IRIDEX Corp (IRIX) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the third quarter 2009 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). This conference is being recorded Thursday, November 12, of 2009.

I would now turn the call over to Ted Boutacoff, President and CEO. Please go ahead, sir.

Welcome to IRIDEX Corporation's third quarter 2009 conference call. I am Ted Boutacoff, President and CEO. With me today is Jim Mackaness, our CFO, and 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. 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 our quarterly report on form 10-Q for the quarter ended October 3, 2009, and annual report on form 10-K for the fiscal year ended January 3, 2009, each of which was filed with the Securities & Exchange Commission. Forward-looking statements contained in this conference call are made as of this date and will not be updated.

Thank you, Susan. Well, I am pleased to report that we are making progress. Today we announced our third consecutive profitable quarter. We generated net income of $650,000 dollars or $0.07 per share for the third quarter, compared to a net loss of $250,000 or a negative $0.03 a share for the comparable quarter last year. Year-to-date we have generated $2 million in net income or $0.23 a share, compared to a net loss of $900,000 or a negative $0.10 a share for the comparable quarter last year.

In the third quarter we generated $2.4 million in cash from operations, which make our year-to-date cash generation total $5.2 million. Our cash balance now stands at $7.9 million. Our bank debt at $3.5 million. Our gross margins continue to improve and we're at 49.2% during the third quarter. These are major accomplishments in this economy, and demonstrate the significant progress we have made in executing our vision and strategy we have laid out to you in previous calls.

Jim Mackaness will now discuss the details of the results with you, and then I will update you on our very successful American Academy of Opthalmology meeting, which include an introduction of new products and a strong positive validation of our IQ 577 yellow laser. We're excited about the progress we have made to date and the growth opportunities we see ahead. Jim.

Thanks, Ted. I will start by reviewing our third quarter revenues. Revenues for the third quarter of 2009 were $10.4 million, a 13% decrease compared to $12.0 million reported for the corresponding quarter in 2008, and 1% decrease in the sequential basis from the $10.5 million as reported in Q2 2009.

Opthalmology revenues for the quarter were $7.7 million, down 6% or $0.5 million from the third quarter of 2008, but up 1% on a sequential basis from the $7.6 million reported in Q2 2009. Most of the reduction in revenues compared to last year is attributable to the reduction in OEM revenues, which fell by $0.4 million. Sequentially this represents the second modest quarter of growth in opthalmology revenues.

Looking at these revenues geographically, domestic opthalmology revenues decreased 11% to $4.7 million compared with $5.3 million for the third quarter of 2008, but were up 7% on a sequential basis from $4.4 million in Q2 2009. We include the OEM revenues previously mentioned within our domestic categorization. If we exclude OEM revenues, domestic revenues were $4.4 million for the quarter, down 4% or $0.2 million for the third quarter 2008, and up $0.4 million or 11% on a sequential basis.

We commented during our last earnings call that there was many some early signs that we may be reaching the inflection point in budget restrictions on capital buying, and that appears to be the case.

International opthalmology revenues totaled $3.0 million, up 4% from the $2.9 million for the corresponding quarter in 2008. But down on a sequential basis from the $3.3 million in Q2 2009, which we attribute to the impact of the typical holiday season that occurs internationally during the summer months.

Focusing on our recurring revenues, which consist of consumer laser probes and service. Opthalmology recurring revenues were $4.1 million, which represents 53% of total opthalmology revenues for the third quarter of 2009. This represents a $0.1 million increase from the $4.0 million reported in the third quarter 2008, but down $0.1 million on a sequential basis. For the year-to-date, recurring revenues increased $0.1 million to $12.7 million.

Competition remains tough both in the US and overseas for this business, and although revenues did increase year-over-year, we're disappointed with the decrease in sequential quarters. We recognize that we must continue to focus on offering quality products with superior performance and reliability that will allow us to earn our customer's business on a repetitive basis.

Aesthetics revenues for the quarter were $2.7 million, compared with $3.8 million for the third quarter of 2008, down 30%, and down 6% on a sequential basis from the $2.9 million reported in Q2 2009.

