IRIDEX Corp (IRIX) 2005 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Iridex Fourth Quarter and Full Year 2005 Earnings Conference Call. My name is Jen, and I will be your coordinator for today.

[Operator Instructions]

I would now like to turn the presentation over to Ms. [Jennifer Bugleman] with the EVC Group. Please proceed, ma'am.

Thank you and thank you all for joining us today for the Iridex fourth quarter and full year 2005 financial results conference call. This is Jennifer Bugleman with the EVC Group. With me today is Barry Caldwell, the company's President and CEO, and Larry Tannenbaum, the Chief Financial Officer of Iridex Corporation.

If you have not received a copy of today's earnings release, please contact Susan Bruce at 650-962-8848 extension 3052 to get a copy or you may view the earnings release through our website at 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.

Before we begin, I'd like to go over our 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 companies 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 businesses 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, the rate of introduction and market acceptance of the company's products, the financial consequences of states not reimbursing for all of the company's procedures, the impact of any continuing weakness and uncertainties related to general economic conditions, or weakness in overall demand in the company's market, 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 it's costs and improve it's operating efficiencies and the timing of the release of 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 companies network of independent distributors, the risks associated with bringing new products to market, the results of clinical trials, and competition in our market. 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 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 Caldwell. Barry?

Thank you JB, and good afternoon. Larry and I are certainly pleased to have the opportunity to speak with you on the strong Iridex fourth quarter and annual results for 2005. By focusing on executing our strategy for our core business, we've reached several new highs for the company during the fourth quarter, and then I'll come back and talk about some highs during the year.

10.4 million in revenue is our first quarter ever in the history of the company, over $10 million. You may recall that during third quarter we talked about having back-to-back $9 million quarters for the first time in the history of the company, consequently as a result of our fourth quarter results, that's now three. We've now recorded three consecutive quarters over 9 million.

Our fourth quarter was our biggest quarter in our history in terms of recurring revenue. Recurring revenue grew 10% in fourth quarter over third quarter of 2005. Our international ophthalmic revenues were the highest ever in the history of the company. Our service and related revenues were the highest in the history of our company. This was our fourth consecutive quarter in which we've experienced double-digit growth year over year. We're proud to say that our DSO level at the end of the year was at 59 days for the quarter and that's the lowest it's ever been in the history of the company.

Now if we look at the full year, we achieved some similar strong results. With $37 million in total revenues every segment of our business grew in comparison to 2004. Sales in both the international and our domestic markets were the strongest they've ever been. 2005 was a record in terms of our recurring revenue as we recorded a 21% increase in recurring revenues over 2004.

If we were to look at our strong operating income results for the year, and if we were trying to go back and look at prior quarters and come up with that same amount, we would have to go back in history 5.5 years to equal the same amount of operating income that we experienced in 2005. And in addition, during that 5.5 years we've increased our cash position by over $8 million. Speaking about our cash position, we're at an all time high of $21.4 million.

With this as an introduction, I'd like to now turn the call over to Larry for the details behind these results. After which I'll come back and have some operating comments before we proceed to questions and answers. Larry?

Thanks, Barry and good afternoon everyone. We are pleased to report that revenues for the fourth quarter of 2005 ended December 31, 2005 grew 14% to 10.4 million from 9.1 million reported in the fourth quarter 2004. 10.4 million was at the high end of the range of guidance that the company provided on January 11, 2006, and is the highest level of quarterly revenue ever recorded by Iridex.

Since we have already released our detailed results at market close today, I will be discussing some of the financial highlights of our fourth quarter. Ophthalmology sales increased 17% to 8.9 million for the fourth quarter of 2005 from 7.6 million in the same period of 2004. Dermatology sales were $1.5 million in the fourth quarter of both 2005 and 2004.

As you may recall, prior to this quarter, we've had four consecutively strong year-over-year revenue growth quarters in dermatology; however, for most of the fourth quarter, we experienced some manufacturing yield problems which inhibited our sales reps ability to demonstrate the product to our customers and file and close sales. We now have demo units with our sales reps and inventory on the shelf.

During the fourth quarter of 2005, strong revenue growth was seen both domestically and internationally. For the fourth quarter domestic sales grew 9% to 6.3 million, from 5.7 million in the fourth quarter of 2004. International sales increased 22% to 4.1 million, from 3.4 million. Since international sales are denominated in U.S. dollars, foreign currency fluctuation had no material impact on sales growth.

