IRIDEX Corp (IRIX) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the IRIDEX third-quarter 2007 conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS). This conference is being recorded today, November 19, 2007. I would now like to turn the conference over to Mr. Ted Boutacoff. Please go ahead, sir.

Welcome to IRIDEX Corporation's third-quarter 2007 conference call. I am Ted Boutacoff, President and CEO. Before we get started, Susan Bruce, our Executive Administrator, will read the required Safe Harbor statement.

This conference call will contain 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 strategy and prospects, revenues, gross margins, and earnings, expenses, integrating the aesthetics business acquired from Laserscope and realizing efficiencies and synergies relating thereto, controlling and prioritizing expenses, managing cash and cash flows, and addressing our liquidity and capital resource needs. Actual results could differ materially and adversely from those projected in the forward-looking statements contained in this conference call. Additional information concerning factors that could cause results to materially differ from those in the forward-looking statement is contained in the risk factors discussed in Part 2, Item 1A day of our quarterly report on Form 10-Q for the quarter ended September 29, 2007 and in Part 1, Item 1A of our annual report on Form 10-K for the fiscal year ended December 30, 2006, each filed with the Securities and Exchange Commission. Forward-looking statements contained in this conference call are made as of this date and will not be updated.

Thank you, Susan. Since we filed our 10-Q today, I will just summarize our financial results and you can review the details in the 10-Q. This will lead more times for questions at the end of the call.

So in summary, revenue for the third quarter was $13.6 million, up 47% from $9.2 million in the year-ago quarter. Our net loss for the quarter was $1.2 million or $0.15 per diluted share. Clearly, we are seeing increased revenues from the acquisition of the Laserscope aesthetic business, but we have yet to balance these increased revenues with an appropriate level of operating expenses. Ophthalmology sales for the third quarter were $7.9 million, similar to the $8 million reported in the corresponding prior-year quarter. For the nine months, ophthalmology sales were $23.4 million compared to $23.2 million in the prior-year period.

Aesthetic sales for the third quarter were $5.7 million compared to $1.3 million reported in the corresponding prior-year quarter. For the nine months, aesthetic sales were $17.9 million compared to $3.7 million in the prior-year period. Gross profit for the third quarter of 2007 was $6.2 million and it was an increase of $1.3 million compared to the $4.9 million for the corresponding prior-year quarter. Gross profit as a percentage of sales for the third quarter was 45.6%, a reduction of 7.2% compared to the 52.8% for the corresponding prior-year period. The reduction in gross profit percentage is due to amortization of intangible assets acquired in the Laserscope purchase, which amounted to 4.6%; also increased costs of service, including increased expenses for the expanded field service organization to support our new aesthetic products, which amounted to about 2.3%; and the remainder about 0.3% resulted from integration costs for the Laserscope product line.

Sequentially, our third-quarter 2007 performance compared for our second quarter in 2007 was mixed. Revenues were lower by $1.6 million with ophthalmology sales $0.5 million lower and aesthetic sales $1.1 million lower. Though some portion of the reduction is seasonal, these lower revenues were a disappointment. However, we saw improvement in gross profit and operating expense trends over the three quarters of 2007. Gross profit improved to 45.6%, up from 43.2% in the second quarter and 41.5% in the first quarter. Operating expenses decreased to $7.2 million or 53.3% of the third-quarter sales and this was down from $9.1 million or almost 60% of the second-quarter sales and down from $10 million or almost 80% of our first-quarter 2007 sales.

Now looking at some of the balance sheet numbers, our cash, cash equivalents, restricted cash, and available for sale securities at the end of the third quarter was $9.6 million. Restricted cash totaling $3.8 million secures our bank term loan.

The inventories were at $13.3 million, down from $14 million at the end of the second quarter. Accounts Receivable were $8.5 million, down from $10.2 million at the end of the second quarter.

