IRIDEX Corp (IRIX) 2007 Q4 法說會逐字稿

Good afternoon ladies and gentlemen. Thank you so much for standing by. Welcome to the Iridex fourth quarter and year-end earnings results for 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) As a reminder this conference is being recorded today on Thursday 10 of April, 2008 and I'll now turn the conference over to your host, Mr. Ted Boutacoff. Please go ahead.

Welcome everyone to Iridex's fourth-quarter and fiscal year 2007 conference call. I'm Ted Boutacoff, President and CEO. With me today is Jim Mackaness, our new CFO. And I'm sure you will enjoy working with Jim as much as I have.

Before we get started, Susan Bruce, our Executive Administrator, will read the required Safe Harbor Statement. Susan?

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 financial strength, 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 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 29, 2007 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. The agenda that will be following this afternoon will be after my initial comments Jim Mackaness will cover the finances in detail and then I will share some strategies, action plans and thoughts and after which we will open the call up to your questions.

We're making progress. Cash flow is improving. In Q4 we were cash flow neutral. And we are executing on an operating plan that we feel will return us to a position of financial strength provided we execute.

Ophthalmology is solid and I'm pleased with its performance. We have a much better understanding of the key elements of the aesthetics business both what parts are contributing and what are not. And we are adapting to the economic times.

And to draw an analogy just like on a sailing ship, while we cannot affect the direction the wind blows, we can affect the set of the sails. We have been constantly adjusting the sails during this economic downturn and we are progressing.

We will cover these in detail later. We will start now with Jim. So I would like to introduce Jim Mackaness.

Thanks, Ted. Let me start reviewing our fourth quarter performance. Reviews for the fourth quarter -- revenues for the fourth quarter of 2007 were $14.1 million a 57% increase compared to the corresponding quarter in 2006. And we're up 4% on a sequential basis from $13.6 million as reported in Q3 2007. The main driver of the year-over-year growth is the impact of the acquisition of the Laserscope aesthetics business which occurred in Q1 2007.

Ophthalmology revenues for the quarter were $8.9 million compared with $7.7 million for the fourth quarter of 2006, an increase of 16% and were up 13% on a sequential basis from the $7.9 million reported in Q3 2007. Looking at these revenues geographically, domestic ophthalmology revenues grew 12% to $5.3 million compared with $4.7 million for the fourth quarter of the 2006 and were up 18% on a sequential basis from $4.5 million in Q3 2007.

International ophthalmology revenues totaled $3.6 million, were up 23% from the corresponding quarter in 2006 and were up 6% on a sequential basis from the $3.4 million in Q3 2007. The majority of our international sales for ophthalmology are denominated in US dollars and therefore exposure to foreign currency gains or losses on translation to US dollars is minimal. However, the strengthening or weakening of the dollar will impact our price competitiveness in overseas markets.

Focusing in on recurring revenues, which consist of disposables and service ophthalmology recurring revenues were $4.1 million which represented 46% of total ophthalmology revenues for the quarter 2007. It is up 13% from $3.6 million in the fourth quarter 2006 and up 11% on a sequential basis from $3.7 million in Q3 2007. Increasing recurring revenues in ophthalmology remain the key focus of the Company and we're pleased with the returns on our efforts so far.

Aesthetics revenues for the quarter were $5.2 million compared with $1.4 million for the fourth quarter of 2006 and down 9% on a sequential basis from the $5.7 million reported in Q3 2007. Looking at these revenues geographically domestic aesthetic revenues increased to $2.3 million compared with $1.4 million for the fourth quarter 2006 but were down 15% on a sequential basis from $2.7 million in Q3 2007.

International revenues totaled $2.9 million compared with $0.4 million for the fourth quarter 2006 and were down slightly on a sequential basis from the $3.0 million in Q3 2007.

We do sell aesthetics systems directly through our UK and French subsidiaries and these sales are denominated in either British pounds or euros. These sales make up approximately half of our international sales and therefore there is some exposure to foreign currency gains or losses on translation to US dollars.

We continue to face challenges in our aesthetics business. The high turnover rate in our US sales force experienced in 2007 has weakened our domestic distribution channel and the softening economy and credit crisis has resulted in reduced demand for aesthetics products as a whole.

Switching attention to gross margins and expenses. Gross margin in the fourth quarter 2007 decreased to to 44.6% compared with 55.5% reported in the fourth quarter of 2006 and decreased lightly on a sequential basis from the 45.6% reported in Q3 2007. The reduction in gross margin is due to the lower margins obtained from our aesthetic products, amortization of intangible assets acquired in the Laserscope purchase and increased cost of service as a result of the expanded field service organization needed to support the new aesthetics products.

