IRIDEX Corp (IRIX) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the third-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, November 3, 2011. I would now like to turn the conference over to Jim Mackaness, Chief Financial Officer. Please go ahead, sir.

Welcome to the IRIDEX Corporation's third-quarter 2011 conference call. I'm Jim Mackaness, Chief Financial Officer. Today, I am joined by Dominik Beck, our new President and CEO. Before we get started, Susan Bruce, our Executive Administrator, will read the required Safe Harbor statements, and then Dominik will begin with a brief introduction of himself.

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 growth strategy, including acquisitions and technology investment, OEM revenues, global and domestic market conditions, health care spending, growth margins, operating expense control, tax rate and valuation allowances, product demand and prospects, including the company's third-quarter revenue, gross margin, 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 period ended April 2, 2011 and July 2, 2011, each of which are filed with the Securities and Exchange Commission, and the quarterly report on Form 10-Q for the quarterly period ended October 1, 2011, which will be filed with the SEC later today.

Forward-looking statements contained in this conference call are made as of this date and will not be updated.

Thank you, Susan. I would like to take a few minutes to introduce myself and my reasons for joining IRIDEX. I have been in ophthalmology for most of my professional career, and have followed the progress of IRIDEX for a number of those years.

IRIDEX has a strong brand amongst retinal and glaucoma practitioners and has made significant contributions to the advancement of therapeutic applications for the treatment of retinal diseases and glaucoma.

I strongly believe I have joined IRIDEX at the right time. Having successfully completed its turnaround, the business is again growing, and I believe I can accelerate that growth in 2012 and beyond and increase shareholder value through instituting a more commercial focus and driving new market-facing initiatives.

Now just a bit on my background and outlook. I am a mechanical engineer with a PhD in mechanical optics. And unlike many technical PhDs, I consider myself to be a marketer, having applied a number of initiatives and strategic approaches to branding and sales with good successes.

Originally born in Switzerland, I have spent the best part of the last 10 years in the US. I started my professional career in the optics industries where I gained experience commercializing diagnostic imaging technologies within the cataracts, glaucoma, and retinal markets. And later was the CEO of a startup company focused on the diagnostic glaucoma market.

Most recently, I was in charge of Haag-Streit's US operations, a $60 million business unit and part of a large multinational Swiss-based corporation. During my time there, I built a successful and fast-growing company, transitioning Haag-Streit's predominantly Switzerland-based business into a broader and more innovative diagnostic power player in the eye care market.

By leveraging Haag-Streit's strong brands and introducing new products to a loyal user base, the company's sales doubled while maintaining profitability during my tenure.

Of course, it's quite early since I have been here only a few weeks, but I see similar, if not better, opportunities for brand loyalty-based growth at IRIDEX.

I look forward to providing a fresh market-driven commercial focus to unlock the value of the Company by accelerating the strategy put in place by Ted, Tim, and the team. In the coming weeks and months, I will be spending a lot of time with customers, suppliers, and partners formulating additional and tangible commercial strategy. I look forward to taking these messages on the road and meeting with existing and potential investors in IRIDEX, and sharing with them my excitement for the future of IRIDEX.

I anticipate there may be further questions at the end of our call, so right now I would like to turn your attention to the Company's performance for its third quarter of 2011.

We're pleased to report our third-quarter results exceeding guidance for all categories -- revenue, gross margin and operating expenses. This was especially pleasing because we are still operating in the uncertain economic times here in the US and Europe. And whenever there is economic uncertainty, there is always a risk that spending on equipment may be impacted as buying entities reassess their budgets.

Total sales for the quarter were $10.8 million, similar to the prior-year quarter. However, this time last year we did draw your attention to the fact that we had won a $0.5 million order from the US Army for our infrared laser systems, which was an unusually large order. Excluding this order, our direct ophthalmology sales grew 11% for the third quarter and 9% for the nine months of 2011. This is in line with our long-term goal of growing our core ophthalmology business at 10% or greater.

Our quarterly profits were $0.3 million or $0.03 per share fully diluted. And our nine-month profits $1.8 million or $0.18 per share fully diluted. Overall, a solid performance.

Now Jim will provide more details, and then I will continue with my thoughts on opportunities that lie ahead, as well as industry feedback we received from the recent Academy of Ophthalmology. Jim?

Thanks, Dominik. I'll start by reviewing our third-quarter revenues. Total revenues for the third quarter of 2011 were $10.8 million, level with the corresponding quarter in 2010 and level on a sequential basis from Q2 2011.