Just to make a few going forward comments, we are putting a lot of management attention to the integration of the Laserscope aesthetic business. However, in doing this, we will not jeopardize our ophthalmology franchise. Vital to our success will be for us first to manage cash carefully and become cash flow positive as soon as possible. And secondly, then continue to the march towards profitability. In order to do this, we must resolve the remaining issues and challenges related to our expanded aesthetics business following the Laserscope acquisition. And we must accomplish this integration without losing focus on our ophthalmology customers. We are controlling our expenses carefully by prioritizing our activities and expense decisions to those that will contribute towards providing value to customers.

So before we open up for questions, I wanted to anticipate one that is likely to be asked and that's how was the Academy of Ophthalmology in New Orleans here last week. And I can say that we had a very good academy and I say that because even though the attendance was down 30 to 40% by some reports, we got -- received a high number of leads and very good quality leads. So we're quite optimistic about our ophthalmology sales going forward. So now I'd like to open up for questions.

(OPERATOR INSTRUCTIONS). Anthony Vendetti, Maxim Group.

Thank you. Good afternoon. Welcome back, Ted. I was wondering if you could -- before we get to specific revenue questions, just talk about sort of the management change that took place and where you are in terms of making any additional management changes, for example CFO, what's the plans there?

We have been very active in recruiting a CFO. It turns out we probably won't be able to bring one in until next year, but we are progressing and reducing our list of very small, very good candidates. So I'm quite optimistic that will be taken care of next year.

Any other management changes?

We have nothing to report.

Okay. Can you give a little bit of background into Barry's departure?

The departure is simple. He resigned and the Board asked me to take his place in a sense.

Okay. Was that Board -- did the Board -- was that Board inspired or --? In other words, did the Board ask for his resignation or --?

I think I answered the question, Anthony.

Okay, can't get into that. Okay. Can you -- I know you lost $0.15 this quarter. Was the -- it sounds like from what you said about the laser piece of the business, the aesthetic piece, that that business was unprofitable at this point.

It has been, yes.

Okay. It actually is -- we all had expected that it would perform much better in the short term.

Okay. Now, what is the -- since you did $5.7 million in aesthetic revenues and most of that at this point is Laserscope, right? I mean it's all combined together, but it's mostly Laserscope at this point?

The majority of it is Laserscope, correctly, and some of it is from the older IRIDEX aesthetic products.

Right. But what is the quarterly run rate based on your current cost structure or what the cost structure should be by the end of this year? What is your breakeven point do you think in terms of revenues per quarter?

You know, I don't have that number.

Okay. And ophthalmology, --

But we are looking at it very carefully.

Okay.

But I just don't have that number. And that's obviously very, very important for us to get to the point where the objective being to be cash flow positive as soon as we can.

Sure, sure. And what about -- did ophthalmology -- was ophthalmology also unprofitable this quarter?

We don't break out the departments overall. But on a direct cost basis you'll see in the Q that we have -- you can see what the contributions were from each of the groups.

Okay. Is there anything other than obviously getting revenues up for the laser business? I know that Barry had mentioned that by AAD 2008, which is the first week in February in San Antonio, that there would be a new aesthetic laser platform or product platform. Do you still have -- is that goal still attainable or has that been pushed back a little bit?

I'm not aware of a platform going to be introduced at AAD that's a brand new platform. We have some discussions about modifications of existing platforms, but that may have been what Barry was referring to.

Okay. Anything else other than cost synergies and so forth as you bring everything into your Mountain View office, anything else to sort of stimulate revenue growth? I mean it's been a tough environment in the aesthetic laser business for most of the companies in the industry. Is there anything you are doing specifically to try to boost those revenues?

Well, we are trying to -- I would call it stabilize our aesthetic sales force. We lost quite a few salespeople who were with Laserscope, some of them for some time, so we want to stabilize that group and bring them up to speed. There is some experience required to sell the products and have them focus on providing them good products and be able to provide the value-added benefits of our particular products over the others. And that is -- we will see rewards for that effort.

Last question on the salespeople. So I think if I remember correctly, there were about 24 total aesthetic salespeople -- that's including about four or six from IRIDEX and about 18 to 20 from Laserscope. How many salespeople do you have now in the aesthetic division and what's the total in the ophthalmology right now?

