IRIDEX Corp (IRIX) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the IRIDEX first quarter earnings 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, Tuesday, May 13, 2008. I would now like to turn the conference over to Ted Boutacoff. Go ahead, sir.

Good afternoon, and welcome to IRIDEX Corporation's first quarter 2008 conference call. I am Ted Boutacoff, President and CEO, and with me is Jim Mackaness, our CFO. 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 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 statements is contained in the risk factors discussed in Part One, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 29, 2007, and in our Quarterly Report on Form 10-Q for the first quarter ended March 29, 2008, 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. During this call, after my initial comments, Jim will cover the financial results in detail, and then I will update you on our progress to date on our action plan for 2008, which remains to establish financial stability in the Company, to focus on our ophthalmology business, and to strengthen our aesthetics business, after which we will then open the call up to your questions.

We continue to make progress in meeting our objectives. We are progressing towards financial stability, and here are several examples. We reduced our operating expenses by $4.5 million, which reduced our net loss from $4.9 million in first quarter of 2007 to $900,000 in the first quarter of 2008. We successfully negotiated a new bank credit facility with Wells Fargo Bank, which replaced our previously existing credit agreements.

And cash flow from operation, was modestly negative, which we anticipated, given that we repaid $1.7 million of our obligation to AMS, leaving us $3.1 million to go. Our ophthalmology business continues to perform well, even in these uncertain economic times. Our aesthetics represents our biggest challenge, particularly the negative impact of the economic downturn in the U.S. and the challenges we have faced with our U.S. distribution channel. Now I'll turn the call over to Jim Mackaness.

Thanks, Ted. Let me start by reviewing our revenues for the first quarter. Revenues for the first quarter of 2008 were $11.5 million, an 8.7% decrease compared to $12.6 million for the corresponding quarter in 2007, and were down 18.9% on a sequential basis, from $14.1 million, as reported for Q4 2007. The main cause of the year-over-year decrease is the ongoing challenge we face with our aesthetics business.

Ophthalmology revenues for the quarter increased 4.8% to $7.5 million, compared with $7.2 million for the first quarter of 2007, and decreased 15.4% on a sequential basis from the $8.9 million reported for Q4 2007. We typically experience a sequential decline from Q4 to Q1, due to seasonal buying patterns, particularly for system sales. This effect is mitigated by our recurring revenues, which continue to grow quarter to quarter.

Looking at these revenues geographically, domestic ophthalmology revenues grew 10.6% to $4.4 million, compared with $4.0 million for the first quarter of 2007, and decreased 16.9% on a sequential basis from $5.3 million in Q4 2007.

International ophthalmology revenues totaled $3.1 million, down slightly from the $3.2 million reported for the corresponding quarter in 2007, and were down 13.1% on a sequential basis from the $3.6 million in Q4 2007. The majority of our international sales for ophthalmology are denominated in U.S. dollars, and therefore, our exposure to foreign currency gains or losses on translation to U.S. dollars is minimal. However, the strengthening or weakening of the dollar will impact our price [competitiveness] in overseas markets.

Focusing in on our recurring revenues, which consist of disposables and service. Ophthalmology recurring revenues were $4.2 million, which represented 55.2% of total ophthalmology revenues for the first quarter 2008, up 4.3% from $4.0 million in the first quarter 2007, and up 2.7% on a sequential basis from $4.1 million in Q4 [2008].

Our recurring revenues provide us with a predictable component to our ophthalmology revenue streams, and the fact that we saw sequential growth was a very encouraging indicator of the strength of our ophthalmology business. Aesthetics revenues for the quarter were $3.9 million, down 26.8% when compared with $5.4 million for the first quarter of 2007, and down 24.8% on a sequential basis from the $5.2 million reported for Q4 [2008].

Looking at these revenues geographically, domestic aesthetics revenues decreased 44.2% to $1.5 million, compared with $2.7 million for the first quarter of 2007, and were down 36.5% on a sequential basis, from $2.3 million in Q4 2007. International revenues totaled $2.5 million, down 9.6%, compared with $2.7 million for the first quarter of 2007, and down 15.3% on a sequential basis from $2.9 million in Q4 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 our international sales, and therefore, there is some exposure to foreign currency gains or losses on translation to U.S. dollars.

