IRIDEX Corp (IRIX) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2005 IRIDEX earnings conference call.

(OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Mr. Doug Chert (ph). Please proceed, sir.

Thank you, operator, and good morning, everyone. Thank you for joining us for the IRIDEX third quarter financial results conference call.

With us this morning Is Barry Caldwell, the company's president and chief executive officer, and Larry Tannenbaum, the company's chief financial officer.

If you did not receive a copy of the updated release that was issued at approximately 7:30 p.m. Pacific Time yesterday evening and would like a copy, please contact Susan Bruce at 650-962-8848 extension 3052 to get a copy. Also, the release is online at the website www.iridex.com.

This conference call is also being webcast on our website. The press release has information about how to access the replay information of this teleconference. I will give you the replay telephone number, which is 888-286-8010 and a pass code of 82049304.

Before we begin I'd like to go over the Safe Harbor statement. Please note that this conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended, relating to the company's growth prospects, sales, revenues, gross margins, operating efficiencies and profitability, as well as the results of studies related to our products and developments in the business of users of our products.

All statements other than statements of historical fact are statements that could be deemed forward-looking statements. These statements are subject to risks and uncertainties and actual results could differ materially from those projected in the forward-looking statements. Some of these factors that could cause results to differ include the actual order and shipment rate for the company's ophthalmology and dermatology product lines, rate of introduction and market acceptance of the company's products, the financial consequences of states not reimbursing all the company's A&D procedures, the international sales for A&D procedures, the impact of any continual weakness and uncertainties related to the general economic conditions or weakness in overall demand in the company's markets, especially with regard to the company's dermatology products which are typically used for elective procedures that can be deferred, and the company's ability to continue to reduce its costs and improve its operating efficiencies and the timing of release and actual results of studies related to our products.

Risks and uncertainties to which the company are subject may include, but may not necessarily be limited to, the amount of orders that the company receives and ships, dependence on international sales and the company's network of independent distributors, the risks associated with bringing new products to market and the results of clinical trials and competition in our markets. Please see a detailed description of these risks contained in our quarterly reports on Form 10-Q and the annual report on Form 10-K for the fiscal year ended January 1, 2005, filed with the Securities and Exchange Commission. Forward-looking statements contained in this announcement are made as of this date and will not be updated and the company may not undertake to update them.

Now I'd like to turn the call over to Barry.

Thank you, Doug, and good morning. It's certainly a pleasure for Larry and I to have the opportunity to again present some strong quarterly results and this afternoon we'll have an opportunity to use these in our discussion points at the Unterberg Emerging Life Science Conference being held here in New York.

As our press release said, all four key segments of our business as we report them, our ophthalmology business, dermatology business, international and domestic, all four enjoyed good growth during the quarter.

As a manager, I've learned in a short period of time to kind of slice this up into more measures than just those four, though we don't report it that way, and I slice it up in about seven different ways. And when I do that, six of those seven measures grew by double digits during the third quarter, while our overall growth was at 11%. So when I look at that, it tells me that's pretty consistent across the board growth.

Our OEM business continues to be a growing aspect of our overall business since we entered that segment in the year 2002. Later in the call we'll discuss additional opportunities that we see within this segment as we move forward.

As presented in our press release, our gross margins were at nearly 54% during the quarter and that's pretty good for us. While we don't expect -- we do not expect similar margins in the short term, we believe that we can achieve those type margins with a focus on the fundamentals of our core business in the future. Later in the call we will also discuss some of the key elements in our strategy to grow this business. Our goal overall is to reach $100 million in revenue before the end of the decade, with margins at greater than 50%.

A few highlights during the third quarter as I look at it, before I hand this off to Larry, would be this third quarter, in terms of revenue, was the best in the history of the company. Secondly, we refer to this as our first back-to-back nines, meaning that this is the first time in the history of the company we've had back-to-back $9 million quarters in revenue. And I might add that we certainly expect the fourth quarter will make it three -- a threepeat of nines. Earnings per share at 11% was the best since the fourth quarter of 1997 and overall our cash level, being at 20 million, the best size it's ever been in the company's history.

At this point, I'd like to turn the call over to Larry, who will review our financial results in further detail. I will then come back and provide some additional comments on key activities during the quarter and open the call for questions.

