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Syneron Medical, Ltd. (NASDAQ:ELOS)

Q3 2012 Earnings Conference Call

November 7, 2012 08:30 AM ET

Executives

Louis Scafuri - CEO

David Schlachet - Interim CFO

Hugo Goldman - CFO

Dr. Shimon Eckhouse - Chairman of the Board

Analysts

Jeremy Feffer - Cantor Fitzgerald

Anthony Vendetti - Maxim Group

Richard Newitter - Leerink Swann

Zach Ajzenman - Griffin Securities

Bill Plovanic - Canaccord

Operator

Good day ladies and gentleman and welcome to Syneron Medical’s third quarter 2012 earnings results call. At this time all participants are in a listen-only mode and 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 introduce our host for today’s conference Mr. Zack Kubow of The Ruth Group.

Zack Kubow

Thank you, operator. I would like to welcome you to Syneron Medical’s third 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 third quarter results press release on the Investor Relation’s page at www.syneron.com.

Speaking on the call today are Syneron’s CEO, Louis P. Scafuri and Syneron’s interim CFO, David Schlachet and recently appointed CFO Hugo Goldman. Syneron’s Chairman of the Board, Dr. Shimon Eckhouse is also on the call and will be available for questions during the Q&A portion at the conclusion of management’s prepared remarks.

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

Louis Scafuri

Thank you Zack, and welcome to Syneron’s third quarter 2012 conference call. Before I begin, I want to express my deep sympathy to our customers, business partners and members of the investment community that were impacted by Hurricane Sandy. Fortunately, I can report that our Wayland Massachusetts facility received minimal damage and all of our employees in the northeast are safe and accounted for. At this point, it is too early to predict any potential impact that the hurricane could have on sales in the region. Our main focus has been confirming and ensuring the safety of our facilities and employees in the affected region.

During the third quarter, we continued to execute on our strategic initiative to strike topline growth and improve our operating leverage. We delivered another quarter of year-over-year revenue growth and non-GAAP profitability. These initiatives included the launch of new products and improvements in our non-GAAP gross margin and operating margin with particular strength in the PAD segment of our business. We completed another phase of the significant re-alignment of our U.S. sales force in order to enhance our competitiveness and accelerate growth particularly as we launch innovative new products.

Earlier this week, we announced the appointment of Hugo Goldman to the position of Chief Financial Officer, further strengthening our executive team. Hugo has had extensive experience as the CFO over few public companies with a broad array of operational expertise that will be valuable as we continue to build on our leadership position in the global aesthetic market. I’d like to take this opportunity to welcome Hugo to the company and provide him an opportunity to briefly introduce himself to you.

Hugo Goldman

Thank you Lou and good morning everyone. I am very excited to be here today as a member of the Syneron team. I came to Syneron after serving as CFO of few global public companies until recently served as CFO of Retalix for over 4.5 years. I have been impressed with my interactions with the management team and the board of directors of Syneron, with the energy of the team and believe Syneron is very well positioned to expand its leadership in the aesthetic market space. I believe the company has very strong assets, it is a global leader also remarkable depth in products in all major markets, has a strong growing pipeline and a strong balance sheet. Therefore, I clearly see a big opportunity to accelerate revenue growth and profitability going forward. These were my considerations when I decided to join Syneron. I look forward to collaborating with the team in order to execute on this opportunity. I look forward to meeting many of you in the future and now I’ll turn the call back to Lou.

Louis Scafuri

Thank you Hugo. I’ll now provide a brief overview of our financial results and an operational update on the third quarter.

Total revenue in the third quarter of 2012 was $60.1 million, up 6% over the third quarter of last year which was exceptionally strong. International sales grew 8% during the third quarter of 2012, mainly driven by a strong performance in Asia where we benefitted from several recent product launches including the elos Plus next generation multi-platform system, eTwo system, GentleMax Pro and the Ultrashape V3 system. Sales in Europe and Latin America and in other international markets also grew compared to the prior year.

