IRIDEX Corp (IRIX) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the IRIDEX Corporation Q2 2010 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today, Thursday, August 5, 2010.

Now, I'd like to turn the conference over to Mr. Ted Boutacoff. Please go ahead, sir.

Welcome to IRIDEX Corporation's second quarter 2010 conference call. I am Ted Boutacoff, President and CEO. I am joined by Jim Mackaness, our CFO. Before we get started, Susan Bruce, our Executive Administrator, will read this 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, and Section 21-E of the Securities Act of 1934, as amended, relating to the Company's scalable business model, operating expense control, product demand, growth strategy and prospects, including the Company's third quarter revenue, gross margins, operating expenses, as well as the effect of its acquisition of RetinaLabs, and the issuance of a patent on its Adjustable Laser Probe, on its consumables revenue and the impact of tissue-sparing laser photocoagulation on the laser market as a whole.

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 Annual Report on Form 10-K for the fiscal year ended January 2, 2010 and our quarterly report on Form 10-Q for the first quarter ended April 3, 2010, each of which are 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. Our second quarter saw mixed results. We were pleased that we recorded our sixth consecutive quarter of operating income and improved the strength of our balance sheet through cash generation. For the first half of 2010, our revenues were $20.6 million compared to $21.2 million for the first half of 2009. During the second quarter, we lost some of the early momentum we saw exiting Q1 of this year as a result of the return of economic uncertainties.

During the second quarter in anticipation of higher demand, we did increase our inventories, however, sales for the quarter were lower than anticipated. Historically, we have had good contributions from our international aesthetic sales, particularly in Europe. But wit the European economic crisis in Q2, these sales were negatively impacted. This impact appears transient.

We generated earnings of $0.08 per diluted share this quarter compared to $0.12 per diluted share for the second quarter of 2009 and $0.13 per diluted share for the first six months of this year compared to $0.14 per diluted share for the first six months of last year.

On the M&A front, during the quarter we closed the acquisition of RetinaLabs. RetinaLabs was incubating a number of patented consumable products that provide value to ophthalmic surgeons while performing vitrectomy procedures. And we are excited about the prospects of introducing all of these devices into our existing sales channel.

In addition, subsequent to the quarter we were granted and issued a patent on our Adjustable Laser Probe. The Adjustable Laser Probe speeds up treatments by allowing continuous adjustment of the optical fiber over a wide range of angles for full coverage of the peripheral retina without requiring removal and reinsertion of the probe from the eye. This patent allows us to differentiate a portion of our probe product line from our competitors and we are working on introducing additional products in the near-term.

And there was a very interesting study published during the quarter that illustrates the value of our tissue-sparing approach to laser photocoagulation. That I'll comment upon later in this talk.

Jim Mackaness will now discuss the details of the results for the quarter and then I'll share further news on the progress we're making on our strategic goals. Jim?

Thanks, Ted. I'll start by reviewing our second quarter revenues. Revenues for the second quarter of 2010 were $9.9 million down 6% or $0.6 million compared to $10.5 million reported for the corresponding quarter in 2009 and down 8% on a sequential basis from the $10.8 million as reported for Q1 2010.

Ophthalmology revenues for the quarter was $7.7 million constant with the second quarter of 2009 and up 1% on a sequential basis from the $7.6 million reported for Q1 2010. Looking at these revenues geographically, domestic ophthalmology revenues, excluding OEM revenues, for Q2 2010 were $3.8 million, down 3.5% or $0.1 million compared to $3.9 million for Q2 2009 and constant with $3.8 million for Q1 2010.

As Ted mentioned, we did anticipate additional system sales during the quarter and brought on additional inventory. However, the reappearance of economic uncertainties in the May/June timeframe dampened demand. OEM revenues, which we disclose as part of our domestic ophthalmology revenues in our Form 10-Q, was $0.2 million for Q2 2010 down $0.2 million from the $0.4 million reported for Q2 2009 and constant with $0.2 million reported for Q1 2010. As we mentioned before, we anticipate OEM revenues to decline as our OEM partner moves to a new platform.

