IRIDEX Corp (IRIX) 2010 Q4 法說會逐字稿

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to the IRIDEX Corporation fourth quarter 2010 earnings release conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Thursday March 3rd of 2011.

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

Thank you, Brittney. Welcome to IRIDEX Corporation's fourth quarter 2010 conference call. I am Ted Boutacoff, President and CEO, I am joined today by 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 scalable business model, operating expense control, product demand, growth strategy, and prospects,including the Company's first quarter revenue, growth margin, operating expenses. These statements are not guaranteed 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 third quarter ended on October 2 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. We are pleased to report a strong performance for our fourth quarter. Our fourth quarter results exceeded our Q4 guidance that we provided you. Total sales for the quarter increased 6% to $12.2 million, up from the $11.6 million in the prior year quarter, and of particular note we saw our Ophthalmology business excluding OEM revenues grow 14%. Our quarterly profits increased 62% to $0.8 million, or $0.08 per share fully diluted, compared to $0.5 million, or $0.05 per share fully diluted. And we generated $1.9 million in cash to end the year with $9 million in cash, and no debt. Earnings for the year increased 18% to $0.30 per diluted share up from $0.26 in 2009.

Our growth strategy is based on organic initiatives and strategic acquisitions, and we are beginning to see momentum from some of the initial steps we have already taken. Although total revenues for the year were up only slightly from $43.2 million to $43.7 million, Ophthalmology revenues excluding OEM sales were up 7% from $29.6 million to $31.6 million.

Our growth strategy involved three elements. One is maintaining our leadership in laser photocoagulation technology. We have demonstrated this with the recent introduction of the IQ577 and IQ532 laser systems, and Q4 represented our best quarter to date of sales of IQ577 systems, and demand continues to grow as more and more doctors are becoming convinced of the additional benefits that a true yellow laser brings to their practice.

And we are beginning to see papers being published in support of using our MicroPulse technology to perform tissue sparing laser photocoagulation, widespread adoption of tissue sparing laser photocoagulation has the potential to speed up the replacement cycle of the installed base of laser systems driving up demand for new systems that can offer this capability, and we lead the way with our patented MicroPulse technology.

Element number two is growing our recurring revenues through new product introductions and strengthen our existing channels. We have worked hard in this area and our fourth quarter revenues for 2010 were $4.1 million up 6% from $3.8 million for 2009. We hired an additional sales rep in the US in 2010, and have just brought on another rep at the beginning of 2011. This was to strengthen our presence in the operating room, and we will continue to look at adding additional reps as time goes on in 2011. We are very excited about the consumable product pipeline we have.

And number three, supplementing our organic initiatives with smart acquisitions. We have an active pipeline of opportunities. We do not believe it is appropriate to discuss the individual transactions, but we are investing our time on targets ranging from IP assets up to sub-$10 million revenue of companies or product lines,primarily in the consumable or diagnostic space,with the goal of any acquisition to be accretive within 18 months of closing.

Jim Mackaness will now discuss the detail of this quarter's results, then I will give you an update on our outlook for 2011. Jim?

Thanks. I will start by reviewing our fourth quarter revenue. Total revenues for the fourth quarter of 2010 were $12.2 million, up 6%, or $0.6 million compared to $11.6 million reported for the corresponding quarter in 2009, and up 13% on a sequential basis from $10.8 million asreported for Q3 2010.

Ophthalmology revenues including OEM sales for the quarter were $9.0 million, up 11% from $8.1 million for the fourth quarter of 2009, and up 13% on a sequential basis from the $8.0 million reported for Q3 2010. Looking at these revenues geographically, domestic Ophthalmology revenues excluding OEM revenues for Q4 2010 revenues were $4.6 million, up 8%, or $0.3 million compared to $4.3 million for Q4 2009, and down 3%, or $0.2 million compared to $4.8 millionfor Q3 2010.