Larry?

Thanks, Barry, and good morning, everyone.

We are pleased to report that revenues for the third quarter ended October 1st, 2005, were 9.1 million, an 11% increase from the 8.2 million reported for the third quarter of 2004. Strong growth was seen in both ophthalmology and dermatology. In fact, ophthalmology revenues grew to 7.9 million for the third quarter of 2005, an increase of 10% compared with 7.2 million for the third quarter of 2004.

Dermatology revenues grew to 1.2 million for the third quarter of 2005, up from 1 million from the corresponding quarter in 2004. Since introducing the VariLite in October of 2004, we've experienced four consecutive strong year over year growth quarters in dermatology.

During the third quarter of 2005, strong revenue growth was also seen domestically and internationally. Domestic revenues grew to 5.8 million, a 12% increase over the 5.2 million reported in the third quarter of 2004. International revenues grew to 3.3 million, a 9% increase compared to the 3 million for the third quarter of 2004. As a reminder, since international sales are denominated in U.S. dollars, foreign currency fluctuations had no material impact on sales growth.

We were very pleased to see gross margins reaching 53.7% for the quarter. Q3 2005 gross margins were fueled primarily by unusually high gross margins on certain OEM ophthalmology product sales, as well as our increasing recurring revenues stream of disposable and service products. Gross margin improved 1,130 basis points from the 4.24% reported in Q3 2004. However, gross margin in the third quarter last year was somewhat below historical trends as it included a 300,000 reserve for additional inventories -- inventory reserve.

Operating expenses in the third quarter of 2005 were 4.2 million, $0.7 million lower than the 4.9 million reported during the third quarter of 2004. However, Q3 2004 was an unusual quarter for us as it included a one-time charge of 1.2 million to establish a reserve for historical adjustment of state sales taxes, all of this charge which showed up in SG&A. Additionally, our third quarter 2005 spending included an accrual for anticipated payments under the company's previously announced bonus and profit sharing plan.

Net income for Q3 2005 of 879,000, or $0.11 per diluted share, represents a significant turnaround from the loss of 720,000, or $0.10 per diluted share, reported in the third quarter of 2004. Net income in the third quarter and nine month period ended October 1st, 2005 includes a benefit of approximately $0.04 per share from certain tax reserves due to the expiration of federal and state statutes of limitation. This tax rebate was based on R&D credits and effectively eliminated the need to reserve for any income taxes this quarter. Net income in the third quarter and comparable nine-month period of 2004 included a one-time charge of approximately 1.2 million, or $0.09 per share tax affected, to establish a reserve for the state sales tax.

Almost any way you look at it, the year over year quarterly comparisons are very strong. For example, on an apples-to-apples basis, we generated a profit of $0.07 per share in Q3 versus a net loss of $0.01 per share in Q3 2004. Here's how we arrived at that comparison. We took the $0.11 per share in Q3 2005 and subtracted the $0.04 tax benefit, yielding a profit of $0.07 per share. Similarly, if we take the $0.10 loss per share reported Q3 2004 and add back the $0.09 per share for the state sales tax reserve, we arrive at a net loss of $0.01 per share.

Revenue for the nine-month period ended October 1st, 2005 was 26.6 million, a 12.4% improvement compared with the 23.7 million reported during the same period of 2004. Net income for the nine month period ended October 1st, 2005 was 1.3 million, or $0.16 per diluted share, compared with a net loss of 604,000, or $0.08 per diluted share, during the comparable period of 2004.

The balance sheet remains very strong. Cash, cash equivalents and available-for-sale securities reached 20.1 million at the end of Q3 2005, a new high for the company. Since the beginning of 2005, we have improved our overall cash position by more than $2 million. Inventories increased to 9.3 million at the end of the third quarter of 2005, up from 8.9 million at the end of the fourth quarter of 2004, primarily based on new product introductions. Inventory turns at the end of the third quarter of 2005 were approximately 1.8 times. At the end of the third quarter of 2005, accounts receivable were 6.9 million, resulting in days sales outstanding of 70 days.

