IRIDEX Corp (IRIX) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the IRIDEX first quarter 2010 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, May 6, 2010.

I would now like to turn the conference over to Mr. Ted Boutacoff. Please go ahead, sir.

Welcome to IRIDEX Corporation's first quarter 2010 conference call. I am Ted Boutacoff, President and CEO. I am in Fort Lauderdale, Florida attending the annual meeting of the Association for Research in Vision and Ophthalmology, or ARVO. On the line at our headquarters in California 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 product demand, product improvements, tax rate, ability to maintain profitability, benefits from strategic transactions, growth strategy and prospects, and expected gross 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 factors and other risks contained in our quarterly reports on Form 10-Q for the fiscal quarter ended April 30, 2010 and our annual report on Form 10-K for the fiscal year ended January 2, 2010, 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 pleased to announce our first quarter results. We have generated strong earnings in a typically weaker quarter, earning $0.05 per diluted share compared to $0.02 per diluted for the first quarter of 2009 -- a 150% increase in performance. If you remove the $0.1 million in acquisition-related expenses we incurred during the quarter, we generated $0.06 per diluted share.

The acquisition-related expenses were related to the acquisition of RetinaLabs, which closed subsequent to the end of the quarter. As we had predicted on the last call, we have now paid off the remaining $3.5 million outstanding bank debt and terminated the credit agreement with Wells Fargo, and now have no bank debt currently outstanding.

And subsequent to the quarter -- of course, we have the RetinaLabs transaction. Now Jim Mackaness will now discuss the details of the results for the quarter, and then I'll share with you further news on the progress we are making, including further details regarding our recent asset acquisition. Jim?

Thanks, Ted. I'll start by reviewing our first quarter revenues. Revenues for the first quarter of 2010 were $10.8 million, up $0.1 million compared to $10.7 million reported for the corresponding quarter in 2009, and down 7% on a sequential basis from $11.6 million as reported for Q4 2009. As Ted mentioned in his opening remarks, our first quarter is typically weaker, especially when compared to our fourth quarter, which is usually our strongest.

Ophthalmology revenues for the quarter were $7.6 million, up $0.1 million for the first quarter of 2009, but down 6% on a sequential basis from $8.1 million reported for Q4 2009. Looking at these revenues geographically, domestic ophthalmology revenues decreased 7% to $4.0 million compared with $4.3 million for the first quarter of 2009, and decreased 12% on a sequential basis from $4.6 million in Q4 2009.

I remind you of the comment we made on the last call where we drew your attention to our OEM revenues. We have seen a reduction and we expect the reduction to continue in OEM revenues as our OEM partner moves to new platform.

Removing OEM revenues, revenues for Q1 2010 were $3.8 million, down $0.1 million compared to $3.9 million for Q1 2009. Systems sales were up $0.3 million and recurring revenues were down $0.4 million. The increase in systems sales confirms that the market for capital equipment is returning to normal levels, which provides us with more confidence looking forward. I'll return to recurring revenues in a minute.

International ophthalmology revenues totaled $3.6 million, up 11% from the $3.2 million for the first quarter of 2009 and up 1% on a sequential basis to $3.5 million in Q4 2009. Demand for equipment has increased and remains strong across most overseas markets. We conduct the majority of our business in US dollars, and so a weakening dollar generally helps us and a strengthening dollar generally hurts us.

Looking at the recurring component of our revenues on a worldwide basis, which consists of consumer-related probes and service. Ophthalmology recurring revenues were $4.0 million, which represented 53% of total ophthalmology revenues for the first quarter 2010. This represents a $0.4 million decrease from $4.4 million reported in the first quarter 2009, but up $0.2 million on a sequential basis.

The increase on a sequential basis marks the first sequential improvement in one year. On our last call, we mentioned that we believe that our recurring revenues have been negatively impacted by a combination of a drop in (inaudible) procedures, product issues, and competition, and that management was focused on improving the situation. We do believe we have seen some signs that the procedure levels are increasing in the US as the economy recovers.

We have addressed a number of the product issues, although we are still working on additional improvements, and our focused efforts has helped us regain ground on our competitors. This is a step in the right direction and we need to keep at it.

