IRIDEX Corp (IRIX) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the IRIDEX conference call. During the presentation all parties are in listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Thursday, May 14th, of 2009. I will would now like to turn the conference over to our host Mr. Ted Boutacoff, President and CEO. Please go ahead, sir.

Thank you, Val. Welcome to the IRIDEX Corporation's first quarter 2009 conference call. I am Ted Boutacoff, President and CEO. With me is James 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 sections 21E of the Securities Act of 1934 as amended. Relating to the Company's financial strength, growth, strategy, and prospects, revenues, gross margin, earnings, controlling and prioritization 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 our annual report on Form 10-K for the fiscal year ended January 3rd, 2009, 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. We have some good news to share with you today. During our first quarter we made significant progress towards achieving our 2009 objectives. Our key accomplishments during the first quarter were; one, we continued our sequential string of quarters being cash flow positive by generating $0.9 million of cash from operations. And two, we returned to profitability.

Returning to profitability given the current distressed economic environment represents a major accomplishment for the Company. This is the first quarter we've been profitable on an operating income level since the fourth quarter of 2005. Vital to our achieving profitability during the quarter were improvement in gross margins to 47% of revenues, managing our operating expenses exceptionally well, and the dedication and determination of our employees.

At this time, I'll turn the call over to Jim MacKaness, who will discuss our quarterly financial results in detail. After Jim's comments, I will update you on some important events which have occurred since our previous call. And then I'll close with an update of our progress towards meeting our 2009 objectives. After which we'll open the call to questions. So, Jim.

Thanks, Ted. I'll start by reviewing our first quarter revenues. Our revenues for the first quarter of 2009 were $10.7 million. A 6% decrease compared to $11.5 million reported for the corresponding quarter in 2008 and a 12% decrease on a sequential basis from $12.1 million as reported in Q4 2008. Historically we have experienced seasonality in our quarters with our fourth quarter typically being our stronger quarter and our first quarter being our weaker quarter.

Opthalmology revenues for $7.5 million, consistent with $7.5 million for the first quarter of 2008 and down 11% on a sequential basis from the $8.5 million reported in Q4, 2008. Looking at these revenues geographically, domestic opthalmology revenues reduced 2% to $4.3 million, compared with $4.4 million for the first quarter of 2008. And were down 17% on a sequential basis from $5.2 million in Q4 2008. We did see domestic customers reduce system purchases due to tight budget restrictions, but view these as delayed opportunities rather than lost. And expect demand for systems to pick up when the economy starts to show signs of stabilizing. International opthalmology revenues total $3.2 million, up 4% from the corresponding quarter in 2008, but were down 2% on a sequential basis from the $3.3 million in Q4 2008.

Focusing on our recurring revenues which consist of consumable laser probes and service, opthalmology recurring revenues were $4.4 million, which represented 59% of total opthalmology revenues for the first quarter of 2009. This represents a 7% increase from the $4.2 million in the first quarter of 2008, and was consistent with the $4.4 million reported in Q4 2008. Recurring revenues in opthalmology have continued to increase year-over-year which is impressive given the severity of the global recession. Opthalmology procedures are typically nonelective and in the US reimbursed by insurance. This part of our business provides us with a dependable revenue stream and is a major strength that the Company can rely on during these challenging economic times. Opthalmology recurring revenues continue to be a key focus for the Company.

Aesthetic revenues for the quarter were $3.2 million compared with $3.9 million fir the first quarter of 2008, down 19% and down 12% on a sequential basis from the $3.6 million reported in Q4 2008. Looking at these revenues geographically, domestic aesthetics revenues increased 37% to $2.0 million, compared to $1.5 million for the first quarter of 2008. And increased 19% on a sequential basis from $1.7 million in Q4 2008. International aesthetics revenues total $1.1 million, down 53% compared with $2.4 million for the first quarter of 2008 and down 40% on the sequential basis from $1.9 million in Q4 2008.

We were pleased with the increased performance of our US direct channel, particularly given the fact that the overall aesthetics market has seen a sharp contraction. Aesthetics procedures are frequently elective and paid for by the patient and so demand for these procedures is impacted by the availability of consumer discretionary dollars. The purchase of capital equipment in this market often relies on credit and the current economic environment has resulted in tightening credit both domestically and internationally.