Looking forward at the full year 2005, we are reiterating our revenue guidance of 36 to $38 million. While we believe that in the next few years IRIDEX can achieve the type of operating efficiencies necessary to consistently reach gross margins around the 54% range reported this quarter, we expect the fourth quarter gross margins to be approximately 3 to 5 percentage points below the level achieved during the third quarter and expect that 2006 gross margins to be slightly better than long term historical rates. We expect to report earnings per share of $0.20 for the full year 2005.

In conclusion, I'd like to point out that during the first nine months of 2005 our revenues, cash balances and earnings were the highest that they have been for any comparable period during the past five years.

With that, I'd like to turn the call back over to Barry.

Thank you, Larry.

As many of you may well know, since our last quarterly conference call Larry's been off on sick leave. And I'm so glad to have him back at work and to hear him be able to go through those comments like that gives me goosebumps.

So, Larry, welcome back.

A few observations during the quarter I'd like to make before we go to questions. First of all, as you know, we had the American Academy of Ophthalmology meeting. That's the largest ophthalmic meeting of the year. Overall, I think the presentation of our company was very good at that meeting. And despite the fact that we did not have a good booth location and thanks to the efforts of our sales team, we did exceed our sales goals on the floor. I think that's the first time we've done that in a few years. So we were excited about that.

We did also introduce a couple of new products, at least to the ophthalmic segment. That was our new ENT laser and some new disposable probes were shown for the first time there. There were also some presentations during the retinal subspecialty day on TTT and PTAMD. Dr. Friburg had a presentation with some of the preliminary results from the PTAMD study and it showed some therapeutic benefit in drusen reduction and it also showed that in a subgroup of 23/30 or worse baseline, the treated eyes observed a four-letter (ph) beneficial gain.

Also, Dr. Terry Brown (ph) made a presentation on the economics of AMD therapies and compared very favorably TTT with results of Macugen and said certainly, if you have a patient with small occult lesions and economics is an issue, you should not hesitate to recommend TTT. Although we've not seen any real significant revenue benefit from our TTT work thus far within the U.S., we have seen it outside the U.S. and that continues to benefit the company.

We also have some focus groups at the Academy. These are focus groups of physicians to allow us to gain more insight into our industry and to try to understand the needs of our customer better. We did also use the Academy as an opportunity to visit with other companies and to review technologies that were available on the floor. So overall, the Academy was very good for us I think.

Secondly, we hired a new Vice President of Marketing during the quarter, Don Todd. I'm very excited about that. Don's a very seasoned marketing executive. I think if you look at the culture of IRIDEX, it certainly began with a technology drive, moving lasers to the solid state size that they're in today. And then it's kind of evolved into a clinical drive and I think now it's certainly time for us to add a marketing drive to our company and I know that Don will bring this to us. So I'm very excited about that.

We also during the quarter presented to the Board our overall strategy for the business going forward. Some of those key points were number one, our objective is to drive our revenues to the $100 million mark by the end of the decade and that growth should be fueled by gross margins of greater than 50%. Our focus will be on ophthalmology during the short term. We'll continue to grow our derm business and will look at other medical specialties in which our technology might be able to extend.

As we look at our business overall, there are three key focuses to our growth. One would be core business, two would be product innovation process, and three would be acquisitions. And I'd like to make a few short comments on each one of those, first of all to our core business.

Certainly a strength of IRIDEX and an area in which I think we have an opportunity to improve is our recurring revenues. And within recurring revenues, this would be our disposable probes that are used with our lasers in the operating room and also our service that's delivered to our installed base. Our current levels of recurring revenue are at about 33% and our plan is to grow those over 40%.

How do we do that? There are really three different ways we're going to focus in on that. First of all, if you look at the market shares, we believe that of our current lasers in the operating room, only about half of the time do we actually enjoy the business of our probes on our lasers. And I can get pretty passionate about the point that if our laser's in the operating room, our probe ought to be used on it.

So we're going to focus in three different areas. First of all is intellectual property. I think, as you know, we currently have quite a few patents and we're going to work to create additional patents to create barriers for new probe introductions. And you also saw during the quarter that we did file litigation to defend one of our patents around our proprietary connector technology. We had discussions with this company for quite a while in the past and we're asking for injunctive and monetary relief. Even though there's certainly a cost and a risk associated with litigation, we believe in the strength of our patents and also believe that the loss of our profits justify this action.

