IRIDEX Corp (IRIX) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the IRIDEX Corporation Q2 2013 earnings conference call. At this time, all participants will be in a listen-only mode. Later we will be conducting a question-and-answer session, and instructions will be given at that time. (Operator Instructions).

I'd now like to turn the conference to our host, Mr. William Moore. Please go ahead, sir.

Thank you, Operator. Good afternoon, and thank you for joining us as we discuss the results for second quarter of 2013. My name is Will Moore, and I am the CEO of IRIDEX. Today I'm 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.

Before we get started, Jill Bertotti from Allen & Caron will read the required Safe Harbor statement. Jill?

Good morning. This conference call will contain forward -- sorry, good afternoon. This conference call will contain forward-looking statements within the meeting of Section 27A of the Securities Act of 1933, as amended; and Section 21E of the Securities Act of 1934, as amended, relating to global and domestic market conditions, demand for the Company's products, and market acceptance of the Company's new products, such as MicroPulse-enabled laser devices, development of new products; the Company's growth strategy, including acquisitions, technology investments, and strategic relationships, including the anticipated benefits of the Company's relationship with Peregrine Surgical, Ltd.; pricing of the Company's products; the success of the Company's operating expense controls; the Company's margin goals; that Company's share repurchase program; and the Company's financial outlook and performance in the remainder of fiscal 2013 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 the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2012, 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, Jill. As I started my remarks in previous quarters by highlighting our goal at IRIDEX, it's to become a more commercially focused Company -- controlling OpEx, growing revenue, and being profitable. Today, we have growing, tangible evidence that we are succeeding on this goal. And I would like to explain why.

Our products are focused on reducing the overall cost of healthcare systems, increasing the productivity of physicians, and improving therapeutic benefits to patients suffering from retinal diseases and glaucoma. Our message is resonating well with our customers. We have continued to see growing demand internationally for our products, where improving economies in developing nations have translated to increased investments in their healthcare systems.

In April, we announced we've received two significant orders totaling more than $500,000. The health systems in many of these countries, because of the costs and logistics, do not support the current drug treatment model for these diseases we see here in the US, which typically includes a regular series of drug injections in the eye.

Growth in the US and other mature markets is being stimulated by one of our major initiatives, which is building support for our unique, proprietary technology called MicroPulse, which we believe is truly a disruptive therapy. MicroPulse was designed for treating serious ophthalmic conditions by allowing tissue to cool between laser pulses, thereby preventing tissue damage and increasing patient comfort, all while creating an extremely safe and effective procedure at a reduced cost compared to alternative drug therapies.

With this as a backdrop, I'm pleased to announce that our revenue for the second quarter was $9.2 million, up 9% over last year. A closer look shows that to get there, we made progress in both systems and recurring revenues. We successfully integrated the distribution channel we secured as part of the distribution and supply agreement with Peregrine Surgical, Ltd., that we announced in April.

The independent channel here in the US is already contributing. And once it is all up and running, we expect it to contribute more than $1 million a year in revenue. Our ultimate goal, once Peregrine-branded products are integrated across all our channels, and our IRIDEX-branded products are integrated into the independent channel, is for these efforts to contribute approximately $2 million annually.

With what I have seen to date, the Q3 forecast we have in hand, and the momentum we are currently experiencing, I believe we are on track to achieve growth of approximately 10% this year. Operating expenses are now under control. Certain executive level positions have been eliminated, reporting structures have been streamlined, engineering has developed new procedures for product development, manufacturing has improved production efficiencies, sales forecasting has been improved, resulting in more efficient use of resources.

Growth is on track, as is profitability. Now we must focus on increasing our gross margin. Today our gross margins are at unacceptable levels; therefore, we're working on both short- and long-term solutions that will provide relief. In the short-term, we will focus our efforts on sales and marketing; more specifically, testing price elasticity. The longer-term solutions are already underway are engineering redesign, reducing the cost for laser systems; at the same time, developing new IP-protected captive disposals.

We did see some improvement in this quarter with our margins, which is an improvement over the last two sequential quarters, and brought us back in line with last year's comparable period. But the full effect of these initiatives will not be felt until Q3 of 2014.

Before I turn the call over to Jim to review in more detail the operational and financial highlights of the quarter, I'd like to take a moment to thank Eduardo Arias for his many contributions to IRIDEX as our Senior Vice President of Global Sales. He is not going away. He'll be our Senior Vice President of Global Affairs going forward. But as you may know, Eduardo is one of the Company's founders, and has been with the Company from the beginning.

As I said, we like the momentum we have built today, and Eduardo is a big reason why we've been successful. That said, others in the commercial organization have stepped up in the recent quarters, and we are expecting great things from them as the Company evolves and moves forward. Organizationally, on an interim basis, I will be taking over responsibilities for international sales; and Tim Buckley, our VP of Marketing, will take over responsibilities for domestic sales.

Now I'd like to turn the call over to Jim. Jim?

