IRIDEX Corp (IRIX) 2012 Q4 法說會逐字稿

Good day ladies and gentlemen and thank you for standing by. Welcome to 4Q 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, February 28, 2013. I would now like to turn the conference over to Will Moore. Please go ahead, sir.

Thank you George. Good afternoon and thank you for joining us as we discuss the results for the fourth quarter and full year of 2012. My name is Will Moore and I am the CEO at IRIDEX, having taken the role in the fall of last year. Today I am joined by Jim Mackaness, our CFO and COO. Jim and I will both be delivering some prepared remarks related to the quarter and the business, then we'll open the floor for questions. But 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 ant technology investments; OEM revenues; global and domestic market trends and conditions; healthcare spending; gross margins; operating expense control; share repurchase programs; product strategy including demand and pricing; and the Company's first quarter revenues.

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, 2012, June 30, 2012 and September 29, 2012, each of 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. I'm pleased to begin this afternoon by saying we had a very good fourth quarter. Our $9.2 million in revenue for the quarter is a record at IRIDEX in terms of ophthalmology sales, which is a testament to the work of our entire team and a great way to finish the year. I'm also pleased to report that much of that momentum is carrying on into the first quarter of 2013 and sales continue to track well both domestically and internationally. So we feel very positive about some of the recent changes and new directions we are taking as an organization.

As most of you know, I have now completed almost six months as CEO of IRIDEX and I believe we have made important strides in our most immediate goal for this company. First, changing its basic DNA. It is shifting the clinically driven scientific company to customer focused commercially centric company. This is how we will unlock potential and the value so many of us believe is inherent in this company. We have an established and emerging product line targeting large and growing markets. Our focus now is on taking advantage of the valuable assets we have here, while at the same time running the business in a profitable and predictable fashion moving forward.

During my first call as CEO at the end of the third quarter, I laid out three principle ways we plan on delivering value to our shareholders. Today I'd like to review each one and comment on the progress we've made. First we promised to return the company to profitability and operate the business in a profitable fashion going forward. As I've already mentioned, we are making great strides on growing our top line revenues. Now we need to do a better job on increasing our gross margins, in part by focusing on our supply chain and eliminating unproductive costs as well as improving pricing discipline. I can tell you that we've already made great strides in these efforts as well.

We have eliminated several positions and significantly cut our operating expenses, the effects of which will begin to show throughout the year. Through constant further streamlining, I also believe we have improved our decision making by breaking down the [silence] here at IRIDEX we are now a flatter, leaner company with a much better internal reporting process. This allows us to make better, much more rapid decisions based on current data, which are important achievements on our way to fulfilling our goal of being a more commercial centric company.

Second, we promised to take advantage of our strong position in the market, to be opportunistic in acquiring or partnering with other companies that have new technologies or products that would benefit by enriching established sales channels. I can tell you that we aim to be active in this area and have initiated discussions with more than one additional partner. We do not to intend to redesign one key distribution relationship, nor do we believe that we need to make numerous or large acquisitions to drive growth and leverage our commercial position. Anywhere we see an opportunity that can deliver value to the organization, whether it be a license agreement distribution or central acquisition, we will act.

Third, thanks to our strong balance sheet, we promise to explore all avenues that would directly benefit our shareholders through our share buyback program. As most of you know we successfully executed a tender offer to buy back IRIDEX stock in the fourth quarter and we are very pleased with the success of that process and that added shareholder value. The original plan ran for two years and allowed for $4 million to be invested in stock repurchase. That has expired.

Today we announced a new plan for one year that will allow for up to $3 million to be invested in our stock. We see this as an example of how we wish to execute our multiple options to return shareholder value.

Now I'd like to turn the call over to Jim, who will fill you in on the operational and financial highlights for the quarter and the year. When he is finished, I'll return and make some closing remarks. 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 and commenting upon our results of our continuing ophthalmology businesses. As Will indicated, we had a strong 2012 fourth quarter as revenues reached $9.2 million, up 7% from $8.6 million in Q4 2011 and up sequentially 17% from the $7.9 million reported for the third quarter 2012. This represented a record revenue quarter for our ophthalmology business.

Of that total revenue, system sales for Q4 2012 were $5.0 million, up from $4.4 million in Q4 2011 and up from $3.7 million in the preceding quarter. Sales were strong across all geographies but especially in the US, where we were candidly surprised at the robust response to the special promotion that is a traditional part of our AAO program.

For the year, revenues were $33.9 million and due to the strong fourth quarter we were able to show a modest growth in revenues over 2011 revenues of $33.2 million. And so we feel we're exiting the year with momentum. Recurring revenues in the fourth quarter 2012 represented the balance of the revenue or about 45%, which is down as a percentage from prior quarters simply due to the strength in system sales. And as Will indicated earlier, we're looking at a number of additional means of getting additional consumable products to market, both directly and via partners.