The second part of our strategy in terms of recurring revenue would be more aggressive marketing programs. We're going to expand our current sales team and add a new sales manager on the ophthalmic side and we're going to allow our sales reps to have more time to focus on the recurring revenue aspect of their business and not just on the lasers as they're sold. We need to create programs from our marketing department that allow us to leverage the strengths that we do have. You'll see us marketing ourselves as The Complete Source, meaning IRIDEX is the complete source for the laser, for the delivery devices, including the probes, the disposable probes, and customer service.

The third part of our recurring revenue strategy will be in the area of our product innovation process. We're changing the name of this to focus on innovation rather than new product development. Historically, I think in this area our competitors maybe have done a better job at this in listening to customers and developing specialty probes. Recently we've introduced several new probes, but going forward we need to work more diligently in this area, listening to our customers and developing new innovative probes.

Secondly, in terms of our core business, looking at our opportunities in dermatology, during the last year, year and a half we've introduced three new products to our dermatology franchise, the VariLite, the DioLite XP, and the ScanLite XP. And during the next few years we'll be focusing on those new products and our sales and marketing channels to the dermatology market.

The third part of our core business opportunities lies with our OEM opportunities. As you know, we currently have, as we've reported previously, existing relationship with B&L (ph). We also have some with some other ophthalmic companies and we did enjoy good success, continued success during the third quarter with OEM. But we want to look to explore opportunities outside of ophthalmology, those that we might be able to use our -- leverage our current technology and our current manufacturing too, and ones that will develop opportunities for recurring OEM opportunities and not just one or two-time hits.

The fourth part of our core business look and focus is our organizational effectiveness. And we're challenging every department within the company to ask themselves and evaluate what they do and how they do it and find ways to become more effective. We think going forward through our planned period that we can maintain our current headcount level within all departments with the exception of sales and marketing and production. The rest of the areas we should remain flat as long as we challenge ourselves from effectiveness and efficiency perspective.

The second part of our growth strategy is in the product innovation process and for us, that means somewhat of a restructuring within our department. It also means having a marketing department that will listen more effectively to customers and translate those needs to our engineers so we can develop products that are innovative. We're looking for our product innovation process to key on new opportunities and not just replacement opportunities. So we're going to be evaluating every one of our projects by incremental revenues they will provide to the company. And the managers of those projects and the total team will be managed by the objectives of those revenues and not just merely the release of products.

The third part of our growth comes within acquisitions. As we said, highest level in the history of the company in terms of cash that we have and we're going to be looking for ways to use that. As we look to grow, I think it's clear that within the ophthalmic segment, IRIDEX is known as a retinal company. We can get deeper into retina or we could choose to get broader into the general ophthalmic segment. And where we stand today and where we're positioned, I think it's best for IRIDEX to say we're going to look at both channels; we're going to look at the retinal segment, we're going to look at the broader general ophthalmic segment, and we're going to be opportunistic. We're going to find the best opportunity with the best value for us and the best opportunity for long-term growth and move in that direction.

So without any further comments, Larry and I will be glad to open it up for your questions.

Thank you.

(OPERATOR INSTRUCTIONS)

Your first question comes from Anthony Vendetti with Maxim Group. Please proceed, sir.

Wanted to just ask a couple of quick high level questions first. On the guidance of $0.20 for EPS, does that include your GAAP number of $0.11 for this quarter or does that include the $0.07 from operating income?

That's based on our reported $0.16 year to date number.

Okay, so basically $0.04 is the estimate for fourth quarter?

Right.

Okay.

Anthony, I might add that as we look into the fourth quarter, we certainly hope that at a minimum we'll be at $0.20, but we are -- we do have some expenses coming up in terms of this litigation. We don't know exactly how high those will be in the fourth quarter. And as a part of our expansion of our sales and marketing team, we plan to bring on several of those folks during the fourth quarter so they're ready to run for the beginning of '06,

Okay, so there'll be some expenses just to ramp up to get ready for '06.

Exactly.

Including those expenses, though, you expect to be at a minimum of $0.04, is that what you're saying, it's kind of where you're at right now but it's hard to gauge the litigation?