Thanks, Will. As you noted in the release, and Will mentioned, we had another good quarter in Q2 as revenues reached $9.2 million, up 9% from $8.4 million in Q2 2012. Of that total revenue, system sales for Q2 2013 were $4. Alion, up from $4.0 million in Q2 2012. To characterize the revenue mix in the quarter, international system sales remained strong and were aided by several large tender wins in the period. And domestic system sales were also up modestly year over year, even as we made changes in the commercial team and structure during the past six months.

Recurring revenues jumped $0.4 million in the second-quarter 2013 compared to Q2 of 2012, also a 9% increase, which translates into recurring revenues remaining at 52% of aggregate revenues for both periods, which is a very positive result. The increase in recurring revenues was a result of a combination of factors, including the introduction of the independent channel selling Peregrine-branded products in the US, and the continued benefits of the Alcon relationship.

Gross margins were at 48.7% for the 2013 second quarter, which is an improvement over the last two quarters, where we recorded 47.0% in Q4 2012, and 47.3% in Q1 2013, and brought us back to the gross margin of last year's comparable period. As we've said in the past and as we continue to innovate on the consumables side and grow that business, we anticipate margin improvement. And with the market strengthening and the value of MicroPulse being recognized, we expect to have more pricing leverage going forward.

These elements, together with cost reduction programs concentrating on the IQ platform and Txcell platform make us confident of being able to reach our stated target of 50% gross margins in the near-term.

Operating expenses continued to trend in the right direction as we came in below guidance at just under $4 million in the period, allowing us to generate operating income of $0.5 million. This compares to an operating loss of $0.4 million for last year's comparable period, a significant improvement. And our net income for the quarter was $0.4 million or $0.04 per diluted share.

It's worth noting that in last year's second quarter, we received a final payment from a legal settlement of $800,000, which we recorded as other income; and, therefore, the comparable net income in the 2012 second quarter ended up also being $0.4 million, or $0.04 per diluted share.

I'll just take a couple of comments on the first six months' results because I think this helps illustrate the progress we've made to date. Revenues for the first six months 2013 are $18.1 million, up 8% on last year's first six months. Operating income is $1.4 million, an increase of $2 million on last year, although this does include the benefit of $0.5 million insurance refund in Q1 of this year. And net income from continuing operations is $1.3 million compared to $0.1 million in the first half of 2012, or $0.13 compared to $0.01 on a diluted basis.

Looking to the third quarter of 2013, we're projecting revenues between $8.8 million to $9.1 million, and gross margins between 47% to 49%, and operating expenses between $3.9 million and $4.1 million, and anticipating generating operating income.

A couple of points to highlight. On the bullish side, $8.8 million in revenue would represent an 11% increase over Q3 2012, and $9.1 million would represent a 15% increase in revenue. And on a cautionary side, Q3 can be a tough quarter to manage because of the customary slowdown in orders we see during the summer holiday season. And so business does tend to be back-loaded in the quarter, making predictability harder.

On a final financial note, we did announce the automatic conversion of the 500,000 shares of preferred stock we had issued back in 2007, into 1 million of common stock. Prior to this quarter, the 1 million of common stock equivalent was included in the diluted number of shares outstanding, but it was not included in the basic number of shares outstanding. This quarter, the 1 million is included in the diluted, and partially included in the basic, because the conversion happened during the quarter. Next quarter, the 1 million common stock will be both the diluted and the basic share count.

We did have some activity under our stock repurchase program. We bought approximately 7000 shares at $4.37 during the quarter, bringing the total purchases under the announced plan to 17,000, with $2.9 million still available to invest. We remain active, although with recent performance of our share price, buying opportunities have been few.

Speaking in broad terms beyond just the financials, we are pleased with the growth in revenues and the profitability that we've been able to achieve largely by simplifying our objectives, putting the right people in key roles, and executing. We think there is more that we can achieve as we continue to position our existing products more appropriately to match existing market opportunities; and from future products that we have under development, especially in terms of MicroPulse, where we continue to see evidence of growing interest.

As an example, MicroPulse was mentioned in 26 different medical publications in the last six months. And we continue to see exciting new revelations about the success of MicroPulse in connection with new treatments. Just last week we published a report of a doctor from a teaching institution who used MicroPulse to treat recalcitrant uveitis. Previously, the patient had been treated with drugs injected in the eye, but with little lasting effect. To quote the doctor, interestingly, in the case of recalcitrant uveitis, MicroPulse was the only attempted treatment that results in resolution of the macular edema. Then the doctor goes on to conclude, I am now more likely to consider MicroPulse in more severe cases, and prior to injection.

You can find the full report on our website. And we use these reports and other similar items to continue to build our online community of MicroPulse physicians, so that they can share their experiences and successes with their peers, and also ask questions. We know that with this type of technology, peer-to-peer validation is the best way to increase adoption.

