IRIDEX Corp (IRIX) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2017 IRIDEX Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to Leigh Salvo, Investor Relations. Ma'am, you may begin.

Thank you, and thank you all for participating in today's call. Joining me are William Moore, Chief Executive Officer; and Atabak Mokari, Chief Financial Officer.

Earlier today, IRIDEX released financial results for the quarter and year ended December 30, 2017. A copy of the press release is available on the company's website.

Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the State Securities Litigation Reform Act of 1995.

Any statements made during this call that are not statements of historical fact, including statements concerning sales, trends and initiatives, including our plans to grow in certain non-U. S. markets and to expand our customer base; the recall of our LIO product and its impact on our business and results; the development of our sales and marketing organization, including hiring clinical specialists and the expansion of our sales team in Germany; our manufacturing plans, including outsourcing plans; the markets in which we operate, including our plans to obtain regulatory clearance in China for the G6; product development and intellectual property related matters, including those related to next-generation-platforms; clinical study plans, future operating expenses; changes in personnel, our strategic plans and our guidance for 2018, including overall and product line reviews, and G6 system and probe shipment levels should be deemed to be forward-looking statements.

All forward-looking statements are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements.

For a discussion of the risks and uncertainties associated with our business, please see our most recent Form 10-K and Form 10-Q filings with the Securities and Exchange Commission. IRIDEX disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, March 8, 2018.

And with that, I'd like to turn the call over to Will.

Thank you, Leigh. Good afternoon, everyone, and thank you for joining us. While our fourth quarter and full year 2017 financial results were disappointing, we believe that the 2017 year was marked by significant progress in our transformation towards the glaucoma market. While this transition has come with some expected and unexpected hurdles, I'm very proud of the advancements our team has made.

As many of you know, our business historically targeted niche retinal disease markets. Today, we are beginning to see traction in addressing the $5 billion glaucoma market. This is a material shift in our target market, also came a material shift in our business model to focus on driving volume and utilization over onetime capital equipment sales. This strategic shift not only affords us with a significantly larger and more predictable revenue growth opportunity, but the potential to meaningfully expand our margins and move towards sustainable profitability.

We entered 2017 with a strong base of clinical data, KOL support and early adopted customers for our G6 products. This gave us the confidence to move ahead with commercialization and commit to the significant investments necessary to ensure we had the foundation in place to realize the opportunity.

I'm proud of our progress towards these goals in 2017, which include substantial enhancements to our infrastructure, including an increased renewed sales force by over 50%, a new and expanded marketing team and significantly higher presence in glaucoma-oriented trade shows and digital media.

We also added 2 key leadership roles, a VP of clinical affairs and a VP of regulatory affairs. And we transitioned to a fully outsourced model of our G6 systems and probes, which improves our production capacity and lowers our cost.

Internationally, we established direct selling operations and launched the G6 in Germany. We also received G6 regulatory clearance and launched in Japan. Both Germany and Japan are our core target countries for outside of the U.S.

Clinical data support of our G6 grew with 28 new studies of over 1,800 clinical glaucoma patients presented at major society meetings in 2017. And finally, we completed the development of several exciting working prototypes of next-generation platforms that we plan to discuss in more detail in the coming quarters.

I'm encouraged by the early traction we are gaining in the G6 business, and confident that we will continue to see greater returns from our investments in 2018.

I'd like to take the next few minutes to review our fourth quarter and full year 2017 results in more detail. Starting with our financial results, we reported fourth quarter 2017 revenues of $10.2 million versus $12.5 million in the comparable quarter last year. Revenues in the quarter benefited from an increase in G6 sales but were more than offset by several issues in our retinal business that prevented us from meeting demand, and I will discuss this in more detail shortly.

For the full year 2017, total revenues were $41.6 million compared to $46.2 million in 2016. G6 revenues were flat, while our medical retina revenues decreased in mid-single digits, and surgical retina revenues decreased in double digits.

Turning to our business highlights. As a quick reminder, we have 3 primary product lines: first, our Cyclo G6 for the treatment of glaucoma; second, our medical retina product line for the treatment of diabetic macular edema, or DME; and third, our surgical retina line of products used for the treatment of retinal tears and detachments.