Yes.

Okay. And in terms of the gross margin, what was really driving that this quarter? Was it the higher sales of the probes or is it the higher sales of some of the ENT products, the new OcuLite or -- ?

It certainly was in the ophthalmology business domestically. In the OEM channel we mentioned that the sales were up there and we had some unusually high gross margins based on sort of a one-time order that we experienced some revenue in the third quarter and we'll experience a little bit of revenue in the fourth quarter on.

But you're right, too, Anthony, that our recurring revenue growth was significant in the -- close to 20% as we look at our recurring revenue.

Okay, so that was part of it. And could you talk a little bit more about your plans in the aesthetic (ph) market? I mean obviously it's a very competitive market with some very large players. Can you talk about your strategy you have for that in terms of carving out a niche there and how much you intend to focus on that in '06 and going forward?

Sure, Anthony. Thank you. Clearly, as I said, we've introduced three new products recently to that side of our business. I think we have to focus on the sales and marketing in that area and that'll come from Don. It'll also come from our Vice President of Sales having more time to focus on dermatology as we bring in a new director of sales on the ophthalmic side. Our product innovation will basically in the next couple of years come from ophthalmology. We don't really currently plan to develop any new products for the derm side in the next two years, so we've got to focus on what we've got and look for any potential alliances in the dermatology area that we might could find.

Okay.

I'd also point out that one of the things I'm pleased about is that with the introduction of these new products, we have improved gross margins, especially in comparison to the end of life type of margins we were expecting on the -- where we were getting on the DioLite.

Yes.

Okay, so the VariLite has better margins. Overall, does the VariLite and the derm products have slightly higher margins than the ophthalmology products or is it about the same?

I'd say it's about the same. Actually...

It's about the same, but with really very little recurring revenue opportunity.

So the drop-off from the second to the third quarter, what would you attribute that to mostly in the dermatology sales?

On a sequential basis?

On a sequential basis.

I think some of it has to do with our new product that we were going to introduce, which we did introduce, but it was later in the quarter than what we expected. So we struggled a little bit with that.

And especially internationally things were down. Typically, the third quarter has been seasonal for us with business in Europe and the vacations people take over there.

Sure.

And I think that hit us somewhat harder in dermatology than ophthalmology.

And certainly when you start talking about a new product and you aren't ready to ship it, it does kind of stall some of the normal sales you might have received during the quarter. We didn't get the new product out for demos until very late in the quarter, so it didn't benefit as much.

And what product is that, is that a new -- ?

DioLite XP.

Okay, so it's the new...

And you know we've got a large install base of DioLite now, so once we started talking about the XP, it just kind of dried the DioLite sales up.

Okay. And, Barry, can you talk a little bit more about TTT? I know you touched on it a little bit. The reimbursement right now, as far as I remember of last year, it was in 17 states. Can you talk about if this has been increased in terms of the number of states that'll reimburse it and exactly how you intend on trying to expand that or is it just -- ?

You're right, Anthony, it remains at 17 states. Nothing has changed in that regard, with the exception of what we have done during the quarter is we've enlisted a firm to help us in our overall strategy with reimbursement for TTT within the U.S. It's a very seasoned experienced group in the ophthalmic segment. We've met with them three times thus far in developing our strategy, so I think we'll have more information in the next quarter or two quarters in that regard as we really evaluate what we've done and we effectively move forward.

Okay, great.

And your next question comes from Larry Hamelvitz (ph) with HMTC (ph). Please proceed, sir.

Larry, could you expand a little bit on the various trends going on in the gross margins? You had a very strong gross margin quarter. You're talking about fourth quarter being down some and then being strong next year, so I'm trying to get a better handle on that.

Well, I think if you look on a sequential basis, Q1 we had 45.2% gross margins, Q2 we had 48.4% gross margins, and then we jumped up to the 53.7 in the third quarter. And if you also look at it on a year over year basis, gross margins were 44.5% in 2003 and increased to 45.4, a 1% -- or 100 basis point improvement. We just continue to see that kind of year over year increase in a normal type of trending basis.

So basically -- I guess I'm trying to just comparison to last year that it'll be down or what's causing it to be down in Q4 after it's been up so strongly in Q3? I guess I'm not understating it.