We were very pleased to see gross margins improve to 48.7% in the fourth quarter of '05 compared with 48.1 during the fourth quarter of '04. The improvement to gross margin was driven in large part by the increase level of recurring revenue, and to a lesser degree by some higher margined OEM revenue. As expected and communicated in the company's third quarter earnings release, the gross margin in the fourth quarter were down sequentially from the unusually high gross margins reported in the third quarter of 2005, which benefited from sales of certain of these OEM ophthalmology products.

Revenues in the fourth quarter of 2005 increased by 1.3 million, while operating expenses in the fourth quarter of 4.4 million was only 0.3 million higher than the 4.1 million reported during the fourth quarter of 2004. The company generated net income of 381,000 or $0.05 per diluted share for the fourth quarter of 2005 compared with 202,000 or $0.03 per diluted share a year ago.

The company's tax rate used in calculating earnings for the fourth quarter increased to 53% which is significantly higher than prior quarters and included a change in estimates used in calculating the tax provision. As an aside, the company's overall tax rate for 2005 was 28%. If we take out the changes in these estimated tax accruals for the fourth quarter, the company would have reported $0.06 per diluted share, double the $0.03 per diluted share reported a year ago.

Now, I'd like to review the 2005 results. Full year 2005 revenue increased 13% to 37 million, from 32.8 million in 2004. For the full year 2005 ophthalmology sales increased 11% to 30.7 million, from 27.8 million in 2004. Full year 2005 dermatology sales increased 26% to 6.4 million, compared with 5.1 million reported in 2004. For the full year 2005, domestic sales grew 14% to 22.7 million, compared with the 2004, while international sales were up 11% to 14.3 million, compared with 2004. Again, since international sales are denominated in U.S. dollars, foreign currency fluctuations had no material impact on sales growth. For the full year 2005 recurring revenue represented 36% of sales, a 21% year-over-year increase.

For the full year 2005, gross margins increased 370 basis points to 49.1 from the 45.4 reported in 2004. Again, this improvement to our gross margin was primarily due to the increase in recurring revenues as a percent of total sales and the one time sale of some higher margined ophthalmology OEM products. Primarily based on commission and other costs associated with higher sales, operating expenses in 2005 were 16.4 million, 0.4 million higher than the 16 million reported in 2004. Operating expenses in 2005 were 44.2% of revenue, compared to 48.7% in 2004.

Net income for 2005 was 1.7 million, compared with a net loss of 402,000 for the fiscal year 2004. Net income for 2004 was impacted by a charge of approximately 1.2 million or $0.09 per share affected to establish a reserve for state sales tax. For 2005 earnings per share were $0.21, and we are exceeding our most recent expectation of $0.20 for the full year. This $0.21 for the full year is up significantly from a loss of $0.06 per share in 2004.

The balance sheet remains very strong. Cash, cash equivalents, and available for sale securities at year end 2005 reached the record high of 21.4 million, compared with 18 million reported on January 1, 2005. Notably, since the beginning of 2005, we have improved our overall cash position by more than 3.4 million or 19%. 2005 year end inventories declined to 8.6 million, from 8.9 million on January 1, 2005 as quarterly inventory turns improved to 2.4 from to 2.2 in the same period of '04.

At the end of 2005 accounts receivable was 6.6 million, resulting in day sales outstanding of 59 for the quarter which, as Barry mentioned, is a record. DSOs for the year of 2005 were 69, an 11-day improvement over the 77 days reported at the end of 2004. Looking ahead to 2006, we expect to again achieve double-digit internal revenue growth rate with recurring revenues growing to an even higher percent of total revenues. We will continue to improve our percent gross margins, ARs, and inventory turns. We are meeting as a management team in early March, where we will establish more definitive goals. We plan on communicating these goals to you at an appropriate time.

With that, I'll turn it back over to Barry.

Great. Thank you, Larry. As a result of our success and focusing on our core business fundamentals, as you can hear we've already made several improvements in our operational efficiencies which have allowed us to post these strong financial results. As we've mentioned a couple of times already, our inventory turns at 2.4 at year end. That's certainly at a quicker pace than we thought we'd get there. Our inventory levels fell to 8.6 million. That's our lowest level since the third quarter of '04.