Looking at these revenues geographically, domestic aesthetics revenues totaled $1.7 million, down $0.4 million compared with the $2.1 million for the third quarter of 2008, and up $0.1 million on a sequential basis from $1.6 million in Q2 2009. International aesthetics revenues totaled $1.0 million, down $0.7 million compared with the $1.7 million in the third quarter of 2008, and down $0.3 million on a sequential basis from $1.3 million in Q2 2009.

Switching attention to gross margins and expenses, gross margins in the third quarter 2009 improved to 49.2%, compared with 41.6% reported in the third quarter of 2008, and up from 45.9% reported last quarter. The primary improvement from the prior year's comparable quarter is because we are no longer suffering the negative impacts to cost of revenues associated with the amortization of intangible assets, and the neutral impact of our manufacturing variances in the quarter, which is an indication of our manufacturing operations becoming more predictable. The improvement in margin is all the more impressive given the reduction in revenues over the comparable period.

Operating expenses in the third quarter 2009 were $4.2 million, a decrease of $1.1 million or 20% from $5.2 million for the third quarter 2008, and down $0.3 million or 6% from $4.4 million for the second quarter 2009. We continue to monitor our expenses closely, and are focused on investing our money in areas which will generate revenue growth.

With our (inaudible) performance in close control over operating expenses, we generated an operating income of $1.0 million or 9.3% of revenues, compared to an operating loss of $0.2 million for the third quarter 2008. This is our third sequential quarter of operating income.

With the continued improvement in operating performance, we have now become taxable and our third quarter results included a $0.3 million tax provision.

This takes us to the bottom line, the Company recorded a net income of $0.6 million or $0.07 per share for the third quarter of 2009, as compared to a net loss of $0.2 million or negative $0.03 per share for the third quarter of 2008.

If you recall, our second quarter benefits from an annual payment of $800,000 from Synergetics that are shown as other income in our Q2 results. Excluding this payment, net income for Q2 2009 was $0.4 million or $0.05 per share, and therefore our third quarter performance shows a sequential improvement in net income as well.

Our EBITDA for the quarter was $1.2 million, and was $3.1 million for the first nine months of 2009. This calculation does not include adding back FAS 123-R stock compensation expense, but does include the other income from Synergetics.

Looking at our cash flows, for the third quarter 2009 we generated $2.4 million from operating activities, and we have now generated $5.3 million from operating activities in this year. Our cash position at the end of Q3 2009 was $7.9 million, up from the $5.3 million at the end of 2008, our bank debt now stands at $3.5 million, down from $6 million at the end of last year. We will likely keep the bank debt at this amount going forward because we have a monthly minimum interest payment that we must make whether we have $3.5 million of debt or less outstanding.

And with that I will turn the call back over to Ted.

Thank you, Jim. You can see why we're pleased with our overall performance in Q3. Our continually improving operating performance demonstrates that we have control over all key aspects of our operation. And as mentioned in our last conference call, we are now focusing our attention and energies on revenue growth.

Now some of the constraints on revenue growth relate to the state of the economy. And as the economy improves, we anticipate seeing our current business grow. And because we have maintained our value proposition and brand in the marketplace, and have an efficient and scalable business, this will drive earnings growth.

In addition, we spent time over the summer distilling a map of the retina and glaucoma diagnostic and therapeutic markets to highlight product areas that we feel are complementary to our core strengths, and that provide growth opportunities so we can have a long-term vision on where we want to go and what is important to both the success of our customers, and therefore to our success. We recognize that our core competencies in laser technology and clinical applications provide us with a unique advantage over most companies in our market, and we are focused on maintaining that leadership position.

At the recently completed American Academy of Opthalmology meeting in San Francisco, we introduced a dual port green IQ 532 laser system, a modular multi-wave length laser system, and received enthusiastic endorsements from physicians on the clinical benefits of our recently launched IQ 577 yellow laser system. All examples of the progress we're making, and all have the potential to increase revenues.

