IRIDEX Corp (IRIX) 2009 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Iridex Corporation's fourth 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 today, Thursday, March 4, 2010. I would now like to turn the conference over to Ted Boutacoff, President and CEO of Iridex Corporation. Please go ahead, sir.

Welcome to Iridex Corporation's fourth quarter and 2009 year conference call. I'm Ted Boutacoff, President and CEO. With me today 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 27 A of the Securities Act of 1933 as amended. This Section 21-E of the Securities Act of 1934 as amended, relating to the company's scalable business model, operating expense controls, product demand, growth strategy and prospects and expected growth margin and operating expense levels for 2010 and in the longer term. These statements are not guarantees of future performance, and actual results may differ materially from those described in these forward-looking statements as a result of a number of factors. Please see a detailed description of these and other risks contained in our quarterly report on Form 10-Q for the quarter ended October 3, 2009 and our annual report on Form 10K 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. I am very proud to present continuing good news of our progress. At the beginning of 2009, our 2009 objectives which were being cash flow positive, driving to profitability and positioning ourselves for future growth. We ended the year meeting all of those objectives. We generated $6.8 million in cash from operations, we were profitable all four quarters generating $2.6 million or $0.29 a share in net income for the year, and we are well positioned for future growth. Our cash balance now stands at $9.4 million and our bank debt is down to $3.5 million. Our gross margins improved from 40.6% to 46.9% for the year. Operating income of $2.5 million for the year represents an all-time high in the company's history. EBITDA was $4.1 million for 2009. These are major accomplishments given the sate of the global economy in which our 2009 revenues reduced by 11%. Having demonstrated our ability to succeed under these conditions, we are excited about our future prospects. Jim Mackaness will now discuss the details of these results, and then I will share our 2010 objectives and strategies with you. Jim?

Thanks, Ted. I'll start by reviewing our fourth quarter revenues. Revenues for the fourth quarter of 2009 were $11.6 million, a 5% decrease compared to $12.1 million reported for the corresponding quarter in 2008, but an 11% increase on a sequential basis from $10.4 million as reported in Q3 2009. Ophthalmology revenues for the quarter were $8.1 million, down 4% or $400,000 from the fourth quarter of 2008, but up 5% on a sequential basis from the $7.7 million reported in Q3 2009. Looking at these revenues geographically, domestic ophthalmology revenues decreased 12% to $4.6 million compared with $5.2 million for the fourth quarter of 2008 and decreased 2% on a sequential basis from $4.7 million in Q3 2009. $500,000 of the reduction compared to the fourth quarter of 2008 and $200,000 of the reduction on the sequential basis was within our recurring revenues. We attribute these reductions to three quarters. One, an overall reduction in the number of correcting procedures during 2009 as a consequence of the recession, the impact of which we had seen steadily increasing throughout the year. Two, quality issues with certain of our products. Three, increased competition.

We have heard anecdotal evidence that beginning this year, 2010, the number of procedures is on the increase, but we will need to see a couple of quarters go by before we can say with confidence that the procedure numbers are returning to pre-recession levels. We suffered two product issues during 2009, one is fixed and the other fix is in progress. These product improvements will help our competitive position, which leads us to competition. Our competitors remain aggressive. The recession has increased price sensitivity in the market ,and we recognize that we must continue to focus on offering quality products with superior performance and reliability. This will allow us to earn our customers' business on a repetitive basis.

Other items of note: We've seen a reduction in our OEM revenues as a result of decreased demand by ultimate end customers for our OEMs product, and we expect this to continue to decrease in 2010. We did comment last quarter on the improved outlook for capital purchases domestically, and we were very pleased with the pace of orders received throughout the fourth quarter, which bodes well for 2010. International ophthalmology revenues totaled $3.5 million, up 7% from $3.3 million from the corresponding quarter in 2008 and up 16% on a sequential basis from the $3.0 million in Q3 2009. Demand for equipment has increased and remains strong since overseas markets have recovered more quickly from the recession and credit crunch. Furthermore, we conduct the majority of our business in US dollars, and so the weakness of the dollar is assisted.