We also continue to take our story to Wall Street to drum up interest amongst the investment community in the opportunities we see before us. And we've been invited to present at the Wedbush Life Science Conference in New York in August; and the Craig-Hallum Alpha Select Conference, also in New York, in September. We will be issuing a press release with further details shortly. Will is traveling overseas during these periods, and so I will be making the presentations and handling the one-on-one meetings.

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

Thank you, Jim. I'd like to conclude by making some remarks about the market opportunities as I see them today. We believe in today's world of healthcare, buying decisions are becoming more economic all around the world. If you have DME today, you are looking at drug injections 6 to 7 times a year for the rest of your life. As we have begun to see in countries in Europe and elsewhere, government healthcare systems are scrutinizing these costs, and either can't afford them or are not going to continue to tolerate them.

To that point, we have for the past number of years been focused on the retinal specialists treating vision impairment caused by diabetes. The number of people that have been diagnosed with diabetes is growing at an alarming rate around the world. Our product portfolio of both conventional continuous wave lasers and MicroPulse lasers are priced for both emerging and developing markets.

In today's economic climate, our products have tremendous value propositions when compared to the drug therapy model, all while having better durable outcomes. We are very excited about the acceptance we are seeing in the marketplace for MicroPulse. Currently, about 1 out of every 10 visible wavelength laser systems we sell is MicroPulse-enabled. We're not quite at the tipping point yet for MicroPulse, but we are close. And we're seeing growth in the take of rate, and lots of interest at conferences among ophthalmologists in general.

Many of you may not have knowledge of our growing presence in glaucoma. Today we provide two treatment options for glaucoma. Basically, glaucoma is an increased pressure caused by fluid buildup which, over time, causes vision impairment. The desired treatment is to reduce the pressure by reducing the fluid by either improving the outflow, or the drain; or the decrease the inflow, the tap. Currently, doctors prescribe drugs, via eye drops. As the disease progresses, they will move to stents, lasers, and therapy. All of these therapies are designed to improve the drain.

Our first entry into this market was a different approach, and that was reduce the inflow, or turning off the tap. We have been successful and have a substantial following of industry-leading physicians using our laser and G-Probe. Recently, physicians have been using our IQ532 MicroPulse green laser to improve the drain with great success. Last month we held a webinar on treating glaucoma with MicroPulse; and, to date, over 1000 physicians have used the program.

Looking towards the future, we have additional product offerings under development for the treatment of glaucoma, which we hope to bring to market in the second half of next year. By the end of next year, we will provide therapeutic solutions for various stages of glaucoma and products that assist in improving the drainage and the tap.

In closing, I'd like to reiterate that we have made substantial progress in turning IRIDEX into a more market-driven organization focused on vision degeneration caused by diabetes and glaucoma. That work is never completely done, but we are succeeding, and are a changed company.

With that, I'd like to thank you for tuning in and listening, and for your interest in IRIDEX.

At this point, I'd like to turn the call over for questions. Operator?

(Operator Instructions). Larry Haimovitch.

Thank you. Congrats on a very nice quarter.

Thank you.

Will or Jim, did Peregrine, the strategic alliance that you announced not that long ago, have any positive impact? Or is it a bit early for us to have seen any real benefit from that?

Larry, this is Jim. Yes, we basically brought them in in April and they have been contributing. So they were one of the reasons for the uptick in the recurring revenue for this quarter.

And should we expect in the quarters to come that the impact will be even bigger? I would assume as they get more comfortable and integrated into the organization, their impact would be even more positive.

Yes, and we actually see the relationship with Peregrine having three elements, if you like. So, to your point, yes, there's the independents selling the existing Peregrine products come in. We think there's a benefit there. And we think that should start to contribute on an annual basis north of $1 million for that. The second benefit we see is being able to take the Peregrine-branded products over the rest of our channels and, to some extent, completing the product portfolio that the independents had, by allowing them to have access to some of the IRIDEX products.

So, if we are successful with all of that, we actually think this will, combined, generate close to $2 million on an annual basis. And then the third element -- which we have indicated a couple of times is the advantage of having Peregrine within the ecosystem -- is they are a very good design house, and they are able to quickly turn some products for us. So we're looking for that to be able to help the consumables product pipeline on an ongoing basis. So we see three elements to the overall relationship.

Jim, if you look longer-term, what should we model -- let's say two, three, four years out -- with the Company as it currently is constructed, for gross margins? And you get to be a company, let's say, with 55% or even 60% gross margin? Or is that just not possible with the fact that you sell so much capital equipment?

No, I think the way we have it is 50% is the short-term goal. And we do think we can obviously get there, to your point. In that term or length of time, we set ourselves the target of getting to 55% or just over 55%. I don't know that we see 60%.

And those extra 6 or 7 basis points of gross margin, Jim, I assume much of that could go to the operating income line?

Yes, we do think we're pretty well leveraged on the OpEx side.

Great. Let me jump back in queue. Thank you.

Joe Munda.

Good afternoon, guys. Thanks for taking the questions. Following up on the prior question on gross margin, that 55% target, is that a target that you guys are aiming for by third-quarter 2014? Are we going to see that --

No, no, no.