Equipment sales were strong and consistent across the product line. We were particularly pleased with the increased sales of the IQ577 yellow laser, as Ted mentioned, this was our best quarter to date. In Q3 2010 we commented that we had won a large order from the US military for $0.5 million, and this accounts for the dip in sales on a sequential basis. OEM revenues which we disclosed as part of our domestic Opthalmology revenues in our Form 10-K were $0.1 million for Q4 2010, down $0.2 million from the $0.3 million reported for Q4 2009, and flat with the $0.1 million reported for Q3 2010. As we have mentioned previously, we anticipate OEM revenues to continue to decline as our OEM partner moves to a new platform.

International Ophthalmology revenues totaled $4.3 million, up 21%, or $0.8 million compared with $3.5 million for the fourth quarter of 2009, and up 40%, or $1.2 million compared to $3.1 million for Q3 2010. Equipment sales lead the way with strong demand across all of the product lines, and similar to domestic results, we experienced our best quarter-to-date for sales of the IQ577 yellow laser.

Looking at the recurring component of our Ophthalmology revenues on a worldwide basis, which consist of our consumable products and service, revenues were $4.1 million and represented 45% of total Ophthalmology revenues for the fourth quarter of 2010. This represents a 6%, or $0.3 million increase from $3.8 million reported in the fourth quarter 2009, but a 3% or $0.1 million decrease from $4.3 million on a sequential basis.

Although our performance improved over the prior year quarter, our goal is to have both year-over-year and sequential growth so we have more work to do. The increase in equipment sales may lead to additional consumable sales if the equipment is destined for the OR or ASC. The introduction of additional consumable products provides us with more revenue opportunity, and we continue to strengthen our channel. Our Japanese distributor recently received regulatory clearance to sell our full line of EndoProbes in Japan, and we have hired two direct sales reps in the US on the OR and ASC. Aesthetics revenues for the quarter were $3.2 million, down 7% or $0.2 million from $3.4 million for the fourth quarter of 2009, and up 13%, or $0.4 million on a sequential basis from $2.8 million reported for Q3 2010.

Looking at these revenues geographically, domestic Aesthetics revenues totaled $1.5 million, down from $1.7 million for the fourth quarter of 2009, and down from $1.6 million reported for Q3 2010. International Aesthetics revenues totaled $1.7 million, level compared to the fourth quarter of 2009, and up from $1.2 million in Q3 2010. We were pleased to see international sales having recovered from the economic crisis experienced in Europe in Q2 2010.

Switching our attention to gross margins and expenses. Gross margin in the fourth quarter 2010 of 48.2%, higher than 45.6% reported for the fourth quarter of 2009, and down slightly from the 48.5% reported on a sequential basis. Compared to Q4 2009, gross margin increased due to an improvement of 2.6%, attributable to volume efficiencies as manufacturing and service costs held steady while revenues increased, and manufacturing variances of 1.6%. Manufacturing variances include inventory on warranty reserve movements, and adjustments for overhead absorbed on closing inventory.

These improvements were mitigated by a decrease in direct margins of 1.6% due to product mix. As our revenue growth was boosted by increased equipment sales. We have commented before that our near term target range for gross margins is 45% to 50%, and we have been executing consistently within this range.

Operating expenses in the fourth quarter 2010 were $4.7 million, up $0.2 million from the fourth quarter 2009, and up $0.3 millionfrom the third quarter 2010. The increase were in sales and marketing in support of the increased revenues. Our operating expenses were 38.6% of revenues for the quarter, this is below our stated goal of managing operating expenses to between 40% to 42% of revenues for the year. We generated $1.2 million in operating income, up $0.4 million, or 49% over the $0.8 million reported for Q4 2009, and up $0.3 million, or 33% over the $0.9 million reported in Q3 of 2010.

