IRIDEX Corp (IRIX) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen. Thank you for standing by. Welcome to today's second quarter 2011 earnings release 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 August 4, 2011. At this time I would like to turn the conference over to our host, Mr. Ted Boutacoff, President and CEO. Please go ahead, sir.

Welcome to IRIDEX Corporation's second quarter 2011 conference call. I am Ted Boutacoff, President and CEO. I am joined today by Jim Mackaness, our CFO; and before we get started, Susan Bruce, our Executive Administrator, who 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 growth strategy, OEM revenues, market conditions, gross margins, operating expense controls, tax rate, evaluation allowances, product demand and prospects, including the Company's third-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, and the quarterly reports on Form 10-Q for the quarterly periods ended April 2, 2011 and July 2, 2011, 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 growing revenues and profits for our second quarter of 2011. Total sales for the quarter increased 9% to $10.8 million, up from the $9.9 million in the prior year quarter. And sales for the first half of 2011 increased 7% to $22 million, up from $20.6 million for the first half of 2010.

Our quarterly profits increased 13% to $0.9 million or $0.09 per share fully diluted. And our half year profits increased 15% to $1.5 million or $0.15 per share fully diluted. We are in-line with our Q2 guidance for revenues, slightly below our guidance for gross margins and slightly better than our guidance for operating expenses. Overall a good quarter and Jim will provide more detail later.

Our growth strategy for 2011 remains focused on the following three elements. One, maintaining our leadership position in laser photocoagulation technology; two, growing our recurring revenues through new product introductions and strengthening our existing channel; three, supplementing our organic initiatives with smart acquisitions.

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 second quarter revenues. Total revenues for the second quarter of 2011 were $10.8 million, up 9% or $0.9 million compared to $9.9 million reported for the corresponding quarter in 2010; down 4% or $0.4 million sequentially from $11.2 million as reported for our first quarter 2011.

Ophthalmology revenues, including OEM sales for the quarter, were $8.1 million, up 7% from $7.6 million for the second quarter of 2010 and down 1% on a sequential basis from the $8.2 million reported for Q1 2010. Excluding OEM sales, our direct ophthalmology sales grew 8% compared to the second quarter of 2010.

Looking at these revenues geographically, domestic ophthalmology revenues -- direct revenues for Q2 2011 were $4.3 million, up 13%, or $0.5 million compared to $3.8 million for Q2 2010; and down 4% or $0.2 million compared to $4.5 million for Q1 2011. We continued to see strong equipment sales for the second quarter of 2011 driven primarily by purchasing the [office core point] and as a result have increased demand for our recently introduced IQ 577 yellow and IQ 532 green laser systems.

OEM revenues, which we disclosed as part of our domestic ophthalmology revenues in our Form 10-Q, were $0.1 million for Q2 2011, down $0.1 million from the $0.2 million reported for Q2 2010; and flat with the $0.1 million reported for Q1 2011. We anticipate OEM revenues to continue to decline as our OEM partner moves to a new platform.

International ophthalmology revenues totaled $3.7 million, up 3%, or $0.1 million, compared with $3.6 million for the second quarter of 2010 and similarly up 3% or $0.1 million compared to $3.6 million for Q1 2011.

We did see some slowing in system purchases at the end of the quarter with a recurrence of uncertainties in Europe.

Looking at the recurring component of our ophthalmology revenues on a worldwide basis, which consists of our consumable products and services, revenues were $4.0 million and represented 50% of total ophthalmology revenues for the second quarter of 2011. This represents a 3% or $0.1 million increase from $3.9 million reported in the second quarter 2010, but a 5% or $0.2 million decrease from $4.2 million on a sequential basis.

International sales were in-line with growth expectations, primarily driven by Japan. Our domestic sales, although comparable to last year, were below growth expectations. This may have been the result of reduced focus during the quarter because of the increased activity and support of the increased system sales in the office set. And the overall market remains very competitive.

Aesthetics revenues for the quarter were $2.7 million, up 23% or $0.5 million from $2.2 million for the second quarter of 2010, but down 10% or $0.3 million from the $3.0 million reported for Q1 2011.