In North America, sales were flat year-over-year. This flat result was attributable to a restructuring of our U.S. sales force completed during the quarter. The sale force restructuring and investment at industry veteran with leadership team new direct representatives and included realignment of our sales territories. These initiatives were designed to improve our competitiveness with broader geographical coverage and a more effective and scalable sales structure. While we knew that this would have a short-term impact on sales in North America, our goal with the strategic sales force initiatives was to ensure that Syneron is positioned for expanded growth in the North American aesthetic market. As we’ve discussed in previous calls, our channel-to-market capabilities leads the industry. Our strategic investment’s focus to expand key direct markets have been well accepted and have and will yield better financial results.

Syneron clearly offers the broader aesthetic device portfolio and we in change maintain this competitive edge with the exciting products at our pipeline that provide our strength in North American sales force a significant growth opportunity. Recurring revenue for the third quarter which includes service and consumables represented 31% of total PAD sales and was relatively flat compared to the prior year. We expect restructured sales team will have a positive impact on consumables in the fourth quarter. Revenue in the PAD segment increased 2.4% and we delivered operating income of $4.9 million where 9.1% of PAD sales.

On a consolidated basis, we achieved a non-GAAP operating income of $1.7 million and a non-GAAP EPS of $0.03 per share. This is our eighth consecutive quarter of non-GAAP profitability. As I mentioned, Syneron has the broadest portfolio as professional aesthetic devices on the market. Our products are differentiated by innovative science based technology that addressed all of the most in-demand procedures including noninvasive body shaping, skin rejuvenation and hair removal. We are also particularly excited about the opportunity in body shaping and continues to progress with the integration Ultrashape. The Ultrashape V3 system is now fully available across our international sales channel and our initial focus has been on upgrading the existing install base.

Last weekend, we were the lead sponsor of the body conference and exhibition in London. We held a press conference leading into the event that highlighted the complimentary Ultrashape and VelaShape technologies and our strategic initiatives to capitalize on this large and fast growing segment of the market. The feedback at the conference was positive and we remained committed to this important category.

The third quarter was an active one in our global channel with several product launches and a strong presence at major aesthetic medical meetings. These included,

1. The initial U.S. launch in July of the elos Plus next generation multi-platform system. Key luminaries have purchased the system and are excited to integrate it into their practices. With our restructured U.S. sales force in place, we’re targeting to replace an upgrade over 2000 previous generation E series systems better installed with our customers.

2. The transition in August of the Ultrashape business in Canada to our direct sales and service organization based out at Toronto was completed in Q3. The team is effectively driving upgrade to the V3 system among the existing Ultrashape install base while building a pipeline across Canada. We maintained our positive product launch momentum late in the third quarter and into October positioning us for a strong fourth quarter. These recent developments included, point one, the recent global launch of the Gentle Pro-U series of upgradeable aesthetic laser systems at the EADV Congress in Prague. The Pro-U series builds on the strong brand history of the Gentle family of the aesthetic laser systems with the ability to upgrade either system from single to dual wavelength as the practice grows providing an even more diverse range of treatment capability. Point two, the reinforcement of recent new product launches that the IMCAS meeting in Hong Kong in early October, highlighted new products included the new high energy E2 tabletop platform, the Gentle Pro-U series and the elos Plus system. Our proprietary elos technology is ideally (inaudible) Asian skin type and we have invested in our Asian business with a regional medical advisory board of aesthetic experts that further enhanced our position with local physician. All together we continued to achieve good performance in Asia which represents a significant growth opportunity for the company.

3. We also received Health Canada approval of the elos Plus workstation also in October. With the addition of Ultrashape in elos Plus, we can now provide our customers in Canada with two state-of-the-art systems that covers the most in-demand aesthetic procedures today. In addition, similar to the U.S. market there is a significant install base of the previous generation E-series system in Canada which gives us great opportunity to upgrade these customers.

During the quarter, we also made progress with our new product pipeline initiatives. We continued to enroll patients in the Ultrashape multi-site clinical trial with the expected FDA clearance in the second half of 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 product portfolio and will enhance Syneron’s comprehensive body sculpting and body contouring offering for our customers.