Aesthetics revenues for the quarter were $3.2 million, level with $3.2 million for the first quarter of 2009, but down 8% on a sequential basis from $3.4 million reported for Q4 2009. Looking at these revenues geographically, domestic aesthetics revenues totaled $1.7 million, down $0.4 million from $2.0 million reported for the first quarter of 2009, and level with $1.7 million reported on a sequential basis.

International revenues totaled $1.5 million, up $0.4 million compared with $1.1 million for the first quarter of 2009, although down $0.2 million on a sequential basis from $1.7 million in Q4 2009. Aesthetics revenues can fluctuate period to period due to the timing of individual orders, because of the relatively high price and low volume of systems being sold. This effect is multiplied for international sales where distributors often place multiple systems orders at one time.

Switching attention to gross margin and expenses. Gross margin in the first quarter 2010 improved to 48.6% from 47.0% reported for the first quarter of 2009 and 45.6% on a sequential basis. Compared to Q1 2009, our direct cost margins improved, 2.2%, due to favorable product mix. Direct cost includes standard material, labor, warranty and royalty costs where applicable. Manufacturing and service expenses increased and negatively impacted margins by 3.1%. Other manufacturing variances, including adjustments for overhead absorbed on inventory, were favorable, resulting in a 2.5% improvement to margins. We were pleased to see our gross margins fall squarely within our near-term target range of 45% to 50%.

Operating expenses in the first quarter 2010 were $4.6 million, a decrease of $0.1 million from $4.7 million for the first quarter 2009. On a sequential basis, operating expenses were up $0.1 million from $4.5 million for the fourth quarter 2009. We incurred $0.1 million in acquisition-related costs during the quarter. Excluding these expenses, operating expenses were $4.5 million or 42% of revenues. We have targeted operating expenses to be within 40% to 42% for the year and, therefore, we were pleased with our performance.

With our margin performance and close control over operating expenses, we generated an operating income of $0.6 million or 5.6% of revenues, up 66% or $0.2 million compared to the $0.4 million for the first quarter 2009. This is our fifth sequential quarter of operating income.

Our tax rate for 2010 is estimated to be 10.25%. Our tax rate is benefiting from a forecasted reduction in the valuation allowance we currently have booked against our deferred tax asset. Ultimately, assuming we remain profitable, the entire valuation reserve will need to be released and we will return to a more normal tax rate. At the end of 2009, the valuation allowance totaled $12.8 million.

This takes us to the bottom line. The Company recorded a net income of $0.5 million or $0.05 per diluted share for the first quarter of 2010, compared to a net income of $0.2 million or $0.02 per diluted share for the first quarter of 2009; an increase in earnings per diluted share of 150%. Net income for Q4 2009 was $0.5 million or $0.05.

Our EBITDA for the quarter was $0.8 million. This calculation does not include adding back FAS 123R stock compensation expense.

Our cash from operations was $0.6 million. This was after we paid out $0.3 million in profit share and bonuses in accordance with our 2009 incentive plan. This is the first time we've paid profit share and bonuses to our employees in 10 years. It represents a well-earned reward for all their hard efforts in returning this Company to a profitable and growing business.

At the end of 2009, we owed Wells Fargo $3.5 million. We did paid off this during the quarter and terminated the credit agreement. You'll notice our cash balance reduced from $9.4 million to $6.4 million as of the end of Q1 2010. And we're in talks to secure a new credit line.

In summary, a very good first quarter. With that, I will turn the call back over to Ted.

Thank you, Jim. Yes, we're very pleased with our start to 2010. Not only have we continued to build upon the foundation that we've laid over the past two years, which have resulted in us producing 150% increase in earnings over the first quarter of 2009, we continue to execute on our longer-term growth initiatives, which, as we have stated previously, are a combination of organic growth and accretive acquisitions.

I'd like to summarize a few of these both in organic and in the accretive acquisition areas.

In the organic growth area, we recently announced our first revenue shipments of a new green laser photocoagulator, the IQ 532. The IQ 532 is a high-power, 532 nanometer, which makes it green; dual port and multipurpose laser system for use by ophthalmologists to treat sight-threatening eye diseases such as diabetic retinopathy, age-related macular degeneration, and glaucoma, and for use by otolaryngologists to treat certain types of hearing loss. The IQ 532 utilizes the same platform as our IQ 577, which we began shipping last year, and has similar features, such as a touch screen user interface, which has been very well-accepted by IQ 577 users.