For the year, recurring revenues were at 50.4% of total revenues for 2012 compared to 48.8% of total revenues for 2011.

Gross margins were 47.0% for the 2012 fourth quarter, down from 49.6% for both the preceding quarter and last year's comparable period. The majority of the margin impact was the result of the product mix with the growth in system sales, compounded by an especially high number of IQ 532 systems sold at promotional prices during this year's AAO conference.

And we did see some increase in cost of goods that we're addressing as we speak. With the market strengthening and the value of MicroPulse being recognized, we expect to have more pricing leverage going forward. That and continued work on our cost structure and manufacturing process makes us confident in being able to reverse this dip and achieve gross margins of closer to 50% by yearend, subject to how weighted towards systems sales we remain.

Gross margins for the whole year 2012 were 48.3% compared to 49.1% for 2011.

Operating expenses continued to trend in the right direction as we came in on target at just about $4 million in the period, allowing us to generate a net income from continuing operations of $0.3 million or $0.03 per share, reversing a loss in the 2012 third quarter of $0.6 million.

Net income from continuing operations was down from the prior year period, in which we posted a profit of $0.8 million but it's worth noting that we did receive a onetime payment of $1.3 million from Alcon in the prior year period, that void those results.

Looking to the first quarter of fiscal 2013, we are projecting revenues between $8.7 million to $9.0 million. Gross margins between 47% and 49%. And operate expenses between $3.8 million and $4.0 million and anticipate generating operating income.

We have also received $0.5 million in the form of a distribution payment from an insurance carrier in the current quarter which will benefit our earnings for the period.

From an operations perspective, the last six months have been a period of change at the company, as Will has indicated. And having assumed the COO mantle in the second half of the year, I thought it would be appropriate to amplify some of Will's comments and highlight some of the changes we have made to the organization.

We have eliminated four VP level positions at the company the last past couple of months. That's not simply a cost saving exercise but a true structural streamline. The marketing and R&D groups have been consolidated from organizations that contain separate silos to single organizations and each function reporting to a single leader.

And it's worth noting that four of the seven executive level positions that we have today are filled by someone that has joined the company in the last two years. These changes have resulted in a more nimble organization, able to make decisions more rapidly and take more direct responsibility for success and failure of decisions.

One visible example of these changes is the way our website and our other marketing materials now focus on the many reasons for our customers to purchase IRIDEX products instead of purely presenting a clinical focus of what our products do. The new structure and mindset have led to lower costs overall, but more importantly we believe we are well positioned to take advantage of the early but growing tailwinds that we are beginning to see in our core market and to more rapidly take advantage of partnering in new product opportunities that emerge.

On a final financial note, as Will mentioned, in December we completed our tender offer and repurchased 487,500 shares of our common stock at $4.10 a share, for a total investment of $2 million. As a result, our outstanding common stock reduced from 8.9 million to 8.5 million. The two-year program has expired and today we announced that the Board has approved a new share buyback program that allows us to invest up to $3 million in the forthcoming year. And we remain committed to exploring multiple opportunities to return shareholder value, including stock buybacks and tuck-in acquisitions.

And with that, I'll turn the call back over to Will.

Thank you Jim. As I promised our team when I came onboard as CEO, I would spend a lot of time in the field talking directly to our customers, suppliers, partners and our sales team. I wanted to personally hear their thoughts about the marketplace and needs in terms of products and services but I also wanted to emphasize personally to our partners the changes we are making here at IRIDEX, shifting to a more customer centric market-driven enterprise. We now have a more project-managing mindset in the operating company. We are making better, more rapid decisions at things like outsourcing development projects that make sense from skillsets and match financially. Our goal is to develop and create a technology advanced products and then be able to bring them to market more quickly and efficiently. We believe this new mindset will play out particularly well in the healthcare environment we have today.

Because of the Affordable Healthcare Act, physicians today are more concerned and focused on overall costs. Diabetes and the subsequent onset of diabetic macular edema or DME is the case in point. The number of people who've had diabetes for 10 years or more is increasing rapidly and virtually all of these will develop DME.

As many of you may know, the pendulum in recent years has swung through drugs, away from traditional lasers to treat conditions like DME. But we believe that with the passage of time, the shortcomings of relying on drugs as a simple panacea to all, are becoming more and more apparent and thanks to new payer restrictions in some geographic areas, the new therapies like our proprietary MicroPulse technology, the pendulum is beginning to swing back. Basically we can't afford to rely solely on expensive drugs and multiple doctor visits to treat DME on a going forward basis.

Furthermore, our MicroPulse base products and therapies will demonstrate that they are not only safe without side effects yet with similar outcomes, but more cost effective and efficient, thus providing a better solution in today's economic environment for many of our serious ophthalmology conditions like DME and glaucoma.