With the increased profits generated in Q4 2010, our tax rate for the year increased to 13.4%, and consequently we booked a tax provision of $0.3 million or 26.9% in Q4 to catch up our provision for the year. Our tax rate is benefiting from a reduction in the valuation allowance we currently have booked against our deferred tax assets. Ultimately and assuming we remain profitable, the entire valuation reserve will need to be released, and our tax rate will return to a more normal level. At the end of 2010, the valuation allowance totaled $12.1 million.

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 fourth quarter of 2010, compared to a net income of $0.5 million, or $0.05 per share for the fourth quarter of 2009. This represents a 62% increase over the prior year period.

Net income for Q3 2010 was $0.9 million, or $0.09 per diluted share. Our EBITDA for the quarter was $1.3 million, this calculation does not include getting back FAS-123R stock compensation expense, and our cash generation was excellent. Cash increased from $7.9 million at the end of Q3 2010 to $9.0 million at the end of Q4 2010, and we have no outstanding debt.

For the year, revenues increased modestly from $43.2 million for 2009 to $43.7 million for 2010. Ophthalmology revenues excluding OEM sales were up 7%, or $2.0 million from $29.6 million to $31.6 million. With believe our efforts in growing revenues are gaining momentum, and reaffirm our strategic goal of growing existing ophthalmology business lines by at least 10% for 2011, with any growth from acquisitions being additive to that rate.

Operating expenses for the year were $18.1 million or 41% of revenues, in the range we gave for the year of 40% to 42%, and comparable to $17.8 million, or 41% of revenues for 2009. Income from operations for the year was a new record for the Company, coming in at $2.8 million, up 12% or $0.3 million, over $2.5 million for 2009. Net income per share on a diluted basis was $0.30, compared to $0.26 for to 2009, a 15% increase.

Looking at Q1 2011, the first quarter of the year is typically a seasonally weaker quarter for us, with that said, we are forecasting revenues to be between $10.6 million and $10.9 million, gross margin to be between 46% and 49%, and operating expenses to be between $4.5 million and $4.7 million.

And now I would like to comment on the press release we issued yesterday, with regards to purchasing the remaining common stock held by American Medical Systems Holding Inc. AMS became a holder of our common stock as a result of our acquisition of the latest scope aesthetic asset from AMS in 2007. We purchased the remaining 75,698 shares at $4, for a total payment of just over $300,000. AMS has been selling shares into the market in a systematic and responsible manner from time to time. We felt that having established momentum in our operations, financial results and stock valuations, that to remove the remaining block of shares in a single transaction would better serve the interest of IRIDEX and our shareholders. Our increasing financial strength allows us to explore multiple ways to increase shareholder value, and we will continue to look forward to and execute on these opportunities.

With that, I will turn the call back over to Ted.

Thank you, Jim. The organization has truly shifted focus as we enter 2011. The assets that we have developed over time include a great brand in our core Ophthalmology market, important new technologies to bring to our customers, and a stronger financial platform to backup our efforts. Looking forward, we will focus our decisions and investments more fully on ways to improve our commercial success. This includes increasing the number of sales force or feet on the street, increasing our presence in the surgical suite with new products supported by clinical benefits to patients, and working with our customers and industries luminaries to identify new product opportunities, to expand applications of existing new products, existing and new products, and to promote via research, publications, and podium presentations our next generation products and applications.

I would like to close by summarizing our key objectives for 2011. Our goals are for revenue, to grow revenue 10% organically, and supplement the organic revenue growth with one acquisition. In equipment, to introduce one new laser system and introduce a novel laser delivery device. In consumables, to introduce two new consumable products, and increase the number of sales reps targeting the surgical suite. And in new technologies, to have one new patent issued, and have several studies published which further validate using MicroPulse technology to perform tissue sparing photocoagulation procedures.

Brittney, I would now like to open the line for questions.

Thank you, sir. We will now begin the question and answer session. (Operator Instructions). Our first question comes from the line of Larry Haimovitch with HMTC. Please go ahead. Good afternoon gentlemen, congrats on a very nice quarter.