We've made very good progress on our DSO evidenced by the fact of the 59 days at the end of the quarter. Our accounts receivables are at their lowest level since the third quarter of '04. Because we've made this progress in such a short period of time, as Larry mentioned, we have to revise our goals for 2006 and we'll be ready to communicate those at a later date.

We've also highlighted to you in the past, our strategy moving forward in terms of growth. There's three prongs to that strategy: number one, organic growth; two, new product introductions; and three, strategic acquisitions. We believe that our successful execution of this strategy will allow us to achieve our previously stated goal of $100 million in annual revenues within four years. First, in regard to progress in our organic growth in the core business, we've made several enhancements to our organization that we believe will allow us to move forward. First of all, in U.S. sales, we've hired a new Vice President of Domestic Ophthalmology. This is [Rick Goff]. Rick has over 15 years of experience in both capital equipment and disposable segments of ophthalmology.

We've also hired two ophthalmic sales specialists and each of them individually have over 20 years of experience in the ophthalmic segment. These additions will allow our current Vice President of Sales to focus more directly on the domestic turn business. We've also hired recently a new sales rep for the derm business as a part of the organizational upgrade. We've reassigned our international derm sales responsibility to our Vice President of Dermatology. This will allow also a more focused effort on the derm segment internationally rather than in the past, the organization has been combined with the ophthalmic segment of our business. I think it's fair to say that as we look at the derm business, we believe that should be more productive for us and that's why we've enhanced the organization so we can focus more on that area.

Overall in marketing, as you know we hired a new Vice President of Marketing recently. We've now hired a new Marketing Manager for dermatology and we're very close to hiring a new marketing manager for ophthalmology. We believe that these enhanced marketing efforts will allow us to generate more sales leads for our sales team and it will create a stronger voice in house in our product development. In addition, we remain focused on increasing our higher margin recurring revenues. As stated in our press release, our recurring revenues which represent our disposable sales and our service now represent 36% of our total revenues. As we stated, our goal is to increase this to over 40% and that's on a growing revenue number.

We introduced several new probes during 2005 and the disposable team has an objective to introduce four new probe designs during 2006. Our increased number of sales specialists combined with new marketing programs, will help us further penetrate this market. The new compensation plan for our sales team rewards them for spending more time on developing this business and these accounts.

Moving to the second component of our overall growth strategy, and that's new product introductions. We've made some strategic changes that we believe will help support our introduction of new products to market. First of all, within R&D, in the past R&D has been organized by two segments, the derm segment, and the ophthalmic segment. We've reorganized the engineering team by skill set, so we'll now have our total skill set of engineers to work on each and every development effort.

In addition, we're in the very closing days of a three month retained search for a Vice President of Product Innovation. This position will report directly to me, and will provide the leadership and process necessary for quick to market product innovation. With our strong cash position and our positive cash flow, we're well positioned to execute on our long-term growth strategies. We're actively pursuing strategic acquisition targets which is the third leg of our strategy, and we have established a criterion upon which and we're looking at several interesting candidates. We've previously announced what that criterion is.

In conclusion, with the strong 2005 results under our belt, we certainly feel confident that we're well positioned to achieve our long-term growth objectives. And throughout 2006 we'll be focused on double-digit top line growth, reallocating and balancing resources within the company, enhancing our core gross margin, increasing our EPS growth, and executing on our acquisition strategy.

With that, we'll open the line up for questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from Larry Hamovich with HMTC.

Good afternoon, gentlemen.

Hi Larry.

I have several questions. Number one, disposable revenues obviously showed some good progress during the year. What was the percentage for '04? Was it about 33%, I think it was?

I think that's about right. Yes.

So we went from 33% to 36% and we're shooting for about 40% for this year?

Right.

40 on a longer term basis.

40 is what we're driving too. We haven't established a number yet for '06 specifically.

Oh. Okay. I misheard then. I thought 40% was the goal for '06. It is the goal for '06.

No.

Oh. It's a longer term --

-- we're looking to grow this business to over the 40% mark in recurring revenue.

Got you. So that's a longer term goal, perhaps, not specifically for this year?

Correct.

Okay. Next question, Larry. On the international business, with the decline -- the dollar was stronger versus the Euro, I think later this year. Did you benefit from any currency translation on the income statements such that the international wasn't truly apples to apples, but there was a little bit of currency benefit on the translation in the P&L?