Looking at the recurring components of our revenues on a worldwide basis which consists of consumable (inaudible) and service, ophthalmology recurring revenues were $3.8 million, which represented 47% of total ophthalmology revenues for the fourth quarter 2009, which represents a $600,000 decrease from the $4.4 million reported in the fourth quarter 2008 and down$200,000 on a sequential basis. Before we address the underlying issues, we're disappointed with these results and we are working diligently on improving them. Aesthetics revenues for the quarter were $3.4 million compared with $3.6 billion for the fourth quarter 2008, down 6% but up 28% on a sequential basis from the $2.7 million reported in Q3 2009. Looking at these revenues geographically, domestic aesthetic revenues totaled $1.7 million, level with the $1.7 million reported for the fourth quarter of 2008 and level with the $1.7 million reported on a sequential basis. International aesthetics revenues totaled $1.7 million, down $200,000 compared with $1.9 million for the fourth quarter of 2008, but up $700,000 on a sequential basis from the $1 million in Q3 2009.

Switching attention to gross margins and expenses, gross margin in the fourth quarter 2009 improved to 45.6% compared with 37.5% reported for the fourth quarter of 2008, although lower than the 49.2% reported last quarter. The primary improvement for the prior year's comparable quarters is because we're no longer suffering from negative impacts to cost of revenues associated with the amortization of intangible assets, and the neutral impact of other manufacturing variances in the quarter which is an indication of our manufacturing operations becoming more predictable. Improvement in margin is all the more impressive given the reduction in revenues over the comparable period.

Operating expenses in the fourth quarter 2009 were $4.5 million, a decrease of $6.3 million from the $10.8 million for the fourth quarter 2008. Q4 2008 includes a $5.4 million charge for the write down of goodwill and intangible assets. Excluding the charge, operating expenses improved $900,000. On a sequential basis, operating expenses were up $300,000, or 8% from $4.2 million for the third quarter 2009. The American Academy of Ophthalmology occurs in our fourth quarter of each year and causes our expense to increase on a sequential basis. Other than that, we continue to monitor our expenses closely and are focused on investing our money in areas which will generate revenue growth. With our gross margin performance and close control over operating expenses, we generated an operating income of $800,000, or 6.8% of revenues compared to an operating loss of $6.3 million for the fourth quarter 2008. This is our fourth sequential quarter of operating income. As a result of our improved operating performance, we are now taxable in our fourth quarter results included $200,000 tax provision. This takes us to the bottom line.

The Company recorded a net income of $500,000, or $0.06 per diluted share for the fourth quarter of 2009 compared to a net loss of $6.5 million, or negative $0.74 per diluted share for the fourth quarter of 2008. Net income for Q3 2009 was $600,000, or $0.07. Our EBITDA for the quarter was $1.0 million and was $4.1 million for the full year 2009. This calculation does not include adding back FAS 123R stock compensation expense, but does include other income received in the second quarter from Synergent. I'll remind you that fourth quarter of 2008 include an impairment charge of $5.4 million, or negative $0.61 per diluted share.

Turning our attention to our results for the 12 months ended January 2, 2010, for the full year 2009, revenues were $43.2 million, down 11% compared with $48.5 million reported for the full year 2008. In 2009, ophthalmology revenues totaled $31.0 million, down 4% compared with $32.4 million reported for the full year 2008. Aesthetics revenues totaled $12.2 million in 2009, a decline of 25% compared with $16.1 million for 2008. Given the state of the global economy for 2009, we feel our revenues held up fairly well. International sales in 2009 were $18.2 million representing 42% of total revenues, similar to 44% of total revenues in 2008. Sales in the United States were $25.0 million in 2009, representing 58% of total revenues, similar to 56% of total revenues in 2008. For the full year, gross margins improved to 46.9% in 2009 compared with the 40.6% reported for the full year 2008. Gross margins for the full year 2009 improved primarily because we're no longer suffering the negative impacts of cost of revenues as mentioned previously and also, large manufacturing variances have been reduced. Operating expenses for the full year 2009 were $17.8 million, a reduction of $9.5 million from the full year 2008. As a result of these performances, we achieved a record high operating income of $2.5 million in 2009 compared to an operating loss of $7.5 million for 2008. Net income was $2.6 million compared to a net loss of $7.5 million in 2008, and our EPS for the full year 2009 was $0.29 compared to negative $0.84. As previously mentioned, the 2008 numbers include an impairment charge of $5.4 million or negative $0.61 per diluted share.

Looking at our cash flows. For the fourth quarter 2009 ,we generated $1.6 million from operating activities, and we've generated $6.8 million for the full year. Our cash position at the end of Q4 2009 was $9.4 million, up from $5.3 million at the end of 2008. Our bank debt now stands at $3.5 million, down from $6.0 million at the end of last year. It is our intention to pay off the balance of our bank debt in Q1 2010.