Okay.

With short-term, we're trying to get the 50% number. And then so short-term, and Will indicated, with some of the cost programs that we're putting in place to take cost out of the IQ platform, the Txcell, we will see all of those benefits coming in at the beginning of next year and continue to come through into Q3 of next year, because some of these programs take six, nine months, 12 months to fully pull off. So that all is what allows us to feel that, in the near strokes, we can get to the 50% number.

Larry's comment was more in the three, four years, which would be as our model continues to evolve and we continue to look for opportunities just to infill on the consumables side, and we continue to see revenue leverage within the operation base that we have, we do think that there's an opportunity in a number of years, but more in that range, to get to that 55%. And as I said to him, but I don't see our way to 60%.

Okay. No, I'm just wondering, because 9% revenue growth, gross margins stayed flat here, I'm just trying to get a sense of -- was it more capital equipment that was sold in the quarter? Is that what--?

Well, yes, one way to look at it, because -- is if you took the 48.7% of last year, we actually improved the margin by 1 percentage point as a result of efficiencies within the operational group. So that would -- all things being equal, we'd have gone from 48.7% to 49.7%. But we gave up 1 percentage point due to the mix, which is your point. A little bit more capital coming through, which is good. MicroPulse adoption, which is good. We do need to look at our pricing on those to see if we can't test the pricing to help us with a regain, if you like that percentage --

I don't mean to cut you off, but was the growth more on unit, or was it price increases? You're making it seem like it was more unit growth.

It was unit growth to date, yes. And now we're going to be testing to see if we've got pricing strength in the market. So, going forward, we'd like to see unit growth and price growth.

Yes. And, Will, you talked about -- now on pricing, you talked about being able to go into the marketplace, feeling a little more confident, being able to sell maybe at a higher price. And I want to know, basically, what is driving the adoption? Is it the use in the institutions? Or is it more of the whitepapers? Or just getting -- having the sales rep right in front of the doc? Really, what is occurring there?

I'll answer that question, Joe. I want to step back a little bit when you talked about hardware mix. Understand, a lot of the things that are going on is the messaging out of marketing is correct. And the adoption is on newer products -- Txcell and 532 greens. Those are relatively new products. And there is always a timeframe to go through that development to get the margins correct.

Now, to the other part, price elasticity -- we came out with a new product with MicroPulse, and a year ago we added $2000 or so per MicroPulse-embedded laser. That's been increased to $4000. We're still getting adoption, and units are growing. And so Jim and I are thinking about -- what is the real elasticity of the market? And we'll test it in a variety of ways on the sales side.

Now, does it mean that the salespeople are in front of the customers more often? I'm not going to say that. But what I will say is, the marketing department is doing a phenomenal job as vis-a-vis the example, the webinar I mentioned earlier. And so there is creating a lot more pull into the market, so our salespeople are spending more time in front of buyers instead of trying to scavenge the countryside for the buyers. So it's a more efficient use of time.

Okay. And I'm just wondering, I know you're saying you have a tough comp in the third quarter. You gave guidance, which we appreciate. But I'm just trying to understand -- Peregrine is being added; now there's more adoption. The possibility of sequential quarter over quarter growth here -- you're saying it will stop short. It will be a significant uptick from the quarter -- third quarter of the prior year. But I'm just trying to get a sense of why maybe, sequentially, it's not going to match up.

Well, I think when you look at Jim's guidance numbers, it's pretty darned close to last quarter, as it is. We derive a lot of our business internationally. 50% of our business is internationally. And there's holiday seasons; there's Ramadan; there's a variety of things going on that makes international a little bit weaker during the third quarter. (Multiple speakers) a little seasonality in there.

No, I understand. European vacations in August; everybody's gone for a month. I totally understand that. But you guys need a guy on the beach to sell them, then. (laughter)

I'm taking that job.

Me, too, if it's up for grabs. The other -- Will, how many teaching institutions have you guys reached out to, or currently are utilizing your laser systems?

Well, when you say our laser system, you're talking about continuous wave or MicroPulse?

Well, let's say MicroPulse, because that's the hot topic.

Yes, so, Joe, I don't have that exact number in front of me, but I will be happy to get it to you. The teaching institutions that are using MicroPulse vary from the United States to other parts of the world. And to me, we're now -- 150-plus MicroPulse units out there. I'm going to say, to be comfortable, Joe, I'm looking at, in the US using MicroPulse on an everyday basis, in teaching institutions -- I don't even know if I could guess. I'm not going to guess. I'd rather go look at it and respond to you specifically.

Okay, okay. And the my final question for you, you guys talked about downsizing and the operating efficiencies. Can you give us a sense -- I know you talked a little bit about executives and -- what are you doing on the manufacturing side? Because you did touch about redesigning lasers. And to me, that seems like a pretty in-depth process. And gross margin may seem to take a hit because of it, historically speaking -- just from other companies, that always tends to be the trend.