Starting with our G6, we shipped 133 G6 systems and approximately 10,600 probes in the fourth quarter, a record quarter for both and reflective of the expanded demand in the U.S. Since our launch in March 2015, we have shipped 874 G6 systems and more than 66,000 G6 probes.

In the first half of 2017, we made significant infrastructure changes and process improvements to support our focus on G6 sales. In the second half of the year, we began to see the benefits of those investments. In particular, the number of G6 systems shipped in the second half of 2017 nearly doubled over the first half of the year. This was largely driven by several factors: progress we've made in onboarding our new U.S. sales team, improved lead generation, repeat orders from larger customers and innovative pricing models that help shorten the sales cycle.

We also saw a meaningful uptick in G6 probe shipments in Q4. In addition to the fourth quarter being seasonally higher, several factors contributed to our improved U.S. probe utilization, this included increasing productivity from our sales reps, improved customer targeting and benefits of better customer service and follow-up.

Last quarter, I highlighted several strategies we are pursuing to drive awareness, adoption and utilization of our G6 platform. I'm encouraged by the notable progress we've made. First, as I noted earlier, we are improving our marketing outreach, including presence at many key industry events worldwide, and developing additional KOL support in targeted regions.

So far, this first quarter, we are off to a fast start with 4 G6 symposia held in Hong Kong, France, the U.K. and Italy, which in aggregate attracted over 500 doctors. At the recent American Glaucoma Society Meeting in New York City, we had 2 main podium presentations and an audience of about 600 doctors. The first presentation was made by our KOL from UCSF, and the second was voted the best presentation at the conference.

Continued cadence of support for our G6 products and MicroPulse technology at these events is encouraging, and we expect to continue the pace to build awareness.

Second, we are adding clinical specialists to work with our customers to help deliver consistent, positive treatment outcomes. We believe customer follow-up after a system sale is key to driving improved probe utilization and reorder rates. This is an area where we are keenly focused.

During the fourth quarter, with our VP of clinical affairs on board, we began recruiting for a manager and specialist to fill these important new roles. We were fortunate to have hired a manager in early January to lead this group. He has been working with us on a consulting basis since the middle of 2017, so we're able to make an immediate impact. We also recently added 2 clinical specialists to serve on this team.

And third, we're seeking opportunities to communicate the clinical and economic value of our procedure for the treatment of glaucoma through clinical education programs and the execution of series of clinical studies. We recently submitted a mechanism action study for IRB review, and hope to begin enrollment in the near term. We've also made progress with our lead investigators regarding our global multi-center clinical outcome study to establish protocols and key study parameters.

Looking at our G6 opportunity geographically, we currently see the greatest momentum in the U.S., where our sales team is making progress with target customers in large hospitals and networks, ophthalmology clinics and ambulatory surgery centers. In the quarter, we were successful in adding new customers as well as increasing the number of institutions that have purchased multiple systems.

Internationally, the G6 is currently sold in more than 50 countries, and we're making progress further penetrating targeted countries. In addition to our controlled launch activities in Germany and Japan -- are proceeding nicely.

In closing on the G6, our overall goal remains the same, to make the G6 platform the global standard care used to treat glaucoma patients. With a large and expanding patient population, we have multiple opportunities to grow our installed base and increase utilization.

Turning to our medical retina products. We continue to see solid underlying demand. However, this business is expected to experience quarter-to-quarter lumpiness, given its capital equipment nature. As an example, in the fourth quarter, we experienced much higher than anticipated orders from one of our core product lines, which put us in a backorder situation, and prevented us from fulfilling those orders. This business was also impacted by our sales team's focus on the G6 throughout 2017 as well as a recall of one of our laser accessories. I'll cover this in a moment as it impacts both our surgical and medical retina businesses.

Next, turning to our surgical retina business. We continue to see the dynamics of the mature market. We also experienced a regulatory issue on one of our largest countries outside of the U.S. that prevented us from shipping a specific product into that country. We have addressed the regulatory issue and expect orders to return in the coming quarters.

Lastly, I'd like to make a few comments on the voluntary recall of our TruFocus LIO Premiere laser accessory that we announced a few weeks ago. The accessory is used in both surgical and medical retina procedures. Our team made the decision to remove the affected product from the marketplace and remedy the situation as quickly as possible.