Thank you very much, Larry. Ted, you have talked about the yellow laser. I think it is beginning to gain some momentum. I wanted to get some more color from you on what you are seeing out there? I think it is beginning to have positive impact on the Company, but I just wanted to get your thoughts on what you are seeing personally as you see this product increasingly in the field?

There are a number of characteristics of the laser that are appreciated by the customers. They are seeing that they can treat patients using less power under better control, and under better visualization, so they can get to very subtle end points, and they can do it quicker, and there is less patient discomfort associated. So all of those benefits put together are beginning to be talked about and appreciated by our customers. Ted, are you pretty much owning that market? I know there was one other competitor at one point that was developing the product. Is there anyone else if the US in the market that markets yellow laser?

There are some in the market. We clearly have the only yellow laser that has MicroPulse technology protected by our patent. Okay. Jim, on the income statement, if revenue grows at 10% or better, should we expect there to be some good leverage on the income statement, that is to say earnings should be growing faster, and cash generation should be better than pure revenue growth?

In our current structure, yes. Okay. What do you mean by current structure?

Well, Ted alluded to obviously as we go forward, we have our eye on acquisitions. Okay.

As you know, they always muddy the water as you try to put the GAAP accounting through your P&L. Of course, right. Regarding acquisitions, obviously you can't go into any detail, but can you talk a little bit more about the pipeline? You have several companies that are in various stages of gestation that you have obviously got to look at a bunch before you get one or two, but give us a thought about how that is going?

I would say at the moment on our target list, we have something just north of 20. What we have in our defined active and on-deck bucket is just under, single digits, just under ten. So you have a pretty risked pipeline?

Yes. We are putting considerable efforts trying to try to move people through the pipeline. Okay, thanks. I will get back in queue.

Thank you. (Operator Instructions). Our next question comes from the line of Sam Bergman with Bayberry Asset Management. Please go ahead.

Good afternoon, Ted and Jim, how are you?

Very good, Sam.

Nice quarter and you have some really great products out there, which I assume will help 2011 in a big way. Couple of questions though. The guidance for the first quarter, knowing that 2011 is organically 10% higher, are we seeing the first quarter is going to achieve that, or not achieve that?

Q1 last year was 10.7 and some change I think, if my memory serves me correct, and within that obviously we have both the aesthetics and the ophthalmology, and when we talk to our 10% organic growth we are really focusing on the ophthalmology piece within that, so we are expecting to be able to be fairly consistent throughout the year as being around the goal that we are trying to get for the whole year.

Now the cosmetic business was a little bit down this quarter, but sequentially better. Do you have the products or product portfolio to continue that business long-term?

We have two gold standard products that we really line up in that business, being the VariLite and the Gemini, and there are opportunities for us to continue to add in and around that as we go forward. Most recently we have been very cautious about making any investment because of the state of the market and the state of the Company.

What was the latest product that has come out from that division, and do you expect any new products to come out in 2011?

The Gemini was the product we brought over from Laserscope. We have continued to enhance both the Gemini and the VariLite, but we have not put a new box into the market.

Okay. And in terms of the products that you acquired at RetinaLabs, you were able to sell those in overseas markets in 2011 where you didn't have the ability do that in 2010?

Sorry, was that a question?

Yes.

We have received CE clearance, so we are now able to take, there are a number of intellectual property assets and couple of productized items from RetinaLabs, so we are able to take the productized ones to Europe, and in certain international markets now, correct.

What type of uptick in he have news do you think you can achieve with that product being over in Europe, or do you have to add many more sales people to obtain that?

With all of this it is going to be spread out over time. Overseas, we go through distribution, so we have a process of basically introducing these products to our distributors, and there is the classic situation of enticing distributors to pick up products, and to get them to basically help you direct them through to the end customer, so I believe it will take some time to basically continue to complete the circle for these overseas.

Okay. And on the MicroPulse technology, what are your expectations in terms of white papers, are there any other white papers coming out on that product or that technology in the next three months, or symposiums that you have set up?

