Syneron Medical Ltd. 2Q 2008 Earnings Call Transcript

Executives

Judith Kleinman – VP, IR

Doron Gerstel – CEO

Fabian Tenenbaum – CFO

Don Fagen – President of Syneron North America

Analysts

Amit Hazan – Oppenheimer

Keay Nakae – Collins Stewart

Anthony Vendetti – Maxim Group

Eli Kammerman – Cowen

Jose Haresco – Merriman

John Minnick – Minnick Capital Management

Yumi Odama – Thomas Weisel Partners

Syneron Medical Ltd. (ELOS) 2Q 2008 Earnings Call Transcript August 14, 2008 8:30 AM ET

Operator

Good day, everyone, and welcome to the Syneron Medical Second Quarter 2008 earnings results conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mrs. Judith Kleinman. Mrs. Kleinman, please go ahead.

Judith Kleinman

Thank you, Operator. I would like to welcome you to Syneron Medical's second quarter 2008 earnings conference call. As you well know, statements herein may be forward-looking within the meaning of the US Private Securities Litigation Reform Act of 1995 relating to future events or our future performance, including statements with respect to our expectations regarding, but not limited to, the financial forecast for 2008, the launch of new products and maintaining a leadership position in core markets. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our 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 risks associated with our ability to introduce and commercialize new products and identify new markets for our technology, our ability to manage our growth, competition and pricing pressure, and risks related to our intellectual property. These risks and other factors are summarized under the heading Risk Factors in our Annual Report on Form 20-F for the year ended December 31, 2007, filed with the Securities and Exchange Commission on May 7, 2008. These factors are updated from time to time through the filing of reports and registration statements with the Securities and Exchange Commission. We do 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 our press release and on the Investor Relations page at syneron.com.

Speaking on today's call are Syneron's CEO, Doron Gerstel, Syneron's CFO Fabian Tenenbaum, and Don Fagen, President of Syneron North America. Shimon Eckhouse, Chairman of Syneron, is also here with us and will be available for questions at the end of our prepared remarks.

I will now turn the call over to Doron Gerstel, CEO of Syneron Medical.

Doron Gerstel

Thank you, Judy. I want to welcome all investor and analysts to our second quarter 2008 conference call. We are pleased to report that in the second quarter of 2008 Syneron's revenue grew to $38.2 million, the highest quarter Syneron has ever reported. Syneron now has an installed base of more than 10,000 units. Average selling prices remained stable in the second quarter despite current economic conditions, reflecting sustained demand for our products worldwide. I'm also pleased to report a 17% rise in international sales. This continued growth of international sales can be attributed to our broad market and product diversification strategy, which we discussed n the last quarter conference call.

Internationally, we are not restricted in selling energy-based devices only to doctors, as in the US, we have continued to deepen our penetration in the market for high-end aesthetic professionals, as well as in the broad medical markets. International sales now account for 50% of Syneron's revenue, reflecting the success of our broad diversification strategy.

I would now like to turn the call over to Fabian, for more detailed discussion of our financial position.

Fabian Tenenbaum

Thank you, Doron. Revenue for the second quarter of 2008 was $38.2 million, compared to $37.5 million in the second quarter of 2007. Gross margins remained stable for the past three quarters. Operating income in the second quarter was $7.6 million on a GAAP basis or $10.2 million on a non-GAAP basis. Operating margin was 19.9% GAAP and 26.7% non-GAAP. Our gross interest income, which we generate on our cash balance, was $1.1 million compared to $2.3 million in the second quarter of 2007 due to the lower interest rate environment. GAAP net profit was $11 million. On a non-GAAP basis, net profit was $13.7 million. EPS per diluted share in the second quarter was $0.40 on a GAAP basis and $0.50 on a non-GAAP basis.

In the second quarter, Syneron recorded a one-time tax credit of approximately $2 million resulting from a change in the base of reporting to the Israeli Tax Authority from US dollars to new Israeli shekel. Cash flow from operations n the second quarter was $12.3 million, cash and equivalents including long term investments rose by $10.2 million to $221 million. Days sales outstanding fell to 103 days on an average balance basis from 112 days in the first quarter of 2008. Shareholders’ equity totaled $252 million and we continue to have no debt.

I would now like to turn the call back over to Doron.