In summary and looking forward, the beginning of 2009 explained the evolution of our financial model and stated that if we benchmarked our business activity at the 2008 levels, we expected to be at operating gross margins of between 45% and 50% and manage our operating expenses to $20 million. At the end of 2009, we can see that even with business activity being 11% below the 2008 levels we have managed to operate with gross margins with 46.9% and operating expenses of $17.7 million, both exceeding our targets. As a result of the stability and scalability we have now built into our business, we have more clarity and certainty about our performance. Looking forward to 2010 and beyond, we see gross margins continuing to be between 45% and 50% on an annual basis with a long term goal of 55%, and we expect to manage our operating expenses to approximately 42% on an annual basis with a long term goal of 40%. With that, I will turn the call back over to Ted.

Thank you, Jim. So you see why we're very pleased with our overall performance during 2010 and congratulate our employees for their significant contributions and their combined success. Our continually improving operating performance demonstrates that we have control overall key aspects of our operations. As we mentioned in our recent conference calls, we are now focusing our attention and energies on revenue growth. As the economy improves, we anticipate seeing our current business grow. We believe we have seen capital budgets ease slightly, and there are early signs that procedure rates may increase during 2010. And because we have maintained our value proposition in brand in the market and have an efficient and scalable business, these factors will drive earnings growth.

I will next discuss in some depth our 2010 objectives and growth strategies so you will have a better understanding of where we see our future.We have three key 2010 objectives, and they are first, increased profits through increasing revenues. We've done a great job of increasing our profitability, but it has been against a backdrop of declining revenues. Our focus now is on moving the top line up to drive further profits. Second, maintain positive cash flow from operations and balance it with investing cash to support our growth initiatives, both internal and M & A; and third, begin implementation of our M & A tuck-in strategy. Specifically regarding our M & A tuck-in strategy, in our history, we have completed four M & A transactions. Three were tuck-ins and one was a large transaction. The three tuck-ins, Life Solutions, Dialight and Novatech adjustable laser probes for acquisitions of products and/or IP which we completed inside and then distributed through our sales channels. All of these were successful. The majority of our revenues today is derived from a combination of these M & A tuck-ins. A large laser scope transaction was not successful; however, we have been able to manage the aesthetics business to become a contributing asset. Our success with M & A tuck-ins, our improved financial condition and our good relationships with the industry give us the confidence that we will be successful in closing small accretive transactions.

Now, specifically regarding our internal growth strategy. Our best internal growth successes have occurred when we have developed products which provide customers with either convenient solutions such as improved reliability and port ability or enabled applications solutions such as for retinopathy of prematurity or uncontrolled glaucoma or in some cases, both. This ability to provide simple technical and application solutions is a core strength of Iridex. We recognize that these 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 and building upon that leadership position. Let me provide two examples. First, we recently released the IQ 577, the first solid state laser photocoagulator that delivers true 577-nanometer yellow light.

Previously, the only way to obtain 577-nanometer yellow light was from large complex and expensive argon laser pumped tunable dialyzer photocoagulators. Opthomologists suffered the inconvenience of these initial 577-nanometer laser systems because of the clinical benefits they provided. The IQ 577 is an elegantly simple solution which is a convenient small portable reliable deposervice laser system which provides the same clinical benefits as the old, inconvenient 577 laser systems. Physicians using the IQ577 have confirmed the scientific and clinical benefits of the 577-nanometer wavelength. The clinical benefits are less patient pain and faster treatments. Therefore, a position that previously required multiple office visits can now be performed in one sitting. The scientific benefits are higher combined absorption, which results in less energy required to obtain an effect and less tissue damage.

Having the IQ 577 expands our potential retina laser market opportunity by about 60%, since we now have a product offering in the multi-wavelength segment, where we have not been competing. For a second example, we have recognized for some time that the greatest opportunity for gross of the photocoagulator laser market would come from developing a laser applications which would provide all of the therapeutic benefits of traditional photocoagulation with no tissue damage. We call this concept Tissue Sparing Photocoagulation.

Our efforts in developing tissue sparing devices and applications has been directed to age related macular degeneration and to diabetic retinopathy. After supporting two large AMD, or age related macular degeneration clinical trials, the TTT for CNV and the PTAMD clinical trials, neither of which met their primary endpoints, we have learned that AMD diseases are too complex to treat all patients with the same laser dosing protocol. In the development of Tissue Sparing Photocoagulation treatment of diabetic retinopathy, we have been finding success. The approach being used as micropulse treatment of diabetic macular edema, using our infrared laser systems, the OcuLight SLX and the IQ810. Treatment of diabetic macular edema is the largest application in the laser treatments for diabetic retinopathy.