We have 11.

Eleven aesthetic right now?

Yes.

And ophthalmology?

We have about 12.

Okay, so the aesthetic has been -- am I right with those numbers -- the aesthetic has been about cut in half right now?

That's correct.

Okay, great. Okay, thanks very much.

Dalton Chandler, Needham & Co.

Could you give us the percentage of ophthalmology revenue from the disposables for the quarter?

That's typically what we had disclosed. Back when I was running it, we didn't disclose that separately.

Okay.

But -- is that -- what Barry has been doing that -- I don't have it here on top of it.

I believe that --

I didn't bring that with me.

I believe it has been, but I can follow up off line.

Sorry, Dalton if it had been. I'm just -- a result that I wasn't familiar with the public disclosures of information.

Okay. And then just to come back to the question about AAD and potential new products. Maybe there's -- maybe it's just a matter of semantics here, but I think Barry had said that he did anticipate a new product, maybe not necessarily a new platform. But could you just maybe clarify what you do expect to announce for AAD with regard to products this year?

I don't know what Barry mentioned as far as what he was referring to. But as I said earlier to Anthony, we're not coming out with a new platform for AAD. And there may have been some plans to make some modifications of some existing products which, then, could be -- have an enhanced performance. That may be the case.

Okay. Well maybe you could comment more generally with reduction in sales force and so forth. Are you rethinking the strategy around the aesthetic side of the business? Or do you expect to continue along the path that's been set so far?

What we're trying to do is to really understand where we are and to stabilize the business and run it like a business. Understand that we can't spend more than we are receiving and what we expect to receive and get good salespeople who manage well and make good products and have customers aware of what the value proposition that our products provide them and have them provide us with a sufficient number of -- purchase on a good margin and we service it well. It's just the basic parts of the business, is what we have to do. And with that, I think we have recognized that there's an opportunity and a potential if we do things right that we can make a business out of it. That's where we are.

Okay.

So if that is a rethinking of what we have done in the past, then it is a rethinking, yes.

Okay, all right, thanks very much.

Mark Richter, Jefferies & Co.

This is actually Josh [Hennings] in for Mark. In the quarter, there have been some analyst reports and some commentary from other management teams of aesthetic laser companies about sort of concerns about a slowdown in the industry, general economic environment and concerns about a recession leading to a decrease in consumer discretionary spend. Can you comment on what you are seeing in the market in general and tell us what you've seen in terms of your sales force generating leads, selling systems and then as well as maybe procedure volumes, if you have any insight into that? Procedure volume trends that your physician customer base are reporting back?

On an overall basis, I have seen -- being in the laser business I think now for 25 years, 28 years, something like that, we -- it is a cyclical business, particularly the aesthetics side of the business. It's affected much more by recessionary trends than the ophthalmology business. The important aspect and important thing to do to concentrate when there is a "meltdown," which I read one time recently about, the aesthetic space, is that you can't let what's happening in the overall market defocus -- we can't let it defocus us from what we're trying -- what we have to do. And what we have to do is to provide long-term value to each aesthetic customer. The customers value products that perform multiple treatments. They perform them safely, and when they perform them, they benefit their patients. And they want products that are reliable and dependable. And those are the things we do and have to do when there is a downturn in the economy. And fortunately, if we get our expenses balanced, then we won't need a lot of sales compared to the competition to provide positive cash flow and then we can weather ourselves through those times where the cyclical cycle is on a downtrend.

Okay, just sticking on the aesthetics side, can you comment on your international aesthetics business? Previous I believe on the last earnings call in the second quarter, is reported as some of the international distributors were a little bit influx after being associated with American Medical and losing the urology side of the laser business once the aesthetic division was sold to you. Is there any progress on that front in terms of solidifying relationships with distributors internationally? And then [coming] that, what is your international sales strategy going forward?

