IRIDEX Corp (IRIX) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Iridex third quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. And instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded today, November 4th, 2008. Now I'd like to turn the conference over to our host, Mr. Ted Boutacoff. Please go ahead, sir.

Thank you. And welcome to Iridex Corporation's third 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, the Company's ability to meet its obligations under the AMS Filament agreement, controlling and prioritizing expenses, managing cash and cash flows, and addressing our liquidity and capital resource needs.

Actual results could different 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 29th, 2007, and in our quarterly report on Form 10-Q for the third quarter ended September 27th, 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 finances in detail. I will then update you on our progress to date on the action plan for 2008, which remains to reestablish financial stability in the Company, to focus on our ophthalmology business, and to strengthen our aesthetics business, after which we will open the call up to your questions.

We continue to make progress in meeting our objectives. We are progressing towards financial stability. Compared to last year, we reduced our operating expenses by $2 million, which reduced our net operating loss from $1.1 million in Q3 2007 to $200,000 in Q3 2008. Cash flow from operations was modestly negative for the quarter, which we anticipated, given we repaid the final $1.5 million of our principle obligation to AMS without increasing bank debt. Our ophthalmology business continues to perform well. And our aesthetics business remains our biggest challenge.

Now I turn the call over to Jim Mackaness.

I'll start by reviewing our revenues for the third quarter. Revenues for the third quarter of 2008 were $12.0 million, an 11.7% decrease compared to $13.6 million in the corresponding quarter in 2007 and a 7.2% decrease on a sequential basis from $12.9 million as reported for Q2 2008. The main cause of the decrease is the ongoing challenge we face with our aesthetics business.

Ophthalmology revenues for the quarter increased 4.0% to $8.2 million, compared with $7.9 million for the third quarter of 2007 and level with the $8.2 million reported for Q2 2008. Looking at these revenues geographically, domestic ophthalmology revenues increased 17.0% to $5.3 million, compared with $4.5 million for the third quarter of 2007, and increased 9.3% on a sequential basis from $4.8 million in Q2 2008. Part of the increase was attributable to a strong quarter for our OEM sales.

International ophthalmology revenues totaled $2.9 million, down 13.2% compared with $3.4 million for the corresponding quarter in 2007 and down 13.0% on a sequential basis from the $3.4 million in Q2 2008. It is typical for us to see a slowdown in our international business during the third quarter due to the impact of the holiday season with the majority of our business coming at the end of the quarter. We did not experience the typical quarter-end run up. And we attribute a large portion of this to the onset of the current economic crisis, which has had a pronounced effect on certain foreign currency exchange rates and negatively impacted the availability of credit on a worldwide basis.

Although 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, an increase in the value of the U.S. dollar against any local currencies can cause our products to become relatively more expensive to customers in a particular country or region leading to reduced revenues from that country or region.

Focusing in on our recurring revenues, which consist of disposables and service, ophthalmology recurring revenues were $4.0 million, which represented 49.3% of total ophthalmology revenues for the third quarter 2008, up 9.5% from $3.7 million in the third quarter 2007 but down 8.6% on a sequential basis from the $4.4 million in Q2 2008.

Our recurring revenues provide us with a more predictable component to our ophthalmology revenue stream. Our international recurring revenues were negatively impacted for reasons previously mentioned, which contributed to a large portion of the sequential decline. And we did experience a supply issue from one of our vendors that produces disposable products for us, which also negatively impacted the quarter. With that in mind, we continue to see the performance of this part of our business as a very encouraging indicator of the strength of our ophthalmology business.

Aesthetics revenues for the quarter were $3.8 million, down 33.4% when compared with the $5.7 million for the third quarter of 2007 and down 19.9% on a sequential basis from the $4.8 million reported for Q2 2008.

Looking at these revenues geographically, domestic aesthetics revenues decreased 22.7% to $2.1 million compared with $2.7 million for the third quarter of 2007 but increased 7.0% on a sequential basis from $2.0 million in Q2 2008. International aesthetics revenues totaled $1.7 million, down 43.0% compared with $3.0 million for the third quarter of 2007 and down 38.8% on a sequential basis from $2.8 million in Q2 2008.

