IRIDEX Corp (IRIX) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to IRIDEX Corporation's third-quarter 2012 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 1, 2012. I would now like to turn the conference over to Mr. Will Moore. Please go ahead, sir.

Thank you. Good afternoon and thank you for joining us as we discuss the results for the third quarter of 2012 and other recent developments at IRIDEX, including the recent changes at the Company and the resulting shift in priorities and directions for the long-term.

My name is Will Moore and I am the Chairman of the Board and Interim CEO. Today I am joined by Jim Mackaness, our CFO and COO. 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 growth strategy including -- acquisitions; the success of the Company's marketing and sales efforts; MicroPulse Laser Therapy; technology investments and strategic relationships; global and domestic market conditions; healthcare spending; market direction and trends; product demand and market acceptance of new products; gross margins; operating expense controls; profitability; the Company's share repurchase program and the Company's financial outlook and performance in 2012 and future periods.

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 December 31, 2011 and quarterly reports on Form 10-Q for the quarterly period ended March 31 and June 30, 2012 which were 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. And since this is my first earnings call as Interim CEO I will begin with a few words of introduction related into my background and my experience at IRIDEX. Jim will then walk through the operational and financial highlights in the quarter and I will wrap up with some commentary about specific plans at the Company moving ahead.

My background is more than 30 years working at or with medical device companies such as Johnson & Johnson, Nellcor and Natus Medical. My role with these companies has generally been sales and marketing. As a co-founder of Natus Medical I helped to assemble the operational and commercial organization of the company and the company has grown from inception to revenues of greater than $200 million with a market cap of more than $300 million.

And I have served as a Board member at a number of additional medical technology companies where I have helped management to focus on delivering results and value to shareholders.

I first became involved with IRIDEX in 2007 when I joined the Board of Directors and in 2011 I became Chairman of the Board. In [initial] years the Company was in survival mode, digging its way out of financial distress brought on by an acquisition completed prior to my involvement that nearly bankrupted the organization.

Management, including Jim, did a marvelous job rightsizing the operation, conserving and then producing cash and finally emerging as a debt-free growing and profitable organization in 2010. I see IRIDEX today an opportunity to unlock significant value and thanks to the efforts and success of management without the high level of risk we saw five years ago.

In August the Board of Directors, acting on the interest of all shareholders, determined that a more focused approach was needed to unlock this value and appointed me to the role of Interim CEO to implement a number of important strategic and operational realignments at the Company. These realignments include the elimination or reassignment of several senior executive positions.

These personnel changes have been accompanied by an assessment of the Company's revenue and spending plans in order to give priority to investments that had the potential to deliver significant near-term shareholder return. The combination of changes was designed to improve performance and accountability at all levels of the organization.

The Company's products, brand, employees and sales channels are valuable assets. What is needed is a clear path to taking advantage of these assets while running the business in a dependable, profitable and predictable fashion as we move forward. This is the basis for what Jim and I have already set in motion as of this call.

I will give a few more specifics before we conclude our prepared remarks. But in general, going forward we plan to deliver shareholder value in three principle ways.

First, we will return the Company to profitability and operate the business in a profitable fashion going forward. Many of the adjustments necessary to deliver on this objective have already been implemented. We will continue to review and eliminate unproductive costs at the Company, focus our investments where we get the greatest return and reenergize the commercial organization to meet this goal while growing at a rate that is greater than the market.

Second, we will take advantage of our strong position in the market to being opportunistic in acquiring and partnering with ophthalmic companies that have developed new technologies or products that will benefit from leveraging IRIDEX's sales channel.

Third we will deploy cash from our strong balance sheet and profitable operations to directly benefit our shareholders through our share buyback program. We are exploring all avenues open to the Company to make the ongoing buyback program more effective. We believe our buyback represents a direct way to deliver value to those who hold the stock while keeping plenty of cash available for investments in development and acquisitions that makes sense.

I would now like to turn the call over to Jim who will fill you in on the operation and financial highlights of the quarter. Jim.