Turning to the EBU, we delivered another quarter of year-over-year growth and Syneron beauty led by sales growth of the Me home-use hair removal system and the Tanda family of LED skin rejuvenation and acme products. We had a temporary delay in the production of the Tanda Pearl teeth whitening system which was backwatered with several customers in the third quarter. Production is now back online and we are on-track with deliveries in the fourth quarter. During the quarter we gained CE mark for the LiteTouch II dental laser and resumed sales activity. We have made good progress with the voluntary field action and expect sales to return to historical levels going forward.

Overall the EBU continued to generate an operating loss for the quarter as we continue to invest in this high growth segment of our business. In October, we achieved a significant milestone of gaining FDA clearance for the Me system which is the third elos based home used hair removal product to be cleared in the U.S. The Me would clear the skin types 1 to 6. This clearance is based on a large FDA multi-site clinical study that demonstrated high degree of safety and efficacy unique elos technology. We developed a hybrid commercialization strategy for the Me system that will leverage our relationship with prestige retail partners and our growing capability to direct the consumer channels. The product is expected to be launched during the first quarter of 2013 in the U.S. It is a positive development for the EBU as it allows us to benefit from the additional economies to scale on the Me business and our increased mix of direct higher margin sales. This is in-line with our ongoing effort to improve the profitability of the EBU segment by launching premium products increasing our mix with direct sales, capitalizing our manufacturing efficiencies and reducing operated cost. On this front, during the third quarter we developed the strategic plan to drive further improvement in the operating performance of the EBU.

Sales of elure skin brightening products also grew in the quarter and were up 40% year-over-year. We executed the initial commercial launch of the product in Hong Kong, one of the major Asian markets for elure. We are also continuing our efforts to gain regulatory approval and launch elure in other major Asian markets with potential processional markets throughout 2013. This morning we announced that we announced that Jonathan Pearson to lead our topical business. Jon has extensive experience in the professional and consumer aesthetic industry including significant experience in the Asian market place. We believe he is an excellent person to lead the growth of elure at potentially additional topical products particularly if we gain regulatory clearance in new aging geographies and build the topical business. We look forward to welcome you Jon, when he officially joins us later this month.

In summary, we made good progress with our strategic initiatives and achieved another quarter of year-over-year revenue growth, improved gross margin and non-GAAP profitability. Throughout the first nine months of the year, total revenue was up 14% and we have a significant opportunity to accelerate growth with the investment and restructuring of the North American sales force as well as recent new product introduction and the exciting products we have in the pipeline. The execution in North America has been strong thus far in the fourth quarter. We are also optimistic about the prospects for the PAD business around the world. For the EBU, we are positioned to continued growth and have sharpened our focus on improving the profitability of this segment which will contribute to improve profitability for the consolidated business.

I would like to now turn the call over to David Schlachet for the financial review. Given that Hugo has just started with the company David will provide the financial overview for this quarter and will be available during the Q&A. We look forward to have Hugo host this portion of the call when we report our fourth quarter results, David.

David Schlachet

Thank you Louis. Revenues in the third quarter of 2012 was $60.1 million, up 5.5% compared to $57 million in the third quarter of 2011. International revenues grew 7.9% year-over-year to $40.8 million and North American revenues grew 0.8% to $19.3 million. 68% of the third quarter 2012 revenues was in the international market compared to 66% in the third quarter of 2011.

Product revenues and the recurring revenues which included service and consumables for the third quarter of 2012 grew $43.6 million and $60.5 million, respectively. Consumable revenue grew 7% year-over-year.

Revenues for the nine months ended September 30, 2012 were $190.9 million, up 14% compared to $167.4 million in the same period of 2011. International revenues grew 16% year-over-year to $128.2 million and North American revenues grew 11% to $62.7 million.

Gross margin for the third quarter of 2012 was 53.2%, or 55.3% on a non-GAAP basis, excluding stock-based compensation and amortization of acquired intangible assets, compared to 50.6% or 53.8% on a non-GAAP basis in the third quarter of 2011. The increase in the non-GAAP gross margin was primarily related to introduction of new (inaudible) family of Candela Lasers and the elos Plus multi-platform workstation, all of which carry higher gross margin relative to the previous generations of this product.

