CYNO

Cynosure, Inc. (CYNO)

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Industry: Health Care
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Cynosure, Inc. (CYNO)

Q1 2014 Earnings Conference Call

May 6, 2014 9:00 AM ET

Executives

Scott Solomon – Vice President-Sharon Merrill Associates

Michael R. Davin – Chairman, Chief Executive Officer and President

Timothy W. Baker – Executive Vice President, Chief Operating Officer and Chief Financial Officer

Analysts

Richard S. Newitter – Leerink Partners LLC

Matthew J. Dodds – Citigroup Global Markets Inc.

Anthony V. Vendetti – Maxim Group LLC

James P. Sidoti – Sidoti & Company, LLC

Zachary R. Ajzenman – Griffin Securities, Inc.

Paul Nouri – Noble Equity Funds

Presentation

Operator

Good day and welcome to Cynosure’s First Quarter 2014 Conference Call. Today’s call is being recorded. There will be an opportunity for questions at the end of the call. At this time, I would like to turn the call over to Mr. Scott Solomon, Vice President of Sharon Merrill Associates. Please go ahead sir.

Scott Solomon

Thank you Danny and good morning everyone. Thank you for joining us this morning. With me on the call are Michael Davin, Cynosure’s Chairman, CEO and President; and Tim Baker, Executive Vice President, Chief Operating Officer and Chief Financial Officer.

Before we begin, please note that various remarks management makes on this conference call about forward expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including those discussed in Cynosure’s filings with the SEC.

In addition, any forward-looking statements represent the Company’s views as of today, May 6, 2014. These statements should not be relied upon as representing the Company’s views as of any subsequent date. While Cynosure may elect to update forward-looking statements at some point in the future, the Company specifically disclaims any obligation to do so.

To supplement its consolidated financial statements presented in accordance with GAAP, Cynosure uses non-GAAP gross profits, non-GAAP income from operations, non-GAAP net income and non-GAAP diluted earnings per share. These metrics are non-GAAP financial measures which the company believes helps investors gain a meaningful understanding of Cynosure’s results, exclusive of acquisition related expenses and also to help investors who wish to make comparisons between Cynosure and other companies on both a GAAP and a non-GAAP basis.

The presentation of this financial information is not intended to be considered in isolation or as a substitute for financial information prepared and presented in accordance with GAAP. For more information on these non-GAAP financial measures, please see the discussion and reconciliation table included in this morning’s earnings release. The table has more details on the GAAP financial measures that are most directly comparable to the non-GAAP financial measures and the related reconciliations between these financial measures.

With that, I’ll turn the call over to Michael Davin.

Michael R. Davin

Thank you, Scott. Good morning, everyone and thank you for joining us. Revenue in the first quarter of 2014 was $62 million, up more than $20 million compared to the same period of 2013. This 52% increase primarily reflected our June acquisition of Palomar and the continued success of our new PicoSure workstation. On apples-to-apples basis, if we had owned Palomar in Q1 of 2013, total revenue declined about 2% year-over-year.

While our direct subsidiaries in Europe and Asia generated solid first quarter results, their performance was offset by lower revenue from North America, and our international distributors.

In North America, the quarter started slowly and picked up in March. A factor that we believe affected our revenue performance is that we exited 2013 short of the targeted number of sales reps, we believe our needed to cover our greatly expanded product line. Our goal is to end the year with a sales force of more than 80.

We concluded 2013 with 76 reps and managers. We’ve since accelerated our plant hiring bringing our total number of reps and managers at the end of Q1 to 85. Experience tells us it takes about six months for new reps to begin to hit their sales line. This continues to be our expectation particularly now given the breadth of our standard product portfolio. Therefore, we would expect contributions of these new hires beginning in late Q2. We look forward to a positive impact from the 12% increase in our sales force, and we expect to continue to increase the size of our distribution until we’ve achieved aggregate coverage.

With respect to our third-party distributors, we continue to evaluate and integrate a third-party distribution network acquired as part of the Palomar transaction. As expected, strategic changes were made to the international distribution organization at the beginning of 2014 resulted in what we believe will be a temporary disruption as from some third-party distribution markets this past quarter.

We believe we’ll begin to see incremental improvements this quarter and achieve the end goal of increased revenue and enhance operational efficiency by the end of the year. International growth remains a key objective. Towards that end, over the past six months we’ve obtained a number of significant international regulatory clearances allowing us to sell products in a large number of countries and we expect additional approvals soon.

Turning to the Palomar integration, we remain on the schedule. By the end of June, we expect that fully transitioned Palomar’s product line to our contract manufacturing model. Within the same timeframe we also plan to complete the expansion of our Westford facility brining all of us under one roof.

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