No. It's just pure dollars. It's all in dollars.

Oh. It's all in dollars. Okay. So that international business then was as it appears to be? Stronger than domestic.

Correct.

Then the question would be what was driving international to be so much stronger than domestic in '05? Or in Q4 specifically?

I think that we have seen an increase in sales in the infrared, or a higher percentage of infrared lasers being sold in Europe as compared in the United States. We've had several additional papers done on TTTs that have been presented and our feeling is that outside the United States, using TTT for treating wet AMD is more popular than inside the United States.

So, we're getting more traction overseas on TTT than we are domestically, where you have the greater impact of the new drugs that are so successful?

Correct.

Got it. Okay.

The only addition I'd make to that, Larry, is that our sales in derm, I think, were at the second highest level ever during the quarter internationally, so we've experienced some good growth there.

A couple more quick questions ,and then I'll jump back in the queue. One is, you've done a magnificent job on the balance sheet, and I think I heard you say days of sales outstanding in Q4 were 59 days and the average for the year though was 69, so I heard that correctly. That means that going forward, we should see further comparisons that are positive on receivables as we compare '06 to '05. Is that correct?

You're correct.

Larry, how much more magic can you -- you've done a great job and I'm just wondering is there more to come?

Be careful, Larry, he's trying to sandbag now.

Oh. Okay.

Which Larry? I will say this, that we really have aligned the company with a lot of the goals that we're looking at, and for the first time this year the sales guys have a bogey for helping us get DSO and inventory turns to where we want them to be as a corporation. I'm quite optimistic that the more and more people I get on the team looking towards that, the easier it will be to improve both DSO and inventory turns.

So, there's a carrot out there?

There's a carrot. Yes.

Got you. Final question, and I'll jump back in queue. Barry, you did not, I don't think in your prepared remarks, mention anything about litigation with any of the competitors, specifically one in particular, that you feel is infringing on some of your disposable intellectual property. Can you comment on that at all? I know it's a little sensitive publicly, but what can you tell us?

Sure. The trial date has been set for April of 2007, which is actually a pretty quick date. The Missouri docket is a pretty quick docket, where during first quarter we are in heavy deposition stages of this litigation and so we're actively involved in that.

In discovery.

In discovery. I'm sorry not deposition.

Are the legal expenses going to have any significant impact in '06?

We certainly have planned for them. They will have some impact, but we had some legal expenses and recruiting expenses that were baked into our 2005 numbers. I feel pretty comfortable that you won't see horrendous increases in --

We budgeted what we think is appropriate.

Okay. As I promised, I'm going to get back in queue now.

Okay.

Your next question is from Anthony Vendetti with Maxim Group.

Thanks guys. I was wondering if you could just talk a little bit more about the dermatology business. You said that there were some manufacturing yield problems. Have those been worked out? What do you expect for '06 in terms of growth in that business? Any new product introductions in that area?

Okay. Hi Anthony. First, this is Barry. First of all, we think now, and I think we mentioned this during the third quarter call, we were having some difficulties third quarter in manufacturing. It continued through, really all of fourth quarter. We had people here all through Christmas working weekends and evenings in order to get the product out the door that we needed. As a part of that too, it hampered our sales efforts in terms of demos and their needs for that. We think now we've come over the hump, but in one of our new products there were some changes and designs that we needed to work on a little bit more as it got transferred over to manufacturing and so we made some changes that are going to make the production a lot easier going forward.

And in terms of new products, anything on the horizon there or --?

In terms of our new product development, I think we previously stated that our innovation development efforts in '06 will be on the ophthalmic side, basically, and that we have two new products in our hands now in dermatology. Now, we've got to go out and sell them.

The innovations in ophthalmology are in addition to the four new probe designs?

Correct. Absolutely.

Okay. Good. I have a couple more questions, but I'll go back in the queue and follow up.

Okay.

Your next question comes from Anthony Petrone with Maxim Group.

Thanks guys. Just on the size of the sales force right now. How big is it for the dermatology and ophthalmology and where do you expect it to go?

Okay. In the U.S., Anthony, we have six dermatology sales reps. We just made a change in one. I made a comment about organizational upgrades. We've certainly tried to do that and we're establishing productivity levels in terms of expectations for each rep. We're trying to make sure that we have reps and they have the tools to meet those levels.