Expenses in the fourth quarter 2007 were $22 million which included a $14.7 million charge for the impairment of goodwill and intangibles. The goodwill and intangibles were created as a result of the Laserscope acquisition that occurred in Q1 of 2007.

And at the year-end, the Company conducted an impairment test in accordance with FAS 142, goodwill and other intangible assets and determined that based on operating results for 2007 in the outlook for the aesthetics business for 2008 and beyond there was significant impairment to the intangible assets and goodwill. In addition the Company revisited the useful (inaudible) associated with the remaining intangibles to ensure they reflected the revised outlook for the aesthetics business.

Without the impairment charge, expenses for the fourth quarter were $7.3 million. This compares to $7 million for the fourth quarter 2006 and $7.2 million for the third quarter 2007. Management remains focused on controlling expenses to make sure expenses are appropriate to the level of revenues being generated and to meet our cash flow goals. As for the bottom line, the Company recorded a net loss of $15.8 million or $1.82 per share for the fourth quarter of 2007 as compared with a net loss of $3.8 million or $0.48 per share in the fourth quarter of 2006.

The impairment charge of $14.7 million represents $1.69 of the net loss per share for the fourth quarter 2007.

Turning our attention to the results for the 12 months ended December 29, 2007 for the full year of 2007 revenues were $55.5 million up 55% compared with $35.9 million reported for the full year 2006. In 2007, ophthalmology revenues totaled $32.3 million a 5% increase from $30.8 million reported for the full year 2006.

Aesthetics revenues totaled $23.3 million in 2007 compared with $5.1 million for 2006. International sales in 2007 were $25.6 million representing 46% to total revenues an increase from 39% of total revenues in 2006. Sales in the United States were $29.9 million in 2007 representing 54% of total revenues a decrease from 61% of total revenues in 2006.

For the full year, gross margin decreased to 43.7% in 2007 compared with 52.4% reported for the full year 2006. As a consequence of the addition of the lower margin Laserscope aesthetics products and increased service components associated with supporting these products, and the addition of the amortization expense for the intangible assets created as a result of the acquisition, gross margin reductions were greater than the benefits gained from economies of scale realized in manufacturing during 2007.

The net loss for 2007 was $22.3 million or a loss of $2.69 per share compared with net loss of $5.8 million or $0.75 per share for 2006. The net loss for 2007 includes the impairment of goodwill and intangible assets of $14.7 million which represents $1.77 of a net loss per share on an annual basis for 2007. Looking at our cash flows, for the fourth quarter 2007 we were cash flow neutral. Net cash from operations adjusting for the $14.7 million impairment charge was $640,000 positive for the quarter.

And in concluding, I would like to spend a moment on our credit facility's cash and liquidity to update you on where we stand. One of our goals was to renegotiate our credit facility to provide the opportunity for additional funding and to reset the covenants to allow the Company to be in compliance. Subsequent to the year-end we were successful and on March 28, 2008 we announced the new funding arrangement with Wells Fargo Bank for an $8 million asset base revolving credit line.

We paid off the old facility by applying $3.8 million of restricted cash and drawing down $5.3 million against the new facility. Our main focus with regards to liquidity is to drive cash flow to repay the remaining obligations to AMS while funding ongoing operations. Our obligations to AMS consist of three components and we're paying these components down on an agreed-upon timeline.

As of December 29, 2007 we owed AMS $4.8 million plus interest and had contractual purchase orders for finished goods inventory to be fulfilled and paid in 2008 of an additional $1.3 million. Of the $4.8 million $700,000 relates to the original purchase price AND will be fully repaid by early August 2008. $4.1 million plus interest is payment for inventory consisting OF raw materials delivered in 2007 which we are consuming as part of our aesthetics business and turning into revenue dollars and will be fully repaid by the end of September 2008.

The $1.3 million for contractual purchase orders represents monthly deliveries of finished goods from AMS that are paid at the time of delivery. These deliveries continue through September 2008. By Q4 2008 we will have no remaining obligations to AMS. I would like to turn the call back over to Ted. Ted?

Thank you, Jim. Cash management has been a primary objective over recent months. And we have been working diligently to control expenses and to sharpen our ability to forecast revenues. As a result, we are managing our way through this challenging time.