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.

Good job, gentlemen.

Thank you, Stan.

A couple of questions. One, what are your expectations of maintaining the current profile and business level, I mean, you're running at a pretty good margin rate and profitable. Can you kind of just talk about the stability of the business rather than trying to forecast at this point?

I will take first crack, Stan. I think, if you remember at the beginning of this year we outlined sort of a financial model that we felt we would be able to operate within, actually based on last year's revenues. And that indicated a gross margin in the 45% to 50%, and so far this year we have been at a, come in, in the three quarters with a gross margin in that range. And we were looking at basically controlling our OpEx at below $20 million for the year, which again is similar to what we have been able to perform.

So at these levels, I would say we feel that we're comfortably balanced. I think we're really looking for areas to actually perhaps judiciously invest to make sure that we're well-positioned to drive revenue growth going forward. So there may be some additional investments we would like to take, to take advantage of opportunities we see.

Ted.

Yes, Stan, I definitely concur with Jim. I think that we do have a way to maintain the business we have right now with opportunities to use it as a solid foundation to grow upon.

Do you think the yellow laser is going to be a significant contributor to future growth from the response?

I think it will be a contributor. I think it will be, significant has different definitions for different folks, but it is clearly a, it's going to be a contributor for us going forward.

Do you see us, and I ask this on each call, getting, selling off our aesthetics business and just concentrating on opthalmology, and trying to be a very focused profitable growth business in opthalmology?

Well, our focus is definitely opthalmology. We believe the aesthetics business continues to contribute as we mentioned in the past, and we do monitor that closely. And then in the broader scope, we always look at opportunities both in adding and disaggregating on all elements. So as I said, I think we're definitely focused on opthalmology, and we like the contributions the aesthetics is currently making.

Last question is, I don't understand why you don't pay off the loan if you have a minimum payment that probably is not interest related but is above a normal interest rate, why not pay off and still have $4.5 million approximately left in cash, which is a safe level?

Well, we basically pay a minimum of $20,000 dollars a month in interest, whether we have a borrowing or not.

That's a commitment fee.

It is a minimum interest payment.

Well, what does that come out to on a percentage of the total outstanding loan?

Well, so what we do is we basically work out that if we keep about $3.5 million, we put it in the money market and we just shave off a very small element, so it is not really a significant strategy one way or the other. We just feel that if we're going to have to pay the minimum interest payment, we might as well have some of the money sitting in the money market trying to accrue marginal interest rates until we get there.

Obviously. So you wouldn't pay it off, you're no mind to get rid of your debt completely?

Not currently. We do -- this is an annual facility we have set up, meaning that we get an opportunity to revisit in March of next year, but at the moment we just feel comfortable that if we're going to have to make that minimum interest payment, we might as well have the moneys borrowed.

Okay. And would you use some of that for stock buyback at these levels? Have you considered that at all?

That is not certainly something we are considering at the moment.

Okay, thank you. Good job, gentlemen.

Thank you, Stan.

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

Good afternoon. I would like to echo Stan's congratulatory comments on the cash management. I think you have done a terrific job, and the Company now is much more stable.

What I am concerned about, Ted, and obviously Jim, going forward is, can the Company start to grow? Obviously the Company has been through a very, very tough time both internally and with the external environment, it could hardly have been tougher, and I have tremendous respect for how you have turned the Company around and the cash generation this quarter is really spectacular, but it worries me that maybe our Company is not poised for growth.

I was at the AAO. I saw some new products. But I think we need to do more things, and I believe there is some smaller companies out there that would make good partners. I think the industry is probably ripe for consolidation.

I guess my question is, do we have the stomach and the management team to really go and build this Company into something more than a modest company that is kind of stable, maybe generates some cash, but doesn't really grow and doesn't create true shareholder value? Our stock is hugely undervalued relative to its sales level, I think. So, Ted, I think perhaps it is more appropriate for you to take a shot at it but certainly, Jim, if you want to go for it, go for it.