An increasing number of peer reviewed studies evaluating micropulse treatment of DME, diabetic macular edema, have been published, They show micropulse treatment of DME is at least as effective as traditional laser photocoagulation treatment with the benefits of no pain, less or no retinal tissue damage, no enlarging laser scars with time and significant functional improvements with higher macular sensitivity. These results are very promising, and we will continue to support these efforts to improve the long term clinical outcomes of patients suffering from diabetic retinopathy. We estimate that if a tissue sparing photo coagulation treatment such as micropulse treatment of DME became the standard of care, the size of the retinal photocoagulation laser market would double.

In summary, we have been working on a pipeline of new product introductions, both through our internal efforts and through acquisitions that will be valuable to our existing customer base and will provide long term revenue growth for the Company. I will now open the line up for questions. Please note that Jim and I are at separate locations, so our handoffs of your questions may not be as crisp.

Thank you, sir. (Operator Instructions) Our first question comes from the line of Stanley Mann with Mann Family Investments. Please go ahead.

Hi, Ted.

Hi, Stan.

Good job in 2009. I have several questions. One, can you define a little more the only negative aspect with all the quality issues and the cost in sales and profits, and you said one of the problems still exists. Can you give us a little more detail on what products are involved where?

We have some pro products that we have vendors manufacturing for us. That quality has not been as good as it should be, and so we have had issues with that.

Is this in the ophthalmology area?

In the ophthalmology area, yes.

Does it cost us sales?

We've had some impact on sales with the quality, yes, we have.

So one issue still remains.

That's the issue that remains, and we're working on it.

Is it a major issue as far as a product loss of sales or --

We have been -- well, we're working on it, and we feel that with what we're working on, we'll restore the sales. We don't think that they're irretrievable.

Okay. You said there's aggressive competition. Is this from Alcon or Ciba or some of the large guys?

There's some from Alcon, yes, and some from smaller competitors.

Is it new? Is this something new in the history of the Company?

I think it's the aggressiveness that's new, and I think some of it has to do with the economy. When revenues are down for everybody, you start people getting a bit aggressive on price.

And it's reflected in our current gross margins? I mean, it hasn't affected our overall gross margin seemingly?

It's not affecting our margin, because we're not competing on price. We compete on value.

Okay. It seems like there is a pipeline. What I would like to know is you went to the American -- the show on ophthalmology, and you seem very positive. Are you seeing actual orders and sales flow from that?

Yes, we are.

So you said there's some, in one area 60% market expansion for an existing product line. Are you seeing increased orders in both the 877 and in this -- is it 510? I couldn't write it down fast enough on the pulse laser.

Well, I think -- that's more a Q1 question.

Q1? (laughter)

Yes, Q1 2010 question.

Okay, you brought it up.

What we did say is we are seeing a increase in capital spending in general.

That's good.

And we saw it into Q4, and we're encouraged that in Q1 it will continue.

Okay, so your outlook for 2010, to be clear ,does not include any tuck-ins or the effect of any tuck-ins? It covers the existing product line in the view of what we have?

It covers our existing product line, and we're aggressively looking at tuck ins. And if they complete, they will be included in 2010.

All right, on the tuck-ins, and I ask this -- is it a reality? Are you just starting or have you looked at things, and can we expect something in the year 2010 in your opinion?

Our opinion is -- this is -- we have been working on this for some time, so we are looking to complete some in 2010, yes.

Okay, the last question is the most embarrassing. Why doesn't anybody care about our performance? We don't seem to be getting any institutional buying at all. I mean, if you made $0.29, normally, we would expect our stock to be above 4. There has been some buying, but is there anything we can do to increase our position, our placement, knowing we're there? Are you there?

I'm here. That's a question that's probably better placed to others than to me.

Yes, I think, Stan, as well, the big thing is we've obviously had to be able to present a track record to ability to execute to what we're talking to, and so we feel that one of the big things we've been waiting for is to be able to get a trading 12 month track record, which we've now got. And to your point, we're certainly going to look for ways to get our story and our vision out to a wider audience.

Do you feel that we have the right people or associations to do that?

Well, historically, we've made the distinction that there was no point in trying to spend a lot of money in that direction because A, with the macro situation and B, with our own performance, we weren't going to move it much.

That's correct, but you've now started, the machine is rolling.

Correct, so I think --

The story has developed, but nobody seems to care except me.