Looking at these revenues geographically, domestic aesthetics revenues totaled $1.4 million, down from $1.6 million for both the second quarter of 2010 and for the first quarter of 2011. International aesthetics revenues totaled $1.3 million, up from $0.6 million for the second quarter 2010, and down from $1.4 million in Q1 2011.

Last year we experienced a significant reduction in sales, particularly in [France] as a result of the economic uncertainties triggered by the Greek debt crisis at the end of Q2 2010. This quarter, although conditions still remain challenging, we did see more normal buying patterns return.

Switching attention to gross margins and expenses, gross margins in the second quarter 2011 were 45.2%, lower than the 45.9% reported for the second quarter of 2010 and lower than the 46.7% reported on a sequential basis.

Compared to Q2 2010, gross margin decreased 1.3% due to product mix as a result of the aesthetics sales making up a larger proportion of overall sales, and 1% due to manufacturing variances. Manufacturing variances include, among other things, inventory and warranty reserve movement and adjustments for overhead absorbed on inventory. These decreases were partially offset by a 1.6% improvement in manufacturing and service expenses as a percentage of revenues due to dollar expenses remaining constant while revenues increased.

We had given guidance of 46% to 49% anticipating the mix would be more biased towards ophthalmology sales. Our annual goal remains 45% to 50%.

Operating expenses in the second quarter 2011 were $4.4 million, level with the second quarter 2010, and $0.2 million lower than the first quarter 2011. Our operating expenses were 41.2% of revenues for the quarter, compared to 44.5% for the second 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 $0.4 million in operating income, up $0.3 million from the second quarter 2010. And down $0.2 million from $0.6 million reported for Q1 2011.

As with last year's second quarter we did received $800,000 in other income from the settlement of a 2007 legal action. There remains one more payment of $800,000 which is scheduled to occur in Q2 2012.

We also reported in other income a one-time expense of $0.2 million being a recognition of accumulated foreign currency translation loss related to the closure of our UK subsidiary.

Our EBITDA for the quarter was $1.4 million. This calculation includes the $0.8 million in other income and 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 $0.2 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 levels 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 $0.9 million or $0.09 per diluted share for the second quarter of 2011, compared to a net income of $0.8 million or $0.08 per diluted share for the second quarter of 2010. This represents a 13% increase over the prior-year period. Net income for Q1 2011 was $0.6 million or $0.06 per diluted share.

Looking at our results for the first half of 2011, revenues have grown 7% or $1.4 million to $22 million from $20.6 million as reported for the first half of 2010. Gross margin for the six months was 46%, in-line with our annual goal. And operating expenses of $9.1 million representing 41.2% of revenues, again, in-line with our annual goal.

Net income was $1.5 million or $0.14 per diluted share, up 15% or $0.2 million from $1.3 million or $0.13 per diluted share as reported for the first half 2010. Our direct ophthalmology business grew 9%, close to our goal of 10% annual growth. Domestic system sales have performed very well followed by international consumable sales. And international system sales and domestic consumer sales have been satisfactory where we are looking for improvement.

And so we end the first half with good solid performance and in addition we are optimistic about the progress we have made on a number of strategic initiatives we are working on. However, you will have seen from our press release that we are very cautious about the outlook for the upcoming quarter. With the returns of the economic uncertainties, particularly in Europe and here in the US, coupled with the typically seasonally slower summer quarter, we see this as a challenging quarter for us. So we are forecasting revenues to be $10 million, gross margin to be 45% and operating expenses to be $4.5 million.

In closing I would just like to mention that we did purchase 25,400 shares under our repurchase program at an average price of $3.84. We would like to have been more active but we were constrained by SEC regulations governing company share repurchases.

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

Thank you Jim. I would like to comment on several subjects of interest. First one is the IQ 577 adoption rate. We are often asked about the adoption curve of our recently introduced true yellow laser system with MicroPulse module. This what we call the IQ 577. It is encouraging to see the adoption rate increasing with the second quarter of 2011 being the best sales quarter to date. Now that we have received regulatory approvals for the IQ 577 for Japan and Mexico, we expect those countries to contribute to IQ 577 growth in the second half and beyond.