Ophthalmology revenues including OEM sales for the quarter were $8.3 million, up 3% from $8.0 million for the third quarter of 2010, and up 2% on a sequential basis from $8.1 million reported for Q2 2011.

Looking at these revenues geographically, domestic ophthalmology revenues, direct revenues for Q3 2011 were $4.3 million, down 11% or $0.5 million compared to $4.8 million for Q3 2010, but level with $4.3 million reported for Q2 2011.

As Dominik mentioned, in Q3 2010, we benefited from a $0.5 million US Army order which was reflected in our domestic revenue number. Excluding this, our third-quarter results were very similar.

OEM revenues, which we disclose as part of our domestic ophthalmology revenues in our Form 10-Q, were $0.1 million for the third quarter of 2011, similar to Q3 2010 and Q2 2011. We anticipate OEM revenues to taper off as our OEM partner completes its transition to its new platform.

International ophthalmology revenues totaled $3.9 million, up 26% or $0.8 million compared with $3.1 million for the third quarter 2010, and up 4% or $0.2 million compared to $3.7 million for Q2 2011.

We saw increased sales from a number of countries, notably Japan, China, and Brazil. We had a very good quarter with Turkey, and India has remained strong.

For both domestic and international, sales of our IQ577 continued to grow as customers become more convinced of the value of the true yellow wavelength and the fact that we offer our MicroPulse module with the IQ577.

Looking at our recurring component of our ophthalmology revenues on a worldwide basis, which consists of our consumable products and services, revenues were $3.9 million and are presented 47% of total ophthalmology revenues for the third quarter 2011.

This represents an 8% or $0.3 million decrease from $4.2 million reported in the third quarter 2010, and a 3% or $0.1 million decrease from $4.0 million on a sequential basis.

As you know, we put a lot of focus on our recurring revenues. It should be noted that a minor part of this is service revenues from either paid service or service contracts, and the majority is from the sale of our consumable products, being our family of EndoProbes, supplemented with our vitrectomy instrumentation.

On a year-to-date basis, our consumable product sales are at 100% of last year's sales. The decreases on a quarter-to-quarter basis are driven by a reduction in service business, possibly linked to customers replacing older systems with new systems, as illustrated by our higher system sales, and the timing of larger consumable product orders which often occurs with our international distributor channel.

Our goal is to grow drive growth in this segment, so having our consumables business being stable with last year is a good foundation, but it is still a work in progress.

Aesthetics revenues for the quarter were $2.5 million, down 10% or $0.3 million from $2.8 million for the third quarter of 2010, and down 7% or $0.2 million from $2.7 million reported from Q2 2011.

Looking at these revenues geographically, domestic aesthetic revenues totaled $1.4 million, down from $1.6 million reported for the third quarter 2010 and level with Q2 2011. International aesthetic revenues totaled $1.1 million, down from $1.2 million from the third quarter of 2010 and down from $1.3 million in Q2 2011.

Last year, we experienced a significant reduction in sales particularly in France in the second quarter of 2010 as a result of economic uncertainty, and benefited from a bounce back in the third quarter of 2010. This quarter, although conditions still remain challenging, we continue to see more normal buying patterns return.

Switching attention to gross margins and expenses, gross margin in the third quarter 2011 were 45.4%, lower than the 48.5% reported for the third quarter of 2010 and higher than the 45.2% reported on a sequential basis.

Compared to Q3 2010, gross margins decreased 3.7% due to product mix, with a higher proportion of our aggregate revenues being generated by total system sales, particularly international ophthalmology sales which occurs through our distribution channel. This decrease was partially offset by 0.6% improvement in manufacturing and service costs.

Operating expenses in the third quarter 2011 were $4.4 million, level with the third quarter of 2010 and the second quarter of 2011 with no notable underlying changes. We generated $0.5 million in operating income, down $0.4 million from the third quarter of 2010, and up $0.1 million from the $0.4 million reported for Q2 2011.

Our EBITDA for the quarter was $0.7 million. This calculation includes adding back FAS 123R stock compensation expense. Our tax rate for the year is currently 15% on a projected annual basis. We booked a tax provision for the quarter of $36,000.

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 in the P&L will return to more normal levels estimated to be between 30% to 40%. For the end of 2010 the valuation allowance was $12.1 million.

This takes us to the bottom-line. The Company recorded a net income of $0.3 million or $0.03 per diluted share for the third quarter of 2011 compared to a net income of $0.9 million or $0.09 per diluted share in the third quarter of 2010. And net income for Q2 2011 was $0.9 million or $0.09 per diluted share.