Third quarter 2012 GAAP operating loss was $2.1 million compared to an operating loss of $37 million in the third quarter of 2011. On a non-GAAP basis, we had an operating income of $1.7 million this quarter compared to an operating income of $1.2 million on a non-GAAP basis in the third quarter of 2011. The increase in the non-GAAP operating income was primarily related to the revenue growth and the 150 basis points improvement in gross margin partially offset by increasing the operating expense associated with the growth of the EBU segment revenues.

GAAP net loss for the third quarter of 2012 was $2.3 million, or $0.06 per share compared to GAAP net loss of $40.1 million, or $1.14 per share in the third quarter of 2011, which included $33.9 million of legal settlement costs. On a non-GAAP basis, net income for both the third quarter of 2011 and 2012 was $1 million, or $0.03 per share. Third quarter of non-GAAP operating income and net income exclude one-time expenses as detailed in the company financials in today’s press release. The one-time expense in this year third quarter were amortization of acquired intangible assets of $2 million, stock-based compensation of $900,000 and other non-recurring costs of $600,000. The non-recurring costs were partially offset by an income tax adjustment benefit of $500,000.

Now I will provide the review and commentary on the results of our two reporting segments, the Professional Aesthetic Devices (PAD) and the Emerging Business Units (EBU). For the third quarter of 2012, PAD revenues were $53.2 million, or 88.5% in total revenues and EBU revenues were $6.9 million, or 11.5% of total revenue.

Operating income on the PAD segment was $4.9 million on a non-GAAP basis led to (inaudible) and operation margin of 9.1%. This compared to a non-GAAP operating income of $4.8 million, or 9.3% operating margin in the third quarter of 2011. While the operating margin in the PAD segment was down slightly in the quarter, we are well positioned to expand profitability with the investment we have made in the US sales force realignment. This factor along with our new product launches and cost cutting measures should derive topline growth in the first quarter and beyond.

Moving to the EBU sales. Sales grew 37.4% over the third quarter of 2011. This year-over-year growth in all of our product lines, including Syneron Beauty skin whitening product and Dental Laser business. Non-GAAP operating loss in the EBU segment was $3.2 million compared to a loss of $3.9 million in the second quarter of 2012. This sequential improvement reflects operating leverage gain with the return of Dental Laser business and our initiative to better manage EBU operating expenses. We are pleased with this progress, however, we anticipate some additional spending in the first quarter of 2013 to support the US launch of the Me Home-Use hair removal device. Management is highly focused on improving the profitability profile of the EBU by introducing new premium priced product, leveraging direct sales channels, and reducing our manufacturing and operating costs.

Combined with our focus on strengthening the profitability of our PAD business, improving the results in expanding the EBU business, should put us in a solid position to drive sustained profitability growth for Syneron.

Turning to the balance sheet, our DSO were 74 days compared to DSO of 71 days in the third quarter of 2011 and DSO of 69 days in the prior quarter. At September 30, 2012, cash and cash equivalents including short term fund deposits and investments in marketable securities were $128.4 million. We have the strongest balance sheet in the industry and we continue to evaluate strategic business development opportunity.

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

Question-and-Answer Session

(Operator Instructions) Our first question comes from the line of Jeremy Feffer with Cantor Fitzgerald. Your line is open.

Jeremy Feffer - Cantor Fitzgerald

Good morning. Thanks for taking my questions. I wanted to start first on those last comments you were making about EBU getting to profitability. Is it going to be more getting these new products online or do you see some areas where you can get some cost leverage?

Louis Scafuri

Jeremy, I think as we made the investments in Syneron Beauty there are multiple opportunities, not only with some of the newer products which have higher margins, as well as the fact that we are focusing our effort on some of the key products. Things like the new Me which we just received FDA approval on, as well as some efficiencies in the operating structure. Selling the product on a direct basis as well in some of the key larger markets we believe as well will improve the financial performance.