As part of this effort, two recently departed members of the senior staff will not be replaced and their responsibilities have been assumed by others. These efforts in rightsizing the business while make us stronger and will be witnessed by positive cash flows as we pay off the AMS obligations.

I'm pleased with the overall performance of the ophthalmology business particularly the continued growth we see in our recurring revenues and the uptick in sales in Q4 2007 which we believe reflects our customers' appreciation of our renewed focus on this part of our business. I'm not pleased with the state of the aesthetics business.

Though parts of the aesthetics business are performing well, a particular note is the domestic field service force who efficiently and profitably serviced a large number of installed laser systems with high customer satisfaction. Our international sales are very encouraging but we need to improve our margins.

The main area of concern is the deterioration in our US direct sales force which is apparent in the poor performance of that part of the business. I would note that in certain territories where we have made -- where we have been able to fill the sales role with experienced salespeople we have seen improvement in results. The experienced salespeople focus on our large satisfied customer base with particular focus on the traditional core segment of the market as defined by dermatologists, plastic surgeons and other laser savvy aesthetics specialists.

These specialists recognize the value of our products and our sales reps are able to leverage our laser reputation and our history of successfully supplying and servicing their needs. This is the foundation and we used to build the domestic aesthetics revenue stream for 2008.

I would like to spend a few moments on sharing my vision both for ophthalmology and aesthetics. My vision for ophthalmology is quite clear. For ophthalmology I perceive that we will be successful in continuing to grow our worldwide ophthalmology franchise by supplying technology-based systems which perform science based applications that provide benefits and provide value for customers and their patients.

My vision for aesthetics is a work in progress. The feedback we get from the market is illustrated by comments we received at the recent ASLMS meeting, the American Society for Lasers and Medicine in Surgery, meeting is that the physicians are tired of marketing hype and want scientifically proven applications that really do what they say they do. This moves the target into our sweet spot and allows us to exploit a reputation and our expertise. We will now open the lines for questions.

(OPERATOR INSTRUCTIONS) Hesham Shaaban, Maxim Group, LLC

I just have a couple quick housekeeping questions. First now with the write-off to goodwill and intangibles what are we expecting as far as amortization expenses on a quarterly basis?

I will give them to you on an annual basis, if I may. For 2008 we are anticipating the amortization of expense to be in total $2.3 million. 1.9 of that will be in cogs and the 400, $500,000 will be in SG&A. In 2009, we would expect the expense for intangibles to drop to about $700,000 with about $200,000 going to cogs and about $500,000 going into SG&A.

Okay, and as far as a target for a gross margin or any expectations you have for 2008, what range are we thinking?

I think at this stage it's a little early for us to really comment on that. The volatility in our margins over seven suggests that we need to continue to focus on that before we start to be predictive.

All right, and just moving onto the sales force. I understand you've had some turnover. As far as current reps in the domestic field right now towards the aesthetics space how many sales reps do you have?

We did have a large turnover last year. We started at about 28 and at the end of the year we were at six.

As far as the expansion efforts is there a target number?

You know we are going to concentrate as I indicated during my presentation on our customer base and generating leads through that way and the number of reps will be increased when we have seen the revenues increase -- the territory revenues increase. We will add it that way as opposed to adding them upfront. (multiple speakers) We will grow with performance.

Sounds good. Thank you for taking my questions.

Larry Haimovitch, HMTC.

At the -- I think it was the AAO in 2006 you showed a product that I thought was very exciting and it created quite a buzz amongst the ophthalmology community and that was the new yellow laser.

Yes.

And my impression is that it is still not FDA approved and I am kind of disappointed at that and I'm wondering if you could give us an uptake about why it's taken so long given that it should be a fairly straightforward [five 10-K].

(inaudible) correct it's still not FDA cleared. The 510K was not simple that was submitted. It was for a broad number of indications because there's applications for the wavelength that go beyond straightforward ophthalmology. And so this is what is being worked on now.

Can you be a little more specific? For example have you thought about breaking the application into straight ophthalmology and going after other indications?Ophthalmology obviously being your sweet spot as the company have you thought about being able to separate that out and go for other indications like ear, nose and throat etc. later on?

We have and we have done some of that.

What's your outlook, Ted, for approval (multiple speakers)

We're looking this quarter.

To be approved?

And having product to show, yes.

Anthony Vendetti, Maxim Group.

I was -- I saw Don over at [ASLMS] in Florida and I was just wondering in terms of new products, I mean part of the I think the reason obviously for the slump in sales in the industry in general is for some companies just the lack of new products. What are you trying to do in that area other than upgrades to the existing Gemini platform and (inaudible) and so forth?