Looking at our results for the first nine months of 2011, revenues have grown 4% or $1.3 million to $32.8 million from $31.5 million as reported for the first nine months of 2010.

Gross margin for the nine months was 45.8%, in line with our annual goal of between 45% and 50%. And operating expenses were $13.5 million, representing 41% of revenues, again, in line with our annual goal of operating expenses of between 40% to 42%.

Net income was $1.8 million or $0.18 per diluted share compared to $2.2 million or $0.22 per diluted share as reported for the first nine months of 2010.

Our guidance for the fourth quarter is as follows -- we're forecasting revenues to be between $11.3 million and $11.5 million; gross margin to be between 47% and 50%; and operating expenses to be between $4.9 million and $5.1 million.

In closing, I would just like to mention that we did purchase 33,000 shares under our repurchase program at an average price of $3.66. We would have liked to be more active but we were constrained by the SEC regulations governing company shares repurchases.

With that, I will turn the call back ever to Dominik.

Thank you, Jim. I would like to comment on several subjects of interest. We attended the American Academy of Ophthalmology in October, which is the largest trade show of the year, and is attended by doctors from all over the world.

One of the highlights was the fact that the Academy selected MicroPulse as a topic for its educational agenda. And Dr. Victor Chong from Oxford University Hospital in the UK gave a presentation on the benefits of using MicroPulse in the treatment of diabetic macular edema to an audience of 1,800 of his peers.

In addition, we had a number of guest presenters at our speaker's forum also speak to the benefits of delivering laser therapy in a tissue sparing manner through the use of MicroPulse. This coincides with the launch of the MicroPulse module now being available on our Green IQ532 laser system. The green wavelength has historically been the dominant wavelength used for retinal surgeons.

There is definitely a growing interest in the benefits of MicroPulse. Our emphasis now changes to focusing on commercializing this technology in a way that drives significant revenue growth to the Company.

We did make this comment on the last call, but I think it bears repeating because the economies of providing health care was a hot topic at the academy, and that relates to the cost-effectiveness of laser treatment.

There's an ongoing dynamic between the use of drugs for treating retinal diseases, such as diabetic macular edema, versus the use of lasers. Our position is that while certain drugs can be effective [tactically], longer-term there are no substitute for laser treatment, both from a long-term efficacy of therapeutic outcome, and also due to significant costs associated with the requiring a patient to embark upon a repetitive drug regime as opposed to being treated one time by a laser.

This position was very recently validated by the UK National Health Service. In July, the National Institute for Health and Clinical Excellence announced a completion of a cost-effectiveness analysis of using the drug Lucentis to treat diabetic macular edema. The independent appraisal [content] 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.

Also, when we talked to our representatives in countries such as China, India and Brazil, we hear a constant message of those health care providers looking for more cost-effective treatments for retinal diseases and glaucoma. Therapies delivered by laser treatments are an extremely cost-efficient proposition, and this partially explains why we have been having consistent success in selling into these markets.

We did make a small acquisition during the quarter. We entered into an agreement with Ocunetics to exclusively license the rights to its intellectual property. And we recruited the two principles to join us, where they will contribute in our broader marketing and product development efforts, as well as focusing on commercializing the intellectual property to develop and sell procedure-enabling medical devices that increase a surgeon's efficiency while improving clinical predictability for ophthalmic surgeons.

As for my next steps to drive accelerated growth, it is too early to give you specifics, but I can obviously identify a few areas that I will concentrate my efforts on.

Given the general macro drivers in ophthalmology, such as poor patient compliance and depressed economic times, exploding health care costs, and a steady move towards more efficient and less invasive surgery, I will focus on exploring the introduction of smart delivery devices that satisfy the need for specificity and improved efficiency, on growing the adoption base of MicroPulse by widening its market exposures, and on having a very good look at our consumable business with an eye to broadening our offering and building more differentiation from our competitors.

And I would like to conclude my remarks by emphasizing that I think the general strategy of driving growth through both organic and acquisitive means that IRIDEX has laid out resonates well with me. I will certainly be testing it for ways to improve it, and I am sure there will be some changes in emphasis. And I will likely look at merger and acquisition opportunities through a more commercial lens.

But my main focus will be to accelerate our progress in key areas such as the MicroPulse positioning migration and brand adherence to consumables, as opposed to making wholesale changes in direction.

The intellectual brand and human assets that are resident here at IRIDEX are highly valuable. And I, Jim and the entire team are focused on translating that value into real gains for the investors. I'm excited about the opportunity that lies ahead. And I will now open the line for questions.