International sales have been quite good for aesthetics products. And you see that in the Q. The -- as far as the method of distribution, the channel that is optimal for us, we're assessing very, very carefully. It's expensive to run a subsidiary in Europe and we have two, one in the United Kingdom and one in France, and they definitely had a larger base of revenue to support those when AMS was running both the aesthetics and the urology business. So we have in a sense acquired those two and we have a lot of overhead associated with that. We are going through those very carefully and we are moving -- we are progressing I think quite well in that and we should have something to -- as far as decisions in the next quarter or so. But there's nothing to report specifically about them except we're reducing our cost there and we are making it much more controllable.

Okay, great. And then on the ophthalmology side, in the second quarter, it was reported, you reached about $2 million or over $2 million in disposable sales revenue. Can you let us know if you were able to reach that level again in this quarter? And then also if there's any update on 510-K approval for the 577 nanometer wavelength laser?

On the second one, we have yet to receive 510-K. That will be public when it gets out. And on the first one, as far as our disposable sales, we are -- we exceeded $2 million this quarter.

Okay, great. Thanks a lot.

(OPERATOR INSTRUCTIONS). A follow-up from Anthony Petrone.

Thank you for taking my questions. Just a couple on the manufacturing side. Have all the efficiencies between the Laserscope and IRIDEX manufacturing been realized at this point or is there still more efficiencies to be realized, and can we see any upside to operating margin from those efficiencies?

Anthony, there's a couple of questions. One is we haven't seen any real manufacturing efficiencies yet. What we are doing now is bringing over the products that had been manufactured at Laserscope and starting to manufacture them here. Now, in doing that, we have been using people here working down at Laserscope and so there hasn't been a lot of efficiencies. As you see no efficiencies virtually in the third quarter from that. It actually cost us, as I said; it hit us in gross margin percent by 0.3%. But when we start producing -- and, we are paying for these products from Laserscope. We pay a premium to them.

When we start manufacturing them here, then we will not be paying the premium to Laserscope or AMS. We will be just paying for the cost of the labor and the materials. That will be a margin benefit. I don't know if that would be called necessarily an efficiency, but that would be a reduction in cost of goods sold.

So just to refresh my memory, on the acquisition, you did acquire a facility from Laserscope. Now, once everything is transferred over --

No, we did not acquire a --

There was no facility?

There was no facility that we acquired.

Okay, great.

And we are transferring that -- we will be completing the transfer and the integration of manufacturing in the fourth quarter. So products produced after the first quarter, the products will be manufactured -- that we have transferred that are produced by us after the first quarter will have lower cost of goods sold.

Okay. I think that you've answered my second question, but just to go over it real quickly, the components of the gross margin compression year over year, you mentioned amortization of some of the existing components and part of this transition is it eroded gross margin. Is there anything else in there? I think you mentioned there was three items just to review those quickly.

The amortization of the technology we've acquired from Laserscope was number one. And the second one was the service organization, a large part of which was the increase in the field service groups that we acquired from Laserscope. And third is the acquisition -- is the integration costs. So the numbers were 4.6% for the intangible amortization, 2.3% for the service organization and 0.3% for the integration costs -- added integration costs.

Okay great. And just a final question under prior management the Company had a long-term goal I guess of reaching $100 million in annual recurring revenue by 2010. Is that goal still in place? And if not, what are the Company's refined goals?

My goals, unfortunately are very, very short-term here right now, and that is to number one, to be cash flow positive and number two, to get to profitability. But clearly we have to stabilize the organization, understand where we are and then from that foundation we can go on and then grow from there. There's a lot of opportunity I'd say in the business. I don't know if it will lead us to $100 million by 2010, but it is definitely -- I'm looking for solid, reliable, dependable, predictable growth.

Thank you for taking my questions.

Mr. Boutacoff, there are no further questions at this time.

So thank you very much. I want to thank everybody for participating in the call. I know this is a short week with the holidays and wish everybody happy holidays and look forward to talking with you at our next call. Thank you.

Ladies and gentlemen, this concludes the IRIDEX third-quarter 2007 conference call. If you'd like to listen to a replay of today's conference please dial 303-590-3000 or 1-800-405-2236. The pass code is 11102345#. ACT would like to thank you for your participation. Have a pleasant day. You may now disconnect.