IRIDEX Corp (IRIX) 2011 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the IRIDEX Corporation first-quarter 2011 earnings conference call. At this time, all participants are in a listen-only mode, and following the presentation instructions will be given for the question-and-answer session (Operator Instructions). And as a reminder, this conference is being recorded today, May 5th, 2011.

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

Thank you, Craig.

Welcome to IRIDEX Corporation's first-quarter 2011 conference call. I'm Ted Boutacoff, President and CEO. I'm joined 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 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 controls, product demand, growth strategy and prospects, including the Company's second-quarter revenue, gross margins, operating expenses.

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 1, 2011, which is 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 first quarter, as demonstrated by our first-quarter results exceeding our Q1 guidance. Total sales for the quarter increased 4% to $11.2 million, up from the $10.8 million in the prior-year quarter. And of particular note, we saw our direct ophthalmology business grow 10%, which is in line with our goal of growth from existing ophthalmology business lines being 10% or more for 2011. And given that our first quarter can sometimes be our lighter quarter, we feel we are off to a good start for 2011.

Our quarterly profits increased 17% to $0.6 million or $0.06 per share, fully diluted, compared to $0.5 million or $0.05 per share, fully diluted.

During the quarter we made good progress in support of our growth strategy, which has three parts -- one, maintaining our leadership position in laser photocoagulation technology; the second, growing our recurring revenues through new product introduction and strengthening our existing channel; and third, looking for tuck-in acquisitions to supplement these efforts.

I will discuss each of those. On the first one, maintaining our leadership position in laser photocoagulation technology, we issued a press release yesterday drawing attention to the results of a new study, which were recently published, that compares the benefits of MicroPulse photocoagulation technology -- similar to that used in the new generation of IRIDEX lasers -- over the standard-of-care laser protocol for the treatment of eyes with diabetic macular edema.

The results indicated that treating using MicroPulse mode was as effective as the standard-of-care protocol in treating DME, with the added advantage of causing no localized laser scars and significantly improving visual acuity. DME or diabetic macular edema affects an estimated 2 million people in the US.

We believe that this is another step towards what could be a paradigm shift in ophthalmic laser eye treatment. And the 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.

The second part of our growth strategy is growing our recurring revenues through new product introductions -- and strengthen our existing channels.

We were very pleased to have a patent issued on our Stepped Angled EndoProbe handpieces. This is an important patent for us, because our Stepped Angled probes are the best selling product line within our consumable product portfolio. Users of these handpieces consistently comment on their performance, their ease of use, and their longer working distance compared to competitive probes.

In addition, we hired an additional sales rep during the quarter in the US to strengthen our presence in the operating room. We will continue to look for ways to add additional products and feet on the street in support of this initiative over the coming months.

The third initiative is supplementing our organic initiatives with smart acquisitions.

We have an active pipeline for opportunities. However, we are driven by making smart acquisitions as opposed to meeting a predetermined calendar deadline. And therefore, to ensure we continue to leverage our cash effectively to drive shareholder value, we announced today a $2 million stock repurchase program. We now have the option of looking for acquisitions and/or buying our stock to return value to our shareholders.

Jim Mackaness will now discuss the details of this quarter's results, and then I will give you an update on recent market trends. Jim?

Thanks, Ted. I will start by reviewing our first-quarter revenues. Total revenues for the first quarter of 2011 were $11.2 million, up 4% or $0.4 million compared to $10.8 million reported for the corresponding quarter in 2010; and down 8% or $1 million sequentially from the $12.2 million as reported for our seasonally stronger fourth quarter of 2010.

Ophthalmology revenues, including OEM sales for the quarter, were $8.2 million, up 8% from $7.6 million for the first quarter of 2010 and down 9% on a sequential basis from the $9.0 million reported for Q4 2010.

As Ted mentioned, when OEM sales are removed, our direct ophthalmology sales grew 10% compared to the first quarter of 2010.

Looking at these revenues geographically, domestic ophthalmology revenues -- direct revenues for Q1 2011 were $4.5 million, up 18%, or $0.7 million compared to $3.8 million for Q1 2010; and down 4% or $0.1 million compared to $4.6 million for Q4 2010.

Often equipment sales can be a little depressed in the first quarter of the year after the seasonally heavy purchasing at the end of the prior quarter -- for the prior year. However, this year we are pleased to report relatively very strong equipment sales for the first quarter of 2011. The results were further enhanced by us winning a sizable order from the US military for $0.3 million.

OEM revenues, which we disclosed as part of our domestic ophthalmology revenues in our Form 10-K, were $0.1 million for Q1 2011, down $0.1 million from the $0.2 million reported for Q1 2010; and flat with the $0.1 million reported for Q4 2010.

We anticipate OEM revenues to continue to decline as our OEM partner moves to a new platform.

International ophthalmology revenues totaled $3.6 million, flat compared with $3.6 million for the first quarter of 2010 and down 16% or $0.7 million compared to $4.3 million for Q4 2010.

We did see some impact from the recent turmoil in the Middle East, both in general terms regarding the business climate; and specifically $100,000 of orders were pushed out.

