IRIDEX Corp (IRIX) 2009 Q2 法說會逐字稿

Welcome to the IRIDEX second quarter 2009 earnings conference call. During today's 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, August 13 of 2009. I will turn the conference over to our host, Mr. Ted Boutacoff, President and CEO. Please go ahead, sir.

Welcome to IRIDEX Corporation's second quarter 2009 conference call. I'm Ted Boutacoff, President and CEO. 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 strengths, growth, strategy, and prospects, and future payments from Synergetics. Actual results could differ materially and adversely from these 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 quarterly report on Form 10-Q for the quarter ended July 4, 2009 and annual report on Form 10-K for the fiscal year ended January 3, 2009, each of which was 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. Today we announced our second consecutive profitable quarter. This is a major accomplishment in this economy, because similar to other companies, we are seeing orders for our products being delayed and therefore our revenues reduced. Against that backdrop, we have continued to improve our performance. Last year we had an EPS of $0.03 per share. This year we earned $0.13 per share. Last year we had a loss from operations. This year we had a profit from operations. Last year our gross margins were 41.3%, and this year our gross margins are 45.9% -- and our ability to generate cash has remained excellent.

During the second quarter of 2009, we achieved another important milestone towards financial stability. We use a metric for balance sheet strength which is calculated as cash, less accounts payable and third party debt. In this calculation, third party debt includes bank debt, and our historical obligation to AMS. During the second quarter our balance sheet strength turned positive and ended the quarter at plus $0.8 million. In comparison, at the beginning of fiscal 2008, our balance sheet strength was negative $9.5 million, an improvement of about $10.3 million over that period.

As we stated in our press release, at the start of 2008, we laid out our vision of strategy for the company. Our first objective was and continues to be cash generation. We have been and continue to be very successful in generating cash. Our second objective was to drive the company to profitability, and we have now achieved two consecutive profitable quarters. With this momentum, we are turning our attention to our third objective, which is growth. As the economy improves, we anticipate seeing our current business grow. In addition, together with our internal product development, we are looking at opportunities outside the company to add complementary products that will allow us to strengthen our position in existing markets, and I will speak to this more at the end of our prepared comments.

At this time, I turn our call over to Jim Mackaness, who will discuss the quarterly results in detail.

Thanks, Ted. I will start by reviewing our second quarter revenues. Revenues for the second quarter of 2009 were $10.5 million, a 19% decrease compared to $12.9 million reported for the corresponding quarter in 2008 and as 2% decrease on a sequential basis from $10.7 million as reported in Q1 2009. Ophthalmology revenues for the quarter were $7.6 million, down 6% or $0.5 million from the second quarter of 2008, but up 1% on a sequential basis from the $7.5 million reported in Q1 2009. Looking at these revenues geographically, domestic ophthalmology revenues decreased 9% to $4.4 million compared to $4.8 million for the second quarter of 2008, but were up on a sequential basis from the $4.3 million in Q1 2009.

As we commented during our last earnings call, we continue to see hospitals in the US reduce system purchases due to tight budget restrictions, but we view these as delayed rather than lost opportunities and expect demand for systems to pick up when the economy starts to show signs of stabilizing. There are some early signals we may be reaching that inflection point soon.

International ophthalmology revenues totaled $3.3 million, down modestly from the $3.4 million for the corresponding quarter in 2008, and up sequentially from the $3.2 million in Q1 2009. Focusing on our recurring revenues, which consist of consumer, laser probes, and service -- ophthalmology recurring revenues were $4.2 million, which represented 55% of total ophthalmology revenues for the second quarter 2009. This represented a 4% decrease from the $4.4 million reported in both the second quarter of 2008 and Q1 2009.

The reduction in recurring revenues in ophthalmology reflects the severity of the recession. For the first six months of 2009, recurring revenues were $8.7 million compared with $8.6 million for the comparable quarter of 2008. So we have seen growth on a year-to-date basis. We do face competition in the US and overseas for this business. Although we are disappointed with the decrease in the second quarter of recurring revenues, we continue to maintain good margins and not change our value proposition here or in other parts of our ophthalmology business. We offer quality products with superior reliability, and therefore our products command higher than average prices in the market. We think it's important to maintain the integrity of our value proposition, especially in these tough times, because it will position us for stronger growth in a recovering economy.

Aesthetics revenue for the quarter were $2.9 million compared with $4.9 million for second quarter of 2008, down 40%, and down 10% on a sequential basis from the $3.2 million reported in Q1 2009. Looking at these revenues geographically, domestic aesthetic revenues totaled $1.6 million, down 20% compared with $2.0 million for the second quarter of 2008 and down 23% on a sequential basis from $2.0 million in Q1 2009. International aesthetics revenues totaled $1.3 million, down 54% compared with $2.8 million for the second quarter of 2008, but up 13% on a sequential basis from $1.1 million in Q1 2009.

Switching our attention to gross margin and expense, gross margins in the second quarter 2009 increased to 45.9% compared with 41.3% reported for the second quarter of 2008, although down from the 47.0% reported last quarter. The primary improvement from prior year's comparable quarter is because we are no longer suffering the negative impact of cost to revenues associated with the amortization of intangible assets. The improvement in margin is all the more impressive given the reduction in revenues over the comparable periods.