Doron Gerstel

Thank you, Fabian. Two weeks ago we launched the LipoLite Energy Access Program (LEAP) to enable physicians to introduce laser-assisted lipolysis to their respective practice without making a long-term financial commitment. For a reasonable cost, doctors purchased a one-year subscription to use the LipoLite device and then buy energy packets as they perform more treatment. Costs are directly linked to patient throughput. The LipoLite Energy Access Program is an integral part of our commitment to ensure the success of our customer by providing a business model that will enable them to penetrate easily into this fast growing segment of aesthetic medicine. We designed LEAP such that Syneron becomes a partner with the physician in their entry to the lipolysis market as Syneron aligns itself with the doctors. We also designed LEAP to offer it on an economically efficient basis for the physicians and for Syneron. Our customers now have access to a seamless interactive system to purchase additional energy packets online. Our ability to offer LEAP, fundamental low cost entry points for the doctor is very much dependent on Syneron's uniquely low manufacturing cost structure.

To explain how doctors can leap into laser-assisted lipolysis, I would now like to hand the call over to Don. Don?

Don Fagen

Thank you, Doron. I am delighted to have the opportunity to describe to you the new LipoLite Energy Access Program. LEAP is based on a subscription model in which a doctor commits to subscribe for one year and in return receives a LipoLite device with a preloaded energy bank. The amount of preloaded energy will enable the doctor to perform between 15 to 30 plus treatments, depending on the volume of fat being removed. The initial preloaded energy will provide doctors with a full return on their initial investment based on current procedure fees. Once the physicians consume the preloaded energy, they may purchase additional energy packets according to their projected treatment requirements.

According to the model, if we calculate the energy cost of each treatment, Syneron would receive approximately 15% of the physician's fee for each procedure performed. Any time during a subscription period a doctor may decide to purchase the LipoLite device. All accumulated expenditures paid by the doctor will be credited towards the purchase. At the end of the first year's subscription the doctor can either renew LEAP for a second year or purchase the system, again with credit for all accumulated expenditures. By offering LEAP, we are enabling our customers to enhance their business practice by aligning our business with their business. Most importantly, we see LEAP as a means by which to achieve rapid penetration of our LipoLite devices into both core and non-core segments of the medical market.

I would now like to return the call back to Doron.

Doron Gerstel

Thank you, Don. In the past conference call we discussed our diversification strategy in terms of geographic diversification, product diversification and diversification of the marketing. Syneron's evolving technologies will allow us to diversify our business model in which, alongside equipment sale, we will begin to benefit from a regular annuity stream. This recurring revenue will be based both on subscription fees from programs such as LEAP and for sales of disposables from future Syneron products. The first of these new products is the Matrix RF, Syneron's upcoming ablative fractional technology, which requires a single-use tip. We expect to see this new income sources contributing to revenue towards the end of 2008 and become material in 2009.

I would now like to open the call to your questions. Operator?

Question-and-Answer Session

Operator

Thank you (Operator instructions) we'll go first to Amit Hazan, Oppenheimer.

Amit Hazan – Oppenheimer

Thanks. Hi. Good morning, guys. Can you hear me okay?

Doron Gerstel

Yes.

Amit Hazan – Oppenheimer

Good. I'm just hoping maybe – unless I missed it, I didn't hear you give any guidance for the year in terms of sales. I think we were thinking around 10% growth for the year. I'm wondering if you can support that. And, if you can, in conjunction give us a little bit more color on the North American market, it looks like sales were down about 9% or so, if you're seeing any kind of stabilization there, or what should we expect for the second half of the year in North America?

Doron Gerstel

Okay. As far as the overall picture, despite the economic situation, we truly believe that in 2008 the 10% revenue growth is within reach and this is something that we see now. As far as North America, the North American situation is pretty much stable and we're very happy with the results of the revenue in North America. We introduced new products at the end of this quarter, actually the sales rating [ph] was in the beginning of July and we're expecting a very strong second half.

Amit Hazan – Oppenheimer

Okay. And in regards to LipoLite and just thinking about Cynosure, if I'm not mistaken, a lot of their units are being placed with plastic surgeons or being used by plastic surgeons, I'm wondering if you can kind of give us a sense of your marketing strategy in terms of doctors. I know you said it's both traditional and nontraditional, but where your focus might be initially and where the big opportunity might be, and if it is the plastic surgeons, give us a sense of your relationships there because, as I recall, most of the products these days are not being sold to that call point.