(Operator Instructions). Raymond Myers, The Benchmark Company.

Thank you for taking the questions. And Dominik, congratulations on your exciting position.

My primary interest right now is understanding the timeline for commercializing MicroPulse over the next say 18 months. What shall investors expect from that?

And then also I understand that the timeline of commercialization [has] accelerated over the past year. That's a happy event. Can you explain how that happened, and what we will expect in the future?

Currently what we see is that we will see many more papers (technical difficulty) published. We will expect a more direct and broader discussion at public trade publications, and obviously more sales of MicroPulse modules starting in the next few months.

(technical difficulty) comments about the change. And I think you're right in saying that the purpose has accelerated a little bit from where we were at the beginning of this year. And it was brought on by a couple of the key papers that came out in the international arena, and that led to an uptick in the interest in the US.

So we do start to see a change in the interest level moving now onto the domestic arena as well, which we think helps us from (inaudible) our product uptake.

Are we seeing increased product uptake leading to increased revenue in the international space?

We certainly continue to see progress and increased unit sales out of the IQ577, which has been, if you like, our leading product to showcase MicroPulse.

Okay. So we start off with increased international sales and then how long do you expect before we start to see increased domestic sales?

Well, with the recent launch of the MicroPulse module in green, we're now going to get a better feeling of how that's going to rollout. So we're we remain cautious. We have to wait until the doctors become truly convinced of the science, and also convinced of the value-add that MicroPulse brings. So we remain cautious, but we now at least have the MicroPulse option available [across] the whole platform.

Right, so it is available now. And at the AAO in Orlando just 10 days or so ago, you won an award and had some major presentations regarding the MicroPulse in green. Have you gotten some feedback and early indications of interest in selling any of those machines for that indication?

We have been successfully selling a few of those units since, but we do not at this point disclose any unit information or unit sale information.

Okay. Well, we look forward to more progress and further dialogue. Think you.

[Greg Kohl], Sidoti & Co.

Thank you for taking my question. I guess I missed it initially. Can you just run over real quickly the ophthalmology domestic and international revenues for this quarter?

Yes, just one second.

And while you're getting that, I guess, can you talk a little bit about when you are rolling this out are you expecting to be able to maintain the same general sales price on your systems? Or is this something that you're going to be looking at, I guess, cutting the cost a little bit just to get, I guess, more freedom to get more [around the room]?

You're talking about MicroPulse?

Guest. The MicroPulse and the yellow laser and green.

We will actually look at increasing our price or defining a value of MicroPulse at this point. So we will expect to see revenue growth through MicroPulse. On the yellow, platform, we will maintain. But at this point, I keep all options open to even increase our pricing levels on those platforms.

And Greg, to your question, we had ophthalmology revenues in total of $8.3 million. We had domestic of $4.3 million, international of $3.9 million and OEM of $0.1 million.

Thank you. And did you mention recurring in there?

The subset of that, if you took recurring as a subset, it would be $3.9 million.

Thank you. I am going to jump back in the queue.

Sean McMahon, Kennedy Capital.

Dominik, can you talk about when you would hope to have your first product from the Ocunetics relationship?

This will be somewhere in 2013 according to our current plan.

Okay. And I'm sure you don't want to talk too much about specifics about the product, but maybe discuss the market that you think for the product at least? Can you at least give the size and maybe how many -- if there's any competitors in that market space currently?

The very specific market we are targeting with our first product will be quite a unique proposition to the glaucoma and eventually also to other markets. The size is substantial. We do see that there is a strong push into that market segment, the surgical glaucoma market segment through quite a bit of inflow of funds and capital into development of implants and surgical devices and techniques.

We do believe that we can participate and partake in that inflow, and that this space is growing to our advantage. And it is too early at this point to really give you any more specifics on what we can achieve with that product.

Do you have an actual working prototype or this is still completely in development?

This is IP and in development. There is concept and there is an early stage development plan.

Okay. And maybe just one more last question on that. Will you actually need to put that in some sort of clinical trial or -- I mean, is it a 510k or PMA? Is it more software? Can you maybe just --?

It is a 510k device. Possibly a clinical trial.

Okay. And then, maybe a broader question for you here is as you take the reins and you went into a lot of depth on your background and kind of some of the things you hope to do, but I would like to just understand what is the main product here or thing that you are looking at that got you excited about IRIDEX?