We continue to face challenges in our aesthetics business, particularly in the U.S., and the challenges are exacerbated by the softening in the U.S. market, brought about by the current uncertainties in the domestic economy. In addition, a significant part of our international business is conducted through distributors, who often purchase multiple units at one time, and therefore, the timing of their orders can affect our performance in any one quarter.

Switching attention to gross margins and expenses. Gross margins in the first quarter 2008 increased to 41.9%, compared with 41.5% reported for the first quarter of 2007, and decreased on a sequential basis from the 44.6% reported in Q4 2007. The reduction in gross margin on a sequential basis is primarily due to the fixed costs of manufacturing and amortization of intangible expenses being absorbed over a lower volume of production.

Expenses in the first quarter 2008 were $5.5 million, down $4.5 million, compared to the $10.0 million for the first quarter of 2007. Expenses were down due to reduced headcount costs, reduced marketing expenditures, and $1.2 million in onetime legal and accounting fees incurred in the first quarter of 2007. Expenses were down $1.8 million on a sequential basis from the fourth quarter 2007. The sequential comparison excludes the $14.7 million charge for impairment of goodwill and intangibles recorded in Q4 2007.

As we stated in our last conference call, management remains focused on controlling expenses, to make sure expenses are appropriate for the level of revenues being generated, and to meet our cash flow goals, and believe the overall reduction in expenses for the first quarter illustrates this commitment and is in line with our goals.

As for the bottom line, the Company recorded a net loss of $0.9 million, or $0.10 per share, for the first quarter of 2008, as compared with a net loss of $4.9 million, or $0.61 per share, for the first quarter of 2007, and a net loss of $1 million, or $0.13 per share, for the fourth quarter 2007, if you exclude the impact of the impairment charge.

Looking at our cash position, cash of $4.0 million at the end of the first quarter 2008 was down $1.8 million, compared to cash of $5.8 million at the end of 2007. However, working capital remained constant. Working capital for the first quarter 2008 was $7.6 million, compared to $7.7 million for the fourth quarter 2007. We were pleased with this result, because during the quarter we repaid $1.7 million of our obligation to AMS, paid for $0.5 million of contractual purchase orders for imagery received from AMS, and reduced our bank debt from $9.9 million to $5.3 million, primarily by using the restricted cash balance of $3.8 million.

We believe that we've been able to use the results from Q1 to make significant progress towards our goal of establishing financial stability through careful cash management. As of March 29, 2008, our obligations to AMS consist of $3.1 million, plus interest, for the remaining balance of the original purchase price and inventory and raw materials delivered in 2007 and $0.8 million for the remaining balance of contractual purchase orders for future deliveries of finished goods. By the end of Q3 2008, these obligations will be fully repaid.

I'd like to turn the call back over to Ted.

Thank you, Jim. Cash management remains our primary objective, and our reduced operating expenses for Q1 2008 show good progress towards controlling expenses and ensuring that P&L is appropriately sized for our revenues. We are focused on returning the Company to a cash flow positive position and a profitability in as short a time as possible.

Our ophthalmology business had another good quarter of performance, especially given these uncertain economic times, and the continued growth in our recurring revenues on a sequential basis highlights the value of this part of our business. We believe our ophthalmology business, as a whole, is off to a solid start for 2008 and is in line with the goal we set ourselves of enhancing its value.

The economy did have an effect on our aesthetics business, as we experienced delays in buying decisions amongst our potential customers. Our domestic aesthetics field service force turned in a good performance for the quarter. We were not satisfied by the performance of our international aesthetics sales, because we believe there is more opportunity in this area.

But the main area of concern remains the poor performance of our U.S. direct sales force during the first quarter 2008. We have replaced a number of domestic aesthetic sales representatives, and fortunately, we have been able to secure the services of some experienced individuals, who give us confidence for better results ahead, even in these unstable economic times.

So going forward, you can expect us to achieve financial stability through closely managing cash and expenses until we satisfy our obligations to AMS and drive to cash flow positive and profitability. Two, focus on continuing to grow our ophthalmology business, and three, strengthen our aesthetics business by focusing on building our sales and service channels.

We would now like to open the lines for questions.