The IQ 577 with the MicroPulse module is also beginning to expand the ophthalmologist's treatment options in their efforts to minimize the side effects while maintaining the efficacy of laser treatments. Which adds to the appeal of this product and provides clear differentiation from competitor's products.

For example, at the recent ARVO meeting held in May, Dr. Jose Cardillo and his colleagues from Brazil presented and interesting clinical study using our IQ 577 to treat eyes with the DME using a novel treatment protocol they called the "Sandwich Therapy." Typically ophthalmologists treat diabetic macular edema by delivering laser applications to the macula which is the part of the retina in the far back of the eye. But, during the treatment they avoid treating the fovea which is that very sensitive central one millimeter diameter region of the macular that provides our central vision.

In this study the authors used the IQ 577 to treat inside the fovea as well as the area outside the fovea. For the area outside the fovea they delivered low dose CW laser applications and for the fovea area they delivered MicroPulse applications. They chose the IQ 577 because it could deliver both continuous wave and MicroPulse modality. The result at six months showed no damage in the MicroPulse treated foveal area. It showed a good reduction in the macular edema and showed an improvement in visual acuity and retinal sensitivity.

The second subject is the growing support for MicroPulse. As you are aware, we view MicroPulse as a strategically important technology that we believe allows for significant improvement in patient outcomes compared to current methods of treatment and provides the company with exciting opportunities to drive revenue growth through a number of commercialization initiatives. As an illustration of growing support for MicroPulse, I draw attention to the Lavinsky paper published in the IOVS which is the Investigative Ophthalmology and Visual Science Journal, the ARVO Journal.

So during the last call we discussed this Lavinsky paper which is part -- Lavinsky is part of the Cardillo Group in Brazil. It was published online during the first quarter. This paper is now published in print in IOVS. And for review, this is the first randomized study which demonstrated a significant improvement in best corrected visual acuity using sub-threshold infrared dialed laser MicroPulse treatment compared to conventional green laser photocoagulation of DME. After one year, the percentage of eyes that improved three or more lines of vision was 48% in the MicroPulse treated group compared to 23% in the conventional laser treated group.

And the third subject is the cost effectiveness of laser treatment. On a more general note, we find this is a point of interest to investors and is the dynamic between the use of drugs for treating retinal diseases such as DME versus the use of lasers. Our position is that while certain drugs can be effective acutely, longer term there is no substitute for laser treatment both for a long-term efficacy of therapeutic outcome and also due to significant costs associated with requiring a patient to embark upon a repetitive drug regime as opposed to be treated one time by a laser.

This position was very recently validated by a UK National Health Service. In July the National Institute of Health and Clinical Excellence or NICE announced the completion of a cost effectiveness analysis of using the drug Lucentis to treat diabetic macular edema. The independent appraisal committee which the UK National Health Service relies upon concluded that treating diabetic macular edema with Lucentis instead of laser photocoagulation would exceed the incremental cost effectiveness ratio that is considered effective use of National Health Service funds and therefore would not recommend Lucentis to treat diabetic macular edema in England and Wales.

So with that I would like to now open the line up for questions.

Thank you sir. Ladies and gentlemen, at this time we will now be conducting a question and answer session. (Operator Instructions). Larry Haimovitch with HMTC. Please go ahead.

Good afternoon, gentlemen. Congrats on a nice quarter.

Thank you, Larry.

I guess, Ted, probably you can answer this although I'm sure Jim could, too. You have had a nice quarter in ophthalmology for sure and as you said you have seen some real pickup on the yellow laser which I'm sure is gratifying since it was delayed for awhile and a bit of a slow start, but now it is doing well. But yet I note compared to one of your competitors, Synergetics, which is public as you well know, seems to be reporting better ophthalmology numbers than we are. I'm just trying to understand are they gaining market share relative to IRIDEX or is it perhaps not an apples-to-apples comparison of their ophthalmic business versus IRIDEX's?

Larry, this is Jim, I will give a couple points. Yes. Obviously we don't know the ins and outs. But my feeling is that we recognize they have a broader consumable products suite that they are selling into the OR. I'm not aware that they compete very much on the laser system side. And I think they have been successful in introducing a couple of new product offerings in that broader consumable offering.

So I am speculating a bit but I am presuming that is where they are getting some traction.