International ophthalmology revenues totaled $3.6 million up 10% from the $3.3 million for the second quarter of 2009 and constant with Q1 2010. Demand for systems has increased over 2009 levels and remain strong across most overseas markets looking at the recurring component of our ophthalmology revenues on a worldwide basis, which consist of consumable products of service.

Ophthalmology recurring revenues were $3.9 million and represented 51% of total ophthalmology revenues for the second quarter 2010. This represents a $0.3 million decrease from $4.2 million reported in the second quarter 2009 and a $0.1 million decrease from the $4.0 million on a sequential basis.

Probe sales, both domestically and internationally, have been constant for the last three quarters after a number of quarters of reductions. We view this stability as positive and with the recent patent granted that Ted highlighted, we are looking forward to differentiating our product line with the goal of increasing future sales.

We did generate revenues from the consumable products we acquired from RetinaLabs. And although these revenues are not significant at this time, we look for revenues from these products to grow over the coming quarters. The reduction in recurring revenues occurred in our services revenues, which are predominantly paid for at the time of delivery and fluctuate independently from the rest of the business.

Aesthetics revenues for the quarter were $2.2 million down 22% or $0.7 million from $2.9 million for the second quarter of 2009 and down 30% or $1.0 million on a sequential basis from $3.2 million reported for Q1 2010. Looking at these revenues geographically, domestic aesthetics revenues totaled $1.6 million level with the second quarter of 2009 and down $0.1 million from $1.7 million reported on a sequential basis.

International aesthetics revenues totaled $0.6 million down $0.7 million compared with $1.3 million for the second quarter of 2009 and down $0.9 million on a sequential basis from $1.5 million in Q1 2010. The economic crisis in Europe had a significant impact on our international revenues during the second quarter. The early signs for Q3 suggest that this was a short-term phenomena.

Switching attentions to gross margin and expenses. Gross margins in the second quarter 2010 were 45.9% constant with that reported for the second quarter of 2009, although down from 48.6% on a sequential basis. Compared to Q2 2009, our direct cost margins improved 1.4% due to favorable product mix. This was offset by manufacturing of service expenses, which although constant in dollar terms, negatively impacted margins by 1.4% due to lower revenues. Other manufacturing variances, including adjustments to overhead absorbed on inventory, inventory and warranty reserves remain constant as a percentage of revenues. We were pleased to see our gross margins stayed within our near-term target range of 45% to 50% given the reduced business activity during the quarter.

Operating expenses in the second quarter 2010 were $4.4 million flat with the second quarter 2009. On a sequential basis, operating expenses were $0.2 million lower than the $4.6 million reported for the first quarter 2010. Our goal of managing operating expenses to be within 40% to 42% for the year was challenged this quarter due to our lower revenues. Our operating expenses were 44.5% of revenues for the quarter. We did generate $0.1 million in operating income. And although this was lower than the $0.4 million reported for Q2 2009 and the $0.6 million reported for Q1 2010, it was our sixth sequential quarter of operating income.

A brief comment on other income, we recorded $0.8 million in other income, this relates to the legal settlement we reached in 2007, and there was a similar payment received in Q2 2009. There are two more payments of $800,000 to come, the next being in Q2 2011 and the final payment being in Q2 2012.

Our tax rate for 2010 is currently estimated to be 14%. Our tax rate is benefiting from a full constant 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 our tax rate will return to more normal levels. The end of 2009, the valuation allowanced totaled $12.8 million. The tax provision for Q2 2010 benefited from a $73,000 tax refund received by our UK subsidiary. Our UK subsidiary ceased operations in 2009 and we're in the final stages of winding down the entity.