Looking at the recurring component of our ophthalmology revenues on a worldwide basis, which consist of our consumable products and services, revenues were $4.2 million and represented 51% of total ophthalmology revenues for the first quarter of 2011. This represents a 5% or $0.2 million increase from $4.0 million reported in the first quarter 2010; and a 3% or $0.1 million increase from $4.2 million on a sequential basis.

The focus and hard efforts we have put into this area are beginning to pay off, as demonstrated by growth over both prior-year quarter and sequential quarter. And the recent patent we were issued for our Stepped Angled probes will also help because of its popularity and the ability to remain differentiated from our competition.

Aesthetics revenues for the quarter were $3.0 million, down 4% or $0.2 million from $3.2 million for the first quarter of 2010, and down similarly from $3.2 million reported for Q4 2010.

Looking at these revenues geographically, domestic aesthetics revenues totaled $1.6 million, down from $1.7 million for the first quarter of 2010 and up from $1.5 million reported for Q4 2010. International aesthetics revenues totaled $1.4 million, down from $1.5 million for the first quarter 2010, and down from $1.7 million in Q4 2010.

We monitor the performance of our aesthetics business closely. It continues to contribute to the overall profitability of the organization and generates cash by reducing aesthetics inventories through sales.

Switching attention to gross margins and expenses, gross margins in the first quarter 2011 were 46.7%, lower than the 48.6% reported for the first quarter of 2010 and lower than the 48.2% reported on a sequential basis.

Compared to Q1 2010, gross margin decreased due to manufacturing variances, which represented an expense of 1.1% of revenues compared to a credit of 1.3% of revenues in Q1 2010. Manufacturing variances include inventory and warranty reserve movement and adjustments for overhead absorbed on closing inventory.

In addition, direct margins decreased 1.2% due to product mix. These decreases were partially offset by a 1.7% improvement in manufacturing and service expenses as a percentage of revenues due to dollar expenses being held constant while revenues increased.

Our stated near-term target range for gross margin is 45% to 50%, and we've been executing consistently within this range.

Operating expenses in the first quarter 2011 were $4.6 million, level with the first quarter 2010, and $0.1 million lower than the fourth quarter 2010. Our operating expenses were 41.3% of revenues for the quarter, compared to 43.0% for the first quarter of 2010, and in line with our goal of managing operating expenses to be between 40% to 42% of revenues on an annual basis.

We generated $0.6 million in operating income, level with the first quarter of 2010, and down $0.6 million from $1.2 million reported for Q4 2010.

Our EBITDA for the quarter was $0.9 million. This calculation includes adding back FAS-123R stock compensation expense.

Our tax rate for the year is currently 15%, and we booked a tax provision for the quarter of $0.1 million. Our tax rate continues to benefit from a reduction in the valuation allowance we currently have booked against our deferred tax asset. Ultimately, and assuming we remain profitable, the entire valuation allowance will need to be released, and our tax rate will return to a more normal level estimated to be between 30% to 40%. 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 $0.6 million or $0.06 per diluted share for the first quarter of 2011, compared to a net income of $0.5 million or $0.05 per diluted share for the first quarter of 2010. This represents a 17% increase over the prior-year period. Net income for Q4 2010 was $0.8 million or $0.08 per diluted share.

Looking at Q2 2011, we are forecasting revenues to be between $10.7 million and $11.0 million. This represents an 8% to 11% increase over Q2 2010. Gross margins are expected to be between 46% and 49%, and operating expenses to be between $4.5 million and $4.7 million.

With regards to other items of note, during the quarter we purchased the remaining common stock held by American Medical Systems Holdings Inc., which resulted from our acquisition of the Laserscope aesthetics assets from AMS in 2007. We purchased 75,698 shares at $4.00 for a total payment of just over $300,000.

As we mentioned on our last conference call, we felt that having established momentum in our operations, financial results and stock valuation, that to remove the remaining block of shares in a single transaction better served the interest of IRIDEX and our shareholders.

Building on this theme -- and as Ted indicated earlier -- today we announced a 2 million stock repurchase program. This program is in addition to the AMS shares purchase transaction, and will run for the next 12 months to allow the company to be active in the market from time to time for the benefit of our shareholders.

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

Thank you, Jim.

We had a good start to the year. One of the things we did for the quarter is, we took the opportunity to go on two roadshows -- one to Boston, and the other to New York and Philadelphia.

We met with over 30 potential investors, and have had numerous follow-up conversations, and noticed an uptick in trading volumes -- a small step but a good step in the right direction of raising investor interest in the Company.

Two consistent high-level themes came out of these meetings, and I thought -- which I thought are worth commenting on. One is the current balance between pharma and medical devices in the treatment of retinal diseases, and how we see it shaking out going forward. And the other is -- was, when will we see the tipping point for MicroPulse adoption that would lead to IRIDEX seeing an upward inflection in revenues?

On the first theme, over the last 10 years, pharma has made significant inroads in the treatment of retinal diseases, most notably with AMD -- the wet type, specifically, of AMD.