Clearly our focus is with cash management and others is we want to be able to provide as much utility to the customer with the minimum amount of expense. So we are doing a number of enhancements we feel for the Gemini platform which hopefully will provide greater utility. But we currently do not have plans to do a major platform presentation.

And then just a quick question -- maybe this is for you, Jim. You said you have drawn down $5.3 million of hte $8 million new credit facility from Wells Fargo, is that correct?

That's correct.

And that was part of that was if not not all of that $5.3 million was to pay off the old facility?

Yes, effectively it was to refinance the old facility, correct.

What interest rate is that $8 million at right now?

I believe it's 0.75 over prime.

I don't have prime in front of me right now. What is that approximately?

I'm not sure I have that data at hand either. I'll get back to you.

I was just curious. But obviously this was at a more favorable interest rate than your old line, correct?

No, the old rate was actually was at 0.25 over prime. It was more the fact that the way the old facilities were structured it was not possible for us actually to obtain any more borrowing against them and in fact one of them was a term loan which meant we would be repaying principal. So in fact it was going to take cash out of our pocket as we paid down the term loan.

Okay, so this was because the old one was expiring or you were in violation of the bank covenant so you had no choice but to refinance at the higher rate, correct?

This was definitely a chance to refinance to get out of the covenant situation and it also provided us with additional funding availability, yes.

Are there new covenants in place and if so can you share those?

There are new covenants. There's two financial ones. One is relating to a debt service covenant which exists while we continue to work down our obligation to AMS and the other one is on a net income loss basis.

Okay, you can't get any more specific than that right at this point?

No.

So -- I'm sorry. You said on a net income basis?

A net income loss; so in other words we have worked with the bank on our outlook for '08 and they have taken our outlook for '08 and modeled those into financial covenants and if you like played back the results to us and said okay, based on your operating plan we would like to hit these net income/loss charges.

Minimum targets, okay. And the second covenant was on debt percentage as a percentage of --?

It's a debt service covenant to ensure that we have sufficient liquidity to be able to manage the AMS liability/obligation. And it will exist while we have the AMS situation ahead of us.

Right and all payments are scheduled to be concluded for AMS by the end of September of '08. What is the total amount of those payments that are still due?

As of today or as of December?

Both. How is that?

Okay, well at the end of the year we had $4.7 million owed to AMS plus an additional 1.3 in contractual purchase orders for purchases we would be making in '08. At the end of Q1 we had (inaudible) made payments to the extent that we owed $3.3 million and we still had an additional $800,000 of the contractual purchase orders ahead of us.

That's very helpful. Thank you.

(OPERATOR INSTRUCTIONS) [Stan Manney, Manney Investments].

I have several questions. Ted, you said something about it seems like the aesthetic sales are a basic problem to rebuild the business.

That's right.

I guess (inaudible) do we have a Vice President or someone that leads the aesthetic sales in place?

We have someone who is a Vice President who is leading the domestic aesthetic sales and then we have someone responsible for the international aesthetic sales.

So we have that in place. What I don't understand is usually we put salesmen out to develop business. I'm not understanding your comment on the aesthetic side which seems to be the problem of how we're going to develop sales and then put a salesman in if there's no salesman in the territory.

We have -- the reps we have on hand now are going to cover a slightly larger territory and as they develop the business in those territories then we will add more reps. We need to at least get the core number of well-performing sales representatives to deliver good numbers.

You have been doing this for the fourth quarter. Is it working? I mean does it seem to be working?

It is working with some reps and we obviously have to get it to be working with a greater number of reps.

So are you looking for new reps at all at this point? Do you have a plan?

We have a plan but we have -- right now we have one open territory.

So you are looking to have seven in the second quarter, seven salesmen?

We will have seven in (multiple speakers).

Domestics. And that does not include the VP of sales domestic?

No, that number does.

It does include. So it's six salesmen you'll have and one VP. Under the Laserscope format I think they used [Harry Scheiner] of somebody for the development. Is that the same format now?

Yes it is and we still use [Henry Scheiner].

Is that working?

Well, it's not working as well as it has in the past.

Not. We have -- we seem to have expanded you said the technical reps in the aesthetic area and that is profitable you said?

This is the field service engineers servicing the existing installed base and that is as I said profitable and we have some very satisfied customers.

Okay, do they then seem to bring in more business when a customer wants to upgrade a machine?

They do and that is a good source of leads.