Where do you think that the Company wasn't headed down or wasn't doing the right thing or you can be better? Is it we weren't -- the salesforce wasn't focused or we didn't complete -- maybe didn't have a full line of product that you hope to bring in? Or maybe just kind of comment on where you -- what asset do you think is being underutilized that can maybe be turned around quickly?

I have seen IRIDEX as a console and consumable provider to a quite narrow field in retinal disease treatment. I do believe that there is a strong IP base and brand base in IRIDEX that can be expanded into other areas.

I do see a great potential in adding and marrying diagnostic technologies to enhance the therapeutic platforms and move those into a broader field in retina, as well as in a broader field in glaucoma.

Specifically to MicroPulse, I see that this is an opportunity that is approximate. That is here today. We're now in the position to launch it commercially and to spread the word and to -- using peer-to-peer conversation, that has been built up over years but I do believe that now we are ready to make a stronger impact in the market.

As I alluded to, the drivers that I see are pressing health care costs in general, our compliance to medications or noncompliance to medication. And I do think that laser therapy in quite a few of those areas, glaucoma and retina, have a strong potential here on out.

Thank you.

Larry haimovitch, HMTC.

Good afternoon, gentlemen. Dominik, welcome aboard. I am looking forward to enjoying some improved growth as you become the CEO.

And, Jim and probably Dominik too, I listened carefully to all of the explanations of the income statement, and I was frankly disturbed by the relatively poor performance of the probe business.

You talked about -- Jim, you gave several different possible scenarios. I'm just frankly wondering, and not to be antagonistic, but I'm just frankly wondering if there's some market share erosion here.

I look at one of your principal competitors in Synergetics. I look at their ophthalmology business which is heavily in the probe business. And I know you compete against them. They seem to be growing at a much more rapid rate. And is there a marketshare or a competitive issue here going on that we might want to understand better?

Well, Larry, we've had this conversation before so we have spent quite a bit of time trying to dig into that. And that's why I did try and relate some of the information we found.

I think, A., absolutely it's a very competitive market. I think we, from our perspective, think that we are holding our own. That's not where we want to be. We want to be moving forward, but we did see ourselves as holding our own.

I think when you compare it to someone like Synergetics, I think we have to remember that they have a broader consumable product offering into the vitrectomy suite. So it's not necessarily easy to determine that we've got a light comparison. And it's quite possible, and certainly when we look at our individual accounts, we would presume that their growth is coming elsewhere.

But we do know that we want to try and move that forward. And to your point, it is highly competitive. When we look at it on the international front, we've had a lot of competition there for a number of years. And we do see progress in places like Japan, but we also see some challenges in places like Europe. So overall, we find that we are in a stable situation, but we have to continue to focus to try and find ways to grow it.

Great. A follow-on question to that for either of you. Assuming MicroPulse begins to gain some real traction in the market, to what extent is that going to be a positive driver for disposable sales? Is it going to be more of an office-based product or more of a hospital-based product, and how will that affect the disposable business?

Initially we see MicroPulse to be office-based, focused on office, delivered through [slip lan base or LIO vase] devices. But we already find ourselves looking into delivered or EndoProbe-delivered MicroPulse as well in retina as well as glaucoma. So we expect to see both, however initially, office.

And the office -- the office side is more prone to the probes or less prone to probes? It is hard to say.

No probes in office. Probes is all OR and AFC.

Okay, so the probe business, given what you just said, Dominik, would probably come on a little bit later if the office is what picks up the earliest.

Correct. However, it gives us a great opportunity to lock out.

Lockout -- meaning?

Competitors in the MicroPulse area.

Right. And then I have one more question and I will get back in queue. Jim, on the buyback, I think you gave us the number of shares, it sounds like there is still a fair amount left in the authorization, correct?

Yes, there is.

Do you have -- aside from the limitations of how many shares you can buy per day, is there some limitation on your price, or are you as aggressive as you can be at this point, given that the price is quite depressed?

Yes, the gating factor is the volume constraints from the SEC at the moment.

And what is that? Is that of the daily trading?

I'm going to pass on that. I don't know that I know the specific numbers.

I think it is 15% or 20%. Not relevant, it is not important. I am just curious. Okay.

Right. Something like that, yes.

Thank you guys.

(Operator Instructions). I'm showing no further questions at this time. I'll now turn the call back over to management for any further closing remarks you may have.

Thank you 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, that does conclude our conference call for today. If you would like to listen to a replay of today's conference, please dial 1-800-406-7325 using the access code 448-4068.

We would like to thank all of you for your participation and you may now disconnect.