Thanks, Will. Just to remind everyone, in the first quarter of this year we sold our aesthetics business to Cutera and therefore we are presenting our results for our continuing ophthalmology businesses.

Revenues for the third quarter 2012 were $7.9 million, down 4.8% from $8.3 million for Q3 2011 and down 6.0% from $8.4 million reported for the second quarter 2012. Systems sales to Q3 2012 were at $3.7 million, down from $4.2 million for Q3 2011 and down from $4.0 million for the preceding quarter.

Last year we commented that our international systems sales benefited from strong sales in Turkey, which did not repeat this year. In addition, we saw softness in the Middle East and South America. However, domestic system sales were up modestly over last year and Q2. And approximately $100,000 worth of orders were held over at the quarter end due to certain parts shortages.

Recurring revenues for the third quarter 2012 were $4.1 million, representing 52.3% of our total revenues. This was up $0.2 million or 5.1% from Q3 2011, but down $0.3 million or 7.3% from $4.4 million reported for Q2 2012.

For our rational consumables we are benefiting from the ramp-up in sales from our distribution partner, Alcon, and we are benefiting in the increase in sales of our glaucoma consumables driven in part by the launch of recent marketing programs.

Gross margins were 49.6% for the third quarter 2012, which represent an improvement from 48.3% from Q3 2011 and from 48.7% in the preceding quarter. We were pleased to see our margins improve even though our revenues were lower. Our direct margin improved and, although as a percentage of revenues our manufacturing and service expenses increased over last year, this was the result of the lower revenue.

In absolute dollar terms our expenses in these areas reduced, which is the direct result of a number of manufacturing efficiency programs we mentioned previously that we've put in place and therefore we feel confident being able to achieve our short-term target for gross margins of 50%.

Excluding one-time severance expense of $0.7 million, operating expenses were $3.8 million for the quarter, up from $3.7 million for Q3 2011, but down from $4.5 million for Q2 2012. These results reflect Will's earlier comments about focusing our spending plans on near-term opportunities.

Including the one-time severance expense we did generate a loss of continuing operations of $0.6 million or $0.06 per share compared with income from continuing operations of $0.3 million or $0.02 per share last year and income of $0.4 million or $0.04 per share in Q2 of this year.

With regards to discontinued operations, we booked a loss net of tax of $0.2 million in the quarter, which is primarily the result of the tax provision which is adjusted each quarter to true it up on a year-to-date basis.

Looking to the fourth quarter of fiscal 2012, we are projecting revenues between $8.4 million to $8.7 million, gross margins between 49% and 51% and operating expenses between $4.0 million and $4.2 million and anticipate generating operating income.

Please note our fourth quarter has additional marketing expense attributable to our attendance at the American Academy of Ophthalmology, which is our major trade show of the year, and also some one-time expenditures we are incurring to ensure we are iso-60,601 compliant, which is a good quality standard our products have to meet.

On a final note, we have continued to execute on our stock buyback program, our trading volume has been ticking up of late and this has allowed us to participate. For Q3 we purchased 76,000 shares at an average price of $3.65 bringing the total number of shares repurchased through Q3 to 41,000 at an average price of $3.82. And with that I will turn the call back over to Will.

Thanks, Jim. As I mentioned earlier, I would be giving some more detail around our plans. During the next several months our revenue growth will remain our top priority, therefore we will be focusing on the following areas to make improvements. First will be in sales.

Together with Eduardo Arias, VP of Global Sales, I am going to be spending time in the field with the representatives to make sure we have the correct distribution model.

Second, in the area of product development, expectations and reality are out of alignment, so Ken Peartree has taken on the role of VP of R&D and will be bringing a new business approach to the department.

Third, in marketing, MicroPulse is reaching a tipping point, so I will be spending time with Tim Buckley, our VP of Marketing, establishing new approaches generating pull to make sales representatives more effective and efficient to create a new standard of care.