We've had these discussions in the past, Larry. Clearly all are accurate, though we are making some very strong movements for growth. And the issues we have dealt with have limited our ability over the last couple of years, but clearly in a much stronger financial stable environment that's going to happen, and with an improving economy it definitely accelerates that.

I guess my concern, Ted, and not to make this a personal thing at all because I have great respect for you. You have historically not been an acquiring kind of a guy. The Company has not been an acquiring type of company, save for Laser Scope, which was made not on your watch, and unfortunately proved to be a mistake. Do you have the mindset, the temperament, the energy to go out and do what this company needs, which is to fill in some product lines and take advantage of a great distribution system around the world, and now what appears to be a very stable and nice balance sheet?

Well, I think I am going to jump in here Larry, because I actually feel pretty excited about the opportunities we have in front of ourselves. I think one of the key things, as you mentioned, in the market where we stand is cash actually has true purchasing power, sometimes in a market cash doesn't really have a lot of purchasing power. But cash has true purchasing power. The ability for us to generate cash continues to put us in a stronger position.

I think you're absolutely right in the sense that there are other opportunities out there to partner with other companies, and really exploit our channel which we feel is pretty dominant and has a great reputation in the marketplace. We have indicated that we have a strategy that does involve business affiliations, M&A tuck ins, bolt ons, however you want to describe it.

We do want to make sure they're modest, as you alluded to with Laser Scope, trying to do the large ones can be more challenging, and we really feel that we're -- we have the good fortune to be in a very good stable shape, which allows us to be very attractive to other entities going forward. So I think we're sort of looking at this as a very good time to try and put those jigsaw pieces together.

Okay. I guess the proof will be in the pudding, won't it? What we need to see is we need to see you guys doing some things, and I will be very supportive and hopeful that you will be able to do some nice little deals that will fit in and it would be nice to get the sales line growing again, wouldn't it? Because then imagine how much cash we would be generating if the sales line was growing, and if you're generating cash when the sales line is declining, that's a great sign, and hopefully we'll be able to generate more.

Jim, I would like to make just one comment. I don't know how much of the press releases you're doing or joint effort, but you spend a lot of time on the conference call going through great detail about domestic opthalmology, international opthalmology, sequentially up, sequentially down. It is very hard to follow. And I wonder if you would consider putting that right in the press release?

You may be sensitive to it, I suppose, because of competition, but on the other hand this call is public record, and anyone can have a copy of the transcript. It would just make it easier for you and for us if we had that in front of us in a table kind of way, so that we could really see the numbers rather than writing frantically and trying to figure out up quarter, down quarter, sideways quarter. Is that something you would consider doing?

Well, I actually believe most of it I quote from the Q, so I will look at the Q to see if it is -- if I am adding anything different.

But the Q is not the press release. Yes, of course I see it you just actually filed your 10-Q today because I get EDGAR and I see you just filed the Q, and obviously it is going to be there, but when we're doing a conference call, you might not have the Q in front of you as well.

True, but then you will take all of my speech away from me, Larry.

Oh, Jim, I don't want to do that.

I won't have anything to say.

Well, no, then you can provide some really intelligent color for us on some of the things, some of the margin things and things like that. Just as a comment, I really object to companies that spend 15 minutes where the CFO goes through every single line with excruciating detail about, we bought more toilet paper this quarter so our G&A was up, and I think we need to see the highlights, and that's what is really helpful to us.

We'll try to convey more information and give you the transparency you're looking for, absolutely.

Great, thanks, Jim. Congrats, really made some great progress this quarter.

Thank you.

Thank you. (Operator Instructions). I am showing no further questions. I will turn the call back to management for any closing remarks you may have.

I want to thank you for participating in this call and for your interest in IRIDEX. We look forward to sharing our progress with you in our next call. Thank you, very much, everybody.

Thank you, sir. Ladies and gentlemen, this concludes the third quarter 2009 earnings conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030 or 1-800-406-7325 and entering the access code 418-1294. We thank you for your participation and you may now disconnect.