Thank you, sir, and once again, ladies and gentlemen, we will now begin the question and answer session.

(OPERATOR INSTRUCTIONS)

And our first question comes from Keay Nakae with Collins Stewart. Go ahead, please.

Yes, good afternoon.

Good afternoon.

You've made some very good progress on your operating expense. How much more improvement can we expect to see going forward?

Well, I think our goal, obviously, is to control operating expenses closely. I think the way we would look at it is we want to make sure [that we're] right size for our revenue streams. At this stage we've been careful to avoid providing specific guidance, so I think we'd just like to see a couple quarters play out to make sure we understand exactly where we need to balance things out.

In saying that, to balance it out, should people expect to see lower spending on an aggregate basis going forward? Or, is getting to breakeven dependent on having higher revenue?

I think we're looking at a mix of both, so again, we want to make sure that we're investing prudently.

Okay. With respect to the U.S. aesthetics sales force, how many reps do you have? The new additions that you had, is that just simply replacing people, or are you adding at this point, and if you're adding, why, at this point?

We're not adding any at this point. We want to make sure each of the territories gets to a certain performance level before we move to add any more territories.

Okay, great. And how many territories do you have then?

We have five.

Okay, very good. Thanks.

Thank you. Our next question comes from Hesham Shaaban with Maxim Group. Go ahead, please.

Hi. I just want to follow up with the cash flow from operations. Would you be willing to quantify that?

Cash flow from operations for the first quarter?

Yes, please.

We were $862,000 of cash used in operations for the first three months of the year.

Okay, and so that -- the entire $1.7 million to AMS, that's included?

Correct. That would fit above that line item in our cash flow forecast, correct.

Okay, and there was another $500,000 charge. What was that associated with? Was that the future [goods]?

I think you're referring to the $500,000 we paid for the purchase orders for the delivery of inventory?

Yes. Yes.

Yes. So that was settled within the period, so it was not a liability at the beginning of the period or at the end of the period. It was settled within the period.

Okay, so it was paid during the quarter, though, I'm assuming?

Correct.

Okay, so strictly speaking from an operational standpoint, aside from these cash outlays, should we assume that you were operationally cash flow positive? Or, am I missing something?

No, I think if you were to remove those two items, we would be cash flow positive for [cash flow] operations for the period. Correct.

Okay, so -- okay, wonderful. So just a refresher on the amortization schedule, as far as gross margins are concerned. How's that working again?

You refer to the amortization of intangibles?

Yes. Yes.

So we obviously had a significant amortization charge through 2007. We did have an impairment of goodwill and intangibles at the end of 2007, but for 2008 we're modeling a comparable intangible expense for 2008, and then it drops off significantly in 2009. So we had $1.8 million of amortization of intangible expense in 2007 going to COGS. We anticipate a similar number in 2008, and we would expect it to drop down to [$200,000] in 2009.

Okay. All right. Thanks for the detail. And one more thing. As far as your sales and marketing expenses, those came down considerably from last quarter. I'm assuming part of that is seasonality, but should we expect a run rate for the remainder of 2008 within this range -- within the $4.5 million range?

Well, again, we're really trying to not necessarily get too much guidance out there at this stage. I think obviously, as you said, there are a couple of items. One was the seasonality impact. There was also a reduction in the amortization expense related to marketing intangibles that occurred and will be consistent in '08, but outside of that, we want to sort of make sure that we invest prudently to make sure that we make the most of our revenue opportunities.

I see. I wasn't familiar with the amortization as far as the marketing. Do you have -- could you offer a little more color on that? As far as numbers, maybe --?

It was -- if you look to the K, you'd see there was about $1 million of amortization expense for marketing in 2007.

Okay.

And we anticipate that being closer to $500,000 for 2008, and that's due to the fact that we wrote off one of the intangible assets that was attributable to marketing at the end of the year.

Okay. Perfect. Thanks for taking my questions.

Okay. Thank you.

Your next question comes from Larry Haimovitch with HMTC. Go ahead, please.

Good afternoon.

Afternoon, Larry.

Hey, Jim, a couple questions for you, then a question for Ted. Just to clarify the last caller's questions, which I thought some of them were very good. Operating cash flow ex the extraordinary payments, et cetera. Did I understand you to say that on a pure operating basis, you were cash flow positive? Did I hear that properly?

