an operating margin of 11.4%. This compared to non-GAAP operating income of $3.2 million or 5.9% of operating margin in the second quarter of 2011.

The significant improvement in our non-GAAP PAD operating results is primarily due to the following factors: higher production and sales volume, improved operational efficiencies and cost-cutting measures and the launch of the new premium products.

Moving to the EBU, during the quarter, we’ll continue to drive revenue growth for the Syneron Beauty home-use product and with the elure Advanced Skin Lightening System. EBU sales grew 13.2% over the second quarter of 2011 and excluding the dental laser business, EBU sales were up 40% year-over-year. This demonstrate the strong growth generated from the Tanda skin rejuvenation and Acne products line, the mē Home-Use Hair Removal System and our skin brightening products, which reach the significant milestone of $1 million in quarterly sales.

We increased Syneron Beauty sales in North America by 112% over the second quarter of 2011, and we are also focused on developing our ecommerce infrastructures for this product to increase our mix of higher margins and direct sales.

During the quarter, we continued with the voluntary field replacement of the LiteTouch Dental Laser product in Europe, which had an impact on dental revenue and profitability, which are included in the results of the EBU.

During the quarter, we generated modern sales in the dental laser business over $100,000 compared to $1.3 million in the second quarter of 2011. We expect to complete the replacement of the dental laser devices in Europe by the end of this year and gradually increase the sales of these products.

Non-GAAP operating loss in the EBU segment was $3.9 million, similar to previous quarters, EBU results in the second quarter reflect lower gross margins compared to the PAD also due to the lack of margin contribution from the dental laser product. In addition, we continue to have higher relative operating expenses, including mainly investments in marketing associated with the continued launch of elure and the Tanda products in North America and internationally and the ongoing launch of the me Home-Use Hair Removal System in Canada.

We are working to improve the EBU profitability by increasing direct sales, introducing higher margin products and implementing cost reduction initiatives. Combined with our focus on strengthening the profitability of our PAD business, improving the results in our and expanding EBU business should be, should put us in a solid position to drive sustain profitable growth for Syneron.

Turning to the balance sheet, our DSO declined to 69 days, representing a decrease of one day compared to DSO of 70 days in the second quarter of 2011 and a decrease of three days compared to DSO of 72 days in the prior quarter. At June 30, 2012 cash and cash equivalents including short-term bank deposits and investments in marketable securities were $135 million. We have the strongest balance sheet in the industry and we continue to evaluate strategic business development opportunities.

With that, I’ll now turn the call over to the operator to answer any questions, you may have. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Rich Newitter from Leerink Swann. Your line is open.

Richard Newitter – Leerink Swann

Hi guys. Thanks for taking the questions. I just wanted to start off on profitability. You made some very nice progress on the PAD segment profits setting a 11% margin this quarter from 8% last quarter I think. Can you won on that part of the business, just talk about where you see that going as we move through the year. It sounds that we have some additional premium products kind of coming into the mix that haven’t been launched and where should we think about that moving up towards especially into the Syneron stronger fourth quarter and then I’ll have a follow-up on the EBU.

Louis P. Scafuri

Rich, very simply we always look to sell more and spend less. We have a very strong management team. We’re executing according to our product roadmap rollouts. We have a very strong portfolio of products the products we’re bringing on board have higher gross margins. As we continue to work closely with not only our distribution partners, but with our direct selling organization. We look to pick up market share across the diverse portfolio that we have and again we are always looking to find additional leverage in our G&A, and our R&D and get it right the first time and execute in the marketplace.

Richard Newitter – Leerink Swann

But just thinking about from where we are kind of today, do we think of this as a maybe a new base level and from here, we should see sustainable improvement any actual percentage operating margin moving up towards the low-to-mid teens over the next couple quarters?

Asaf Alperovitz

Hi, Rich this is Asaf. Good morning, how are you? I think this quarter we demonstrated higher gross margins year-over-year and as Lou mentioned that was presented in this quarter new products including the recently introduced GentleLase Pro, GentleMax Pro both with premium features, that’s also contributed to higher ASPs and with lower production costs both contributing to higher margins. We do some higher production in sales volume and better operational efficiency in cost cutting and definitely we’re enjoying the economical scale or better utilizing and leveraging our fixed cost infrastructure and our sales continue to grow, we expect to see more utilization of that.

In this quarter we also reported increased consumable sales, which also include now the transducers by Ultrashape. And as you know the consumables are presenting higher gross margin and we are very much focused on this razor/razor-blade model going forward, which will definitely support increased margin if that trends will continue.