Doron Gerstel

So we are looking at the core physician market in North America in this regard, dermatologists and plastic surgeons. We are coming with a unique program. We have a unique product that we can elaborate more as far as the technology and what this product brings to the market. Together with this unique business model, we have no doubt that we can attract our existing users, existing customers as well as new customers that are interested on the minimally invasive liposuction treatment.

Amit Hazan – Oppenheimer

Okay and then just a few quick ones for Fabian. The G&A expense jumped up pretty sizably. I'm wondering if, number one, you can give us an idea what happened there. Number two, if you can give us the currency benefit in the quarter. And number three, can you help us out a little bit more with the actual tax credit that you had? It's a little bit more than the $2 million. You've been recognizing a tax rate of about 10% the last couple of quarters. Is that what it would have been this quarter without that tax credit? Thanks very much.

Fabian Tenenbaum

Sure. So I'll start with the G&A. The G&A was higher than we experienced in previous quarters, and most of the difference between what we saw in the second quarter and what we saw in previous quarters is based on some professional due diligent fees that we had on the potential transaction that we eventually decided not to pursue. As far as the currency, you mentioned currency benefit; I'm not sure that what we're seeing is actually currency benefit in that the effect is a little bit more complex than that. Generally speaking, we have a bit of higher expenses in our Israeli headquarters when the dollar devaluates versus the shekel, and we tend to get some benefit especially in places like euro when the euro strengthens against the dollar. So it goes in different directions. I think that overall, it's not an overwhelming effect on our P&L for the quarter. And as far as the tax credit goes, as you're aware, we have a unique tax status in Israel where we pay no taxes on corporate operational income. And the only taxes that we do pay are on interest income, which tends to be the Israeli corporate tax rate of about 29% on whatever interest income we generate that quarter and that would be the number that we should have seen there. But since we have decided to implement a change in the base of reporting to the Israeli Tax Authority, we gain a one-time credit this quarter that is about $2 million. So that's essentially the net effect.

Amit Hazan – Oppenheimer

Okay, thanks very much.

Doron Gerstel

Thank you.

Operator

We'll go next to Keay Nakae with Collins Stewart.

Keay Nakae – Collins Stewart

Yes, good morning. With respect to the LEAP marketing program, can you give us an idea of what the first year's subscription cost is?

Don Fagen

Sure. The subscription cost initially is $30,000. That $30,000 is good for one year. We estimate the doctor will be able to perform 15 to 30 procedures. And based on the current rates we've seen out in the market as far as reimbursement, it's pretty apparent that if they do a minimal number of procedures they can definitely cover their costs in a relatively short period of time. After the initial packet of energy that goes out, it comes with 300 kilojoules of energy, they're invited and encouraged to marketing programs to get as many patients through as possible and to buy more energy from us, more energy packets. The energy packets range from $5,000 to $15,000.

Keay Nakae – Collins Stewart

How are you accounting for this in terms of your revenue?

Fabian Tenenbaum

Well, we're just starting with the LEAP program and the overall accounting for the revenues for LipoLite in general and also LEAP will depend on a few factors. But essentially this is a subscription model, and therefore it is very probable that initial fee or part of this initial fee will need to be deferred over some period, probably somewhere around 12 months.

Keay Nakae – Collins Stewart

How do you determine what percentage of the $30,000 you defer, and how much do you immediately recognize?

Fabian Tenenbaum

Well, it will all depend on what the $30,000 is built off, because as Don just mentioned part of that initial fee includes an energy bank [ph] that already comes preloaded in the system and it includes the access to the system, it includes the fact that we get some disposable elements with it. So according to the different elements that are put into that package, we'll have to break that down precisely and see what elements are used by the physician immediately and what are used or taken advantage of over time, and those we'll have to defer.

Keay Nakae – Collins Stewart

Okay. And strategically, would we be wrong to view this as a test case for how perhaps all of your future product sales might be marketed?

Doron Gerstel

I wouldn't jump into conclusion. I think that this product fits this kind of model based on intensive market study that we did and I think it's too early to say.

Keay Nakae – Collins Stewart

Okay. One final question, if I may. Back to the US, are there specific factors that you're seeing that made the quarter more challenging in terms of either financing or is it just the longer sales cycle and then I'll stop there?

Don Fagen

Yes, it's been a little bit more challenging as far as finding doctors qualifying for getting significant loan amounts. We have been looking for other banks to assist us, and I would say our prognosis on the situation is probably no different than what yours is personally. We're being as aggressive as possible, but I think you'll find that with our creativity and our new plans such as LEAP, we've got a whole new opportunity ahead of us.

Operator

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