And four, M&A, with the state of the VC and capital markets for emerging medical devices we will have an opportunity to use our balance sheet to acquire small companies.

And to improve performance accountability, by the end of the year we will have eliminated three VP positions and one director position. As a consequence we will have one VP responsible for each functional area, making it easier to understand who is responsible thus reducing inefficiencies and costs.

With that I will thank you for bearing with us. I know we spent a lot of time -- extra time going over our strategy. So at this point in time I would like to conclude our prepared remarks and open the call up for questions. Operator?

(Operator Instructions). Joe Munda, Sidoti & Company.

Real quick, I've got a couple of questions for you. Will, do you prefer Will?

Yes, I do.

Okay. Will, how is the search for the new CEO going and how long do you plan to -- any plans to step in the full-time role or are you just kind of locked in as the interim?

There is no search at this point in time and I am the Interim CEO and serving as long as the Board believes it is the right thing to do. I am not the permanent replacement on a long-term basis. But at this point in time there is no search.

Okay. In your prepared remarks you were talking about looking for new partnerships in the space. Is there a possibility to expand on your relationship with Alcon or a possibility of a partnership with let's say a small company like a Synergetics or even CooperVision, is that the type of partnerships you are looking for?

Yes, I think it is fair to say we do enjoy the relationship with Alcon, we are certainly open to continue to explore broadening that. You mentioned a couple of other good players in the market who we think there are always opportunities if we can find commercial reasons to hook up when it makes sense. So that is the right sort of target list, yes.

Okay. I missed the part on -- right before you were talking about softness in the Middle East and South America. Sales declined because of Europe? Is that mainly at the main factor? I'm sorry, I got cut off there -- it went in and out.

Yes, on the system sales we -- domestic was modestly up, the weakness we saw was international.

What was the domestic number? Do you guys break that out?

Yes, it is in the Q, it's about [1.65] I think from the top of my memory. So the weakness was international, a couple of different components there. As we mentioned, last year we referenced -- we actually benefited from a strong order out of Turkey.

So the classic lumpiness that we sometimes face with our distributors sort of came back this time of year because we didn't see a repeat order from Turkey of that magnitude. So that was one effort. We did see a little bit of weakness in the Middle East and South America where we had been running quite strong previously.

Now how much of the Middle East is your let's say percentage of revenue?

We don't typically get into that order of magnitude. I would say in our [theaters] it is probably -- overseas is probably third or fourth down, Europe being one of the bigger ones.

Okay. And is it just because the situation there with the deterioration of what is going on that you are seeing softness there? Or is it more -- why is there softness in the Middle East?

I would attribute it to, definitely as you said, a lot of the areas are in turmoil and therefore just the placing of orders and who you are dealing with is changing.

Okay. And do you break out the growth of the consumable sales number by any chance -- you guys didn't release the Q yet, right?

The Q is being filed as we speak. It will go through the (inaudible) machine and probably show up on at the SEC early next week by the time it gets out the other side. We do -- we aggregate our recurring revenues and I think I commented that they were about -- looking back at my comments -- 52.3% of revenues overall and $4.1 million.

Okay. And it seems in your guidance you seem to be thinking gross margin is going to be trending up. What is leading you guys to that assessment?

Well, as we mentioned in the prepared remarks, we have been putting some efficiency plans in place in the operation, so we are seeing a reduction in absolute dollars and, as we expect our revenues to be in the 8-point-something range for Q4 we would expect that to help. And also there are various things that are happening within the direct margins which are trending positive.

Okay, is that an ERP system that you guys are putting in place, is that what that is?

No, nothing of that magnitude. A little bit more just sort of working through our procedures and policies and just trying to make sure we have much more single touch as opposed to repeat touch wherever possible, which just reduce -- ultimately reduces a little bit of your personnel costs over time, temporary workforce, those type of improvements.

I just have a couple more. Tax rate going forward, how should we model that? What do we -- I mean what should -- what is a good base line rate to look at?