We also seen some improvements in the gross margin of the EBU year-over-year, which we expect to continue again mainly driven by increased volume, lower production cost and we will present to the market again higher margin products and we are focused on increasing our direct sales in North America and in other locations.

So just to summarize, I think economical scale are definitely have premium products definitely helpful, increased consumables and the better utilization of all of our infrastructure. We do some fixed costs built into that and the more we sell and produce we should see improvements going forward.

Richard Newitter – Leerink Swann

I mean it sounds to me like there were a number of items in the second quarter, the dental contribution in the EBU you had some delayed purchasing that seems to be getting pushed out into the back half for the PAD segment. I mean this seems like all well sequel it should be significantly improved kind of back half performance versus even these relatively strong or directionally positive results in the second quarter from a profit standpoint. Is that the right way to think about it?

Asaf Alperovitz

Yes.

Richard Newitter – Leerink Swann

Okay. Thank you. And then just one actually two quick last ones. I think you said for elure, you expect approval in at least two countries in some of the key Asia territories. I was wondering, if you can tell us what countries those were, and when we might expect that, is that going to be something towards the later part of the year or could that come as soon as next week?

Louis P. Scafuri

We are launching in Hong Kong in Q3 and India in Q4. And we have distribution partners lined up. We also expanded our direct distribution sales force in North America. So we are expecting improved revenue traction in the second half of the year.

Richard Newitter – Leerink Swann

Okay, thanks a lot. I’ll let some other jump in, appreciate it.

Louis P. Scafuri

Thank you, Rich.

Operator

Our next question comes from Jeremy Feffer from Cantor Fitzgerald. Your line is open.

Jeremy Feffer – Cantor Fitzgerald & Co.,

Good morning, thanks. Quickly on Ultrashape, are you able to give us any hard numbers around what sales look like in the quarter and if not, can you give us a sense of how Ultrashape is performing year-over-year?

Asaf Alperovitz

Hi, Jeremy, good morning this is Asaf. As you know we do not currently provide breakdown of revenue by product line. We can’t say, we are growing and we are implementing our plan and further integrating, but I don’t know if we want to expand more at this stage.

Louis P. Scafuri

Well, right now the efforts are almost going out there to existing Ultrashape installed base and working closely with our distribution partners as well as getting our sales force up to speed. We had appreciable revenue this quarter. We were able to bundle along with others Syneron products, which we think is a very, very good sign. And we are looking towards Canada. We are really I think is probably the best learning lab as we anticipate coming into the U.S. with FDA clearance some time towards the latter part of 2013. So we have a fairly significant installed base in Canada, we have a direct selling organization and we’d like to talk more about our results there in next quarter, once we get a full quarter under our belt of executing in the marketplace.

Jeremy Feffer – Cantor Fitzgerald & Co.,

Okay, and then on I was wondering to come back to the previous question on elure approvals, as you mentioned Hong Kong and India this year, previously, you had been talking about some other markets in Asia, I think China, Japan are those are going to be pushed out a little bit longer, as you just sort of delays beyond your control or what’s happening in some of those markets?

Louis P. Scafuri

I think we’re finding, and I think we’re hearing on all of our competitors calls as well, we’re dealing in a real challenging regulatory environment, so what we really want to do on this call was point to some hard tangible markets there, we know we’re going to be in this year, we have no, we’re not anticipating anything unusual in those markets, but I’d rather not point to those regulatory approvals, I’d rather point to markets where we know we’re ready to go at this point in time.

Jeremy Feffer – Cantor Fitzgerald & Co.,

Okay, fair enough. And just lastly, given the trajectory both in sales and costs, you’re still on track for nearing break-even in EBU by 4Q?

Louis P. Scafuri

We’re working hard towards that end, we certainly, we’re mid-way through the voluntary field action with dentals that certainly will help our results as well as the revenue ramp in elure sales, and we are going direct in certain markets or direct sales activities we’ve made investments in infrastructure, in Syneron Beauty and so we’re working very, very hard to achieve improved results and clearly it’s within our reach.

Jeremy Feffer – Cantor Fitzgerald & Co.,

Okay, thank you very much.

Louis P. Scafuri

You are welcome.

Asaf Alperovitz

Thank you.

Operator

Our next question comes from Anthony Vendetti from Maxim Group, your line is open.

Anthony Vendetti – Maxim Group

Thanks. Good morning.

Louis P. Scafuri

Good morning.

Asaf Alperovitz

Good morning.

Anthony Vendetti – Maxim Group

So just a follow on about the direct sales and total U.S. sales, so can you tell us how many countries right now you’re directing and what your goal is by the end of the year and then, what’s your total U.S. direct sales force count at this point?