Well, I think, as Barry mentioned, we had some strong reoccurring revenues and we also had a one-time order from an OEM that most of the -- three-quarters of that was in the third quarter and the other quarter of that will be in the fourth quarter. And that, based on the nature of the relationship that we're not allowed to discuss per the contract, contributed to our gross margins because they were at the higher end than we've normally experienced.

So are you saying in Q4 the mix won't be as attractive? Is that what you think?

It'll be less of a percent of business.

Right. Okay, good. And then next question, the guidance for the year, 36 to 38, if you take the midpoint of that range and suggest revenue of roughly 10.4 million in Q4, up from last year's 9.1 million, which is about a 14% increase, which I think would be your best revenue quarter of the year if I'm not mistaken...

Right, ever.

Best ever, but also in terms of percentage growth over Q4 -- over any quarter this year, that would be the best revenue percentage gain, is that a reasonable assumption from your guidance?

Right.

Okay, great.

And your next question comes from Fred Coney (ph) with Medcap (ph). Please proceed, sir.

A few questions. The first I have is I didn't quite understand -- if you said this I apologize. The 100 million goal, does that include acquisitions or exclude acquisitions?

It includes acquisitions. And to get to 100 million, we would have to make some type of acquisition.

Okay. Any stab at what dollar number of acquisitions you'd need to get to that goal?

You know, of course, it depends upon how early you get that in the coming years here.

Sure.

If we get an acquisition in the short term, it doesn't have to be that high because we'll grow it. But if it takes a couple of years, it would have to be higher.

The -- you referenced gross margins in '06 to be better than long-term historical levels. What are you -- what number do you attribute to long-term historical levels?

Well, I think, as I said, that 2004 increased 100 basis points over 2003. We've seen that kind of increase. I think we'll try to hone in on 2006 guidance at the next phone call, but...

But I'm just talking about specifically -- when you refer to specific guidance of gross margin in '06 slightly better than long-term historical levels, what number do you attribute to long-term historical levels?

Well, we get the 45.5% in 2004. I think year to date we're closer to 49%. We'll probably end up somewhat less than that this quarter when -- on a year to date basis. So it would be -- but we think it'll be up for the year, year over year.

So would -- 46 to 49 is kind of a long-term historical level? Is that fair?

That's fair.

Okay. Let's see. Next, is there -- are DSOs about where they should be or should you be able to bring those down?

No and yes. I'll answer before Larry can. And we certainly have goals to get that down and Larry and his organization are working on that. We've made some progress but we'll continue to find areas to improve.

Okay. Next question, other than acquisitions, are there any other -- you're sitting on, for a small company, a fair amount of cash and you're generating cash, obviously, year to date. Any thoughts about uses of cash? Obviously, you've been -- the company's been holding it in reserve for strategic opportunities, I presume, but are there other thoughts you've got about cash usage?

Not other, Fred, than using the money in our product innovation process and focusing that on the ophthalmic segment. I think there are a couple of new opportunities that we -- that we could grow within the house and we'll be focusing on that and it may take some more cash going forward to do those things.

So R&D earmarked projects and acquisitions are really the prime usage you would presume? Would you do acquisitions with cash or would you do acquisitions with stock or a combination?

As you know, these things are pretty much dependent on the company that is being acquired and sort of what their preference is. I would feel -- at this level I'd feel comfortable using some stock to do that. But I also know that some companies are pretty motivated on cash. So...

Would you be committed to doing non-dilutive acquisitions?

That's what we're shooting for. We want it to be accretive within the very short period of time.

Okay. You touched on TTT and the reimbursement and strategy update to (inaudible). I'm pleased to hear that you've hired a top firm to help expand reimbursement and the strategy there. Can you just maybe expand a little bit on TTT and how much focus it's getting within the company? Do you still see it as this big opportunity, as the company once did?

Okay. Good, Fred. To me, as I envision our opportunity in TTT as something that's over on the research side of the house, there's a lot of dynamics going on right now within the whole AMD therapy area. And I think it's probably going to take a little while for all of that to sort out and I think there will be various options once things are sorted out. One of those options may well end up as a combo therapy between some type of TTT type treatment and a drug. So we're continuing to work on analysis of subgroup, we're continuing to work on ways to find -- to make the results potentially clinically more effective than they were in our first study, and we're making a decent investment in that area.

