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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.

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