Switching attention to gross margin and operating expenses. Gross margin in the first quarter 2009 increased to 47.0%, compared with 41.9% reported for the first quarter of 2008, and increase from 37.5% reported in Q4 2008. We did indicate in our last conference call that we believed our gross margins under normal circumstances would trend between 45% to 50% on average during 2009 and see our performance for Q1 as validating this belief. We are no longer suffering the negative impacts to cost of revenues associated with the amortization of in tangible assets and given our performance and outlook do not see a need to make any significant changes to our inventory reserve.

Operating expenses in the first quarter of 2009 were $4.7 million, a decrease of $0.9 million or 15% from $5.5 million from the first quarter of 2008. And down $6.2 million or 57% from $10.9 million for the fourth quarter 2008. It should be noted that the fourth quarter 2008 included an impairment charge of $5.4 million.

We continue to monitor our expenses closely and are focused on investing our money in areas of growth. With our strong margin performance and tight control over operating expenses we generated an operating income of $0.4 million or 3.4% of revenues and EBITDA of $0.6 billion or 5.6% of revenues. Our EBITDA calculation does not include any add back for non-cash stock compensation expense. As Ted said in his opening remarks, this is the first quarter since the fourth quarter of 2005 that we've generated an operating income.

As for the bottom line, the Company recorded a net income of $0.2 million or $0.03 per share for the first quarter of 2009, as compared to a net loss of $0.9 million or $0.10 per share for the first quarter of 2008 and to a net loss of $6.5 million or $0.13 per share for the fourth quarter 2008. Again, it should be noted that the fourth quarter of 2008 included an impairment charge of $5.4 million.

Looking at our cash flows. For the first quarter 2009 we were cash flow positive. We generated $0.9 million in cash from operations. And excluding the payments we made to AMS during the first three quarters in 2008 and this represents the fifth straight quarter that we have generated cash from operations. Our cash position from the end of Q1 2009 was $5.7 million, up from $5.3 million at the end of the fourth quarter 2008. And our bank debt was $5.5 million, down from $6.0 million at the end of the fourth quarter 2008.

With that, I'll turn the call back over to Ted.

Yes, thank you, Jim. There are two noteworthy events which occurred subsequent to our previous conference call that I would like to share. The first is that in April we began shipping our IQ577 laser system for commercial sale to customers. The IQ577 is a high power true yellow 577-nanometer wavelength laser system for use by ophthalmologists. As we dicussed on previous calls, the IQ577 is the first of a family of laser systems which will be released on this new IQ platform.

And second, last week at ARVO, and ARVO is an annual opthalmology research meeting. At the meeting, three results of an NEI clinical study comparing laser versus intravitreal injection of Triamcinolone for the treatment of diabetic macular edema were presented. Triamcinolone is a steroid compound. Two-year results published in September 2008 showed that four-month results significantly favored the Triamcinolone group.

By one year, there was no significant difference between the groups. But by 16 months and extending to two years the mean visual accuity was significantly better in the laser-treated group than in the Triamcinolone treated groups. The three-year results presented at ARVO last week showed continue benefit of the laser treatment over Triamcinolone.

So why is the study important to us? Well, for one, this is the first large clinical study that confirms that shorter term, less than a year, benefits of pharma, and the longer term benefits of laser. It also confirms that there is a solid need in the foreseeable future for laser treatment of diabetic macular edema, which is the most frequently performed retinal laser procedure.

Now I would like to take a few minutes to cover and review our performance in meeting our 2009 objectives. In short hand and in priority order, our 2009 objectives are one, be cash flow positive, two, drive to profitability, and three, drive for growth. Now please note we see profitability as demonstrating that we are operating in an efficient business. And therefore place profitability at a higher priority than growth. However we anticipate that there will be times going forward where we choose to make incremental investments to drive long-term growth in preference to limited operating expenses to drive short-term profitability.

So I will comment on each objective individually. The first one, I believe our performance in meeting our primary objective has been very good. We have been cash flow positive from operations for our past two quarters. And excluding the payments we made to AMS during the first three quarters of 2008, we have generated cash from operations for five consecutive quarters. The cash generated over these five quarters, excluding AMS repayment, totals $7.1 million.

On the second objective, during the first quarter we achieved profitability on an operating profit level despite a back drop of tough economic times which has resulted in reduced revenues. This gives me comfort that we have created a very efficient operation that will be able to weather these economic times and take advantage of growth opportunities. Third, being efficient allows us to focus more of our resources towards growth. The growth opportunities we're looking at will be in opthalmology.