Operating expenses in the second quarter 2009 were $4.4 million, a decrease of $1.2 million or 21% from $5.6 million for the second quarter 2008, and we're down $0.3 million or 5% from $4.7 million to the first quarter 2009. We continue to monitor our expenses closely and are focused on investing our money in areas which would generate revenue growth. With our margin performance and close control over operating expenses, we generated an operating income of $0.4 million or 3.8% of revenues compared to an operating loss of $0.3 million for the second quarter 2008. This is our second sequential quarter of operating income.

A brief comment on other income -- the second quarter of 2008, 2009, 2010, 2011, and 2012 have and we expect will benefit from an $800,000 payment from Synergetics relating to a legal settlement. These amounts are shown in the profit and losses part of other income. This takes us to the bottom line. The company recorded a net income of $1.2 million or $0.13 per share for the second quarter of 2009, compared to a net income of $0.3 million or $0.03 per share for the second quarter 2008 and a net income of $0.2 million or $0.03 per share for the first quarter of 2009. EBITDA for the quarter was $1.4 million and was 1.9 million for the first six months of 2009. This does not include adding back FAS 123R stock compensation expense, but does include other income from Synergetics.

Looking at our cash flows -- for the second quarter 2009, we were cash flow positive again. We generated $1.9 million in cash from operations. Our cash position at end of Q2 2009 was $6.6 million, up from $5.3 million at the end of 2008, and we reduced our bank debt to $4.5 million, down from $6 million at the end of last year. With that, I will turn the call back over to Ted.

Thank you, Jim. We see these results as validating the work we have done to create a very efficient and scalable business. The challenge that lies before us is growth. As the economy improves, we anticipate seeing our current business grow. And because we have maintained our value proposition and brand in the market and have an efficient and scalable business, this will drive earnings growth. In addition, we want to capitalize on the momentum we have to generate incremental growth through additional product introduction and through complementary acquisitions.

As you are aware, shipments of our new IQ577 laser system commenced last quarter. I have a quantitative and a qualitative update for you today. Quantitatively, we have had single digit unit sales to date. Qualitatively, customer comments on the system utility and performance have been, without exception, very positive. They have confirmed that the IQ577 allows them to achieve similar treatment end points while using less laser energy compared to traditional green laser wave lengths. Lower energy helps reduce collateral damage from the photocoagulation procedures, while maximizing patient comfort. Both of these characteristics may contribute to a more efficient patient treatment experience and enhance clinical outcome. There is growing evidence that -- such as this that the IQ577 provides the ophthalmic surgeon with the most flexible and tissue sparing visible laser system available. We will further refine and solidify these qualitative benefits as new reference centers are added worldwide and we expect sales to increase accordingly.

While its benefits are becoming more obvious and compelling, the IQ577 is one of the most expensive products in our ophthalmic product portfolio. The launch of such a high end product in the current economic climate presents us with a significant challenge. We remain patient and confident and continue to work with luminaries to demonstrate unique benefits of the IQ577 Yellow while further optimizing our supply chain and manufacturing process [fees] to allow us to deliver product with obvious and unique customer value while maintaining acceptable margins.

I also wish to reemphasize is that the resources and efforts invested in making the IQ577 ready for market have also included much of the groundwork common to additional members of the IRIDEX IQ product family. We have already developed a flexible platform and obtained regulatory clearances for future anticipated products. This will pay a dividend in the form of an efficient and rapid deployment of future products to further enhance our laser product portfolio. As we mentioned in our last conference call, we do see small M&A deals as part of our growth strategy. We are in the very early stages of setting this process up. The momentum we have achieved to date is very important to making this effort a success, because as we demonstrate our progress, we become a more appealing partner to other successful ventures.

I will now open the line up for questions.

Thank you, sir. We will now begin the question and answer session. (Operator Instructions). Our first question comes from Stan Manning with Manning Family Investments. Please go ahead.

Reasonably good quarter. I have some questions. You didn't talk very much about the aesthetic line. Could you give us a brief overview how you see it and what's happening and give us some confidence we aren't going totally backwards?

Well, the aesthetic line strategy remains the same. We are balancing our direct expenses with the revenue levels we are getting, and we are still receiving a direct margin contribution from the aesthetics family.

Okay. We discussed in past the possibility of selling off that product line or giving it away to charity or something, to clean up our business operation and focus. Any comments on that?

I think as long as it's making a solid direct contribution, it's a value to the company. And it also is -- we still have the inventory from the Laserscope acquisition which we are converting to cash. So that's a very important part of that.

I understand that. If it was sold off, you would sell off inventory and assets, so the cash would come in and you would be able to focus on the ophthalmology line. Do you -- are you seeing -- you implied you are seeing a turn in the marketplace in ophthalmology. Can you speak a little more toward that? And the yellow laser seems to be -- it could be a significant winner. Could you give us a little more detail on what you see with the yellow laser? And also online extensions that you allude to?

We have three questions there.

I know.