Joe, we're going to answer this in two questions. I'm going to answer part, and then Jim is going to go to the other part.

When I talked about streamlining -- when I arrived, there was 12 vice presidents here. We're down to five.

Okay.

There's one.

Now, Jim can touch on the other side, which is start talking about the manufacturing and R&D side.

Yes, so, on the manufacturing and R&D, it just builds from what Will had mentioned before. We've alluded to the fact that we have the IQ platform and we have the Txcell platform that we are building products off. And it's just very customary that as you mature the platform there are opportunities to basically address cost engineering opportunities.

So, I don't see this as earth shattering, if you like. It's just a question of saying, okay, now that we've had anywhere between 1 year to 2.5 years or whatever experience, let's go back and revisit the bomb and the labor and find ways to take cost out. So it's a very standard procedure, which we think can generate significant benefits.

Thank you, guys. I'll hop back in the queue.

Jason Stankowski.

Thanks, guys. Great job in bringing us to profitability. Really appreciate it as a large shareholder, doing what you're saying. I was curious if you've looked into whether we're getting new sales outside of the retinal specialist space, and basically brand-new customers that we never had before, because of the convenience and the safety of MicroPulse. Are you seeing any of those?

Yes, Jason. I think there's a couple things going on. I'm going to bifurcate that into US and international. On the international front, diabetes is a large problem. And it's very large in countries such as Saudi Arabia and India and Vietnam; Brazil. And those, as we announced earlier that we had a couple large orders in that area. At least we had new customers in India. 12 new clinics came on in the last quarter. We had a number in Brazil, as well.

Those were a combination sale, Jason, between MicroPulse lasers and continuous wave lasers. So, as those countries become a little more economically stable and growing, they start to spend more money and invest more money in healthcare. And vision is a pretty important thing. And with the population aging the way it is, older people have vision problems, and these lasers that we have really help out.

And what happens for us internationally is the long-term success we've had with our continuous wave lasers here that are valued as products that last a long time, makes for a very easy decision for these tenders for these government buys. And they also are stepping up and buying one or two MicroPulses that take care the earlier-on treatment, so we're seeing that internationally.

On the US side, the migration we're seeing from the retinal specialists to what we'll call the comprehensive office -- and the comprehensive office is more of a general type physician. They basically are beginning to decide that they don't want to send their patients -- if they're not going to do injections, they don't want to send their patients over to a retinal specialist. They'd either do it themselves, and in our particular case, because of the safety factor of MicroPulse, they can. And so their fear of doing harm goes away, and so their desire to make more money increases. And they'll either do it themselves or they'll hire their own retinal graduate. And we're seeing those types of customers as well.

Great, great. That's good news. I didn't quite understand your comments about thanking Eduardo for all of his help. When you said he's still going to be with us, or he's not -- or he's going to stay with the Company, but you guys are going to take the respective roles, you and Tim.

Yes. I'll try to clear it up a little bit, and I apologize if it was confusing. Eduardo is still here, and he will be for the foreseeable future. He's working with me at the moment as we try to figure out how to integrate these programs that we've put in place -- international, the US, independents, how do those come together; varying products that we have to push from one side to the other. Meaning we've got the Peregrine products with those independents, and now we've got Peregrine products with independents and with our reps; our products with us going over to the independents. How does that fit? How many do we really need?

Eduardo is about as close to an accountant as you can get when it comes to numbers and details like that. So, I'm working with him to design those programs. On top of that, you've heard Jim talk about not only the Peregrine deal, but the increase with Alcon; and we'll continue to reach out to other people to partner. There is a matrix that we've got to put together with the distribution channel. And that's where we're going to use Eduardo more on the strategic side, working with me to then implement into the sales side.

Okay. So, from a management standpoint, he's just able to be more strategic and helpful than be a quota-carrying guy; get just a little bit more flexibility in his schedule, et cetera.

Yes, I think when you have somebody that's got 25 years of experience in the marketplace, that knows doctors all over the world, he's a valuable resource.

Yes.

And that's what we want to utilize. And we're bringing people into play that are maybe -- I won't say hungrier, but are maybe a little more aggressive, to go out and look for new orders.

Right, and get the orders. It's great that you've been able to keep him on from a strategic standpoint. He's clearly an asset.

Maybe you can give us -- my last question I guess is just a little bit about what you're seeing in terms of -- I think the Peregrine deal, even though you have to deal with some of the distribution issues and channel conflict, seems like a great financial as well as strategic deal.

Are there a handful of things out there? Dozens? Or is it really hard to find and evaluate smart things -- incremental smart things? How are you seeing that landscape? Thanks.

Well, one, before I get -- answer the question completely, this particular situation with Peregrine, I want to complement Jim. He did a phenomenal job negotiating that contract. And I'm sure we'll be able to find other transactions like that, such as what we did with Alcon on the green tip, a similar type of transaction. In today's world, there's a lot of technology that has been developed over the last five, eight, 10 years, but it has no ability to go public. It has no real ability to -- it's a product line, not a company.