We sell aesthetic systems directly through our French subsidiary. And these sales are denominated in euros. And therefore, there is some exposure to foreign currency gains or losses on translation to U.S. dollars for these sales. Other international sales are predominantly denominated in U.S. dollars. And therefore, exposure to foreign currency gains or losses on translation to U.S. dollars is minimal. However, as previously mentioned, an increase in the value of the U.S. dollar against any local currencies can cause our products to become relatively more expensive to customers in a particular country or region, leading to reduced revenue from that country or region. And we do believe the current global economic crisis, which has caused a run up in the strength of the dollar against other currencies, has caused an impact in overseas markets.

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.

Our aesthetic business continues to face challenges. And although we've made progress with reestablishing our U.S. sales channel, as demonstrated by the sequential improvement in domestic sales this year, the current economic environment, which has resulted in tightening credit, both domestically and internationally, and the rising dollar internationally has negatively impacted our business.

Switching attention to gross margins and expenses, gross margins in the third quarter 2008 decreased to 41.6% compared to 45.6% reported in the third quarter of 2007. We're slightly up on a sequential basis from the 41.3% reported in Q2 2008.

The reduction in inventory in the third quarter 2008 resulted in previously capitalized production expenses being released to the income statement. This amounted to a 4.3% reduction in gross margin for the period.

Expenses in the third quarter 2008 were $5.2 million, down $2.0 million compared to $7.2 million for the third quarter of 2007. Expenses were down due to reduced headcount and related costs, reduced selling costs, and reduced marketing expenditure. Expenses were down $0.4 million on a sequential basis from the second quarter 2008.

We remain focused on controlling expenses to make sure expenses are appropriate for the level of revenues being generated and to meet our cash flow goals. As a result, our loss from operations for the third quarter 2008 were $0.2 million, an improvement of $0.9 million compared with the loss from operations for the third quarter of 2007 of $1.1 million and comparable to the operating loss of $0.3 million reported for the second quarter 2008.

As for the bottom line, the Company recorded a net loss of $0.2 million or negative $0.03 per share for the third quarter of 2008, which is an improvement over the net loss of $1.2 million or negative $0.15 per share reported for the third quarter of 2007. The net income of $0.3 million or $0.03 per share in the second quarter of 2008 included $800,000 relating to the legal settlement with Synergetics recorded below the operating loss for the period.

Looking at our cash position, cash at $3.0 million at the end of the third quarter 2008 was down from $1.1 million compared to cash of $4.1 million at the end of the second quarter 2008. Working capital increased to $9.4 million from $8.9 million. And we used $1.0 million in operations during the quarter. We were pleased with these results because during the quarter we paid the final $1.5 million of the principle obligation to AMS. WE paid for the remaining $0.4 million of contractual purchase orders and inventory received from AMS, while keeping our bank debt at $6.0 million.

The repayment of the amount owed to AMS has represented a significant financial burden to the Company. In August 2008, the Company was not able to meet the debt service covenant contained within its credit agreement with Wells Fargo Bank. However, the Company obtained a waiver from Wells Fargo Bank and was in compliance with the covenant in the agreement during September 2008 and remains in compliance.

In total, including principle, interest, and payment for the non-cancelable purchase orders, we have paid AMS $6.3 million in 2008. We believe the fact that we have fulfilled our obligations to AMS represents a significant step towards our goal of establishing financial stability for the Company through careful cash management.

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

Thank you, Jim. We remain focused on returning the Company to a cash flow positive position and profitability in as short a time as possible. We believe our ability to reduce our operating loss to $200,000 for the quarter, primarily by rigorous expense controls, and the fact that we used only $1.0 million of cash in operations, including the final $1.5 million principle repayment to AMS demonstrates management's commitment to these goals.

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

During the quarter, we received a 510(k) clearance from the Food and Drug Administration for our family of Iridex IQ Laser Systems. This is a broad clearance that covers four laser system configurations which utilize a common platform. The clearance covers the Iridex IQ 532, the IQ 577, the IQ 630, 670, and the IQ 810 laser systems and their associated delivery devices to deliver laser energy in either CW pulse, micropulse, or long-pulse modes. These laser systems are intended for a wide range of specific applications in the medical specialties of ophthalmology, ear, nose, and throat, which is ENT, otolaryngology, and dermatology.