So are you looking at -- or are you being approached about combination trials with drugs?

We have spoken to several physicians about that and we'll begin discussions potentially with some other companies.

Okay. And then lastly, sorry to have such a long list of questions, the...

Could I just add, though...

Sure.

...before you go on, I really do think that TTT and some of the other (inaudible) procedures that we're seeing, especially based on what I saw at the Academy, internationally is really -- a good degree is driving a good percentage of our business.

And how much of that is due to the tremendous cost advantage it has in relation to the clinical outcomes? Obviously, you get more bang for your buck than you do with the drugs, certainly in the sub-patient population. But how much of that's really driven by costs in the international market and the outcomes they're getting?

Yes, I think, Fred, it's attributable to costs, but also this whole area, there's so many questions and so much new news coming out in terms of drug therapy that physicians are sticking with something right now internationally they know that's working for them and they'll continue to look at the drug options.

And then the last question, obviously you've made great strides in dermatology in terms of growth. Obviously it's still a relatively small business and how would -- and so much is going on in the dermatology space in terms of growth opportunities for the whole sector and you're seeing that from a lot of other companies. How do you -- it's still such a small business at this point, how do you do something strategically to refocus away from it on ophthalmology or grow it to a size that you can really become a real player in this sector?

Well, I think a couple of things, Fred. I mean you're right, it's about 20% overall of our business. But we do have improving margins and nice revenue increases. And we have somewhat of an inexperienced sales team out there that we want to focus more on and we're adding a new marketing manager to focus in on this area as we move forward. And we think what's in our current product offering that we still have opportunities for some good growth in the area in the next couple of areas and that's where we'll focus. If anything else comes up, we'll certainly try to take advantage of it.

Okay, so it's a business you're committed to and you're going to grow the existing product lines and be opportunistic? Is that a fair characterization?

Absolutely.

And the -- in terms of developing additional applications for those products in-house, is that a focus as well?

No, it's not. Our focus in-house will mainly be on the ophthalmic segment...

Okay.

...next couple of years.

G

Great.

I think, though, in terms of talking about what you can use the laser for in that type of application that we are looking at, we've been working with doctors to clinically find more uses for our existing products once it gets introduced.

And your next question comes from Anthony Petrone with Maxim Group. Please proceed, sir.

Just on Latin American sales on the ophthalmic business, how are they this quarter? I know last quarter that provided some growth there and you had a new distributor in Latin America. How was that this quarter?

It was very good and it was as good as our total international business, which is very promising because it has -- it has not been at that type of level in the past several quarters. We're very excited about the new addition we made down there in terms of direct employee, but also in terms of some new distributors that we have in Latin America. And I did have the opportunity to meet with several of those during the Academy.

And on the percentage of total, I guess sales, what did that represent in Latin America? Do you have that number?

We only talk about international as a total, I'm sorry. But it is -- as you can well appreciate, probably Europe is -- Europe and the Far East are the biggest portion of that.

Okay. And just on the aesthetic side, the VariLite, how were the VariLite sales during the quarter? I know since the company introduced the product, the aesthetic business has been improving year over year, as you said on your comments, for the past three or four quarters, with some of the weakness this quarter due to lower VariLite sales.

Well, as Barry said, we introduced the new product, the DioLite XP, and expect to be shipping that this quarter. And I have a sense that that somewhat moderated sales of the VariLite in the third quarter so that doctors could do a comparison between the two products.

So in other words, the sales force was more focused on the DioLite XP rather than the VariLite. Is that a fair assumption?

Yes, I think that's fair.

Okay.

And we have no further questions at this time.

Well, great. I wanted to thank everybody. We are here in New York and if you'd like to talk with us, please get hold of Doug at EVC (ph) and we'll see if we can arrange a meeting, although we've got a pretty tight schedule. Or if you'd like to come see us at the Unterberg, Towbin conference, we're presenting at 4:20 this afternoon.

Great, thank you very much.

Bye-bye.

Thank you, ladies and gentlemen, for your participation in today's conference. This concludes the presentation. You may all now disconnect.

Good day.