And given our strong financial position and our market presence, I think we're a great avenue to deal with that. And there's a number of them. I don't see anything happening for us in a Peregrine-type transaction over the next number of months. Because, as we were saying, I'm spending more of my time on international, and we've got some other items we're working on to increase revenue that we've already got here. So, we will do those deals, but we're not going to be doing them once a quarter.

Right. When the smart ones come, you'll take advantage of them.

We'll be opportunistic, yes.

Okay, great. Thanks a lot, guys. We really appreciate it.

Stan Mann.

Congratulations, gentlemen. Good job.

Thanks, Stan.

I've got several questions. One, you've got an unusually high mix of international business compared to other medical device laser people. Is that -- is there a reason for that? Are we weak domestically? Or can you give us a little color on that?

Well, Stan, I take it as a positive. And I'll respond in a little different way. Your comment about -- are we weak domestically? I think we're fine domestically. And I look at the growth rate in the marketplace today with ophthalmology lasers, and this type of business, it's growing in a 3% to 5% range. And we're doubling that, so I think we're pretty strong, both US and internationally.

And I think by having the large international exposure, that's come about from a lot of studies that we've had, both Europe and the US, and the number of doctors that come and train here and then go back to their countries. And we're just taking advantage of that situation. So I don't think we're weak in the US at all. We've got 10 US direct people, and 10 independents at this point in time.

Okay. So, normally, again, normally at other companies in the healthcare field, international carries a lower margin than domestic. Is that the case here also?

It does a little bit for us in the mix, yes, Stan, because we go through distribution internationally. So, you're correct; so that's part of that margin issue that we could face.

Okay. And you're expecting to keep our ratio of domestic to international fairly constant in the way you are building our gross profit overall?

I think at this stage, yes.

Okay. My second question is, does the disposables, again -- normally, disposables carry higher margins than hardware. Is that the case for us with our disposables business?

Yes. You're correct, Stan, yes.

Okay. And is Peregrine -- the product line, equivalent to our normal gross profits, bottom line?

It's probably not as close to our direct IRIDEX-branded consumable disposable, but it is accretive to the overall Company margin.

Okay, because your distribution -- you don't have salesman with Peregrine. Okay. My next question is, what are we going to do with our cash? It keeps building, which is great, but we're at $13 million, which is $1.30 per share. Do you have any vision or near-term plan or something for our cash? Since it earns very little in this kind of a climate.

Well, Stan, I think that we're always looking at the cash situation because, as an asset, it's just sitting there, as you described. And that's true. That is why we have the periscope up, and we're looking for other transactions that we could do at any point in time. And I have, at this point, there's no other plan to use the cash other than for potential acquisitions going forward.

And the pipeline is not near-team, as you see it?

What do you define as near-term, Stan?

Within the next year is near-term. One year is near-term.

Yes, I would think that there would be some transaction within the next year.

Okay. My last comment is a congratulations, because us going to Wedbush and Craig-Hallum in New York, that's a big deal. That really is getting us exposure. And I've got to really congratulate you and Jim and whoever works on it for getting us significant visibility that I don't think we've ever had -- except in the phony old days, old days. So, that's good. And, hopefully, we'll be webcast or something so that others, including our investors, can listen in.

Well, Stan, thank you very much. But I think that Jim and I will both take a little bit of credit, but the real credit goes to the team here that is producing products at reasonable prices. The marketing department is getting the right message, and the sales department delivering the numbers we need.

Congratulations. Thanks.

William Singleton.

Yes. Congratulations on the quarter.

Thank you.

This is the question I'm going to ask. I see it that I'm the fifth caller. Everybody else has asked so many questions. But the one question that they need to -- probably really wanted to ask you, which I'm going to figure out how to ask -- is with all the stuff moving forward, with all this positive information, and doing better and better each quarter, when do you -- is this stock going to be moving? It seems to be undervalued. Is it time for the stock to show us some money?

Could you repeat -- I didn't hear the -- can you repeat the question? I heard the preamble, but I (multiple speakers).

The question to you guys is -- I mean, Jim, I guess, is doing great; Eduardo, the whole team of everybody there. The question is, what all the other colors probably wanted to ask, when is this stock going to move? When is it -- with all the positive information -- moving forward? I heard you say within a year's time. Questions being, isn't it time for this stock to show us, as the shareholders, the money, as far as moving?

Well, I hear your question, and it relates to whether you think it's undervalued or not. As far as movement, I've been here nine months and at that point in time when I arrived it was $3.19. Today it's $6-something. That's substantial movement in my mind. So I'm not sure I understand the question.

Well, meaning that, with all of the things you guys got moving forward, it seems to me that it would be move a little bit more than what it's been moving.

Okay, so, I think there's a couple of levels of complexity to the question, and I think Stan alluded to it just before that. And that's the exposure that the Company is finally getting with a couple of institutions like Craig-Hallum and Wedbush.