So, going into next year there is a couple of things we have to bear in mind. So we would expect the tax rate -- in the P&L initially I would suggest to be a more normal tax rate in the high 30s. However, under the presumption that we keep the valuation allowance against our deferred tax asset, we would actually probably expect that the net number in the P&L will actually perhaps come closer to the low-single-digits.

If you recall -- I'm not sure how closely you have been following us -- but we have incurred a large NOL as a result of the sale of the (inaudible). So our cash tax is effectively going to be zero.

Okay, got you. And that leads me to my next question. How are you guys going to account for the med device tax, assuming that everything goes as planned? Is that going to come into cost of goods?

Yes. If it comes and it will basically have to show up in that area.

Is that in your forecast or is that something that as we come to it that is something -- I don't know --?

As we get closer we may -- you may hear me making specific comments as to how it will impact us. I think at this stage we are all a little fuzzy on what this is really going to be.

Yes, you and everybody else.

Yes, exactly.

I have just two others. What was CapEx through the first nine months?

CapEx through the first nine months was approximately $300,000.

Okay. And then depreciation and amortization, do you happen to have that number?

That looks right off what I'm looking at about $300,000.

Okay, so net-net, okay. All right, thank you guys. I really appreciate it. Will, good luck going forward and I will -- I will catch up with you guys off-line.

Stan Mann, Mann Family Investors (sic).

I have several questions. One, on your buyback plans, it was always been pretty difficult to buy any large quantity of stock, as we all know. But you did accomplish buying a significant amount in this third quarter. So can you state or indicate where you would get that large quantity from? Is it from some holder or founder or BlueLine, can you share that with us?

Sure. For Q3 this was -- we do have, as you mentioned, Stan, we definitely have -- we have brokers active -- tries to be in the market every day and this really was just the fact that our volume has been ticking up and so it just has meant that on a day-to-day basis we have been able to move our participation up.

So it is just the aggregate of being in the market on a repetitive basis. It is not attributable toward any significant one block, one person, one entity sale.

Okay. Second question is -- you've got availability for, I don't know, 800,000 shares. And it seems to me that that would be a very difficult task to accumulate over the time allocated. I mean, you have got $3 million left on your buyback. Can you speak to -- is there some secret or way you are going to acquire that kind of volume?

I don't think there is any (inaudible). You are absolutely right. We have been very disadvantaged, if you like, by the volume restrictions from the SEC in the past. Obviously, to the comment we just made, we have seen that improve.

We do actively try to get the message out that anyone who is interested in selling blocks or shares should approach the Company. So we will continue to aggressively look at all the avenues to try and make sure that we can take whatever shares are available at the price we think make sense, and complete those purchases.

Okay. My next question is simple. You are looking for M&A or acquisition opportunities as I hear it. Are you using a professional search source -- a paid source for the M&A or is it just a random of trade shows, et cetera?

Stan, this is Will. No, we are not using a professional source. And no, it is not a random process of doing so. I think there is a substantial disconnect today in the way people are financing their companies that are small and we happen to have a very strong brand and people do call.

They have ideas of products, they have been able to get them up, maybe they have the FDA, but they can't get the financing through the venture capital markets or private equity world and they are looking for liquidity and they are looking for a distribution channel.

But, that's not an existing company with an existing sales volume?

That is correct.

Okay, so it is not a significant use of our capital? So we have $13 million less $3 million possible, but $13 million available. Do you see a use for that near-term? The possibility of accretively using that near-term?

That would always -- depends on time. I really can't answer the question, Stan, there will be companies out there. We will take a look at them and we will evaluate it and we will use what cash we believe is appropriate for the right transaction. But to say anything else it's impossible at this moment.

Okay. Well, (technical difficulty). So my last question is, would we be amenable to a sale by IRIDEX at a reasonable price?

I didn't hear -- what was the first part of the question?

Would we -- would we, the Board, be -- and the management be amenable to an acquisition approach of IRIDEX at a reasonable price?