This 510(k) covers green, which is 532 nanometers, yellow at 577 nanometers, red at 630 to 670 nanometers, and infrared at 810 nanometers in single wavelength systems. We expect this common platform concept to facilitate the efficient development and timely introduction of related products.

The first product to be released to market using this platform will be the IQ 577, which will deliver 577-nanometer yellow light from a solid-state laser in either conventional, continuous wave or micropulse mode. The IQ 577 provides a wavelength and technology that complements our product portfolio and is not commercially available from any of our competitors.

577 nanometers is of interest because it is at the peak of the oxyhemoglobin absorption curve and was a popular wavelength when the argon dye laser systems were widely distributed. However, due to complexity and poor reliability, those products are now obsolete. We believe that reliable, solid-state 577-nanometer laser system has the opportunity to fill this void.

The IQ 577 will be shown in our booth at the American Academy of Ophthalmology Annual Meeting, which starts this coming weekend in Atlanta, GA. Following the AAO meeting, the IQ 577 will be rigorously exercised at a number of physician sites. We expect revenue shipments to begin in mid-first quarter of 2009.

Our aesthetics business has been affected by the economy. During this economic downturn, we are focusing on our historical strengths, which is our large customer base in the core market to generate business. We have chosen to be very judicious in our investments in aesthetics in 2008. And we will continue to be judicious in our investments in aesthetics during these current uncertain economic times.

So going forward, you can expect us to -- one, continue to closely manage cash and expenses with the primary objective to be cash flow positive. Because of the current economic uncertainties, it has become apparent that many other companies are having to prioritize their businesses to similarly make the management of their cash flows as their primary objectives. We believe the work we have done over the past nine months will be beneficial to the Company's ability to ride out the current economic uncertainties.

Two, we'll focus on continuing to grow our ophthalmology business, as illustrated by the addition of the new yellow laser; and three, strengthen our aesthetics business by focusing on building our sales and service channels.

We will now open the lines for questions. Hello?

Thank you, sir. (Operator Instructions) And our first question comes from the line of [Larry Hamil] with [HMTC]. Please go ahead, sir.

Good afternoon, gentlemen.

Afternoon, Larry.

Ted, I was very pleased to hear you talk some about the yellow laser because I recall at an ophthalmology show not that long ago there was a lot of interest. Is that product going to be proprietary? In other words, can other people enter the yellow arena without infringing on any patents or other proprietary knowledge?

Well, we don't talk about proprietary until we have a patent issued. But other people have entered products that are yellow. But none have entered it at 577. And none have had these micropulse or fine control pulsing capabilities that we offer on our IQ 577.

And what about solid state then? Are they offering solid state?

There are some solid state yellow lasers. But they don't perform the same on oxyhemoglobin as 577.

So this could turn out to be a pretty significant new product for the Company in 2009, shouldn't it?

It could be.

Okay. Let me jump over to Jim and ask Jim a couple questions. Jim, you mentioned in your prepared remarks that the -- in the ophthalmology business benefited from some strong OEM sales. And I recall a couple of years ago a quarter when you had a similar situation. Then a year later when we went against that comparison, it was a tough comparison. How significant was the OEM business this third quarter versus, for example, last year's third quarter?

Last year was $400,000. Q2 was $400,000. And this quarter, Q3, it was $700,000.

So it's not a huge number. It was better, but not a huge, huge number.

Correct, not worth calling attention to.

And that number jumps around from quarter to quarter depending on just timing of shipments and this sort of thing.

Correct.

I want to make sure I understand. You've talked about cash management. And needless to say, in this environment, we're all happy to hear you talk about that, both of you. Jim, I want to make sure I understand. You paid AMS in the quarter. Tell me -- what did you pay AMS in the quarter? And what does that imply for actual operations, operating cash flow, if you will?