The comment that Jim made on the -- we are starting to see some changes in the inflection point of sales, particularly system sales. And I think that's comforting for us and for anybody in industry, because the recession has affected everybody, and we are starting to see some people pay. We are seeing people pay quicker, so seems like credit is opening up. So those are very positive trends. Does that answer the first question?

Yes, is this $100,000 unit -- you said that it was very expensive?

Now there -- I'm talking generally of our product. Secondly and specifically, on the IQ577, that is a -- domestically it was priced at $60,000 for the laser and the delivery device. And that is more than twice the cost of our next level of green laser photocoagulator.

Do you rent it to alleviate the upfront cost?

We offer -- we don't rent it, but we offer leasing.

That's what I meant, leasing.

Yes.

What about the product extensions, where this can lead to?

The platform that we developed that delivers this IQ577 yellow light can be used to deliver other wavelengths. And this wavelength, these family has already been submitted to the FDA and cleared by the FDA for product line extension. That will not be a delay in introductions of new products. We have basic platform and the regulatory path.

What does it do for us, I guess for us? We are investors, not doctors.

We can get products out quicker that way. So without as much R&D effort and resources.

Is there a vision of actual products near term?

Yes, there is.

And is the market significant and is there a market requirement for?

Yes, there is.

Okay, so we could see some leveraging up of sales once things loosen up?

And we are also optimistic in that regard.

Could you -- then last question is, could you speak to the M&A and whether they would be accretive and what thoughts you have on that?

Well, yes. We're in the early stages as we go through, because now we can spend a bit more time focusing on this. The general concept would be we like to make sure that they are accretive at the start -- that makes the hurdle for us easier to clear -- and we will continue to broaden our funnel and just sift through these opportunities. As we said we really -- in the bull's eye, we are looking for small items relatively that can add to our existing product. We internally turn it as a make versus buy proposition, with the idea -- do we wish to invest intending to make this product or should we look at an opportunity to buy them from a third party?

Are there real options that you are already looking at? Realities?

Let's put it this way, there are some targets in the first part of the filter.

Okay. Your filtering of potential. And you are looking at accretive, so we will not be diluted or get into a problem area like we did with the Laserscope purchase?

For sure, exactly.

Good job in turnaround.

Thank you, Stan.

Thank you, and our next question comes from the line of Larry Haimovitch with HMTC. Please go ahead.

Good afternoon, gentlemen. Good progress on the income statement. I wanted to follow up on the previous questions. You got into some of the things I was interested in. I wanted to understand your process better in terms of some of these potential acquisitions you may make. How are you finding them? How are you screening them? Who was involved in the process of evaluating them? What sort of due diligence you are planning to do? Et cetera, et cetera.

All good questions and as we emphasize, we are in the early stages of this. I think we want to make sure that one sort of approach that we are doing -- so we have multiple approaches going on -- but one approach is we are looking to explore the realm of diagnostic and therapeutic ophthalmology and we're looking to populate a product map across all of that, and then we are looking to determine which products we currently have, which products we would like to have, and which products we really don't intend to have because they don't have synergies or fit well with us, and use that as a way to at least try and identify targets and move forward in that fashion.

We also obviously -- as we start to become more successful, naturally inbound calls start to increase, so we have that part of the process going as well. I think to your point is to who. It will definitely be a team effort. We want to make sure that we understand I think particularly starting from the market and working our way back in, and our channel, so those are items that we want to make sure we understand. Then once we get through that part of the filter, you've got to get into the financial side. It's going to be a pretty arduous and time consuming process. We are beginning to embark upon it.

Given the stock price where it is, Jim or Ted, and given the fact that the company doesn't have a lot of cash, I'm wondering -- I would assume these acquisitions have to be rather small initially, because you don't have cash or stock that you'd like to trade for it.

Our initial target would be the low single digit millions, exactly. The issue, of course, is as we go through it, we have our internal filter. We have to take it out to the world and map it on the world and figure how many targets pass through it. There is still a bit ahead of us to really get it down to real life objects that we can talk to.

People I have been talking to who are trying to make acquisitions in other industries within healthcare tell me that the prices really haven't come down that much, even though valuations in the public's sight, including IRIDEX's stock, has come down a lot. Curious what your thoughts are, Jim?

From what I've heard as well, that is true. I think that again is one of the items we know that we will have to work our way around, and just deal with. So yes, I heard the same thing.

And have you -- are you not far enough down the road with your own acquisition to be able to say yes, prices are too high?

Correct.

Thank you.

Thank you. (Operator Instructions). I'm showing there are no further questions in the queue. I'll turn it back to management for any closing comments.

Thank you for participating in this call and for your interest in IRIDEX. We look forward to sharing our progress with you at our next call.

Ladies and gentlemen, that does conclude IRIDEX's second quarter 2009 earnings conference call. If you like to listen to a replay of today's call, dial 303-590-3030 or 1-800-406-7325. Enter the passcode 40133387. Once again, those numbers are 303-590-3030 or 1-800-406-7325. Enter the passcode 40133387. Thank you for your participation and for using ACT Conferencing. You may now disconnect.