Well, I think our job is to get, as you said, we get the machine rolling and now we've got to start making some noise about it. So I think that it's appropriate to ask the question and to say that as we move forward, we will look for opportunities to get our story out.

Does anybody cover us institutionally?

We have just picked up a relationship with Morning Star.

Oh, you have? And have they written anything or you just talked to them?

We are in the process of talking to them.

Okay. Well, that's a start.

Yes.

I have just one more question. Are we -- you are talking about market potential growth. Are you going to add salesmen or coverage in order to be able to benefit from the increased the market that is now out there for these products? Or are you going to add salesmen?

The goal is certainly -- yes, when we talk about investing for growth, one of our objectives is to be able to look to invest money in increasing the sales channel, yes.

We will. Okay, good job on '09 really. Excellent.

Thank you, Stan.

Thank you. Our next question comes from the line of Jason Stankowski from Capital Peak.

Hi, it's Castle Peak. And just curious if you go into the criteria that you're using to look at acquisitions and kind of what you're -- or how you're judging what you're willing to pay for an acquisition in the marketplace.

Well, we've spent a bit of time last year really trying to assess where we thought the opportunities for us are. We would like to sort of do what I would call one degree moves so by that, I mean things that would naturally add to the existing sales force. One of the dynamics we're looking to leverage is in the vitrectomy procedure. Our sales rep is often in the OR for the space of perhaps three hours and effectively, hands over the laser probe at the end of the procedure. So we're looking for opportunities that would naturally compliment that time spent with the doctor in that facility. As far as size, obviously, we don't have a lot of balance sheet strength yet. Our equity is -- as Stan was mentioning a little bit, I think we would all view it as a little bit as undervalued, so we have to be a little bit judicious on the size of what we're looking at. So we think where we described them small, we're probably talking -- our target zone would be in the single millions, and obviously from our perspective, we want to try and get them for as best a bargain as we can.

Yes, and I guess what I'm driving to is how are you defining bargain? It's simply accretive? I have not had the experience of all of the other tuck-in acquisitions, but was involved in watching the Company try to grow revenue for the sake of revenue and essentially imploding itself, and I think before you get out and try to get investor relation firms engaged and people writing on the Company, it would be interested to understand the economics that you're looking for in an acquisition versus -- I appreciate the fact that you are not going to go far afield and you aren't going to go real big, but once again, you're now building up a balance sheet of cash again ,and congratulations on doing that. But the real question is what happens to it. If you aren't going to give it to me as a dividend but you're going to go reinvest it, I'm keenly interested in what the parameters are -- economic parameters are in which you're willing to go out and invest. Do you have hurdle rates? How do you look at the value of that money you're going to deploy?

Well, again, as you said, first of all, we don't want to go -- and I do want to keep stressing, because I think it's very important, that we are looking for things that are complimentary to our existing ophthalmology business. So we want to allay fears that we're looking to go further afield than that. We obviously recognize that our multiples of revenue make it somewhat challenging to necessarily pay up for other people's revenues. We do want to make sure that if their -- we would ideally like to see it accretive right away, certainly accretive within a very short time with a lot of confidence that we can get there. I think you're saying what we're saying as well, is we don't want to do a repeat performance of what we just dug ourselves out from.

Right. and I guess -- I keep hearing accretive in multiples of revenue. Are you generally buying or looking at companies that are just not profitable? Is that pretty much the standard for a sub $10 million Company in your business?

I would say we're probably more looking for, if we can, called full product lines.

Okay. So I guess once again, I would just encourage you to focus or at least talk to the market about how you're going to make money incrementally, not necessarily -- if you paid one-times revenue for something, even though you're trading at a half, it's seemingly not accretive. But you told me you paid $1 million for it and you were going to make $.5 million in the next 12 months from the acquisition, I'd be much more interested in that than the price to revenue you were paying. And I do think you're trading at kind of a value of stock price right now, and people want to know how you're not going to destroy the capital that you're amassing on the balance sheet, and I'll get back in the queue. Thank you.

Understood.

Thank you. (Operator Instructions) I show no further questions in queue. I'd like to turn the call back over to management for closing remarks.

I'd like to thank you all for participating in this call and for your interest in Iridex. We look forward to sharing our progress with you at the next call. Thank you.

Thank you. Ladies and gentlemen, this concludes the Iridex corporation's fourth quarter 2009 earnings conference call. If you'd like to listen to a replay of today's conference, please dial 1-303-590-3030 or 1-800-406-7325 and enter the access code 424-4509. ACT would like to thank you for your participation and you may now disconnect.