Louis P. Scafuri

We currently sell direct in 13 countries and our total U.S. sales force now stands at 45 including the sales management team.

Anthony Vendetti – Maxim Group

Okay. Lou, may be you can just explain the difference between elos Plus, which you just got FDA approval for the last week in June, and because that is a multi-platform system and then the GentleMax Pro and just how those two are positioned, and priced in?

Louis P. Scafuri

Well they are both very, very different products elos Plus – ELOS space it’s a combination of dynamic energy forms where we believe, we have best-of-breed in the various areas of fractional capability in addition to skin rejuvenation in addition to leg vein hair removal and alike. It’s multi-application platform, it succeeds to eMax, which was the best selling Syneron product of all times. I think if we look at the strength of our balance sheet, if we look at the success we had in North America in developing Syneron as a preeminent company in the dynamic energy business. We feel, we have superior product, multi-application platform to suit the needs across the board for both new users as well as to it’s advanced core users again offering best-of-breed with Sublative, Sublime and Motif. We also see this opportunity as well outside the U.S. In terms of Candela’s GMax Pro, it’s the premium solid state laser platform with best-of-breed capability in hair removal, vascular as well as pigmented lesions.

It is again top to the line premium product. It’s in a different category of devices. We see this product primarily focused towards the core market and we see the elos Plus cutting across all the markets. This is a bit of pricing differential. We can bundle and unbundle. We have range of products around both products. And at the end of the day, what we look to do is build every customers’ need part of what we’ve done over the last several years is develop a product portfolio with breadth and depth second to none in the industry as well as channel to market capabilities in over 90 countries and having the right product at the right price for our customers both at the premium end as well as the value end is direction where we’re heading.

So we see a clear differentiation. Our reps have been trained. Our distributive partners have been trained. In Q2, we were geared up or we were hopeful to have the FDA clearance earlier on in the quarter and certainly launching in Asia and launching in Europe word gets around and so we had unusually high code activity but unfortunately not having the clearance till the last week of the quarter.

We saw press release, we announced it very first part of July, so we are lock and loaded ready to go on both products for the quarter.

Anthony Vendetti – Maxim Group

Okay. That’s good segway into my last two questions of core versus non-core sales this quarter?

Asaf Alperovitz

Core sales were 54% and non-core sales were 46%.

Anthony Vendetti – Maxim Group

Okay and then lastly, Asaf if you have the stock-based comp breakdown between the operating expenses and COGS?

Asaf Alperovitz

Yes, definitely. So the entire stock-based compensation were $1,278,000 and the breakdown is as follows, sales and marketing $394,000, G&A $673,000, and COGS we had $32,000, and in R&D $79,000.

Anthony Vendetti – Maxim Group

Perfect, thanks. I'll hop back in the queue.

Asaf Alperovitz

Thank you.

Operator

Our final question comes from Dalton Chandler from Needham. Your line is open.

Dalton Chandler – Needham & Company

Hi, good morning. I appreciate, you don’t really give us product level revenue breakdowns, but so you did acquire Ultrashape just last quarter. So maybe could you give us an organic year-over-year growth rate overall?

Asaf Alperovitz

The organic year-over-year growth rate was, we don’t disclose the numbers, but it was the appreciable portion of the number we reported.

Dalton Chandler – Needham & Company

The Ultrashape was an appreciable portion of the growth that we are seeing here?

Asaf Alperovitz

No, I’m saying that the organic.

Dalton Chandler – Needham & Company

Okay. Okay, got it. And could you just remind us on a lure the markets that you have been selling in?

Asaf Alperovitz

We’ve been selling the product in the U.S. and in several countries in Asia, including Malaysia and Indonesia.

Dalton Chandler – Needham & Company

Okay. All right, thanks for that.

Asaf Alperovitz

As well as Singapore, you may add that as well.

Dalton Chandler – Needham & Company

Okay. All right, thanks

Operator

I’m showing no further questions at this time. I’ll now turn the call back over to management for closing remarks.

Louis P. Scafuri

I would like to thank our employees and our partners around the world for their hard work, commitment and dedication that we’ve had on an ongoing basis to achieve the successful results that we’ve reported here today. We’re diligent in our efforts to improve shareholder value and we’re working hard in Q3 and Q4 with the sense of urgency to improve our position in the marketplace and increase our shareholder value. I’d like to thank everyone and wish you all a very good day.

Operator

Ladies and gentlemen that does conclude today’s conference. You may all disconnect and have a wonderful day.

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