We are focused on opthalmology for several strategic reasons. One, because this is our core competence. Two, because this is what IRIDEX's brand is recognized widely for, and three, opthalmology is a business that can grow even in tough economic times. We see growth coming from both within, through the introduction of additional consumables and systems such as the IQ577. And through complementary acquisitions, which are accretive, small tuck-in revenue opportunities, which provide complementary opthalmology products and/or complementary channels. Of course at any time we welcome the economy to turn around and make some contribution to our growth.

Now I would like to open the line up for questions.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). One moment please for the first question. And our first question comes from the line of Larry Haimovitch with HMTC. Please go ahead.

Good afternoon, Jim, good afternoon, Ted.

Good afternoon, Larry.

Good afternoon, Larry.

Congratulations on profitability. I'm sure you're feeling very happy about that.

Thank you.

I wanted to ask you, looking at the opthalmology revenue, which was stable, flat for the quarter, disposables were up a little bit, capital equipment was down. Can you talk a little bit more about the capital equipment environment? Was the capital equipment down mostly because of just the capital equipment environment or in fact is there any competitive issues that we should be aware of?

What we heard directly was the selling environment was very, very challenged in Q1. And definitely the fact that we saw predominantly potential orders being delayed. So we're attributing it more to economic situations than attributable to any competitive situation.

Okay. And then looking at the cosmetic business, have you seen any signs at all that it's beginning to stabilize because the economy, from what I hear, is -- the consumer's feeling a little better. Certainly discretionary consumer spending is still a little bit soft, but any kind of subjective thoughts? You're halfway through the quarter, I'm not trying to find out about the quarter more, I'm just trying to get a sense of how you're seeing the cosmetic market right now.

I think the anecdotal evidence we've got is the fact that those practitioners, particularly in the core market, who have focused on making this their core business, continue to actually perform well and see good results. That doesn't necessarily mean they're back in the market for new equipment but they certainly seem to make money. But I think the peripheral markets are still suffering.

Okay. And then the cosmetic business, Jim, how much is capital equipment versus disposable?

In the cosmetic?

Or disposable/service?

Yes. Let me just have a look. So service revenues for aesthetics were $1.6 million for the quarter.

And that's on a revenue base? Was it 3.2? I don't have the press release.

Right.

So 50% of your revenue in the cosmetic side is recurring and over 50%, 60% or something, in the opthalmic area?

Correct. Yes.

I'll jump back in queue if there are other questions waiting, otherwise I'll keep going. I'll let the operator determine that? I have a couple more questions, but I don't want to hog the scene here.

Okay. We have one other question in the queue. And our next question comes from the line of [Stan Manning with Manning Family Investments]. Go ahead.

Good job, Ted and et cetera.

Thank you, Stan.

I have several questions. One, you mentioned the IQ577 yellow laser intro. What you didn't mention is the commercial acceptance. Have you sold any systems? What does that look like?

Yes. We have sold. We started shipping them for revenue. And the response has been -- has been good to the performance of the laser, wavelength and the visualization of the optical system that we have. People are being able to -- the comments we've received from our customers, users, are that they can see clearer, they can use less energy, overall energy to deliver and create an outcome that they want. And they're very, very pleased with the performance. So we're becoming kind of increasingly optimistic about the potential of this product.

What does the system sell for?

We have a basic system in the US that sells for -- I think we're at $59,000. $59,500.

And is that with all of the accuterments on it?

You can always add accuterments and then add it up, but that's the basic system where people can --.

All right. What about the disposable that go -- what is the disposable picture on the IQ?

The IQ577 is directed towards the office. We have the [Juarez] our disposables are primarily in the operating room.

So there are no disposables with the 577?

There are no disposables. If the IQ577 were used in the operating room, then there would be disposables that's could be used with the IQ577.

Is there a service of any recurring revenue with that?

Yes, I mean -- after the warranty period, you have service available for that, yes.

Is there another family that is planned to go into the operating room?

Yes. We have an IQ family that is going into the operating room.

And that is due to -- we'll see that this year or next year? What is your expectation?

We're not predicting it. We're going to release it first and then we'll tell everybody that it's released.

Okay. Second question. You spent a little time on your objectives and you mentioned acquisitions, tuck-ins, product line. Where are you on that? Is there something on the near horizon or is this just a conceptual dream?