Jeremy Feffer - Cantor Fitzgerald

Okay. I wanted to come back on any updates on the Ultrashape trial, how that is going in the US and if there are any updated thoughts on the timeline?

Louis Scafuri

As we said earlier, the trial is well underway. We have all of the sites up and running. We have enrolled significant number of patients. We expect to conclude the trial within the next several months and we are anticipating a submission early in 2013 and approvals from the FDA or clearance from the FDA in the second half of the year.

Jeremy Feffer - Cantor Fitzgerald

Okay. And then, again, lastly, I apologize if I have missed this, elure in Asia, how is that going with new approvals and where do you expect your next approvals to come?

Louis Scafuri

Well, we have many different markets that we are currently selling in that were underway, but they are the smaller markets, markets like Singapore, Indonesia, the Philippines, Hong Kong, Thailand, and Vietnam. The major markets we have made progress with the approval process there, we anticipate the 2013 some ability to sell topicals in this marketplace. We also are targeting several other larger markets such as Korea and Japan, as well for the 2013 Canada.

Jeremy Feffer - Cantor Fitzgerald

Okay. That’s very helpful, thank you very much.

Operator

Thank you. Our next question comes from the line of Anthony Vendetti with Maxim Group. Your line is open.

Anthony Vendetti - Maxim Group

Thanks. I was wondering if Louis can just give us an update on the body contouring products that are in the pipeline and expected to be out by the end of this year. Just a little bit more color on that timeline.

Louis Scafuri

In terms of the efforts and the launch program, we have all the efforts behind the version three of the Ultrashape. As we looked at our roadmap, we delayed one of the products we had in roadmap and anticipated, which is competitive with the V3, and in terms of the other product which we are anticipating. We had a recent meeting with the FDA and we are waiting FDA approval on that device.

Anthony Vendetti - Maxim Group

Okay. You have launched a couple of new devices recently here. Can you talk about the initial uptick? And then also, if there is a consumable with the new elos Plus and the new Gentle Pro-U series?

Louis Scafuri

With the elos Plus system, one of the key application is sublative rejuvenation, and again, that comes with treatment chips and it’s been very well received by key luminaries in the initial phase of the launch and this cuts across geographies. We had a very strong response to the system. We think it’s clearly the best of breed in terms of multi-application platforms, and again, it does have a consumable trial along with it. The Gentle Pro series and the GentleMax series all come with consumables such as fibers and windows and the like as well. We are, as we mentioned in earlier calls, focused on building our recurring revenues as well as also introducing consumables along with our new product introductions.

Anthony Vendetti - Maxim Group

Do you think with the new Head of Sales that you have hired and some of these new products you have launched that you could jump start North American sales and sort of – you said I think the fourth quarter is off to a solid start. I was wondering if you could just elaborate a little bit more on what’s being done differently in North America?

Louis Scafuri

Well, I would start with saying that when we had challenges in the economy in 2009, in 2010 we made the decision to focus on some of the major growth markets outside the U.S. We also went and merged with Candela and put together two sales teams, which were unique in terms of the product as well as the customer segments that they covered.

Today, I think our customers in the marketplace has accepted and likes the combination of Syneron and Candela, and we believe we chose the right leadership team. We went out and hired the best talent in the industry capable of selling across the market segments, core and non-core as well as selling the facial, hair and body contouring products. We have also expanded our numbers in the field, we have gone up by three territories, and we are looking to make other strategic investments in North America. The point I want to make is we have executed in many more challenging marketplaces. We have significant infrastructure for support in North America and we are now approaching this challenge, and we will improve our competitiveness and growth prospects in this critical region.

Anthony Vendetti - Maxim Group

Okay. Thanks, I will hop back in the queue.

Operator

Thank you. Our next question comes from the line of Richard Newitter with Leerink Swann. Your line is open.

Richard Newitter - Leerink Swann

Hi guys. Thanks for taking the questions. I have a couple, just to maybe start on the restructuring, I was wondering, one, you said that this was something that you expected to have a sales impact. And I think you said it again in July. Just wondering, I don’t remember you calling it out on your last quarterly call. So, one, I was just wondering why now and then also what the – was this something that took you by surprise, it was a little bit worse, or more disruptive than you had expected? And then should we expect this to be very transient and it’s pretty much you are through the disruption into the fourth quarter?