I think the answer to that is always yes. We will do what is in the best interest of shareholders.

Okay. So then it is a possibility and nothing is occurring that we should know about?

Nothing is occurring that you should know about. And has always been the case.

Okay. Just seems like we have got quite a struggle [against] significance. But hopefully something will happen. I appreciate it, thank you.

(Operator Instructions). Will Nasgovitz, Heartland Advisors.

I was just hoping you could elaborate on your comment that the MicroPulse is at a tipping point? There was discussion of it in the press release over the last nine months. If you could elaborate on that that would be great.

All right. So, whenever you are looking at -- the term tipping point to me is simply when you reach a level of usage it makes it difficult for physicians that are not using it to really continue down the current path.

For example, if I have 2,000 retinal specialists in the US and all of a sudden I end up with 400 or 500 that are using MicroPulse and they're getting outstanding results, and someone does not use MicroPulse and they end up with a situation where a patient does not get the same benefit, they are at risk. And that is kind of how you start to move down to the standard of care.

When we start approaching 150 to 200 physicians we are starting to reach a level that says, we need to do a little bit more to get us over that horizon. And if you think about it, well, it is kind of like being from your area -- if you think about being in canoes, they kind of rock back and forth and if you can get that little ridge out of the water it flips over.

We are rocking the canoe at the moment. It has been 10 years of work with this, the clinical studies are supporting what we are saying and we are getting traction both in the US and outside of the US. So for me, spending money to accelerate that process with more users will only benefit the Company.

Can you perhaps update us on what the market opportunity for this product might be over the next three to five years?

Well, typically the way we look at it is we say that if you look at the expenditure on the system side of the equation you've got something like $150 million to $200 million spent on an annual basis. And historically you can peg that there is the replacement cycle, because it's predominantly replacement driven, somewhere in the seven to eight years.

So another way of looking at what Will is saying is we are trying to get at a tipping point so basically people are forced back into the market earlier because they don't want get left behind. So when you do the back of the envelope calculation and sort of say, hey, if we can shorten the seven year replacement cycle to somewhere like five or four years before people get back in the market, you can see that that could make the market grow somewhere upwards of $20 million to $50 million on an annual basis. This is out in years three, four and five.

So we've got to get that tipping -- got to get those people moving over, have that impact the replacement cycle and, as that replacement cycle shortens, anticipate that the market size for laser systems will increase significantly. And then obviously we have to be in a position to capture that and win that market share to us to drive our revenues.

Great. That is good color. You mentioned the upcoming conference or perhaps it has already passed. Is there going to be further research published on the product at this conference or was there research published?

I think definitely we can take this off-line. You've probably been very interested in -- we have a speaker's forum where we have a lot of physicians who will be speaking. And I think off the top of my head, but we can look at it, you will find that the majority of the talks have been speaking formally around MicroPulse.

And, Will, the answer is the show is coming up in another week.

Great. I look forward to hearing more about it and welcome aboard.

Thank you. And tell your father hello.

All right, sounds good.

Stan Mann.

Obvious question but do you have any near-term plans to expand your sales -- direct sales force? And also, what is the size of our direct sales force?

To answer your question, the first one is no. The size of the sales force is 12 in the US augmented by another four outside the US plus distributors. As I said in my comments earlier, I am going to be spending time in the field looking at the distribution channel and understanding what is the right model.

When you have a company where sales are flat and -- you need to get out and figure out what the issues are and that is what I will be doing. So hopefully in the next call, Stan, I will have better answers for you.

Okay, thank you very much.

Thank you. And I am showing no further questions at this time. I would now like to turn the call back over to management for closing remarks.

Okay. Well, we would just like to thank everyone for joining us on this earnings call and there will be playback information for those who are interested. Thank you very much.

Ladies and gentlemen, this concludes IRIDEX Corporation's third-quarter 2012 earnings release conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030 or 1-800-406-7325 with the access code of 457-2831. ATT would like to thank you for your participation; you may now disconnect.