We are looking for published peer reviewed journal articles coming in for MicroPulse. Yes there will be some out within the next three months and there will be presentations at the podium at major meetings.

What sales force of the Company is selling their product?

It is sold through the ophthalmology sales force. It is a technology that we put into our infrared and currently our IQ577 lasers. It is sold by the direct sales force in the US, and it is available to all of the ophthalmology distributors on a worldwide basis for those products.

What is the feedback you are getting from the salespeople on that product line right now, versus what you had three months ago?

Again, you are referring to the MicroPulse, correct?

Yes.

I would say that we fine that internationally there is a stronger understanding and desire on the customer base. In the US, we typically find people a little more hesitant to go beyond what is the standard, so again, this gets back to Ted's point about having these papers and presentations at podiums, to basically provide sufficient clinical evidence, particularly to the US markets, to allow the doctors to embrace the new approach.

And the last question, I know you did say, I think Ted said plan on executing some smite acquisitions in 2011, maybe one if that comes along and it is the right price. Should we expect you to use some stock in an acquisition like that, even though the stock is unusually low, and I know you just bought back the shares from AMS, or would it be debt, part cash, part debt?

I would say our answer to that at the moment is we are willing to be flexible. We obviously recognize that our share price, at least in our opinion, is undervalued. Having said that, there maybe something there that is more enticing for someone willing to join us, so we would be willing to consider anything that we think makes sense to both parties, both parties, so I would say it is not out of the question.

Which way is management leaning?

I don't think, well, it depends on how large the deal is. If you look at the RetinaLabs one, we did that as a combination of a little bit of cash and a little bit of shares, so I can imagine that as being a fairly normal approach.

Okay, thank you very much.

Thank you, Sam.

Thank you. (Operator Instructions). Our next question comes from the line of Stan Mann, Mann Family Investments. Please go ahead.

Hi gentlemen, good job for 2010. I have a couple of questions. One, how many salesmen do we have after the addition of two in ophthalmology?

Thirteen guys directly in the field.

Is that including the two new?

Yes.

So that is over a 20% increase from base, approximately?

Correct. Yes.

How long does it take for a salesman to get up to selling in your business from your experience?

It depends on the product. For the equipment we have, it takes a while. If they have no experience in the field but they understand ophthalmology, it may take a year for the disposable products, consumable products, less sort of the time, half of that.

Thirteen salesmen and 40 domestically, annually how much are the sales? I am trying to understand the metrics per sales when they get to maturity.

For the domestic sales for the year we were probably around, I am just trying to make sure I got the right number for you, at 50%, I think off the top of my head. I would say $15 million rings a bell.

$15 million?

Yes.

One-five.

15, $15 million.

In ophthalmology?

For the domestic?

Yes. Fifteen?

Yes.

So that is $1.2 million something like that per salesmen when they get up to speed?

It depends on territories, but somewhere between $1 million to $1.5 million, correct.

Okay so what do you think the potential of the new products is domestically? I am trying to get an understanding of where we are going, and what the potential is?Do you have a feel for that?

Well, let me explain it one way, see if this helps. On the consumable side, the way we look at it is we say that we know historically we have been able to sell a probe, with has an average price of $150, a family of products, but $150 would be an average price, and we are able to make on a global basis, again round numbers, but we make something like $15 million from the consumable side, the disposable side of the business. We are looking to add additional consumable products, with the goal of taking the $150 per case opportunity, up to $250. If we are able to do that on a worldwide basis we would see our consumable revenue stream of $15 million grow to $25 million.

I appreciate that I am trying to understand what the total market potential for these products, consumables and separately the booked, is it a $15 million worldwide market? A $100 million potential?

For laser systems, currently the worldwide market is somewhere around the $150 million range worldwide, then you have the consumable piece on top of that, the laser probe piece, which is probably somewhere, let's say another $50 million to get you around to $200 million for these laser systems, which can be sold both in the OR and the office, and the probe, which is used in the OR setting, so that piece of the product portfolio has a worldwide market of around $200 million.