Let me phrase it this way. Our cash used in operations for the quarter was $862,000, so we're $862,000 cash out.

Right.

That included the $1.7 million that we paid to AMS, which was a reduction in the liability that we've been showing.

Right.

And there was also a $500,000 worth of cash settlement, if you like, for the purchase orders that related to inventory delivered in the quarter.

So if my arithmetic is good here, you're about $1.5 million positive cash flow, purely from operations? Taking out these items, which are somewhat extraordinary. I mean, I realize they're ongoing, but in a sense, they're extraordinary, because they're not part of the day to day business.

Well, yes. I mean, there are a number of other items that move up and down on your cash flow statement, so I want to be a little bit cautious about sort of --

No, I understand, but just in running the business, without these special payments, you were cash flow positive?

Correct.

Okay. Great. And then, Jim -- and that doesn't include anything to the positive side, like the Synergetics payment, which was what, $700,000 or $800,000, -- came in April, if I'm not mistaken?

That is correct. [It was] in Q2.

That was received?

Okay. Great. So clearly, you are making progress on the expense side, as a previous caller pointed out, and you are also making progress in generating cash day to day from the business, which is obviously [encouraging].

Ted, I asked you this question a few weeks ago. I'm going to ask you to update us, because I've been to enough of your ophthalmology meetings to know the yellow laser is going to be quite a positive addition. Where do we stand with the yellow laser?

It actually is the same as I had indicated at the last meeting -- the last call, Larry, is that we're scheduling it for the end of this quarter.

Okay. Still believing you'll have that at the end of this quarter.

Yes. Yes.

Ted, can you -- I know you don't want to get into guidance per se, but is it -- give us some sense about what you feel the impact of the yellow laser is to IRIDEX. My -- in my mind, from [being in] the trade shows, quite positive, but I'd like to hear it from you. You know ophthalmology longer and better than I do.

Well, we're positive, but there hasn't been a 577 laser out available for some time, since the tunable dye laser that [Coherin] has.

Yes.

So I'd -- we really have to understand the market better -- [I mean], test the market better with the new device to really come up with a good guidance. We are optimistic, obviously, but as far as quantifying it now, I'd like to hold back on that.

And then one more for Jim. Jim, on the disposable revenue, which grew to be over 50% now, is that because it's growing faster than capital equipment sales, or did capital equipment sales actually decline? I haven't done the math on that.

Yes, capital equipment was slightly down for the quarter.

So that's one of the reasons why its market -- its share of the total ophthalmology revenues was higher?

As a percentage, correct. It did increase in absolute dollars quarter over quarter, as well.

Ted, are you seeing any impact at all in ophthalmology from the economy? Would you say that --?

You know, we're -- obviously, we're not seeing it at all in our recurring revenue stream, which, to reinforce Jim's last response, is running about 50% of our aggregate ophthalmology revenues.

Yes. Yes.

The -- and as far as systems, we haven't seen it yet in ophthalmology. I think there could be some delays in purchasing, but the purchasing decisions haven't been delayed as long as we see it in the aesthetics side of the business.

Jim, one more question for you, then I'll jump back in the queue. In terms of big payments or receipts -- we got the synergetic payment in April, and then there's the scheduled AMS payments. Are there any other big payments that we should be aware of that will affect cash, aside from Synergetics, which is in, and AMS, which is the next two quarters?

Not that we've got on our radar screen. No.

Okay. Great. All right. Thanks very much, guys.

You're welcome.

Thank you.

(OPERATOR INSTRUCTIONS)

One moment, please. And we have no further audio questions. I'd like to turn the conference back over to management for any closing statements.

Well, I want to thank everybody for your participation and for your interest, and we look forward to sharing our progress with you at our Annual Meeting, which we're holding here in Mountain View on June 11 and -- or our next earnings call. So, thank you, and good evening.

Ladies and gentlemen, this concludes the IRIDEX First Quarter 2008 Earnings Conference Call. If you would like to listen to a replay of today's conference, please dial 800-405-2236 or 303-590-3000 with the pass code 11114480 and the pound key. ACT would like to thank you for your participation, and you may now disconnect.