Louis Scafuri

First of all, I will answer the last question first. We expect to not to disrupt our fourth quarter. In terms of the announcement we made in Q2, we announced that we made a change in leadership and we were changing our sales and marketing structure and simplifying it in North America. We had a combination previously of sales and marketing people field-based. We went back towards a more traditional field sales organization with the VP of Sales and the Global VP of Marketing.

We went out and we hired people capable of full-line selling and augmented them with specialists in body contouring, specialists in the Candela products, specialists in ELOS, very simple, straightforward, easy to execute on sales structure. The reason why we decided to do this is when we went and did the analysis of combined sales forces post-integration with Candela, we found the number of territories we were only focused on one segment of the market to one particular customer group. Because of the diverse nature of our products, the capability to sell across segments, this change was necessary. I believe we hired the best of the best, the best talents in the industry in the key markets, we can build upon it, we have the right leadership team, and we have the right products as we go forward.

Richard Newitter - Leerink Swann

Okay. That’s helpful. And then, can you quantify what the – on the cost side, what the impact from restructuring was? I am just trying to get a sense. It sounds like this is more of a kind of a 3Q related issue and try to get to a more normalized PAD segment margin, and should we expect that normalized level in the fourth quarter? Could you give us some color on maybe what the impact was this quarter?

Louis Scafuri

As David said, when he discussed the operating margins, they were slightly off year-over-year by several hundred thousand dollars, and I think that’s about the magnitude of it. As we look forward here, we look towards improved operating margin in Q4. We see these costs, we have taken the one-time costs through the P&L. There is no one-time charges associated with it, and it’s done in Q3. Now, as we look at 2013 with some major product launches and making investment to build out the sales force further, that’s a discussion I think we have as we finish the year and coming into 2013.

Richard Newitter - Leerink Swann

Okay. And then maybe just one last one. On the EBU, do we kind of think of the margin trajectory that you had outlined last quarter impact? It sounds like you feel pretty confident about – starting in the fourth quarter and then moving on from there with a number of catalysts. Do we think about kind of where your breakeven thoughts were as on-plan, ahead of plan, or how should we think about that?

Louis Scafuri

First off, we sell the products direct, as we achieved certain economies of scale, the manufacturing, the margins will improve. The recent clearance by the FDA of the me home-use hair removal device we see is a major opportunity to improve the margins in Syneron Beauty. And we view the Gentle Pro and other products, which we are selling in key direct markets such as North America as a matter of being operating performance improving opportunity.

As we look forward here, we are achieving certain milestones in terms of reaching profitability. We went through, we clearly focused our plan on certain key products, which have all these characteristics that I outlined in terms of being a premium products with high margins, indirect market, and we believe that this will lead us in a trajectory of profitability into 2013.

Richard Newitter - Leerink Swann

So, you do see the EBU turning profitable on a GAAP basis in 2013 still?

Louis Scafuri

Yes.

Richard Newitter - Leerink Swann

Thank you.

Operator

Thank you. Our next question comes from the line of Zach Ajzenman with Griffin Securities. Your line is open.

Zach Ajzenman - Griffin Securities

Thanks. Good morning. First question, looking at EBU gross margin this past quarter, can you speak of why they declined year-over-year?

David Schlachet

It’s simply the markets that we sold into. We sell through a third party and some of the markets, which drove the most volume. Some of the markets in Europe, we sell to a major third party and we sell it at lower gross margin.

Zach Ajzenman - Griffin Securities

Okay. And then, moving on to launching of EBU products, any new geographic regions, which you have launched? I know you mentioned Allure in Hong Kong. And can you also elaborate some of the trends and some of the more prominent regions which Syneron has on these products?