The promise of our products is particularly true in some of the emerging countries of the world. In India for example, the rate of diabetes per capita is higher than ours in the United States and the number of people who can now afford medical care like we offer is absolutely huge.

On a recent field visit to a prestigious university, I was informed that our MicroPulse based products, due to their safety and simplicity are now taught to residents prior to teaching them drug injections. This is a major shift and as Jim mentioned earlier, a shifting of the trade winds that will give advantage to our MicroPulse technology. The reduction of anxiety to provide therapy at a reduced cost is exactly what is needed to solve this exploding diabetic edema problem on a global stage.

In short, today the trend or trade winds are shifting. As they become tailwinds, the market will move to our solutions. More than any other time in IRIDEX history, we are ready and have an efficient and confident IRIDEX team to capitalize on opportunities provided these prevailing winds.

With that, I'd like to thank you for tuning in and listening to the call and for your interest in IRIDEX. At this point I'll turn the call over for questions.

(Operator Instructions) Joe Munda, Sidoti & Company.

Real quick, you talked about stripping some cost out of the manufacturing side or the cost of goods side and judging by your guidance you expect to be in the 47% to 49% range; I was wondering what those costs may be and how should we look at gross margin going forward for the year? Are we going to see it steadily improve or is it going to be in that high 40 range?

Will and I are in different locations. I'll step in and have the first swing at it and then Will can comment as well. I think to your point, we've guided 47 to 49, we've indicated that we think towards the end of the year that we'd like to get back to our short-term target which was 50. Part of the issue is the good news, if you like, which is the increased demand that we're seeing on the systems side of the equation. So there's just the product mix that sort of knocked us down a little bit in the first place. We've got moves afoot, as I said, to try and build up the consumables as well.

And then we did have a little bit of pricing through the promotional AAO so we look as though we think we can recover that. We are looking to continue to use some pricing leverage on MicroPulse to move that up. So I would like to see us move back into the 49%-51% bracket by the end of this year.

You talk about 0.5 million from an insurance carrier. Can you give a little bit more? What is that in relation to?

That was a very beneficial outcome to us. One of our insurance carriers decided to demutualize and as a result of being a policy holder at the time of that decision, they had to basically do a onetime distribution of all the reserves they'd been holding for their mutual owners, if you like, of which we were one. So the consequence of that was they had to return to us about $0.5 million of their reserves. So we received that money. It's in the bank and obviously we'll book that credit in this period.

And that's going to be booked below the OpEx line, right?

A little bit open to discussion on that at the moment. We're going through the technical research to understand whether it should be. The SEC gets a little bit sensitive to putting things in other income.

That's what I'm wondering, your OpEx guidance, does that include it?

No. The OpEx guidance does not presume the credit.

So on our end, how do we go about modeling? Should we put it below?

I'd say for modeling purposes for what you're saying, put it below, because what you're really looking at is our standard OpEx expenditure envelope is more in the 3.8 to 4.0. That would be more representative of a normal quarterly OpEx expense for us.

On the OpEx side of the business, it seems like you guys eliminated four VP positions. How should we look at R&D and sales and marketing going forward? Are we expecting increased investment in R&D? You're sitting on a lot of cash here and how do you get to that sales number that you guys are talking about in the first quarter? Is that with increased sales and marketing spend?

Not particularly. On the OpEx side we're looking to manage ourselves at 4 million or below on the OpEx, a quarter. That does allow us to continue to fund ongoing R&D. Typically you'd see us around $1 million a quarter goes into R&D. I think what we're particularly seeing on the revenue side is we did put a lot of effort in last year, we continue to, which is more targeted marketing programs and a repositioning of the products and the value proposition to make them more relevant to a larger portion of doctors out there, if you like. And then the last thing is we did launch a delivery device, specifically a Texel delivery device in the fourth quarter which we're quite excited about the opportunities that that brings to us. We think that rounds out the product portfolio quite nicely.

So I think we feel we're well positioned to actually be able to see increased revenue growth without necessarily having to right away push up the OpEx.

What exactly is Texel?

The typical way that a laser delivers the laser beam is one shot by a foot depression so basically a single shot per, if you like, click of the button and what we've got here, in response to what was initially launched by another company called OptiMedica was an opportunity for the physician to scan or basically put multiple laser dots down with a single depression of the foot switch or the button. The advantage of that is the doctor for example could perhaps lay down 49 laser spots all at one go instead of one. So the efficiencies to the physician are quite dramatic, so that they really appreciate the throughput, the faster time and we're actually seeing it's also beneficial to the patient because the patient has to spend less time in the chair receiving the laser treatment.

So can the doctor control the number of pulses per depression of the foot?

Yes. You basically can dial up a grid and instead of just putting a single dot for each depression, you can go up, as I said, maybe to a 7x7 grid that basically allows them to put 49 spots.