The other issue we have is, we continue to this day to have a limited flow, which makes it hard for people to buy. And so it's harder for larger institutions to get into our stock. Below $5, it was hard for people to buy the stock. We're now above, so -- it's changing and it's growing. And I think as long as we deliver the results we're doing, I suspect the stock will continue to migrate up. That's about what I can tell you. I don't really have another answer.

Okay, well that seems to answer the question. It seems like everybody else wanted to ask you that question, but they didn't ask it. They went around asking it, hey, when is this stock going to move? Your last guy said, hey, (inaudible) going to be about a year. I'm coming straight out, and want to know the direct answer from the people who are in control of this business.

All we can do is operate efficiently here and try to deliver numbers, and let the investors do the rest.

Yes, sir. Well, I appreciate that, and congratulations on the quarter. Good things ahead; we're going to try to stick this thing out, and high-energy, and let's get going.

Paul Sonz.

Yes, thank you, and thanks for the steady progress. A couple of questions. I noticed that the reserves were somewhat light. What are you guiding the tax rate at?

The tax rate should state pretty light for the whole of this year. We are benefiting from the net operating loss. And, at the moment, the combination net operating loss, our actual tax is fairly minimal. So we're actually expecting the tax provision to similarly stay fairly light for the rest of this year.

And what's the tax loss carryforward that remains?

At the beginning of this year, we had about $13.9 million of net operating losses.

Thank you. And the CapEx expectations here for the year?

Yes, I would say they are pretty much in line with what we've done for the first half. So, we typically -- we're in the -- maybe we can run about $100,000 in a quarter; $50,000 to $100,000 in a quarter. So I don't see anything at this stage out of that bounds going forward at this stage.

Thank you. And then, from more a quantitative commentary -- besides the internal cost controls, which I'm sure have some interim expense here and the redesign of the platform again, which has some interim expense -- there was also an opportunity to leverage your worldwide distribution and support channel. And you made some announcements during the quarter. And in fact you talked a little bit about some of the things, products you were putting into the channel.

In light of -- and look at that as three legs of the school -- are there any positive profit contributions in the quarter from each of those? Or are the expenses still running ahead of what will -- our benefits in the long term?

I'm not sure I quite -- could you take a run at that one more time, just to make sure I got (multiple speakers).

We certainly -- I'm sure that the internal cost controls that were put in place, there's some realization of expense control there. But I'm not -- there's also severance items. There's other things. Just a sense of how much it is impacting the quarter.

And also the redesign of the platform, I'm not sure what stage that's in, whether those expenses are behind the Company or not. And also in the changes in the distribution channel, putting other products in to cover overhead, things like that. How much of that opportunity really is contributory now?

Okay. So, let me see. As you said, as --

Just in a quantitative -- not in a quantitative way, but in a qualitative way. How far along are we -- is the Company?

Right, I think I got it. Good question. So, I think as far you said, as far as the realignment of the organization and therefore associated, for example, severance cost. That should all be behind us. We don't really see any of that going forward and --

Okay, so we're enjoying the benefits, the fruits of that now.

Yes, we should -- exactly. We should be at the steady-state, if you like, on that. I do think you raise a very good question on the redesign of the platforms. We are -- on one particular project, we are actually sizing that as we speak. So, as we get our arms around exactly the type of investment, and the speed at which we want to do it, we'll have a better handle on that.

That may be something we could absorb within the existing expense structure, if you like. Or it may be something -- because I think we're all very, very keen to try and get the gross margin benefit sooner rather than later. So one of the things we're looking at is can we accelerate that by in fact maybe going outside as well. So we may see that we want to step our way through some incremental expenditure there, but we're working on that. As far as the --

Could I ask just a little bit about that? Is this a design for manufacturability? Is this a design to reduce the requirements in the field for setting them up and using it? Or what's the thrust here? (multiple speakers)

Yes, I would suggest that what we have at the moment is when we birthed the -- in this case I'm talking about the IQ platform -- when we birthed the IQ platform, we wanted to make sure that it could satisfy multiple product variations out of the platform, which is great and has allowed us the flexibility to get more (technical difficulty) from that platform. The issue is, if you like, is therefore you carry a lot of commonality of cost across the end product, which ultimately may not actually benefit that particular product.

So, there's ways to go back to the platform and try to allow for different variations to be pulled from it in a more cost-effective fashion.

Yes.

So, that's what we're in at the moment, so we're looking at that. And then your third question was on the distribution channel. So, that's benefiting now; that's on. And so it's contributing already. And we do think there's more upside leverage opportunity, room to grow additional revenues through those channels. So that's contributing, and we look to see improved contribution.

And your average cost per share in the quarter for the share buyback?

$4.37, I think it was.

And so there's still $3 million remaining in the authorization?

$2.9 million. Yes, we made a scratch.

Yes, yes. Okay, thank you very much.

Sam Bergman.