Okay, the manufacturing of the machines, you're buying parts from AMS. Is that (technical difficulty) existing machine, the laser machines?

We have bought a large inventory of parts from AMS and we're manufacturing products here at Iridex. Particularly we're manufacturing the Gemini.

(multiple speakers) and all of the hand pieces. There are also some finished goods inventories that Laserscope/AMS produced for us and those are the ones that Jim referred to earlier that we're purchasing from them during 2008.

And then you'll manufacture and do that on your own?

The products which we feel are -- have good life in the field we will transfer the manufacturing here and if not we will do an end of life on those products.

Will it be more profitable with self manufacture than purchase from AMS?

At good volumes, absolutely.

Approximately the gross margins on the aesthetic business at 35% which is way lower than the margins that Laserscope had. Is that because of volume or efficiency and how do you expect it to change in 2008?

I definitely think one component is we have the amortization of the intangible costs hitting our cogs. Obviously as we see an increase in volumes we would expect to see efficiencies in manufacturing. We've not seen the volumes yet to be able to really take that benefit so we could see some upside by just being able to get product efficiencies through.

But you're getting volumes out of your international business which seems to be strong in aesthetic. Is that working I mean with direct sales on that volume, is that something you expect to continue? I'm trying to understand the direction of the aesthetic side.

Internationally we sell through distribution. We sell through subsidiaries and I would say the majority of the units go through distribution. Some are routed to our -- have been routed through our subsidiaries but they still go through distribution. The majority are going through distribution. We have some very strong distributors who have been supporting Laserscope for many years, very capable --

And those have held and and maintained?

And they have and I have been impressed at their capabilities and their knowledge in the area. And probably that is the biggest difference besides there's less uncertainty in the world markets right now than there is in the US market. So we are looking to gain the same level of expertise in the US salesforces as we have in the international distribution channel.

Two more questions. Are you encouraged by the total business for 2008 and when will you give us a look-see as full year forecast?

We are encouraged at the business. We have a plan that we put together that if we execute on will in a sense put us in a good financial situation particularly when we complete payment of the AMS obligation. And in executing the plan we've -- the performance in Q4 with the reduction or getting us to a cash flow neutral situation supports the fact that the plan has some credibility.

Okay, so basically looking down the road we can be encouraged?

Yes, I am encouraged.

Last question is you are due in April, I think April 16 a payment of $700,000 from Synergetics. Is that expected and that looks like that agreement is going to be fulfilled?

That's $800,000 (multiple speakers) and that is expected.

So if I put all the numbers together it seems to me like at some point this year from what you have said you would be profitable, bottom-line profitable based on what you just said as far as cash flows.

I think we're definitely looking to drive ourselves to a cash flow positive situation in as short a period of time as I don't think at this stage we'll make any comments on the profitable side.

You were neutral in the fourth quarter. You're reducing costs. Sales seem to be increasing slightly. It would seem to be that when you put that puzzle together you come out with a positive cash flow and a positive at some point during the quarter bottom-line. That's just from the numbers I'm putting together that you just gave us.

Well we'll definitely hit cash flow positive first. We do have (multiple speakers) on cash expenses that run through on the P&L.

Okay, do you expect to get any of these Laserscope people back on payroll or especially in the sales and marketing area at all this year?

You know, I don't know about that.

Thank you. You seem to be making progress.

(OPERATOR INSTRUCTIONS) Mark Kronenfeld, Ridgemark Partners.

Could you guys explain to me why you wouldn't just sell your aesthetic business? You have a good ophthalmology business and a bad business aesthetics business.

You know we are (technical difficulty) it takes two sides for a transaction. And we clearly have to make the aesthetic business perform as best as it can even to make it attractive. So if we had a good expression of interest we would consider it as we would with any asset we have.

It just seems to me if you literally closed down your aesthetic business your stock would be up threefold.

I can't comment on that.

Thank you.

Thank you management. There are no further questions at this time. Please continue with any closing comments.

You know I just want to thank everybody for joining the conference call and appreciate your support and I am pleased we're able to share some promising results (inaudible) our plan and look forward to the next quarterly conference call where we can share more results with you. Thank you.

Thank you, sir. Ladies and gentlemen, this does conclude the Iridex fourth quarter and year-end results for 2007 conference call. If you'd like to listen to replay of today's conference in its entirety you can do so by dialing 1-800-405-2236 or 303-590-3000 and put the access code 1111-1765. (OPERATOR INSTRUCTIONS) ACT would like to thank you very much for your participation. You may now disconnect and have a very pleasant rest of your day.