This takes us to the bottom line. The company recorded a net income of $0.8 million or $0.08 per diluted share for the second quarter of 2010 compared to net income of $1.2 million or $0.12 per diluted share for the second quarter of 2009. Net income for Q1 2010 was $0.5 million or $0.05 per diluted share. For the first six months the Company recorded a net income of $1.3 million or $0.13 per diluted share compared to net income of $1.4 million or $0.14 per diluted share for the first six months of 2009.

Our EBITDA for the quarter was $1.1 million. This calculation does not include any [bank] FAS123R stock compensation expense but does include the legal settlement. Our cash from operations was $0.8 million and our cash balance now stands at $7 million with no debt. During the quarter we did enter into a $5 million loan facility with Silicon Valley Bank to establish a banking relationship, although currently we do not anticipate using the facility.

In the past a number of investors have asked us to provide guidance. We are always looking for ways to provide a greater understanding of our business, and so with our growing confidence in our business model and with some improvement in the economic environment, we felt it appropriate to provide guidance for our upcoming quarter. In Q3 2010 we are forecasting revenues to be between $10.0 million and $10.2 million, gross margin to be between 45% and 48%, and operating expenses to be between $4.3 million and $4.5 million.

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

Thank you, Jim. Q2 was more challenging than we had expected. At the beginning of the year we were increasingly optimistic about an improving economy and we were seeing signs of increased business activity and as a result increased inventories in anticipation of increased demand. European economic crisis during May/June had a swift and negative impact on capital equipment sales. Fortunately it appears that the reaction was transient.

With regards to our strategic plans, 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. During the quarter, we had quite a bit activity in these areas. In the organic growth area, we commenced revenue shipments of the new green laser photocoagulator, the IQ532.

The IQ532 is a high powered 532 nanometer dual port multipurpose laser system for use by the ophthalmologist to treat sight threatening eye diseases, such as diabetic retinopathy, age-related macular degeneration, and glaucoma. And for use by otolaryngologists to correct certain types of hearing loss. It is used in the operating room in the ambulatory surgery centers or office setting.

We commenced revenue shipments of the new Symphony 2 modular multi-wavelength laser solution during the quarter and this product combines the clinical capability of our new high powered IQ577 yellow laser with the flexibility of our IQ810 and OcuLight SLX infrared lasers. This combination increases the physician's treatment options beyond a traditional multi-wavelength system with a more economical solution.

We also announced the publication of a clinical study, which compared eyes with diabetic macular edema treated using an IRIDEX laser and MicroPulse Treatment protocol to those obtained using the recognized standard of care early treatment of diabetic retinopathy study laser protocol.

The key takeaways from the study are that the IRIDEX MicroPulse laser protocol -- A, resulted in improvement in central visual function; B, was as successful in treating diabetic macular edema as the current standard of care; and C, caused no damage to the retina. These are important findings because of the improved patient outcomes and because the ability to treat without causing damage provides the physician the option to choose laser treatment at an earlier stage in the progression of the disease.

MicroPulse capabilities are available on our IQ577, IQ810 and OcuLight SLX laser systems. Subsequent to the end of the quarter, we were issued a patent to our Adjustable Laser Probe. This helps us maintain the differentiation of our vitreoretinal product line from those of our competitors and we plan to capitalize on the leverage afforded by this new patent by expanding this product line in the near future.

In the acquisition area, during the quarter we closed our first tuck-in acquisition, RetinaLabs, which shows -- A, our commitment to growing the business with complimentary acquisitions; B, brings higher gross margin products to our product family; and C, cements our position with the customer within the operating room and increasingly important ambulatory surgery centers, which in turn will help our existing recurring revenue streams. We are continuing to look at additional strategic opportunities.

I will now open the line up for questions.

(Operator Instructions) And our first question comes from the line of Stan Manny. He's a private investor. Please go ahead.

Hi, gentlemen.

Hi, Stan.

Hi, Stan.

Two basic questions. One, it's fairly obvious that somehow we need to get some more sales and marketing power. And my question is what do you plan to do to try and get better and more coverage?