This issue impacted our fourth quarter revenues for medical and surgical retinas in 2 ways: one, product orders were booked in Q4, but could not be shipped while we investigated the issue; and two, our sales returns reserve increased given the voluntary recall.

For the time being, we do not have an LIO that we can sell with our retinal laser systems, so this issue continues to impact our business. We are actively working on a solution, including potential adjustments to the existing product and third-party alternatives. The timing is unclear, given the uncertainty of the regulatory process. In the interim, we have a plan in place to minimize the impact on our business by offering alternative laser accessories.

At this point, I'd like to turn the call over to Atabak to provide further detail on our financial results for the quarter and guidance for 2018. I'll then conclude our prepared remarks with our goals and outlook for the year. With that, Atabak?

Thank you, Will. Revenues for the fourth quarter of 2017 were $10.2 million compared to $12.5 million in the prior year period, representing a year-over-year decrease of 18%. G6 revenues in the fourth quarter increased by approximately 17%, while medical and surgical retina revenues decreased due to the issues that Will described.

In 2017, our G6 revenues were relatively flat year-over-year at approximately $9 million. G6 system revenues declined but were more than offset by an increase in our G6 probe revenues. In 2017, we shipped 377 G6 systems compared to 384 systems in 2016. System revenue was impacted by new pricing programs that we introduced in mid-2017 to facilitate the sales process and shorten our sales cycle.

On the G6 probe side, we shipped 32,000 probes in 2017 compared to 27,000 probes in 2016, an increase of approximately 18%. Probe revenue also benefited from a modest increase in ASP in 2017.

From a geographic perspective, approximately 60% of our G6 system installed base is in the U.S., while approximately 75% of our G6 probes is in the U.S.

In the fourth quarter of 2017, domestic system sales decreased 48% to $1.5 million from $2.9 million in the fourth quarter of 2016, while our international system sales decreased 20% to $3.3 million from $4.1 million in the comparable quarter. Recurring revenues in the fourth quarter of 2017 decreased 2% to $5.4 million from $5.5 million in the prior year period, as growth in our G6 probes was offset by a decline in our legacy probes.

Gross margin in the fourth quarter of 2017 was 21.2% compared to 44.4% in the fourth quarter of 2016. Gross margin was primarily impacted by costs associated with our voluntary recall and pricing pressure in the retina business, which offset the benefit of higher-margin G6 revenues.

Our G6 contribution margin in 2017 was approximately 65% and is expected to improve as the mix of G6 probes increase.

Operating expenses for Q4 2017 were $7.4 million, up from $6.6 million in Q4 '16. The level of our operating expenses reflects our growth investments to support our expanding commercial infrastructure, including increased sales and marketing expenses. Consequently, our operating loss in the fourth quarter of 2017 was $5.2 million compared with operating loss of $1.1 million in the prior year's fourth quarter.

From a balance sheet perspective, throughout 2017, we improved our working capital management with significant decreases to our inventory and accounts receivable, and we ended 2017 with $21.7 million in cash and no debt.

Turning to our guidance for 2018. We expect G6 probe shipments of 40,000 to 45,000, which represents growth of approximately 32% year-over-year at the midpoint, and expect shipments of 350 to 400 G6 systems. We expect total revenue for the full year to range from $37 million to $41 million.

With that, I'll turn the call back over to Will for some closing remarks on our 2018 goals.

Thank you, Atabak. We are making meaningful progress each and every day towards the worldwide commercialization of our G6 and building awareness of the benefits of our MicroPulse technology. Physicians and surgeons around the world are recognizing the value of our G6 platform, and we are committed to making it the standard of care in the treatment of glaucoma.

As we look towards 2018, I'm more confident than ever in the opportunity we have ahead, and the strategy we laid out in 2017 remains on track. Our top 2 priorities for 2018: first, to improve the G6 probe utilization from our existing installed base, while continuing to install base expansion across the globe; second, to introduce new products that have the potential to improve the quality, reliability, manufacturing cost of all our products. In order to achieve this, we plan to drive probe utilization in the U.S. through improved sales execution and building out our clinical specialist team.