Do you think you are gaining share, Jim, or losing share, or holding share vis--vis competition in the market?

I think the moment in international, certainly in Japan we seem to be getting some good penetration as Ted drew attention to that. And I think we are losing a little bit in the US.

And what can be done to stem the US share losses?

I think what we, well, part of it is we are attributing to whether we are spending more time in the office with the increase in the laser system sales, so we want to make sure that we have a right balance of focus there. And we continue to look to broaden the product offering to make sure that we have an appealing product offering in the OR suite. And we basically want to make sure that we stay very competitive in all of the accounts. And if we do lose an account we look aggressively to win it back.

Okay. And Jim, also for you, the share repurchase -- you weren't able to buy that many shares. I know there are restrictions. What are the main restrictions that prevent you from buying more? Is it the percentage of the shares traded every day that you can't exceed a certain amount or you can't be the first buyer and last buyer? So what are the constrains that are keeping you from adding more? Because I am sure you would like to at these prices.

Correct. Both of those. The volume restriction I would say is the biggest throttle.

Okay. And so you still have plenty of room left in the program because you have up to $2 million that the directors have authorized, correct?

Exactly.

Okay, great. Thanks Jim. I'll jump back in queue.

Thank you. (Operator Instructions). And our next question comes from the line of Bill Nasgovitz with Heartland Advisors. Please go ahead.

Yes. Good afternoon. Thanks for taking my question. I was just wondering if you could elaborate a little bit on your guidance. And you mentioned you see a challenging environment -- if you could just provide a little bit more color that would be helpful.

Sure. Couple of things versus last quarter as well to note would be that we benefited from a large army order in 2010 for $500,000 and we got a little bit of bounce back. So if you normalize last year you will see that we are somewhat just into the $10 million would be where you might see a comparable quarter. We are a little cautious this time just because we saw a little bit of easing in some of the overseas markets towards the end of Q2. And right now there seems to be reasonably good demand but we are about to enter August. So August is always a challenge especially on the capital side. It tends to go a little bit lighter in August and the question is do you pick it up in September. So we are just being a little cautious with regards to that.

As far as the consumable side goes, that continues to be obviously much more linear and predictable and that seems to be hanging in there. The other component obviously is the aesthetics piece which has always been more volatile because we have a higher unit ASP. They are a higher priced unit. We sell a Gemini for example, it can go for up to $100,000. So one or two units of Gemini in or out of quarter can make a difference.

So we are just being cautious given the landscape with how we are forecasting Q3.

Overall do you still see an upgrade cycle for I guess laser equipment worldwide, or any comments on that in terms of the average life of machines? Any comments on the upgrade cycle that you potentially see out there.

Well I think that is why we were making sure people recognize the adoption rates, particularly in the IQ 577 and to some extent the IQ 532. We see that as a way of people sort of coming into the market earlier because there is an opportunity to upgrade and provide themselves something new and at the cutting edge of the technology. So we view that very positively.

The fact that we have just recently gotten the regulatory approval to take the product into Japan and Mexico we believe will help. When you launch these products it does take quite a few months if not years to finally get them into all of your global markets. And Japan is a key market as is Mexico. So we see that as good opportunities to present there.

So as I said, we think the backdrop is strong, it's just that, rather like everyone else, we are very cautious with the current short-term just sort of impacts.

What was the $153,000 of other expense in the current quarter?

There was a, in the Q you will see, there was about a $0.2 million of a foreign currency rollout due to closing down the UK subsidiary. There had been a foreign currency gain that had been captured in the prior period and now we have finally got the subsidiary all done. We were just having to remove all remaining items and so that came out through the other income.

Great. Thanks for your time guys.

Thank you.

Thank you. And I'm showing there are no further questions in the queue. We will turn the call back over to management for any closing comments.

Well I would like everybody for participating in this call and for your interest in IRIDEX. We look forward to sharing our progress with you on our next call. Good afternoon.

Thank you. Ladies and gentlemen if you would like to listen to a replay of today's call, please dial 800-406-7325 or 303-590-3030. Enter the pass code 4460193. That does conclude today's second quarter 2011 earnings release conference call. Thank you for your participation. You may now disconnect.