Louis Scafuri

Okay. So, I will try to separate the question separately. We see the North American sales of Syneron Beauty accelerating quite rapidly, and as I keep coming back to this FDA clearance of the me product, will be a significant driver as well as now having the ability that the Gentle Pro out on the shelves and available. We see this again as two very important margin improvement, profit drivers, sales volume and have many, many good attributes. As we look at Allure, we continue to make progress in North America with our direct sales effort. I mentioned that our sales were up 40% year-over-year. With Allure, we are off to a good start, selling in Hong Kong, the customers that have the product, the end users are very satisfied, both the patients and the physicians. And with the addition of Jonathan Pearson, a seasoned veteran, very well respected within the industry to help us lead and focus our efforts. We will continue to work diligently upon gaining regulatory clearance in the major markets in Asia.

Zach Ajzenman - Griffin Securities

Okay. And lastly, what’s some of the latest updates or rhetoric regarding the relationship with Procter & Gamble for EVOS skin rejuvenation?

Louis Scafuri

In terms of updates, the relationship with P&G is quite strong. We mentioned previously that we are in the process of trying to obtain regulatory approval with our joint venture or joint product that we have with them, and we will have more to report in the future.

Zach Ajzenman - Griffin Securities

Thanks a lot.

Operator

Thank you. Our next question comes from the line of Bill Plovanic with Canaccord. Your line is open.

Bill Plovanic - Canaccord

Great, thanks. Good morning. So, I just have two questions. The first is just on the distribution changes in North America. How much cost savings do you expect? I mean, it sounds to me like you have basically merged two separate sales forces into one. So, I would assume that was a pretty sizeable headcount reduction as you did. And I am just trying to get granularity on the scale of this.

Louis Scafuri

I would say Bill that we did the integration of the sales force. Most of the P&L impact was -- headcount impact was in 2011 as we did that. Now, we are at the point where we are building out the sales force again. If we look at our sales and marketing investment, we can expand upon it further. We think that there is the opportunity in North America. We see the economies recurring, and we see the opportunity to improve our profitability as well as strive top line growth by making this expansion now. So, you will see an increase in headcount versus it going the opposite way.

Bill Plovanic - Canaccord

So, when you say you are restructured, I mean, what exactly did you do then? I guess I don’t understand. If you didn’t cut heads and you restructured territories or you cut territories, or I am trying to understand why the change in distribution would impact the revenues?

Louis Scafuri

We went for a completely different structure. We had a combined structure where we had field-based marketing people across product lines to support the selling efforts back to a more traditional separated sales and marketing, or then separated but aligned sales and marketing organization with the sales people who are responsible for selling and the marketing people who are responsible for the go-to-market strategy. So, we moved people around, we replaced half of the regional managers, we upgraded several of the territories, many of the territories to people capable of selling full-line across the product segment. Before we merged the sales force, we had people who came either from Candela or Syneron and the ability to balance the sales necessary across the product line. It was represented a great challenge, and we think through the changes in leadership, through this simplified structure, the ability to block and tackle and execute in the field will be enhanced.

Bill Plovanic - Canaccord

That’s very helpful. And then, as you talk about driving the profitability of the EBU unit in focusing on higher margin products, does that mean that you are going to stop selling some of the existing products and that we should expect kind of some type of impact maybe in Q4, Q1 on the revenue stream growth? I want to understand that a little better.

David Schlachet

I think it has to do with the marketing dollar, where you invest the money. We have several new products that are very exciting that have been well-received. We are putting the money behind those. If we look at the products that we have available, in Syneron Beauty, we have great depth in that product line and we are focusing on the key ones that we feel have had the strongest market reception and investing our marketing dollars and sales dollars around those products. So, we expect to see top line growth, and we expect again to see the margin improvement and the results improvement across the board by doing this.

Bill Plovanic - Canaccord

Great, thanks. That’s all I have.

Operator

Thank you. I am showing no other questions. So, I will turn the call back to management for any closing remarks.

Louis Scafuri

Thank you, operator. First of all, I would like to thank our employees for their hard work and dedication and efforts. I would also like to thank our loyal customers for supporting the company and their reception to our new products. And I would like to thank our shareholders and we look forward to solid results in Q4. Thank you very much.

Operator

Ladies and gentlemen, this does conclude your conference. You all may disconnect and have a good day.

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