Well clearly we've been focusing on the basics here for the last year very rigorously. Now Jim and I feel much more comfortable that the business is operating efficiently and performing well, then we have a better opportunity to look beyond our current. We have obviously, we have constant efforts working on the -- the products we're developing inside. The organic growth. In the M&A ones, we have discussions that are almost continuous.

Have you seen opportunities in the last year, two years, at the time when you couldn't do anything, that are good possibilities and accretive tuck-ins? Have you seen that?

The requirements we have are, as we define, a tuck-in is something that we can absorb efficiently, easily, without making great impact to the organization. So having that, that's accretive, it's tougher in this economy. So we have to make some projections on how they will perform as the economy changes.

Okay. But have you seen -- I mean it's been two years where we've been working with just the basics, tossing the ball in the infield. But during this time have you seen these opportunities that we could -- would be brought to fruition near term?

No. Dam, we haven't spent a lot of time in the last couple of years looking at acquisitions.

Okay. So this is a new area of investigation?

Yes. This is a new initiative.

All right. My last question is my favorite one. When are you going to sell the aesthetics business and get on with our total process of moving forward?

Well, I think it comes back to the general topic of M&A. And we're always looking around at all opportunities. Obviously if there is an opportunity we thought that made sense to desegregate then we would move forward with it.

Well we could almost give it away with a bow on it and we would be ahead of the game. That's the only reason I mention it.

We still view our aesthetics as contributing. We assess both the aesthetics and opthalmology very closely on direct contributions to make sure that overall they're contributing. So that's one of our key metrics for making sure that we have valuable paths in our business.

Now we did have a aesthetics manager in the last six months? Is that accurate?

We have someone who is managing the US aesthetics business.

Well and that's your -- that's the business where it increased in the last quarter?

Yes, but that's a person we've had on for about a year. He's -- he's --

Not new.

He's not new within the last six months, no.

Okay. But he's more experienced?

Absolutely.

So are you basically starting to see a little bit of a turn in that market?

I think it's too early to say that.

It is too early. Okay. Any way, congratulations on a really, really good job.

Thank you, Stan.

Thank you. (Operator Instructions). And our next question is a follow-up question from the line of Larry Haimovitch with HMTC, please go ahead.

Ted or Jim, when did you start shipping the IQ577? Was it in Q1 or Q2?

It was in April.

Okay. So you didn't book anything in Q1 then?

No.

Did you go into the shipment period with a significant backlog of -- that enabled you to get a good running start on the shipments?

Well, no. If Jim mentioned, we've been very, very careful with the launch of the IQ577 by placing it in a number of key potential sites, to get feedback and make sure we're listening to that feedback. So we would anticipate that this would generally percolate out over the course of this year.

Okay. As I recall, the IQ577 had a pretty broad platform and when you got the final FDA approval it included much more than opthalmology. Can you speak to its use outside of opthalmology?

The IQ577 had both opthalmology and dermatology indications in the 510-K.

Wasn't there something Ted, unless I'm totally nuts, I thought there was something for EMT or some other applications which I wasn't aware it could be used for?

Yes, well remember the approval for the FDA is for the IQ family, which is both for yellow, green, red and infrared, it's a whole series of products. And within that approval, there was opthalmology, dermatology and EMT.

Okay. Are you doing -- are you addressing anything outside of derm and opthalmology with the current product?

With the IQ577 no, but obviously with some other members of the family we will target toward EMT.

Okay. Good. So it sounds to me like the IQ577 will be gaining momentum as you get more experience and as your customers give you the kind of feedback that you're looking for that gives you the feeling that you can go more aggressively to really develop this product?

Yes. Agreed.

Great. Thanks again.

Thank you.

Thank you. And I'm showing there are no further questions in the queue. I turn it back over to management for any closing comments.

Well I would like to thank you for participating in this call and four your interest in IRIDEX. And we look forward to sharing our progress with you on our next call. Thank you.

Thank you, sir. Ladies and gentlemen, this call will be available for replay. If would you like to listen to a replay of today's call, please dial 303-590-3030 or 1-800-405-7325 enter the pass code 407-5884. Once again those numbers are 303-590-3030 or 1-800-405-7325. Enter the pass code 407-5884.

That does conclude today's IRIDEX first quarter 2009 earnings conference call. Thank you for your participation. You may now disconnect.