Over the last several years, pharma has been running randomized clinical trials for the treatment of diabetic macular edema, where lasers have been the standard of care for over 25 years. The trials have shown that drugs have favorable, acute effects -- effects in the short term -- and that those favorable effects can be extended when used in combination with laser treatment. This issue remains in flux with retinal physicians questioning whether they see lasers -- whether they will be used primarily, and pharma used for non-responders, or whether pharma will be used as the primary intervention and lasers used to treat non-responders.

Our current belief is that over the long term we will see combination therapies in most cases where pharma and laser will each be used to provide what they do best. For example, the patient will receive a brief regimen of pharma to provide acute benefit, while allowing the laser treatment to take effect and provide the long-term, durable benefit. We also believe less damaging laser procedures such as MicroPulse will push the use of lasers earlier in the disease process and may delay the use of pharma later in the process.

On our MicroPulse strategy, the question of when do we see mass adoption and what is the possible financial impact of mass adoption -- we have spent a number of years in the research phase of developing tissue-sparing photocoagulation technologies, concentrating on the advancement of the science and evolving the protocol. With the recent publication of the randomized Midena and Lavinsky's papers, both of which we've put out in press releases -- these two use similar protocols and reported therapeutic benefits of MicroPulse photocoagulation in randomized trials.

We have determined, now, that the appropriate MicroPulse protocol parameters to use to maximize beneficial patient outcomes -- and therefore we believe we have entered the early adopter phase of the process. During this phase we will support additional studies to broaden the body of evidence to validate the benefits of MicroPulse technology as a tissue-sparing photocoagulation treatment and to heighten the awareness of these benefits amongst the retinal community.

The reason we are excited about this opportunity is twofold. Firstly, we believe MicroPulse photocoagulation will significantly benefit patients with improved patient outcomes. And secondly, shifting the paradigm for standard -- from standard photocoagulation to MicroPulse photocoagulation provides us with an opportunity to significantly grow our revenues.

For example, one of the benefits of less damaging therapies is to be able to treat a larger population earlier and preserve vision while it is better. We believe this would significantly increase the overall market size for laser photocoagulation units. We saw this effect occur when we first introduced the semiconductor solid-state laser, and we see the possibility of a repeat performance.

A second revenue driver is the opportunity for higher ASPs for lasers sold when the MicroPulse module is purchased. We see a possible range of 15% to 20% increase in system ASPs.

And finally, the widespread adoption of MicroPulse would likely result in an increase in replacement rate within the installed base. We calculate that this might lead to approximately $120 million of additional sales opportunities over a 3-to-5-year period. We caution, though, that the transition from early adopters to mass-market acceptance will take time. And although we see some momentum today, it is quite possible that it will take 2 to 3 years before we see widespread adoption. Obtaining additional clinical data, together with driving increased awareness, takes time.

I will now open the lines for questions.

Thank you very much. Ladies and gentlemen, at this time we will begin the question-and-answer session (Operator Instructions).

Good afternoon, Ted; good afternoon, Jim. Congratulations on continued progress. A comment and a question. The comment is, I'm very pleased to see that you and the Board have moved to a share buyback. I think we would all agree the stock is very much undervalued, and I think it's a good use of our funds to be buying the stock back, so I'm very pleased to see that.

Thank you.

Question -- I joined the call late; forgive me if I'm asking you to repeat what you just covered. Last call, we talked about acquisitions, the pipeline, what you were doing. I don't know if you said anything on the call, but any quick updates on activity, prospects? How does it look for this year perhaps, to maybe get one acquisition tucked in?

I think we just referred to the fact that it remains active. We did indicate that we were trying to avoid being driven purely on calendar. And that's when we introduced the fact that we were also looking at the stock buyback as an opportunity to use our funds as a sensible way to increase shareholder value.

Okay, thanks.

(Operator Instructions). Larry Haimovitch, HMTC.

Well this looks like a private call; I love it. Again, I joined the call late -- forgive me for that, and if I'm asking any questions that you covered. On the aesthetics side, are you seeing any signs of life in that business, based on the fact that we are getting a little bit of recovery in the economy, and that that business is perhaps getting a little bit of a lift from that?

I think what we definitely continue to see -- a little bit more of a normal buying pattern. We've made references, I think, last quarter for the first time -- what I mean by that is, when we can take a lead through the sales funnel in a more normal fashion with a higher probability of closing it out, in the past what we would see is, even if we felt that someone was really going to make a purchase, we would often get right up to the end of the quarter; they would basically take a look at their portfolio and their accountant, and defer the decision.

Right.

Now we are just seeing that it flows more normally through that. So, on a contextual basis, we do think there's a little bit more of a normal buying market returning.

Okay, great, thanks.

And at this time there are no further questions in the queue. I'd like to turn the call back over to management for any closing comments.

Well, 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.

Thank you. Ladies and gentlemen, this does conclude the conference call for today. If you would like to listen to a replay of this conference, you may do so by dialing either 303-590-3030, or 1-800-406-7325. You will need to enter the access code of 4435858 (Operator Instructions). Again, we do thank you for your participation on today's call. You may now disconnect your lines at this time.