Hi, Will and Jim. Nice quarter. And thank you very much for the in-depth review of operations.

Thank you.

A couple questions. In terms of R&D for the rest of the year, will it run pretty flat to this quarter? Or is there an expected bump, third and fourth quarter?

I'm kind of thinking it's going to be somewhere around the same for Q3, and then Q4 starts to come back to that question about whether we want to accelerate the -- or whether we have the option to accelerate the platform revisit on the IQ. So, we're working on the data. We want to scale it, size it, see how long it's going to take, and then we'll have better understanding.

Okay. And in terms of the glaucoma -- or MicroPulse being used for glaucoma, can you give me an idea if that particular product line is delivering some revenue right now? And how do you plan to handle the growth -- the upcoming growth in that particular business, which I think is tremendous, with a direct sales staff or existing sales staff that you have? Or are you going to go indirect?

Sam, we've had the tap side, the turning off the tap, the G-Probe, for quite a while. And it was repositioned not long ago with marketing, and we've been gaining leading positions across the world with that device. It is a very late-stage part of the disease when you do the photocoagulation using our G-Probe and our 810 laser.

Now, what we've been looking at is how do we move upstream into earlier and earlier treatments, because the number of people and the number of procedures are larger and larger.

The first thing was, I mentioned in my comments how safe the 532 was, the IQ532 MicroPulse, because it is that it's phobia friendly; it's not going to cause any damage. When doctors find a treatment modality that is extremely safe, they're going to try and look at new places in new areas to use it. That has led us into the area which we call MLT. There are other products that are out there today which they are calling SLT, which deals with the trabecular mesh network. And it's basically trying to find a way to make that network allow -- that mesh network to allow for drains.

ALT was the original one. And it was just basically burning a hole in the mesh to try to get an additional drain. The 532, if you think about it, it's more -- being in Boston, you would understand this. At the end of the winter, your soil in your garden is pretty hard. You've got to take and trowel it out to get it -- to allow the water to go through. The 532 green MicroPulse laser basically acts like a massage on the mesh network, and it allows for an improvement in drains. There is some published data that's coming out.

The other area we're talking about in glaucoma is even earlier yet. And that would be a product -- it's not scientific in nature; this is just straightforward engineering. It's not trivial, but it's straightforward. It's an idea that -- look at finding a way to create another drain in another part of the eye using our laser system with a captive disposable. Those projects are underway, and we expect them out sometime next year.

Do you have any idea how large that market is? Or how large that market could be for IRIDEX?

I would rather ask my marketing guy specifically. I do know this, that there's over $4 billion spent in and around glaucoma. So it's pretty large. And the growth, if you think about it, just think this way -- if the growth rate in the aged population is 65 or 85, over the next 10 to 15 years is going to be approaching 100%. That's a huge market and all of us are -- Sam, I hate to say it, but all of us will reach that point with glaucoma at some point in time.

Not wanting to get there, but we will.

I understand.

And last question, trade shows. So, what's the next trade show that you're going to be at, and presenting?

Next week in South America at the Pan-American Conference, there's thousands of doctors coming from all over Latin America. And we have a presenter from Mexico that has been using 577 MicroPulse, and another one from Brazil that will be in the booth. It's not our booth; it's our distributor's booth. But they will be making presentations there. And then (multiple speakers) after that in September, we'll have a conference in Germany, where Dr. Luttrull from the United States and two doctors from Europe -- one from Italy and one from Germany -- will be having a workshop at the [annual] Retinal Conference. And that's not on our dime. That is by the society, inviting these doctors to come and teach them how to use MicroPulse. That's in September.

And one last remaining question -- how many doctors are using the glaucoma product off-label?

I don't think anybody's using it off-label, Sam. The situation is that the product is designed and it's able to be used -- the glaucoma, the tap, if you will, on the 810 and the G-Probe. We've had approval for that for quite a while. MLT, we've had approval for that for quite a while. The idea of using the 532, it's approved to be used on the eye. So nobody is using it off-label, at this point in time, that we're aware of.

In terms of doctors using it as it's supposed to be used because it has been approved, what kind of increases have you seen on that?

I think it's too early, really, Sam. I mean we're talking about minuscule numbers. What we're trying to suggest on our conference is that because of the safety and efficacy of MicroPulse, we are going to see it being used more and more in other areas, as Jim described in his specific case, on uveitis. These are new areas, new procedures, because people are just discovering that the device is so safe, and will be discovering that on a regular basis.

The interest for us on the glaucoma is it is a strategic initiative for us over a long period of time, over the next number of years. And we will be the only company, when we're done, that we are aware of, that will have a device that deals with the tap and the drain in varying stages of the glaucoma disease.

Thank you very much for your time.

And I'm showing no further questions at this time. Please continue.

With that, I'd like to say thank you to everybody for your participation and interest in IRIDEX. And we look forward to delivering positive results in the next quarter as well. Thank you.

Ladies and gentlemen, that does conclude our conference for today. You may now disconnect.