Well, I think one of the things, Stan that we've come to know is that we need to invest in a couple of areas. We have actually brought on a couple of senior marketing folks. So we do have a little bit of extra bench strength that we're looking and they've been instrumental. One of them is focused on aesthetics, one of them is focused on our consumable product stream. So they are at work looking to put programs together.

We've had quite a bit of success getting some luminaries to comment favorably on our aesthetics products, so we like that. It's going to take a bit of time to get that back out to the customer base, but we look forward to that. And we're looking at good consumable marketing programs to try and help that. We have also invested in an additional headcount in the sales force in the US direct ophthalmology, again, to try and put more feet on the street to address that issue.

When do you think we'll start seeing some significant results from these additions? How do you plan additional feet on the street because we got $7 million sitting there not earning a lot.

We definitely plan more feet on the street. We would like to start to see results coming in immediately.

Okay. Second, the aesthetics business, isn't it time to try and get rid of it? I mean it's almost [minute] and isn't possible to just get rid of it, take a one-time beating and move on and concentrate in the area that you really have a reputation and know and get results from.

Well, as we've mentioned, we do look at both of those entities separately to make sure they're contributing. We continue to like the results of the aesthetics have brought us in the sense that they have helped us defer our overhead base. But we are always open to look at various different solutions to these challenges. So all of the options are on the table.

But nothing imminent.

I think at this stage we just want to comment on the high level outlooks.

Okay. My third question, and we've discussed it, the size that we currently are running, the $40 million to $50 million, nobody pays any attention. And I've suggested, isn't it an interesting or good idea to possibly look for a merger or a partner that gets us to a significant size that where we get attention from the investing public?

Yes. I would comment back to the last answer as well. We look at all these permutations and we recognize that there are definite advantages to being able to create growth in the Company. We obviously look at organic growth. We look at M&A tuck-ins. We're aware of the advantage of industry consolidations if they can be done correctly. So I think, how can I put it, you're comment is in tune with some of the rationale and the thinking we apply to the problem as well.

But it doesn't happen without hiring or spending some money to get it done. So my question is, are we going to do anything to try and implement that program? Companies don't get sold or bought or combinations occurring without a focus and activity, paid activity.

Well, we definitely we look at all -- as I said, I'm repeating myself a little bit, but we definitely look at all of these permutations. We definitely apply time and effort and focus. We are not in the habit necessarily of out-of-pocket expenditure to third parties to make these things happen, but that doesn't meant they're discounted.

As you pointed out, the advantage of continuing to grow our strength and our resources means that these types of opportunities can become at our disposal. So I wouldn't want to say that they're off the table, but at the moment we've been focusing on doing these things form an internal perspective.

Okay. Thank you.

Yes.

Thank you. (Operator Instructions) And management, I'm showing no further questions in the queue. Please continue with any -- oh, I'm sorry. We do have a follow-up from Mr. Manny. Please go ahead.

Yes, I think the fact that there's nobody else on the call asking questions other than Mr. Manny reinforces the comments that I've made. In order to get value in this company we have to have investors and coverage. And I think at the current, although you've done an excellent job in turnaround, excellent, I think we're just going to be sort of a side event. The market needs size. It needs -- in order to get recognition and coverage, and that's the only way you get value. So I just wanted to make that comment because nobody else is on the call asking questions, obviously, there's not a lot of interest.

Stan, thank you for making the comment. I appreciate it.

And that's not negative on the management, by the way. You've done an amazing job on the turnaround.

Thank you.

Yes, our job is to make us more relevant to the larger invested community, absolutely.

Thank you. And management, I have no further questions in the queue. Please continue with any further remarks.

So I would like to thank you for participating in this call and for your interest in IRIDEX and we look forward to sharing our progress with you at our next call. Good night.

And, ladies and gentlemen, that does conclude the IRIDEX Corporation Q2 2010 earnings conference call. If you'd like to access a replay of today's conference, you may dial 1-800-406-7325 or 303-590-3030 and enter the access code of 4336037. Thank you for your participation and you may now disconnect.