Is this a move the needle type of launch that you guys are coming with?

Let me jump in on that one Jim. The advantages you just spoke of are substantial, but another advantage that we have on this is that on the MicroPulse, since it does not burn the tissue, it's hard for the physician to see the spot and so by having a grid allowing the doctor to set in the density of the spots, the size of the spots, whether it's in a circle, whether it's in a grid going across, it matters not. So the physician can set that up and in one depression, as Jim said, it's 49 spots. They know exactly where they went. They know exactly how close they are to each other, exactly what size.

In the earlier stages with MicroPulse it was one shot and you could not really tell where it was going because it just didn't burn, it didn't leave a mark. This is a major step forward for the physician to be able to use MicroPulse and have confidence that they've done something and see the treatment. Within a few days they'll start seeing the advantages of it. So for us we believe it is a major move the needle type of introduction.

At George Washington University I watched the first one the doctor had ever done and it took him 12 seconds to do something that was generally substantially longer. It is a needle mover.

Okay, so then your first quarter revenue includes Texel?

Yes, it will include the sale of certain number of units of Texel. It became available to the channel at the beginning of the year.

On the cash and the buyback, I'm just curious why - the float is so low here, why continue to use the cash to buy back stock? And you had spoken about acquisitions or partnerships; is that taking away from your ability to maybe use that cash in another acquisition or partnership? I'm just a little confused.

I think the situation really is that we will be opportunistic at utilization of the cash and when we're talking about the buyback we have certain levels where we buy the shares and it's not going to be an absolute, like the tender that we did in the fourth quarter. It'll be more like we've done prior to the tender. We'll utilize a little bit of cash, we'll utilize the cash from the standpoint of doing acquisitions if we need be.

And the other comment about the float, we don't have any float anyway, so I'm not sure that taking a few more shares off the market is going to harm us in any way and I think from my standpoint it enhances our existing shareholders' value, the people that believe in the story and I believe Jim's comments earlier support the fact that we're going to be generating enough cash to be able to do so and still do acquisitions if we need to. We're not going to be doing any large acquisitions; that's for certain, so we don't need to have 15 million or 17 million.

No, I understand that. It's just from my standpoint it seems like you guys are trying to slowly take this thing private.

Well, the answer is no.

Jason Stankowski, Clayton Partners.

Nice quarter and good expense management and it's nice to see us starting to get a little bit of traction here. Just curious if you had a final share count at the end of the quarter as opposed to the weighted average?

What I had was 8.5 million on the common. You then have to add 1 million for the presumed conversion of the preferred and then there's 1.6 million options outstanding. So I get to a total of 11.1 million.

Is that a fully diluted number or are a lot of the options under water?

That was presuming all options were above water. That's fully diluted.

Can you give us any sense of the MicroPulse adoption into the non-retinal surgeon area if that's starting to gain any traction and whether any of the sales of MicroPulse machines have come from new customers in this quarter and as you broadened the distribution? I'm just curious how that to the comprehensive kind of doctors is going and whether you're seeing that start to move at all yet?

The answer to that is yes. I think Jim mentioned earlier about the way the webpage is presenting data today, we are getting orders directly off the webpage from comprehensive doctors. I think the term we use, comprehensive, these practices are getting substantially large, they also are employing a few retinal people themselves and trying to keep in their own house. And what this does for us is we've been calling on about 2,000 retinal - in the US, not outside the US, but 2,000 retinal specialist doctors and offices with the advent of MicroPulse and the safety evident by the way they're treating and teaching residents today how to use MicroPulse because of its safety, the doctors and the comprehensive offices are saying this is - I can do no harm, therefore I want to try.

And I think what we're seeing is now you go to 2,000 retinal specialists; there may be another 60,000 doctors that would be employing MicroPulse before the patient would be sent to a retinal specialist for some other severe treatment. So I think it's opening up markets that are substantial for us and we are beginning to see that. And both trade shows and the way Tim Buckley, our VP (inaudible) these programs where we're doing teaching programs at different trade shows. We should see more and more going forward.

For what it's worth, I think Berkshire Hathaway had about 1.8 million shares for the first 29 years of its existence and shareholders did just fine, so we're fully supportive of helping people who need liquidity that aren't interested in the story and using some cash to take them out of their positions.

(Operator Instructions) I'm showing there are no further questions. I'll turn the call back to Will Moore for closing comments.

I want to thank everybody that's on the call today for your support and continued interest in IRIDEX and we will do the best we can to enhance shareholder value on a going forward. I look forward to talking to you on the next conference call. Thank you.

Ladies and gentlemen, this concludes our conference for today. If you'd like to listen to a replay of today's call you can dial 303-590-3030 or 1-800-406-7325 with the access code of 4603021. We thank you for your participation. You may now disconnect.