On the ophthalmic side in the U.S., we're now at nine sales reps. We have one more to add and as I previously said, we've added this Director of Sales for ophthalmology so they're reporting to him now and our Vice President of Sales has all six of the U.S. derm reps reporting to him. On the international side, we've placed our Vice President of dermatology directly responsible for international sales. Just like in the U.S. We've separated those two sales efforts because they are different and in the past internationally they've been combined and I think that maybe that's hindered some of our penetration of certain international markets.

Where do you -- I think you're still planning on expanding. Is there any kind of number you're looking at?

I think overall we're only looking to add one more sales rep currently on the ophthalmic side and then we'll be at full level.

Just turning to the gross margin and I know you had the OEM contract last quarter, but you had 500 basis points you went down. Was it anything else or strictly just the contract that was no longer there?

I think it was strictly that. I think that's why we tried to iterate several times during our third quarter call that it was atypically high during third quarter.

Thank you, guys.

Thank you.

[OPERATOR INSTRUCTIONS]

You have a follow up question from the line of Anthony Vendetti with Maxim Group.

Thanks guys. Just quickly on the tax rates. Obviously it was high this quarter, but that was just from an estimate calculation.

You know, Anthony, if I could talk to that a little bit. Based on some of the FAS [five] and the 123R rulings, tax rates are going to be very difficult to project. I'm sorry FAS 109, excuse me. That basically whenever you get a one-time adjustment like we had in the third quarter where you get something that falls under statutory, you have to recognize that in the current quarter, and that comes off as a deduction of what you feel would be your statutory rate. You can look at our history. Every third quarter our tax rate is going to go down if we're a tax paying person going forward, because unless we get audited there these reserves that are there in case of audit and those will get released during the third quarter.

Likewise in the fourth quarter, you get the true up for the year and that might cause you a higher rate. I'm afraid it's going to be, for most companies, a little bit of a seesaw. I mean if they're at our size, because when you're talking about 2.5 million or so in profits, 25,000 is a one point swing in the rate. I apologize, but that's going to be something very difficult to get our hands around and forecast correctly in the future.

I think, Anthony going forward, one of the things that might be helpful for us, and I think we did try to do this in third quarter, is to kind of signal what we thought the total tax would be for the year. Even though we were a bit surprised in fourth quarter, we knew that fourth quarter we would have to pay additional taxes, because I think we had stated our rate would be about 30% for the year and it did end up at 28% for the year.

Right.

Obviously there's going to be the true up in the fourth quarter, but for modeling purposes do you think 30 to 35% is a reasonable rate? Somewhere in that range or, do you have a more specific range for the first couple of quarters of '06?

As part of this exercise, we've decided we really need to sit down with our tax people and come up with that. I hope to be able to provide that for you on the next call if not before.

Okay. With some of these new innovations, in terms of as a percent of revenue, should we see R&D tick up as a percent of revenue, stay around the 11/12% range --?

We have budgeted the normal rates for '06. You're right, between 11 and 12% overall for R&D.

Okay. With some of the new sales hires, any guidance in terms of SG&A? In terms of as a percentage of revenue, should we see that around the same rate it was?

We're trying to drive operating efficiencies. Operating expenses as a percent of sales should improve again in 2006. Those are some of the goals Barry was talking about that we need to finalize.

A lot of these additions, Anthony, too are somewhat reshuffling of the deck in terms of the resources we've had, so they're not all true adds. We've made some cuts in other areas.

Okay. Anything double-digit? I think you mentioned for revenue growth. Clearly you could be 10% and double-digit [goals] would mean 99% growth.

Oh, good.

It will probably be closer to 10 than 99.

Do you have -- a little bit better range? Is it 10 to 15? Is it 15 to 20 --?

I think at this time it would be hard for us to say that. Maybe as the year progresses a little, we'll be able to give you better information.

Okay. Great. Thanks guys.

Thank you.

As there are no further questions in the queue, I'd like to hand the presentation back to management for closing remarks.

We'd like to thank everybody for participating in the conference call. Appreciate your support. We look forward to talking to you next quarter.

Thank you.

Thank you, very much.

Ladies and gentlemen, as a reminder a replay will be available for this conference one hour after the meeting ends, and available for eight days. The dial-in number is 888-286-8010 and the access code is 70345273. We thank you for your participation in today's conference. This does conclude the presentation, and you may now disconnect. Have a good day.