Okay. So within the balance sheet, if you like, we obviously had the principle accrued. So we made payments against the principle of $1.5 million. So if you were to look at our cash flow, you would be able to determine that our accrued expenses reduced by $1.5 million for that element that was paid to AMS. In addition, we were required to make payments for non-cancelable purchase orders. The aggregate amount in Q3 for those was $400,000.

Okay.

And they have ceased as well. And then obviously, there was interest that we had to pay on the deferred payment stream, if you like. So that doesn't necessarily come out from the cash flow perspective. But it obviously is cash out to us as we pay the interest.

So with that -- so roughly -- my own math here now. Correct me obviously if I'm wrong. Roughly $2 million or so in cash directly -- indirectly, however you want to say -- attributed to AMS payments this quarter.

Correct.

Okay. So if I add that back, the Company in fact generated cash in the normal course of business this quarter.

Correct.

And how much would that be?

Well, we were about $1 million negative for the quarter. So if you add the full [two bank] to it, you'd flip it to $1 million positive.

Okay. Very good. So the Company is operating on a cash flow positive basis. And should -- if sales in Q4, Jim, were to remain static with Q3 -- let me make that assumption. I'm not asking you to forecast. But if the sales in Q4 are exactly the same as Q3, would you expect the Company to maintain a similar level of cash generation in Q4?

Similar. The only item that I'm wrestling with is we have all our insurance premiums that come due. And they tend to get paid out upfront for an annual basis. So that's a -- I'm commenting on that because that's a reasonable-sized one, out of something like $400,000 perhaps plus or minus. That would be -- that's an anomaly in Q4 compared with Q3. But other than that, as you said, we would expect things to basically move forward consistently.

Okay. And when you look at how you plan for '09, what type of currency levels are you viewing in the planning process? And what type of economic environment are you looking at? And obviously, that affects aesthetics way more than it does ophthalmology.

To be candid, we're working our way through that I think as similar to a lot of other folks. So I don't have a conclusion at this stage.

Okay. And will you be at the AAO, Jim?

No, unfortunately, I won't.

You're going to be back at the ranch.

Yes.

Okay. Well, I'm sorry I won't meet you. But continue the great job, Jim.

Thank you.

Thank you very much.

Thank you, sir. And our next question is from the line of Hesham Shaaban with Maxim Group. Please go ahead, sir.

Actually, most of my questions have been answered. I just wanted to get a little bit more color on the aesthetics side. Would you be able to break out the international-domestic aesthetic sales again?

Yes, hang on one second. Aesthetic revenues -- domestic aesthetic revenues were $2.1 million in this quarter compared with $2.7 million for the third quarter of 2007 and compared to $2.0 million for Q2 of 2008.

Okay. And as far as your goals heading into '09, I mean, just to paraphrase if I can -- we're going to continue to manage cash expenses and grow the ophthalmology business. And then you touched upon the aesthetics side. Would you be able to provide a little bit more color on what you're expecting, like what your steps are, what you're thinking as far as building out aesthetics a little bit more?

Well, I think my comments that we will be very judicious in these investments takes that in consideration. We are cautiously looking at all the expenses and trying to do it carefully and balance them to the revenues that we expect that they will deliver on a shorter term. Our horizons are short on the aesthetics business.

Okay. And as far as your outlook for your dedicated aesthetics sales force, I believe the last count was six reps, if I'm correct. Are you -- is that still current? Are you planning on scaling back at all? What is your outlook as far as your sales force?

We have five for headcount that are focused on domestic-aesthetic sales generation.

And plans going forward as far as --

We're not planning on making any changes right now.

All right, thanks for taking my questions.

Thank you, sir. (Operator Instructions) All right, I'd like to hand the call back over to management. I have no further questions in the queue.

Well, in that case, I want to thank everybody for your participation in this call and for your interest in Iridex. And we look forward to sharing our progress with you at our next earnings call. Thank you.

Ladies and gentlemen, this concludes the Iridex third quarter 2008 earnings conference call. If you'd like to listen to a replay of today's conference, please dial (303) 590-3000 or (800) 405-2236. Enter access code number 11122023. ACT would like to thank you for your participation. You may now disconnect.