Okay. So we have, what, a 20% penetration worldwide? I am trying to understand what is our future.

Yes, we are currently at about a 20% position in the market, of that piece of the market, and we see adding consumable instrumentation as a way to take us beyond that. All told within the retinal device segment, if you add all of the pieces including the retracting machine and all of the rest of it, can you see that whole piece adding up to somewhere around $800 million.

In the US, do you see us adding another three, four salesmen in 2011?

Unlikely that we would expand that quickly in 2011.

Okay. So let me get down to the basic question I had. We have got $9 million in cash, which is about $1 a share, okay. I think you have done a great job. The equity has gone no place. I have a question on your plans to use the cash. Now you bought some stock back from AMMD, American Medical, that is not a large purchase, you have 8-something million shares. Is the possibility since our cash is going to buy more stock back at all?

Well, it is a possibility. I will point out that one of the things that we recognized that we have a very small trading volume and a relatively small float out there, so we have to balance the idea of using our cash on a buyback, with the idea of making our stock attractive to new investors by having shares available and increasing our volume. So again, we are looking to do sensible steps to basically find ways to increase shareholder value. One of those as you said, it is on our target list, would be stock buybacks in particular situations.

What about a stockholder dividend? I am just trying to explore the use of $1 a share in cash?

Currently not thinking about a dividend.

Not thinking about it, okay. So the other question I have is, what are your plans to get institutions or buyers interested in a company in the current market that is booming, nobody cares about companies that are as small as IRIDEX? We have had this conversation. How do you increase equity value? It hasn't happened, and you have done a great job.

You are correct, Stan, we have had this conversation a number of times. We have, as we mentioned previously, we will comment again, as we have been able to show a track record of performance, and as we have been able to demonstrate our vision and execution to that, we have taken steps to take our story out.

We were at OneMed earlier this year, we have an invitation for a conference coming up shortly, and we are planning to take some road trips to visit with a number of institutions who have signaled that they would be interested in hearing our story. We are taking all of the he essential steps that we can to, A, make sure that IRIDEX performs, and B, that we take that to a wider audience.

With respect for a wider audience, 2010, what audience have we added because I don't see it? I don't see that additional, the recommendations, or new buyers or institutional. If I am wrong, I would like to know that I think whoever is investing would like to know that.

Well, it takes two sides to get there, so we are continuing to push our strategy forward, and we are convinced that over time we will be able to drum up more interest.

Has any major institution added IRIDEX to their list in 2010 thus far in 2011? Has anyone?

I would suggest you have a look at the institutional share holdings on Yahoo to see the movement.

But you know what it is, so answer my question.

Stan, please, if you want to drill down into these levels, I would be happy to talk to you either individually, or you can look at Yahoo. You mentioned you have made these comments a number of times in the past, and our answer remains at same, and as you pointed out we continue to show very good results, and we are going to continue to take the essential steps including we have brought on an Investor Relations group, and we are going to continue to take essential steps to continue to take the story to a wider audience.

Okay. My last comment is, we need to look at getting a larger institution, whether that be through an M&A, and someone buying us, but in this marketplace we need to get over $100 million in sales, in order to get notoriety or significance and attention, and I have made this statement before, and I will continue to make it since I am a significant stockholder that is probably as frustrated as you are. That is my final comment, and I thank you. You have done a good job.

Thank you.

Thank you. I am show no further questions in the queue. I would like to turn the call back to management for any closing remarks at this time.

I would like to thank everybody 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 evening.

Thank you. Ladies and gentlemen, this concludes the IRIDEX Corporation fourth quarter 2010 earnings release conference call. This conference will be available for replay after 4 PM Pacific Standard Time today through March 9th 2011 at Midnight Pacific Standard Time. You may access the replay system at any time by dialing 303-590-3030 or 1-800-406-7325, and entering the access code of 4414639, followed by the pound sign. Thank you for your participation. You may now disconnect.