Commenting briefly on the acceptance of the IQ 577, we are receiving continued and growing feedback on its clinical performance and growing reputation in the market for being able to treat sensitive retinal tissues with consistently lower powers and shorter durations, making the procedures faster and more comfortable to the patient. The clinical benefits of these features combined to yield an affective clinical outcome, while confining the volume of affected tissue.

Both the IQ 577 and IQ 530 demonstrate our commitment to being the technology leader of the photocoagulator market, which supports our brand and position to our customers. We plan to continue with this platform approach and we look forward to the timely introduction of additional systems currently under development.

We are pleased with the consecutive quarter uptick in recurring revenues, which is partially to do with the economy but also a reflection on our focus that we are getting it right. And there is still more progress that we can make in this area.

Now in the acquisition area, under our stated M&A strategy, we closed our first acquisition, RetinaLabs, which shows our commitment to growing the business with complementary acquisitions. The acquisition brings higher gross margin products into our product family, and cements our position with the customer within the operating room and the increasingly important ambulatory surgicenters, which in turn will help our existing recurring revenue streams.

We are continuing to look at additional strategic acquisition opportunities. And to convert these growth initiative results into revenues, we are looking to invest in additional feet on the street.

I will now open the line up for questions.

(Operator Instructions). Larry Haimovitch, HMTC.

Congrats on all the progress. Ted, the Company obviously had to retreat and really focus on operations for the last couple of years with the economy and the acquisition and the financial challenges. It seems to me now that you're on a much firmer footing; there's so much progress has been made. You're able to step out recently and make a nice acquisition, and I'm sure there are more coming.

Just wondering what plans you have now to begin to get out to Wall Street to start telling the story and get -- develop some more investor interest? Are you planning that at all on a proactive basis?

Yes, we are. It helps to carry positive results and we feel that we have been able to do that. So I think it's very timely your suggestion that we do that.

And what specifically are you thinking? I mean, what -- (multiple speakers) are you planning to go out on the road or --?

Pardon me?

Are you planning to go out on the road, perhaps or --?

I think we -- well, first, we want to definitely have an opportunity to meet our key investors face to face, and then to be able to broaden that to new investors. But yes, it will take us out of the office.

So you guys will be traveling to Boston and New York and places like that to visit investors?

Yes.

Good. Okay, thanks.

(Operator Instructions). We have a follow-up from -- question from the line of Larry. Please go ahead.

So we're having a good private conversation here. This is great.

Ted and Jim, the first acquisition you made was small, but I know from doing some homework on it at a recent trade show, it looks like a very promising deal for the Company. What's your comfort level to step out and make a bigger acquisition? And can you quantify how big you might be willing to go at this point? I mean, I realize your resources are somewhat limited, but they're much less limited than they'd been. Could you address that at all?

Well, the key would be the strategic value to the Company, and then we could work back from that. As far as the amount, let me defer that to Jim.

Yes, I think, as you said, this will make a lot of sense. It was very complementary, very logical for us to proceed with. We had to look at the strength of our balance sheet and the value of our currency to figure out how we would afford significantly bigger acquisitions.

But our goal, as Ted said, is really to go out and just identify targets that make sense; and then as we work forward, we'll try and figure out the best ways to finance them. We've indicated that a target range for us that would be in our more normal range would be in the lower single million dollar range. That's probably the one that's close to our bull's-eye, but we're keeping our eyes open across the board.

Okay, thank you.

(Operator Instructions). And I don't show any further questions at this time. Please continue with any closing remarks.

In that event, I'd like to thank everybody for participating in this call and for your interest in IRIDEX. We look forward to sharing our progress with you at our next call. Good night.

Thank you. Ladies and gentlemen, that does conclude our conference for today. If you would like to listen to the replay of today's conference, please dial 303-590-3030 or 1-800-406-7325, using the access code 4291498. Thank you for your participation. You may now disconnect.