Internationally, we intend to obtain regulatory clearance in China and Korea for the G6 and continue to build out our sales team in Germany. We also expect to begin enrollment of our IRIDEX-sponsored G6 clinical studies. We anticipate an increase in clinical studies by independent physicians to be precedent throughout the year at major society meetings.

And lastly, on the product development front, we plan to launch at least one of our next-generation platforms.

And lastly, I look forward to updating you on our progress in the coming quarters. With that, I'd like to turn the call over to the operator for questions. Operator?

(Operator Instructions) And our first question comes from David Solomon with ROTH Capital Partners.

I just want to start with the LIO. So you talked about 2 alternatives, internal development or some third party. Which way do you think this is going to be going? And I know you can't give specific guidance, but could it be midyear? Or do you expect it to be something that will take longer than 3 to 6 months?

Well, David, this is Will. I think there's 2 alternatives there as you talked about. One is fairly short depending on how the FDA responds to our response to them. And the second one could take a little bit longer period of time and, could it be 3 to 6 months, yes.

And so you sent -- so you're waiting to hear back from them? Okay, that's helpful. And then on the -- you mentioned some accessories. Can we get a little bit more color on what those alternative laser accessories could be?

Sure. It depends on whether they're in medical retina, surgical retina, pattern scanners, EndoProbes, SLAs. There's just -- there's an array of products that are used at how you get the laser energy to the spot you want in the eye. And the LIO is just one of those.

Yes. And so let's just switch gears, and I want to talk a little about the G6. How much -- or how many of the systems were ex-U. S. or foreign-sold through the quarter out of the 133?

So for the G6s, as we talked about, about 60% of our installed base is outside -- is inside the U.S. And for the quarter, it was roughly that. It was consistent with those numbers.

And I just wanted to get an update on the clinical specialists. And I know you mentioned 2 were hired on top of the manager. How many can we expect in the next year? And what do you see this number becoming over time domestically?

That's an answer and a question that we're monitoring on a regular basis. We want to get these 2 onboarded, see how they work. There will be -- we've said in previous calls that we believe that a field force could be as many as 24 or more, and it's a mix between salespeople and clinical people. And I don't have the right answer -- I don't have an answer right now that would be the exact number, but I think you'll see a mix. And more than likely, the next number of hires would probably be clinical people.

That's very helpful. Sorry, continue.

David, in the remarks, we said that there's basically an increase in installed base, which comes from the sales department, but increasing utility comes from better education in the sales department and clinical specialists.

Absolutely. Do you see these people focusing more on larger centers? Or do you see them going around to the private clinics that are using your devices?

We see them focused on large-volume people. Whether that's a university base or a high-volume ASC, the main focus is to get the KOL, the podium speakers, the people that move markets and make sure they're trained to use the device specifically, and they get consistent positive results, which will, in turn, provide us with better coverage and better utilizations on a global basis.

Great. Just one more question. I just want to talk about the current sales force. I know there's a learning curve to the ability to sell these products. And how has it been? I know you mentioned it briefly, but could we get a little bit more color on certain lessons that have been learned and things that have been adopted because of those lessons?

Sure. The definition of sales force and personnel has changed over the last year or so -- well, I'll say 2 years now since we've been in the G6. We transitioned from a series of people that were predominantly retinal specialists, and we moved into -- which is a transactional-type sale. And we moved into glaucoma business, which is predominantly a relationship-type sale with a front-end transaction, if you will.

And the lesson learned is people that have an understanding of relationships and that can teach and educate someone how to use a device becomes far more important than the -- all the technology and how to put a close on a $70,000 piece of equipment versus the continued use of probes.

Right. I'd like to just have one more. On the skill required and the consensus of how to use the device, has that shifted with the recent presentations or recent clinical studies, where there is becoming more of a consensus on how to use the G6?

A little bit. But in my earlier comments, we talked about the art of this. And we want to get to the point where it's -- the art becomes more consistent, by that, I mean, how fast you go around the eye, how you hold your hand. And so that training of fine-tuning that art, if you will, will enhance and get better results and, in turn, begin to increase the utility.

I'm not showing any further questions at this time. I would like to turn the call back to William Moore, CEO, for any further remarks.

Thank you once again for joining the call today, and we thank you all for -- and all our employees for ongoing dedication and strong drive to succeed together. We look forward to evaluable contributions in 2018 and beyond. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.